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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______________ to ______________
Commission File No. 1-4095
McDERMOTT INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 74-1032246
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-4411
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
Series A $2.20 Cumulative Convertible New York Stock Exchange
Preferred Stock, $1 Par Value
Series B $2.60 Cumulative Preferred New York Stock Exchange
Stock, $1 Par Value
Securities registered pursuant to Section 12(g) of the Act: NONE
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 (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $165,244,686 as of April 23, 1996.
The number of shares of Common Stock, par value $1 per share, outstanding as of
April 23, 1996 was 3,600.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Information Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14C under the Securities and
Exchange Act of 1934 in connection with action to be taken by the Company
without a meeting of stockholders on August 6, 1996 is incorporated by
reference into Part III of this report.
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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 - K
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PART I
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Power Generation Systems and Equipment
General 3
Foreign Operations 4
Raw Materials 4
Customers and Competition 4
Backlog 5
Factors Affecting Demand 6
C. Marine Construction Services
General 7
Foreign Operations 8
Raw Materials 8
Customers and Competition 8
Backlog 8
Factors Affecting Demand 9
D. Patents and Licenses 9
E. Research and Development Activities 9
F. Insurance 10
G. Employees 11
H. Environmental Regulations and Matters 11
I. Transactions With Related Parties 13
Item 3. LEGAL PROCEEDINGS 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
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I N D E X - F O R M 1 0 - K
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS 16
Item 6. SELECTED FINANCIAL DATA 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General 18
Fiscal Year 1996 vs. Fiscal Year 1995 19
Fiscal Year 1995 vs. Fiscal Year 1994 21
Effects of Inflation and Changing Prices 23
Liquidity and Capital Resources 23
New Accounting Standards 25
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Report of Independent Auditors 26
Consolidated Balance Sheet - March 31, 1996 and 1995 27
Consolidated Statement of Loss for the Three Fiscal
Years ended March 31, 1996 29
Consolidated Statement of Stockholder's Equity for the
Three Fiscal Years ended March 31,1996 30
Consolidated Statement of Cash Flows for the Three Fiscal
Years ended March 31, 1996 31
Notes to Consolidated Financial Statements 33
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 61
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I N D E X - F O R M 1 0 - K
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 62
Item 11. EXECUTIVE COMPENSATION 62
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 62
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 62
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 63
Signatures 65
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P A R T I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott Incorporated was incorporated in 1946 as a successor to a business
which had been providing construction services to the oil and gas industry
since the 1920's. McDermott International, Inc. ("International") is the
parent company of the McDermott group of companies, which includes McDermott
Incorporated and J. Ray McDermott, S.A. ("JRM"). International's Common Stock,
McDermott Incorporated's Series A $2.20 Cumulative Convertible Preferred Stock
and Series B $2.60 Cumulative Preferred Stock and JRM's Common Stock are
publicly traded.
On January 31, 1995, International contributed substantially all of its marine
construction services business to JRM, a new company incorporated under the
laws of the Republic of Panama in 1994. Also, on January 31, 1995, JRM
acquired Offshore Pipelines, Inc. (the "Merger"). In connection with the
Merger, McDermott Incorporated sold a portion of its marine construction
services business to International. The business sold included the fabrication
and installation of marine pipelines and offshore structures and subsea
production systems. The discussion set forth below under Items 1. and 2.
describes the McDermott Incorporated's Marine Construction Services business
segment as currently conducted after the sale.
Unless the context otherwise requires, hereinafter the "Delaware Company" will
be used to mean McDermott Incorporated, a Delaware corporation which is a
subsidiary of International, and its consolidated subsidiaries.
"International" will be used to mean McDermott International, Inc., a Panama
corporation; "JRM" will be used to mean J. Ray McDermott, S.A., a Panama
corporation, a majority owned subsidiary of International, and its consolidated
subsidiaries; and "McDermott International" will be used to mean the
consolidated enterprise.
The Delaware Company operates in two business segments:
o Power Generation Systems and Equipment, whose principal businesses
are the supply of fossil-fuel and nuclear steam generating
equipment to the electric power generation industry, and nuclear
reactor components to the U.S. Navy; and
o Marine Construction Services, which supplies design, engineering,
and project and construction management services for the offshore
oil and gas exploration and production and hydrocarbon processing
industries, and to other marine construction companies. This
segment's activities also include the maintenance and construction
of a variety of marine vessels and fabrication of structures and
equipment for offshore drilling and production operations.
The business of the Power Generation Systems and Equipment segment is conducted
primarily through a subsidiary of McDermott Incorporated, Babcock & Wilcox
Investment Company, the principal subsidiary of which is The Babcock & Wilcox
Company. Unless the context otherwise requires, hereinafter "B&W" will be used
to mean Babcock & Wilcox Investment Company and its consolidated subsidiaries,
including The Babcock & Wilcox Company.
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The Delaware Company has a continuing program of reviewing joint venture,
acquisition and disposition opportunities.
The following tables show revenues and operating income (loss) of the Delaware
Company for the three fiscal years ended March 31, 1996 and do not include the
operating results for the period after January 31, 1995 for the portion of the
marine construction services business sold to International. See Note 16 to
the consolidated financial statements for additional information with respect
to the Delaware Company's business segments and operations in different
geographic areas.
REVENUES
(Dollars in Millions)
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<CAPTION>
FOR FISCAL YEARS ENDED MARCH 31,
1996 1995 1994
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<S> <C> <C> <C> <C> <C> <C>
Power Generation Systems
and Equipment $ 1,708.3 84% $ 1,663.0 75% $ 1,614.0 72%
Marine Construction Services(1) 329.6 16% 560.0 25% 632.2 28%
Intersegment Transfer
Eliminations (9.9) - (.6) - (2.8) -
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Total Revenues $ 2,028.0 100% $ 2,222.4 100% $ 2,243.4 100%
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OPERATING INCOME (LOSS)
(Dollars in Millions)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MARCH 31,
1996 1995 1994
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<S> <C> <C> <C> <C> <C> <C>
Segment Operating Income (Loss):(2)
Power Generation Systems
and Equipment $ 17.2 - $ 17.6 - $ 49.6 90%
Marine Construction Services(1) (26.9) - (34.6) - 5.7 10%
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Total Segment Operating
Income (Loss) (9.7) - (17.0) - 55.3 100%
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Equity in Income of Investees:
Power Generation Systems
and Equipment $ 31.8 88% $ 5.8 56% $ 8.6 95%
Marine Construction Services 4.5 12% 4.5 44% .5 5%
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Total Equity in Income
of Investees 36.3 100% 10.3 100% 9.1 100%
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General Corporate Expenses (2) (22.8) - (34.9) - (32.4) -
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Total Operating Income (Loss) $ 3.8 - $ (41.6) - $ 32.0 -
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(1) See Note 2 to the consolidated financial statements regarding the sale of
a portion of the marine construction business during fiscal year 1995 .
(2) Fiscal years 1995 and 1994 have been restated to reflect the allocation of
certain expenses to the business segments which were previously included
in General Corporate Expenses.
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B. POWER GENERATION SYSTEMS AND EQUIPMENT
GENERAL
The Power Generation Systems and Equipment segment provides engineered products
and services for energy conversion worldwide. It supplies individually
engineered boilers, complete fossil fuel steam generating systems and related
equipment and facilities, and environmental control systems for electric power
generation and for industrial processes. These facilities use a wide variety
of fuels, including, but not limited to coal, oil, bitumen, natural gas, solid
municipal waste, agricultural waste and biomass. This segment is also engaged
in the erection of electric power plants and industrial facilities and the
repair and alteration of such existing equipment. It provides replacement
parts and engineered plant enhancements for existing fossil fuel steam
generating systems and specially engineered accessories and components, such as
air heaters and cleaning systems for heat transfer surfaces. This segment also
supplies air-cooled and condensing heat exchangers for the process and power
industries.
This segment is actively involved in the market for providing power through
cogeneration, refuse-fueled power plants and other independent power producing
plants. It is participating in this market as a contractor for
engineer-procure- construct services, as an equipment supplier, as an
operations and maintenance contractor and through ownership interests.
The Power Generation Systems and Equipment segment provides nuclear fuel
assemblies and nuclear reactor components to the U. S. Navy for the Naval
Reactors Program. This activity has made significant contributions to the
operating income of the Delaware Company in all three fiscal years and is
expected to do so in the foreseeable future. B&W, in addition to its Naval
Reactors Program business, is a supplier of ordnance, missile and torpedo metal
parts and other equipment and services to the U.S. Government and is proceeding
with new, non-defense Government projects and exploring new programs which
require the technological capabilities it developed as a Government contractor
for the Naval Reactors Program.
B&W is a major supplier of nuclear steam generating equipment, including
critical heat exchangers and replacement recirculating steam generators, in the
Canadian, U.S. and international markets, from its Cambridge, Ontario and other
B&W locations. The Cambridge facility was awarded contracts during fiscal
years 1993 through 1995 valued at approximately $430,000,000 to supply
replacement recirculating steam generators to four domestic utilities and work
performed on these contracts has made significant contributions to the
operating income of the facility. While most of these contracts will be
completed during fiscal year 1997, this activity is expected to continue to
make significant contributions to operating income in the foreseeable future,
although at lower levels. B&W also supplies field repair and refurbishment
services to the Canadian, U.S. and international markets from this location.
The principal plants of this segment, which are owned by B&W, are located at
Indianapolis, Indiana; West Point, Mississippi; Barberton and Lancaster, Ohio;
Beasley and Paris, Texas; Lynchburg, Virginia; and Cambridge, Ontario, and
Calgary, Alberta, Canada. All these plants are well maintained, have suitable
equipment and are of adequate size.
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FOREIGN OPERATIONS
The amounts of Power Generation Systems and Equipment's revenues, including
intersegment revenues, and segment operating income derived from operations
located outside of the United States, and the approximate percentages of those
revenues and segment operating income to the Delaware Company's total revenues
and total segment operating income, respectively, follow:
<TABLE>
<CAPTION>
REVENUES SEGMENT OPERATING INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1996 $ 657,627 32% $ 33,289 -%
1995 530,689 24% 36,714 -%
1994 372,474 17% 30,529 55%
</TABLE>
Revenues and segment operating income presented above do not include the
operating results of this segment's equity investees. B&W primarily conducts
its foreign business from its Calgary, Alberta and Cambridge, Ontario (which
also serves the United States market) locations. Products for international
installation are engineered and built in B&W's United States and Canadian
facilities, as well as in the facilities of International's equity investees
located in China, Indonesia, India and Egypt.
RAW MATERIALS
The principal raw materials used by this segment to construct power generation
systems and equipment consist of carbon and alloy steels in various forms, such
as plate, forgings, structurals, bars, sheet, strip, heavy wall pipe and tubes.
Significant amounts of components and accessories are also purchased for
assembly for supplied systems and equipment. These raw materials and
components generally are purchased as needed for individual contracts.
Although shortages of certain of these raw materials have existed from time to
time, no serious shortage exists at the present time.
This segment is not sole source dependent for any significant raw materials
except for uranium, which is furnished and owned by the U.S. Government, and
used in the nuclear fuel assemblies supplied to the U.S. Navy for the Naval
Reactors Program.
CUSTOMERS AND COMPETITION
The principal customers of this segment are the electric power generation
industry (including government-owned utilities and independent power
producers), the U.S. Government (including its contractors), and the pulp and
paper and other process industries such as oil refineries and steel mills; and
other industrial institutions. The electric power generation industry
accounted for approximately 36%, 41% and 36% of the Delaware Company's total
revenues for fiscal years 1996, 1995 and 1994, respectively. For the fiscal
years 1996,
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1995 and 1994, the U.S. Government, excluding government-owned utilities,
accounted for approximately 19%, 16% and 17% of total revenues, including 16%,
14% and 13% related to nuclear fuel assemblies and reactor components for the
U.S. Navy.
Steam generating system equipment orders are customarily awarded after
competitive bids have been submitted as proposals based on the estimated cost
of each job. Within the United States, a number of domestic and foreign-based
companies, specializing in steam generating systems, equipment and services,
compete with B&W in the fossil fuel steam generating system business. In
international markets, these companies plus additional foreign-based companies
compete with B&W. B&W also manufactures and sells components such as
replacement recirculating steam generators, which are incorporated into nuclear
steam generating systems designed by other firms. In the sale of these nuclear
steam generating systems, B&W competes with a small number of companies. A
number of companies are in competition with B&W in environmental control
equipment, related specialized industrial equipment and the independent power
producing business. Other suppliers of fossil fuel steam systems, as well as
many other businesses, compete for replacement parts, repair and alteration and
other services required to backfit and maintain existing systems.
B&W is the sole supplier of nuclear fuel assemblies and reactor components to
the U. S. Navy for the Naval Reactors Program. In fiscal year 1996, B&W was
awarded approximately $375,000,000 in new orders for aircraft carrier
components and prototypical steam generation equipment for the newest submarine
design. B&W is the sole supplier to the U.S. Navy for all major nuclear steam
system equipment for the Naval Reactors Program. There are a small number of
suppliers of small nuclear components with B&W being the largest based on
revenues.
BACKLOG
Backlog as of March 31, 1996 and 1995 for the Power Generation Systems and
Equipment segment was $2,276,973,000 and $2,130,754,000 or approximately 92%
and 86%, respectively, of the Delaware Company's backlog. Of the March 31,
1996 backlog, it is expected that approximately $1,144,111,000 will be
recognized in revenues in fiscal year 1997, $541,081,000 in fiscal year 1998
and $591,781,000 thereafter, of which approximately 73% will be recognized in
fiscal years 1999 through 2001. At March 31, 1996, this segment's backlog
with the U. S. Government was $816,783,000 (of which $57,988,000 had not yet
been funded), or approximately 33% of the Delaware Company's total backlog.
Included in backlog at March 31, 1996, are contract awards of approximately
$200,000,000 to supply two 660 megawatt coal-fired boilers and complete wet
flue gas desulfurization systems to the Sumitomo Corporation of Tokyo for a
power plant in central Java, Indonesia; two contracts totalling approximately
$110,000,000 signed with the Egyptian Electricity Authority for the supply of
steam generating equipment for two new power stations; and awards of
$100,000,000 by Hyundai Heavy Industries Co., Ltd to supply flue gas
desulfurization equipment for ten 500 megawatt coal-fired power station units
in Korea.
If in management's judgement it becomes doubtful whether contracts will
proceed, the backlog is adjusted accordingly. If contracts are deferred or
cancelled, B&W is usually entitled
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to a financial settlement related to the individual circumstances of the
contract. Operations and maintenance contracts, which are performed over an
extended period, are included in backlog based upon an estimate of the revenues
from these contracts.
B&W attempts to cover increased costs of anticipated changes in labor, material
and service costs of long-term contracts either through an estimation of such
changes, which is reflected in the original price, or through price escalation
clauses. Most long-term contracts have provisions for progress payments.
FACTORS AFFECTING DEMAND
Electric utilities in Asia and the Middle East are active purchasers of large,
new baseload generating units, due to the rapid growth of their economies and
to the small existing stock of electrical generating capacity in most
developing countries. These newly-emerging economies need power and steam
generating systems, equipment and services to build their industrial base.
Electrical consumption has grown moderately in the United States in recent
years. Competition within the electric power industry in the United States has
intensified, as the Federal Energy Regulatory Commission has begun to implement
the provisions of the Energy Policy Act of 1992, which deregulated the electric
power generation industry by allowing independent power producers and other
companies access to the electric utilities' transmission and distribution
systems. The modest growth in demand and the changes associated with this
transition from a regulated to a competitive industry have caused electric
utilities to defer ordering of large, new baseload power plants in the United
States. When electric utilities are in need of peaking capacity, many are
producing combustion turbines with short lead-times or they are purchasing
electricity from other utilities and non-regulated sources, such as
cogenerators and independent power producers.
Substantially all the customers of B&W are affected by environmental
regulations of the countries in which their facilities are located. In the
United States, the Clean Air Act Amendments of 1990 required many customer
industries to implement systems to limit or remove emissions. These mandated
expenditures have caused some customers to defer repairs and refurbishments on
existing plants. The same requirements have caused other customers to purchase
environmental control equipment from B&W. Future changes in environmental
regulations will continue to effect demand for B&W products and services.
The systems, products and services of B&W are capital intensive. As such,
demand for the company's products is heavily affected by the variations in the
business cycles in the customer industries and in the overall economies of
their countries. Availability of funds for financing, investment and
maintenance at B&W's customers varies with the conditions of their domestic
businesses.
Even with the maturing of the U.S. Navy's shipbuilding program and U.S.
Government defense budget reductions, the demand for nuclear fuel assemblies
and reactor components for the U.S. Navy has continued to comprise a
substantial portion of this segment's backlog with the U.S. Government at March
31, 1996. The backlog of orders for the U.S. Navy nuclear fuel assemblies and
nuclear reactor components is expected to continue to be a significant part
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of backlog because B&W became the sole source provider of these assemblies in
fiscal year 1991, and supplies nuclear fuel assemblies due to reload
requirements.
B&W has applied its technological capabilities by supplying new products for
power generation applications. It has diversified into new markets and
activities not related to power generation that require complex engineering and
machining. Examples of these markets include environmental restoration
services, computer integrated manufacturing products and services and the
management of government owned facilities, primarily within the Department of
Energy's nuclear weapons complex. Currently, B&W operates the Specific
Manufacturing Capability facility at the Department of Energy's Idaho National
Engineering Laboratory and, since July 1, 1995, has participated in the
management and operation of the Rocky Flats Environmental Technology Site near
Denver, Colorado with six other companies. In addition, B&W is part of a team
that operates and manages the Strategic Petroleum Reserve from New Orleans,
Louisiana.
C. MARINE CONSTRUCTION SERVICES
GENERAL
In connection with the Merger of Offshore Pipelines, Inc. into JRM on January
31, 1995, the Delaware Company sold a portion of its marine construction
services business to International. The discussion below describes the
Delaware Company's Marine Construction Services segment as currently conducted
after the sale.
The Marine Construction Services segment supplies design, engineering, and
project and construction management services for the offshore oil and gas
exploration and production and hydrocarbon processing industries. This segment
also provides maintenance services to energy related industries. This
segment's shipyard facilities supply complete maintenance and construction
facilities and is a builder of a variety of marine vessels, including ferries,
barges, tugboats, container ships, bulk carriers, and other specialized
vessels. This segment's shipyard is located on approximately 58 acres of
leased land near Morgan City, Louisiana.
The Delaware Company owns a 49% interest in a joint venture, Universal
Fabricators, Incorporated, whose activities include the fabrication and
assembly of structures and equipment for offshore drilling and production
operations and facilities, and is located in New Iberia, Louisiana.
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FOREIGN OPERATIONS
The amounts of Marine Construction Services' revenues, including intersegment
revenues, and segment operating income (loss) derived from operations located
outside of the United States, and the approximate percentages of those revenues
and segment operating income to the Delaware Company's total revenues and total
segment operating income (loss), respectively, follow:
<TABLE>
<CAPTION>
REVENUES SEGMENT OPERATING INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1996 $ 254,838 13% $ (12,447) - %
1995 235,923 11% (13,229) - %
1994 238,656 11% 7,202 13%
</TABLE>
Revenues and segment operating income presented above do not include the
operating results of this segment's equity investees. The majority of the
Delaware Company's foreign operations are conducted by McDermott Engineers and
Constructors (Canada) Ltd. which was acquired in fiscal year 1994.
RAW MATERIALS
The raw materials used by this segment, such as carbon and alloy steel in
various forms, welding gases, concrete, fuel oil and gasoline, are available
from many sources and this segment is not dependent upon any single supplier or
source. Although shortages of certain of these raw materials and fuels have
existed from time to time, no serious shortage exists at the present time.
CUSTOMERS AND COMPETITION
This segment's principal customers are oil and gas companies, ship owners
and, primarily in the inland U.S. waterways, barge operators and owners.
Customers generally contract with this segment for design, engineering, and
project and construction management services, maintenance and construction of
marine vessels, and fabrication of structures and equipment for offshore
drilling and production operations. Contracts are usually awarded on a
competitive bid basis.
There are several companies which compete effectively with the Delaware Company
in each of this segment's activities.
BACKLOG
As of March 31, 1996 and 1995, the Marine Construction Services' backlog
amounted to $187,288,000 and $333,912,000 or approximately 8% and 14%,
respectively, of the Delaware Company's total backlog. Of the March 31, 1996
backlog, it is expected that approximately $156,579,000 will be recognized in
revenues in fiscal year 1997, $21,751,000 in fiscal year 1998 and $8,958,000
thereafter. Not included in backlog at March 31, 1996 and 1995 was backlog
relating to contracts performed by unconsolidated joint ventures of $24,000,000
and $36,000,000, respectively.
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Work is performed on a fixed price, cost plus or day rate basis or combination
thereof. This segment attempts to cover increased costs of anticipated changes
in labor, material and service costs of long-term contracts either through an
estimation of such changes, which is reflected in the original price, or
through price escalation clauses. Most long- term contracts have provisions
for progress payments.
FACTORS AFFECTING DEMAND
The activity of the Marine Construction Services' segment depends mainly on the
capital expenditures of oil and gas companies for developmental construction.
These expenditures are influenced by the selling price of oil and gas along
with the cost of production and delivery, the terms and conditions of offshore
leases, the discovery rates of new reserves offshore, the ability of the oil
and gas industry to raise capital, and political and economic conditions.
Demand for new ship construction and inland barges is impacted by charter rates
that ship and barge owners and operators can earn and by the age and condition
of the existing fleet.
Oil company capital exploration and production budgets in calendar year 1996
are higher than 1995 expenditures. While oil prices remain flat, natural gas
prices have increased significantly as compared to calendar year 1995.
Expenditures are expected to increase. Demand for offshore drilling rigs has
increased and this, historically, has been a leading indicator for an increase
in the need for marine construction services. This segment's markets are
expected to begin to emerge from the competitive environment that has put
pressure on margins in prior periods.
D. PATENTS AND LICENSES
Many U.S. and foreign patents have been issued to the Delaware Company and it
has many pending patent applications. Patents and licenses have been acquired
and licenses have been granted to others when advantageous to the Delaware
Company. While the Delaware Company regards its patents and licenses to be of
value, no single patent or license or group of related patents or licenses is
believed to be material in relation to its business as a whole.
E. RESEARCH AND DEVELOPMENT ACTIVITIES
The Delaware Company conducts its principal research and development activities
at its research centers in Alliance, Ohio and Lynchburg, Virginia; and also
conducts development activities at its various manufacturing plants and
engineering and design offices. During the fiscal years ended March 31, 1996,
1995 and 1994, approximately $66,597,000, $63,695,000, and $67,695,000,
respectively, was spent by the Delaware Company on research and development
activities, of which approximately $45,106,000, $44,240,000, and $48,112,000,
respectively, was paid for by customers of the Delaware Company. Research and
development activities were related to development and improvement of new and
existing products and equipment and conceptual and engineering evaluation for
translation into practical applications. The Delaware Company's new
multi-million dollar clean environment development facility in Alliance, Ohio
was completed during fiscal year 1995. The facility was constructed in
response to present and future emission pollution standards in the U.S. and
worldwide. Approximately 300 employees were engaged full time in research and
development activities at March 31, 1996.
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F. INSURANCE
The Delaware Company maintains liability and property insurance that it
considers normal in the industry. However, certain risks are either not
insurable or insurance is available only at rates which the Delaware Company
considers uneconomical. Among such risks are war and confiscation of property
in certain areas of the world, pollution liability in excess of relatively low
limits and, in recent years, asbestos liability. Depending on competitive
conditions and other factors, the Delaware Company endeavors to obtain
contractual protection against uninsured risks from its customers. However,
there is no assurance that insurance or contractual indemnity protection, when
obtained, will be sufficient or effective under all circumstances or against
all hazards to which the Delaware Company may be subject.
The Delaware Company's insurance policies do not insure against liability and
property damage losses resulting from nuclear accidents at reactor facilities
of its utility customers. To protect against liability for damage to
customers' property, the Delaware Company has obtained waivers of subrogation
from the customer and its insurer and is generally named as an additional
insured under the utility customers' nuclear property policy. To protect
against liability from claims brought by third parties, the Delaware Company is
insured under the utility customer's nuclear liability policies and has the
benefit of the indemnity and limitation of any applicable liability provision
of the Price-Anderson Act, as amended ("the Act"). The Act limits the public
liability of manufacturers and operators of licensed nuclear facilities and
other parties who may be liable in respect of, and indemnifies them against,
all claims in excess of an amount which is determined by the sum of
commercially available liability insurance plus certain retrospective premium
assessments payable by operators of commercial nuclear reactors. For those
sites where the Delaware Company provides environmental remediation services,
it seeks the same protection from its customers as it does for its other
nuclear activities.
Although the Delaware Company does not own or operate any nuclear reactors, it
has coverage under commercially available nuclear liability and property
insurance for four of its five facilities which are licensed to maintain
special nuclear materials. The fifth facility operates primarily as a
conventional research center. However, this facility is licensed to possess
special nuclear material and has a small and limited amount of special nuclear
material on the premises. Two of the four owned facilities are located at the
Delaware Company's Lynchburg, Virginia site. These facilities are insured
under a nuclear liability policy which also insures the facility of B&W Fuel
Company ("BWFC") that was sold during fiscal year 1993. All three facilities
share the same nuclear liability insurance limit as the commercial insurer
would not allow BWFC to obtain a separate nuclear liability insurance policy.
Due to the type or quantity of nuclear material present, two of the five
facilities have the benefit of the indemnity and limitation of liability
provisions of the Act, pursuant to agreements entered into with the U.S.
Government. In addition, contracts to manufacture and supply nuclear fuel or
nuclear components to the U.S. Government generally contain contractual
indemnity clauses, which become effective at the time of shipment, whereby the
U.S. Government has assumed the risks of public liability claims.
The insurance coverage of the Delaware Company for products liability and
employers' liability claims is subject to varying insurance limits which are
dependent upon the year involved. The Babcock & Wilcox Company has an
agreement with a majority of its principal insurers
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<PAGE> 15
concerning the method of allocation of products liability asbestos claim
payments to the years of coverage. Pursuant to the agreement, The Babcock &
Wilcox Company negotiates and settles these claims and bills these amounts to
the appropriate insurers. For financial reporting purposes, a provision has
been recognized to the extent that recovery of these amounts from the Delaware
Company's insurers has not been determined to be probable. 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 (see Notes 1 and 11 to the
consolidated financial statements), 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.
G. EMPLOYEES
At March 31, 1996 the Delaware Company employed, under its direct supervision,
approximately 14,600 persons compared with 16,000 at March 31, 1995.
Approximately 6,400 employees were members of labor unions at March 31, 1996 as
compared with approximately 4,600 at March 31, 1995. The majority of B&W's
manufacturing facilities operate under union contracts which customarily are
renewed every two to three years. During the next twelve months, four
contracts covering approximately 300 of B&W's hourly workers will expire. B&W
expects to renew these contracts successfully, without incident. The Delaware
Company considers its relationships with its employees to be satisfactory.
H. ENVIRONMENTAL REGULATIONS AND MATTERS
The Delaware Company is subject to the existing and evolving standards relating
to the environment. These laws include the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") of 1980, as amended, and
similar laws which provide for responses to and liability for releases of
hazardous substances into the environment; and the Clean Air Act, the Clean
Water Act, the Resource Conservation and Recovery Act and other federal laws,
each as amended, and similar foreign, state or local counterparts to these
federal laws, which regulate air emissions, water discharges, hazardous
substances and wastes, and require public disclosure related to the use of
various hazardous substances. The Delaware Company's operations are also
governed by laws and regulations relating to workplace safety and worker
health, primarily the Occupational Safety and Health Act and regulations
promulgated thereunder. The Delaware Company believes that its facilities are
in substantial compliance with current regulatory standards.
The Delaware Company's compliance with U. S. federal, state and local
environmental control and protection regulations necessitated capital
expenditures of $1,275,000 in fiscal year 1996, and it expects to spend another
$3,908,000 on such capital expenditures over the next five years. The Delaware
Company cannot predict all of the environmental requirements or circumstances
which will exist in the future but it anticipates that environmental control
and protection standards will become increasingly stringent and costly.
Complying with existing environmental regulations resulted in a charge against
income before taxes of approximately $7,398,000 in fiscal year 1996.
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<PAGE> 16
The Delaware Company has been identified as a potentially responsible party at
various cleanup sites under the CERCLA as amended. The Delaware Company has
not been determined to be a major contributor of wastes to these sites.
However, each potentially responsible party or contributor may face assertions
of joint and several liability. Generally, however, a final allocation of
costs is made based on relative contributions of wastes to each site. Based on
its relative contribution of waste to each site, the Delaware Company's share
of the ultimate liability for the various sites is not expected to have a
material effect on the Delaware Company's consolidated financial position.
Remediation projects have been or may be undertaken at certain of the Delaware
Company's current and former plant sites, and, during fiscal year 1995, B&W
completed, subject to Nuclear Regulatory Commission ("NRC") certification, the
decommissioning and decontamination of its former nuclear fuel processing plant
at Apollo, Pennsylvania. All fabrication and support buildings have been
removed, and all contaminated soil has been shipped to authorized disposal
facilities. B&W expects to obtain approval from the NRC to have the site
released for unrestricted use before the end of calendar year 1996.
During fiscal year 1995, a decision was made to close certain of B&W's nuclear
manufacturing facilities and a provision of $41,724,000 for the
decontamination, decommissioning, and the closing of these facilities was
recognized. Previously, decontamination and decommissioning costs were being
accrued over the facilities' remaining expected life. Decontamination is
proceeding as permitted by the existing NRC license, while funding support is
being sought. A decommissioning plan was submitted for review and approval as
required by the NRC during January 1996. B&W expects to reach an agreement
with the NRC in fiscal year 1997 on the plan that will provide for the
completion of facilities dismantlement and soil restoration by the end of
fiscal year 2001. B&W expects to request approval from the NRC to release the
site for unrestricted use at that time.
The Department of Environmental Resources of the Commonwealth of Pennsylvania,
("PADER"), by letter dated March 19, 1994, advised B&W that it will seek
monetary sanctions, and remedial and monitoring relief, related to B&W's Parks
Facilities in Parks Township, Armstrong County, Pennsylvania. The relief
sought relates to potential groundwater contamination related to the previous
operations of the facilities. B&W is currently negotiating with PADER and
expects to reach a settlement without having to resort to litigation. Any
sanctions ultimately assessed are not expected to have a material effect on the
consolidated financial statements of the Delaware Company.
The Delaware Company performs significant amounts of work for the U.S.
Government under both prime contracts and subcontracts and operates certain
facilities that are licensed to possess and process special nuclear materials
and thus is subject to continuing reviews by governmental agencies, including
the Environmental Protection Agency and the Nuclear Regulatory Commission.
Decommissioning regulations promulgated by the U. S. Nuclear Regulatory
Commission require B&W to provide financial assurance that it will be able to
pay the expected cost of decommissioning its facilities at the end of their
service lives. B&W will continue to provide financial assurance of $11,788,000
during fiscal year 1997 by issuing letters of credit for the ultimate
decommissioning of all its licensed facilities, except one. This facility,
which
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<PAGE> 17
represents the largest portion of B&W's eventual decommissioning costs, has
provisions in its government contracts pursuant to which all of its
decommissioning costs and financial assurance obligations are covered by the
U.S. Government.
Compliance with existing government regulations controlling the discharge of
materials into the environment, or otherwise relating to the protection of the
environment (including decommissioning), does not have, nor is it expected to
have, a material effect upon the consolidated financial position of the
Delaware Company.
I. TRANSACTIONS WITH RELATED PARTIES
The Delaware Company has material transactions occurring during the normal
course of operations, including the sale of engineering and design services and
the performance of certain general and administrative services, with
International and other affiliated companies. The Delaware Company has also
entered into various financial agreements with International and its
subsidiaries, including a Stock Purchase and Sale Agreement. (See Note 6 to
the consolidated financial statements.)
The Delaware Company has charged International for engineering services based
on charges to unrelated parties for similar work and for general and
administrative activities based on an allocation of cost. Effective April 1,
1996, the Delaware Company and JRM, through subsidiaries, created an equally
owned joint venture which is a preferred (but not exclusive) provider of
engineering services to certain subsidiaries of McDermott International in the
U.S. for onshore- related work and to JRM for offshore-related work. The
charges for such services are to be based on charges to unrelated parties for
similar work and for general and administrative activities based on allocation
of cost. Arrangements for pricing these services will be reviewed periodically
by the parties.
While the Delaware Company's employee liability, comprehensive, general
liability, property, marine and other insurance programs are placed through
commercial insurance carriers, substantially all of such employee liability
exposure is reinsured, and significant deductibles under the Delaware Company's
other insurance programs are insured, by wholly owned insurance subsidiaries of
McDermott International. The premiums charged by such insurance companies of
McDermott International for such insurance are based upon the claims experience
and forecasted activities of the Delaware Company and its subsidiaries.
Management believes this approach is more cost effective as there is generally
no commercial market for insurance on the same economic terms for these types
of exposure.
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<PAGE> 18
Item 3. LEGAL PROCEEDINGS
Due to the nature of its business, the Delaware Company is, from time to time,
involved in litigation. It is management's opinion that none of this
litigation will have a material adverse effect on the consolidated financial
position of the Delaware Company.
For a discussion of the Delaware Company's potential liability for non-employee
products liability asbestos claims, see Item 1F and Note 1 and 11 to the
consolidated financial statements.
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<PAGE> 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the solicitation of proxies
or otherwise.
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<PAGE> 20
P A R T I I
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
As a result of the plan of reorganization announced by the Delaware Company on
October 28, 1982 and completed on March 15, 1983, all of the Delaware Company's
outstanding Common Stock is owned by International and, consequently, there is
no market for the Delaware Company's Common Stock. For restrictions on the
Delaware Company's present or future ability to pay dividends, see Item 7
Liquidity and Capital Resources and Note 7 to the consolidated financial
statements.
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<PAGE> 21
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED MARCH 31,
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 2,027,975 $ 2,222,390 $ 2,243,366 $ 1,969,622 $ 2,309,408
Income (Loss)
From Continuing
Operations before
Extraordinary Items
and Cumulative
Effect of Accounting
Changes $ (27,143) $ (73,880) $ (26,316) $ (27,079) $ 29,857
Net Income
(Loss) $ (27,143) $ (74,392) $ (127,066) $ (273,825) $ 26,489
Total Assets $ 3,019,780 $ 3,386,429 $ 3,500,726 $ 2,345,658 $ 2,464,818
Long-Term Debt $ 423,882 $ 423,150 $ 584,532 $ 492,036 $ 658,007
Redeemable
Preferred Stocks 173,301 179,251 196,672 204,482 204,482
------------- ------------- ------------- ------------ ------------
Total $ 597,183 $ 602,401 $ 781,204 $ 696,518 $ 862,489
</TABLE>
See Note 3 to the consolidated financial statements regarding acquisitions in
fiscal years 1996 and 1994. See Note 2 regarding the sale of a portion of the
marine construction services business to International in fiscal year 1995.
See Note 1 regarding the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 112 in fiscal year 1995 and Emerging Issues Task Force
Issue No. 93-5 in fiscal year 1994. Fiscal year 1993 includes the cumulative
effect of the adoption of SFAS No. 106 and SFAS No. 109. See Note 11 regarding
the uncertainty as to the ultimate loss relating to products liability asbestos
claims.
In fiscal year 1996, Net Loss included an after tax equity income gain of
$20,047,000 resulting from the sale of two power purchase contracts and an
after tax charge of $7,840,000 due to the write-off of an insurance receivable
due to an unfavorable arbitration ruling related to the recovery of cost
incurred for corrective action in certain utility and industrial installations.
In fiscal year 1995, Loss before Cumulative Effect of Accounting Change
included after tax charges of $30,218,000 for provisions for the
decontamination, decommissioning and closing of certain nuclear manufacturing
facilities and the closing of a manufacturing facility, and $8,832,000 for the
reduction of estimated products liability asbestos claims recoveries from
insurers. Also, in fiscal year 1995, after tax income included $16,631,000
for a reduction in accrued interest expense due to the settlement of
outstanding tax issues. In fiscal years 1993 and 1992, Income (Loss) from
Continuing Operations before Extraordinary Items and Cumulative Effect of
Accounting Changes included after tax gains from the sale of the Delaware
Company's interest in its two commercial nuclear joint ventures of $15,667,000
and $35,436,000, respectively.
All of the Common Stock of the Delaware Company is owned by International and,
therefore, no per share data is shown above.
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<PAGE> 22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
A significant portion of the Delaware Company's revenues and operating results
are derived from its foreign operations, which are primarily located in Canada.
As a result, the Delaware Company's operations and financial results are
affected by international factors, such as changes in foreign currency exchange
rates. The Delaware Company's policy 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 it is unable to match the foreign currency receipts and
disbursements related to its contracts, its practice of entering into forward
exchange contracts to hedge foreign currency transactions reduces the impact of
foreign exchange rate movements on operating results.
In general, both of the Delaware Company's business segments are capital
intensive businesses that rely on large contracts for a substantial amount of
their revenues.
The performance of the Power Generation Systems and Equipment segment is
largely a function of capital spending in the electric power generation
industry and U.S. Government spending, especially for nuclear fuel assemblies
and reactor components for the U.S. Navy. This segment's recent business
activities have been characterized by significant demand for large, new
baseload generating units for electric utilities in Asia and the Middle East
and relatively weaker markets in the United States and Europe.
The performance of the Marine Construction Services segment is a function of
the level of oil and gas development activity. As a result, this segment's
revenues and profitability reflect some variability associated with the timing
of the completion of significant development projects and commencement of
others as to which it has contracts. In addition, the demand for new ship
construction and inland barges is impacted by charter rates that ship and barge
owners and operators can earn and by the age and condition of the existing
fleet. Based on its ongoing dialogue with existing customers with respect to
possible future contracts, the Delaware Company expects some improvement in
certain of its significant markets including the Gulf of Mexico. However, the
Delaware Company cannot at this time predict the timing or extent of any
improvement in the industry or the future level of demand for services of this
segment.
The foregoing statements regarding the Delaware Company's markets and the other
statements in this discussion are forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties,
including, among others, the uncertainties relating to the development of
electric generating units and offshore development decisions to be made by oil
and gas exploration and development companies.
During fiscal year 1996 and 1995, the Delaware Company's Canadian operations
contributed 44% and 34% to total revenues and $18,655,000 and $25,431,000 to
operating income, respectively, reflecting increased activity at its Cambridge,
Ontario location, principally due to the supply of replacement recirculating
steam generators to domestic utilities and work for two government owned
utilities located in the Far East.
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<PAGE> 23
FISCAL YEAR 1996 VS FISCAL YEAR 1995
Power Generation Systems and Equipment's revenues increased $45,257,000 to
$1,708,274,000. This was primarily due to higher revenues from engineering,
procurement and construction of cogeneration plants, from defense and
space-related products (other than nuclear fuel assemblies and reactor
components), replacement nuclear steam generators for domestic customers
manufactured at B&W's Cambridge, Ontario location and fabrication of industrial
boilers. These increases were partially offset by lower revenues from repair
and alteration of existing fossil fuel steam systems, fabrication and erection
of fossil fuel steam and environmental control systems and nuclear fuel
assemblies and reactor components for the U.S. Government.
Power Generation Systems and Equipment's segment operating income decreased
$466,000 to $17,176,000 due to the write-off of an insurance claim of
$12,600,000 due to an unfavorable arbitration ruling related to the recovery of
cost incurred for corrective action in certain utility and industrial
installations. There were also lower margins from engineering, procurement and
construction of cogeneration plants. In addition, there were lower volume and
margins from repair and alteration of existing fossil fuel steam systems, plant
enhancement projects and from operations and maintenance contracts. These
decreases were offset by provisions of $46,489,000 for the decontamination,
decommissioning and closing of certain nuclear manufacturing facilities and the
closing of a manufacturing facility in the prior year. In addition, there were
higher volume and margins from replacement nuclear steam generators, improved
margins from fabrication of fossil fuel steam and environmental control systems
(including a license buyout agreement of $8,574,000) and higher volume from
defense and space-related products (other than nuclear fuel assemblies and
reactor components).
Power Generation Systems and Equipment's equity in income of investees
increased $25,891,000 to $31,747,000. This represents the results of
approximately 10 active joint ventures, but is primarily due to a nonrecurring
equity income gain of $30,612,000 resulting from the sale of power purchase
contracts back to a local utility.
Backlog for this segment at March 31, 1996 was $2,276,973,000 compared to
$2,130,754,000 at March 31, 1995. At March 31, 1996, this segment's backlog
with the U. S. Government was $816,783,000 (of which $57,988,000 had not yet
been funded) and includes orders for nuclear fuel assemblies and reactor
components for the U.S. Navy. These orders are expected to continue to
comprise a substantial portion of backlog with the U.S. Government as B&W is
the sole source provider of these nuclear fuel assemblies due to reload
requirements.
This segment's foreign markets for industrial and utility boilers remain strong
as electric utilities in Asia and the Middle East are active purchasers of
large, new baseload generating units, due to the rapid growth of their
economies and to the small existing stock of electrical generating capacity in
most developing companies.
Domestic utility markets remain weak as competition within the electric power
industry in the United States has intensified, as the Federal Energy Regulatory
Commission has begun to implement the provisions of the Energy Policy Act of
1992, which deregulated the electric
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<PAGE> 24
power generation industry by allowing independent power producers and other
companies access to its transmission and distribution systems. The modest
growth in demand and the changes associated with this transition from a
regulated to a competitive industry have caused electric utilities to defer
ordering large, new baseload power plants in the United States and when
electric utilities are in need of peaking capacity, many are purchasing
combustion turbines with short lead-times or they are purchasing electricity
from other utilities and non-regulated sources, such as cogenerators and
independent power producers. In addition, the Clean Air Act amendments of 1990
required many customer industries to implement systems to limit or remove
emissions. These mandated expenditures have caused some customers to defer
repairs and refurbishments on existing plants. However, the U.S. market for
replacement nuclear steam generators is expected to continue to make
significant contributions to operating income in the foreseeable future,
although at lower levels than in recent years.
As discussed (see Item 1F - Insurance), provisions for estimated future costs
for non-employee products liability asbestos claims have been recognized for
financial reporting purposes (see Notes 1 and 11 to the consolidated financial
statements and the discussion of Liquidity below). Inherent in the estimate of
these 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.
Marine Construction Services' revenues decreased $230,367,000 to $329,583,000
primarily due to inclusion in the prior year of revenues related to the marine
construction services business sold to International on January 31, 1995 and
lower volume from shipyard operations. These decreases were partially offset
by higher revenues from engineering activities in the U.S.
Marine Construction Services' segment operating loss decreased $7,688,000 to
$26,931,000 primarily due to income in the prior period related to the marine
construction business sold to International on January 31, 1995. These
decreases were partially offset by higher margins from domestic shipyard
operations.
Marine Construction Services' equity in income of investees increased $56,000
to $4,534,000 primarily due to improved operating results of a domestic
fabrication joint venture. Last year's results included income from its CMM
joint venture whose results are now included in J. Ray McDermott, S.A.
Backlog for this segment at March 31, 1996 was $187,288,000 as compared to
$333,912,000 at March 31, 1995. Not included in backlog at March 31, 1996 and
1995 was backlog relating to contracts performed by unconsolidated joint
ventures of $24,000,000 and $36,000,000, respectively.
The activity of the Marine Construction Services' segment (including its
significant investees) depends mainly on the capital expenditures of oil and
gas companies for developmental construction. These expenditures are
influenced by the selling price of oil and gas along with the cost of
production and delivery, the terms and conditions of offshore leases, the
discovery rates of new reserves offshore, the ability of the oil and gas
industry to raise capital, and political and economic conditions. Demand for
new ship construction and inland barges is
20
<PAGE> 25
impacted by charter rates that ship and barge owners can earn and by the age
and condition of the existing fleet.
Oil company capital exploration and production budgets in calendar year 1996
are higher than 1995 expenditures. While oil prices remain flat, natural gas
prices have increased significantly as compared to calendar year 1995.
Expenditures are expected to increase. Demand for offshore drilling rigs has
increased and this, historically, has been a leading indicator for an increase
in the need for marine construction services. This segment's markets are
expected to begin to emerge from the competitive environment that has put
pressure on margins in prior periods.
Interest income decreased $888,000 to $11,798,000 primarily due to decreased
investments in government obligations and other investments.
Interest expense increased $11,574,000 to $52,910,000, primarily due to a
reduction of accrued interest of $26,300,000 on proposed tax deficiencies that
was recorded in the prior year, partially offset by changes in debt obligations
and interest rates prevailing thereon.
Other-net increased $37,939,000 to income of $4,935,000 from expense of
$33,004,000. This increase was primarily due to a loss related to the
reduction of estimated products liability asbestos claim recoveries of
$14,478,000 from insurers and a provision for the settlement of a lawsuit, both
in the prior period, and gains in the current year of $6,425,000 on the
disposal of assets.
The benefit from income taxes decreased $24,120,000 to $5,269,000 while loss
before the benefit from income taxes and cumulative effect of accounting
changes decreased $70,857,000 to $32,412,000. The decrease in the benefit from
income taxes is due primarily to the decrease in loss from operations.
Net loss decreased $47,249,000 to $27,143,000 reflecting the cumulative effect
of the adoption of SFAS No. 112 of $512,000 in the prior year in addition to
the other items described above.
FISCAL YEAR 1995 VS FISCAL YEAR 1994
Power Generation Systems and Equipment's revenues increased $49,063,000 to
$1,663,017,000. This was primarily due to higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems, nuclear fuel
assemblies and reactor components for the U.S. Government, replacement nuclear
steam generators, repair and alteration of existing fossil fuel steam systems,
and operations and maintenance contracts for small power plants. These
increases were partially offset by lower revenues from defense and
space-related products (other than nuclear fuel assemblies and reactor
components), extended scope of supply and fabrication of industrial boilers,
and replacement parts.
Power Generation Systems and Equipment's segment operating income decreased
$31,972,000 to $17,642,000 due to provisions for the decontamination,
decommissioning and closing of certain nuclear manufacturing facilities and the
closing of a manufacturing facility ($46,489,000) and a favorable warranty
reserve adjustment recorded in the prior year
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<PAGE> 26
($11,000,000). Operating income increased due to lower operating expenses
(including favorable workers compensation adjustments) and administrative
expenses (including cost reduction initiatives); higher volume and margins on
operations and maintenance contracts; and improved margins on plant enhancement
projects. These increases were partially offset by lower volume and margins on
extended scope of supply and fabrication of industrial boilers, lower volume on
replacement parts, and lower margins on nuclear fuel assemblies and reactor
components for the U.S. Government.
Power Generation Systems and Equipment's equity in income of investees
decreased $2,779,000 to $5,856,000. This represents the results of
approximately 12 active joint ventures each of which is relatively small. The
decrease was primarily due to a provision for loss on discontinuing a domestic
joint venture.
Marine Construction Services' revenues decreased $72,292,000 to $559,950,000
primarily due to lower volume in domestic engineering, fabrication and marine
operations, and shipyard operations. These decreases were partially offset by
the inclusion of revenues of MECL, which was acquired in June 1993, for the
full fiscal year. (See Note 2 to the consolidated financial statements
concerning the sale of a portion of the marine construction services business
to International on January 31, 1995.)
Marine Construction Services' segment operating income (loss) decreased
$40,287,000 to a loss of $34,619,000 from income of $5,668,000 primarily due to
unfavorable operating results from MECL's operations, higher operating
expenses, lower margins from shipyard operations, and start-up costs associated
with new shipbuilding activities. These decreases were partially offset by
higher margins in domestic engineering.
Marine Construction Services' equity in income of investees increased
$4,033,000 to $4,478,000 primarily due to improved operating results of its
Mexican joint venture.
Interest income increased $7,144,000 to $12,686,000 primarily due to higher
interest rates on investments in government obligations and other investments.
Interest expense decreased $12,534,000 to $41,336,000, primarily due to a
reduction of accrued interest on proposed tax deficiencies, partially offset by
changes in debt obligations and interest rates prevailing thereon.
Other-net expense increased $23,938,000 to $33,004,000 primarily due to a loss
related to the reduction of estimated products liability asbestos claim
recoveries from insurers, a litigation provision for the settlement of a
lawsuit and foreign currency transaction losses in the current period.
Provision for (benefit from) income taxes decreased $30,304,000 to a benefit of
$29,389,000 from a provision of $915,000 while loss before the benefit from
income taxes and cumulative effect of accounting changes increased $77,868,000
to $103,269,000. The increase in the benefit from income taxes is due
primarily to the increase in loss from operations.
Net loss decreased $52,674,000 to $74,392,000 reflecting the cumulative effect
of the adoption of SFAS No. 112 of $512,000 in the current year and the
cumulative effect of the change in accounting for non-employee products
liability asbestos claims of $100,750,000 in the prior year, in addition to the
other items described above.
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Effect of Inflation and Changing Prices
The Delaware Company's financial statements are prepared in accordance with
generally accepted accounting principles, using historical dollar accounting
(historical cost). Statements based on historical cost, however, do not
adequately reflect the cumulative effect of increasing costs and changes in the
purchasing power of the dollar, especially during times of significant and
continued inflation.
The management of the Delaware Company is cognizant of the effects of inflation
and, in order to minimize the negative impact of inflation on its operations,
attempts to cover the increased cost of anticipated changes in labor, material
and service costs, either through an estimation of such changes, which is
reflected in an original price, or through price escalation clauses in its
contracts.
Liquidity and Capital Resources
During fiscal year 1996, the Delaware Company's cash and cash equivalents
increased $1,872,000 to $22,886,000 and total debt decreased $120,997,000 to
$598,871,000. This included the Delaware Company's repayment of its 10.25%
Notes of $150,000,000 on June 1, 1995. During the same period, the Delaware
Company used cash of $200,565,000 in operating activities; $150,165,000 for
repayment of long-term debt; $39,111,000 for additions to property, plant and
equipment; $37,967,000 for repayment of short-term borrowings; $13,663,000 for
cash dividends on the Delaware Company's preferred stocks; $13,083,000 for
acquisitions; and $5,743,000 for the repurchase of preferred stock to satisfy
current and future sinking fund requirements. Also during this period, the
Delaware Company received cash of $363,845,000 from the liquidation of its
investment portfolio; $65,363,000 from short-term borrowing from McDermott
International, Inc.; and $29,465,000 from the sale of assets.
The increase in receivables reflects the reduction in the amount of receivables
sold to a U.S. bank and a federal income tax refund receivable. Lower payables
are primarily due to settlements of amounts owed to McDermott International,
Inc. Increases in net contracts in progress and advance billings were
primarily due to the timing of billings on B&W's Canadian contracts.
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 increased during the second
half of fiscal year 1995 and the first nine months of fiscal year 1996, but
have decreased during the March quarter. Management believes, based on
information currently available, that the recent increase represented 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 $5,500 per claim over the
last three years) has continued to rise. Claims paid during the fiscal year
ended March 31, 1996 were $151,961,000, of which $135,778,000 has been
recovered or is due from insurers. At March 31, 1996, receivables of
$63,223,000 were due from insurers for reimbursement of settled claims,
including $21,050,000 due from certain insurers which have refused to reimburse
B&W for amount 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
23
<PAGE> 28
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.
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 (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 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
$32,682,000 to $39,111,000 in fiscal year 1996. Fiscal year 1995 included
$20,908,000 of capital expenditures relating to the portion of the marine
construction services business sold to International. The majority of
expenditures incurred in fiscal year 1996 were to maintain and replace existing
facilities and equipment. The Delaware Company has committed to make capital
expenditures of approximately $8,069,000 during fiscal year 1997.
At March 31, 1996 and 1995, The Babcock & Wilcox Company had sold, with limited
recourse, an undivided interest in a designated pool of qualified accounts
receivable of approximately $107,000,000 and $175,000,000, respectively, under
an agreement with a U.S. Bank. During fiscal year 1996, the maximum sales
limit available under the agreement was reduced from $225,000,000 to
$140,000,000 and was amended to provide for an annual renewal of the program.
At March 31, 1996 and 1995, the Delaware Company had available to it various
uncommitted short-term lines of credit from banks totalling $285,859,000 and
$247,903,000, respectively. Borrowings against these lines of credit at March
31, 1996 and 1995 were $58,314,000 and $33,220,000, respectively. In addition,
The Babcock & Wilcox Company had available to it an unsecured and committed
revolving credit facility which was amended during fiscal year 1996 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 borrowings of $50,000,000 against this facility at March 31, 1996 and none
at March 31, 1995.
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.
Substantially all of the net assets of the Delaware Company is subject to such
restrictions. At March 31, 1996, 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
24
<PAGE> 29
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. There were no transactions under this agreement during fiscal
year 1996.
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. At March 31,
1996, the Delaware Company had borrowed $65,363,000 against this agreement, all
of which was repaid in April 1996 with funds from borrowings under shor-term
lines of credit. There were no borrowings against this agreement at March 31,
1995.
Working capital increased to $92,086,000 at March 31, 1996 from a deficit of
$21,580,000 at March 31, 1995. During 1997, the Delaware Company expects to
obtain funds to meet capital expenditure, working capital and debt maturity
requirements from operating activities, additional borrowings and capital
contributions from International (if required). 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 1996 and 1995.
The Delaware Company has provided a valuation allowance ($14,673,000 at March
31, 1996) 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 at March 31, 1996 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.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued 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 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.
25
<PAGE> 30
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
McDermott Incorporated
We have audited the accompanying consolidated balance sheet of McDermott
Incorporated as of March 31, 1996 and 1995, and the related consolidated
statements of loss, stockholder's equity and cash flows for each of the three
years in the period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McDermott
Incorporated at March 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for postemployment benefits and investment
securities in 1995 and recoveries of products liability claims in 1994.
ERNST & YOUNG LLP
New Orleans, Louisiana
May 15, 1996
26
<PAGE> 31
MCDERMOTT INCORPORATED
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 22,886 $ 21,014
Short-term investments 439 130,195
Accounts receivable - trade 257,094 233,005
Accounts receivable - other 82,145 54,655
Accounts receivable from McDermott International, Inc. 38,698 19,493
Insurance recoverable - current 116,280 111,188
Contracts in progress 275,488 223,262
Inventories 69,739 61,714
Deferred income taxes 82,381 74,643
Other current assets 7,916 6,840
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 953,066 936,009
- --------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land 12,922 15,580
Buildings 160,199 171,319
Machinery and equipment 474,765 488,373
Property under construction 19,270 30,217
- --------------------------------------------------------------------------------------------------------------
667,156 705,489
Less accumulated depreciation 388,111 402,500
- --------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 279,045 302,989
- --------------------------------------------------------------------------------------------------------------
Investments - 231,701
- --------------------------------------------------------------------------------------------------------------
Insurance Recoverable 606,963 750,219
- --------------------------------------------------------------------------------------------------------------
Investment in McDermott International, Inc. 600,292 605,242
- --------------------------------------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net
Assets of Purchased Businesses Less Accumulated
Amortization of $97,814,000 at March 31, 1996
and $90,923,000 at March 31, 1995 135,877 136,311
- --------------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 256,802 248,718
- --------------------------------------------------------------------------------------------------------------
Other Assets 187,735 175,240
- --------------------------------------------------------------------------------------------------------------
TOTAL $ 3,019,780 $ 3,386,429
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 32
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1996 1995
---- ----
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 109,626 $ 296,718
Note payable to McDermott International, Inc. 65,363 -
Accounts payable 145,779 132,799
Accounts payable to McDermott
International, Inc. 4,410 51,789
Environmental and products liabilities - current 159,824 133,280
Accrued employee benefits 72,173 83,078
Accrued liabilities - other 152,309 128,760
Advance billings on contracts 149,245 117,584
U.S. and foreign income taxes 2,251 13,581
- --------------------------------------------------------------------------------------------------------------
Total Current Liabilities 860,980 957,589
- --------------------------------------------------------------------------------------------------------------
Long-Term Debt 423,882 423,150
- --------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 377,457 371,707
- --------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 721,740 913,939
- --------------------------------------------------------------------------------------------------------------
Other Liabilities 89,501 128,258
- --------------------------------------------------------------------------------------------------------------
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 91,164
- --------------------------------------------------------------------------------------------------------------
Total Redeemable Preferred Stocks 173,301 179,251
- --------------------------------------------------------------------------------------------------------------
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 625,841 620,981
Deficit (234,075) (193,341)
Minimum pension liability (763) (39)
Currency translation adjustments (18,088) (15,070)
- --------------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 372,919 412,535
- --------------------------------------------------------------------------------------------------------------
TOTAL $ 3,019,780 $ 3,386,429
==============================================================================================================
</TABLE>
28
<PAGE> 33
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF LOSS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues $ 2,027,975 $ 2,222,390 $ 2,243,366
- ----------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (before depreciation
and amortization) 1,863,058 2,031,884 1,985,589
Depreciation and amortization 50,280 66,104 66,825
Selling, general and
administrative expenses 147,153 176,351 168,039
- ----------------------------------------------------------------------------------------------------------------
2,060,491 2,274,339 2,220,453
- ----------------------------------------------------------------------------------------------------------------
Operating Income (Loss) before Equity in
Income of Investees (32,516) (51,949) 22,913
Equity in Income of Investees 36,281 10,334 9,080
- ----------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 3,765 (41,615) 31,993
- ----------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 11,798 12,686 5,542
Interest expense (52,910) (41,336) (53,870)
Other-net 4,935 (33,004) (9,066)
- ----------------------------------------------------------------------------------------------------------------
(36,177) (61,654) (57,394)
- ----------------------------------------------------------------------------------------------------------------
Loss before Provision for (Benefit from)
Income Taxes and Cumulative Effect
of Accounting Changes (32,412) (103,269) (25,401)
Provision for (Benefit from) Income Taxes (5,269) (29,389) 915
- ----------------------------------------------------------------------------------------------------------------
Loss before Cumulative Effect of
Accounting Changes (27,143) (73,880) (26,316)
Cumulative Effect of Accounting Changes - (512) (100,750)
- ----------------------------------------------------------------------------------------------------------------
Net Loss $ (27,143) $ (74,392) $ (127,066)
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements. Significant
related party transactions are disclosed in Note 6.
29
<PAGE> 34
MCDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Capital Retained Minimum Currency Total
Common in Excess Earnings Pension Translation Stockholder's
Stock(1) of Par Value (Deficit) Liability Adjustments Equity
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance March 31, 1993 $ 4 $ 356,802 $ 37,926 $ (5) $ (5,236) $ 389,491
Capital contributions from
McDermott International,
Inc.
Cash - 100,000 - - - 100,000
Investments, including
accrued interest - 132,283 - - - 132,283
Net loss - - (127,066) - - (127,066)
Preferred stock dividends - - (15,719) - - (15,719)
Minimum pension liability - - - (615) - (615)
Translation adjustments - - - - (6,271) (6,271)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1994 4 589,085 (104,859) (620) (11,507) 472,103
- ------------------------------------------------------------------------------------------------------------------------------------
Adoption of SFAS 115 (1,480) (1,480)
Sale of marine construction
services business
to International - 29,015 - - - 29,015
Redemption of preferred
shares - 239 - - - 239
Tax benefit on exercise of
stock options - 2,642 - - - 2,642
Net loss - - (74,392) - - (74,392)
Preferred stock dividends - - (14,142) - - (14,142)
Minimum pension liability - - - 581 - 581
Gain on investments - - 1,532 - - 1,532
Translation adjustments - - - - (3,563) (3,563)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1995 4 620,981 (193,341) (39) (15,070) 412,535
- ------------------------------------------------------------------------------------------------------------------------------------
Division of pension plan - 4,585 - - - 4,585
Redemption of preferred
shares - 206 - - - 206
Tax benefit on exercise of stock
options - 69 - - - 69
Net loss - - (27,143) - - (27,143)
Preferred stock dividends - - (13,539) - - (13,539)
Minimum pension liability - - - (724) - (724)
Loss on investments - - (52) - - (52)
Translation adjustments - - - - (3,018) (3,018)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1996 $ 4 $ 625,841 $ (234,075) $ (763) $ (18,088) $ 372,919
====================================================================================================================================
</TABLE>
(1) There were 3,600 common shares outstanding at March 31, 1996, 1995, and
1994 consisting of 3,000 voting shares entitled to 12,000 votes per share
and 600 non-voting shares.
See accompanying notes to the consolidated financial statements.
30
<PAGE> 35
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (27,143) $ (74,392) $ (127,066)
- ----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 50,280 66,104 66,825
Gain on sale and disposal of assets (6,425) (1,527) (904)
Cumulative effect of accounting changes - 512 100,750
Provision for deferred taxes 10,361 1,869 746
Other (1,531) 3,001 327
Changes in assets and liabilities, net of effects
from acquisitions and divestiture:
Accounts receivable (76,598) 20,425 (13,571)
Accounts payable (39,001) 44,345 8,361
Inventories (5,359) 788 1,738
Net contracts in progress and advance billings (20,474) (33,044) 29,470
Income taxes (25,230) (48,989) 4,215
Accrued liabilities 20,310 (17,666) (49,297)
Other, net (35,275) 16,333 8,682
Proceeds from insurance for products liability claims 107,481 105,314 103,994
Payments of products liabilities claims (151,961) (126,151) (112,271)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (200,565) (43,078) 21,999
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (13,083) - (28,249)
Proceeds from sale and disposal of assets 29,465 13,171 3,712
Purchases of property, plant and equipment (39,111) (71,793) (62,650)
Purchases of short and long-term investments (196,610) (20,699) (497)
Sales and maturities of short and
long-term investments 560,455 20,603 -
Sales of government obligations, under reverse
repurchase agreement with affiliates - - 753,063
Purchases of government obligations, under reverse
repurchase agreements with affiliates - - (674,203)
Proceeds from redemption of International stock 2,500 2,500 2,500
Investment in equity investees (299) (10,190) (979)
Other 1,379 (49) -
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 344,696 (66,457) (7,303)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 36
Continued
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (150,165) $ (16,707) $ (207,646)
Issuance of long-term debt - - 92,841
Increase (decrease) in short-term borrowing (37,967) 130,811 (4,580)
Short-term borrowing from McDermott
International, Inc. 65,363 - -
Dividends paid (13,663) (14,142) (15,719)
Capital contribution from International - - 100,000
Redemption of preferred stock (5,743) (17,182) (7,810)
Other (439) (75) 5,034
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (142,614) 82,705 (37,880)
- ---------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 355 480 (1,001)
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,872 (26,350) (24,185)
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 21,014 47,364 71,549
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 22,886 $ 21,014 $ 47,364
===============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 57,305 $ 62,623 $ 61,539
Income taxes (net of refunds) $ 24,697 $ (11,705) $ 3,483
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 37
MCDERMOTT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of McDermott
Incorporated and all subsidiaries. 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 to conform with the presentation at March 31,
1996.
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Changes in Accounting Policies
Products Liabilities - As a result of the consensus reached on Emerging Issues
Task Force ("EITF") Issue No. 93-5, a company is no longer permitted to offset,
for recognition purposes, reasonably possible recoveries against probable
losses which until fiscal year 1994 had been the Delaware Company's practice
with respect to estimated future costs for non-employee products liability
asbestos claims. Effective April 1, 1993, the Delaware Company adopted this
provision of EITF Issue No. 93-5 as a change in accounting principle and
provided for estimated future costs to the extent that recovery from its
insurers was not determined to be probable. 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 pretax Loss before Cumulative Effect of Accounting
Change of $19,947,000 ($12,168,000, net of tax) in fiscal year 1994, as costs
in fiscal year 1994 that would have been recognized under the Delaware
Company's prior practice were included in the cumulative effect of the
accounting change.
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
33
<PAGE> 38
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 fiscal year 1995. Prior to April 1, 1994,
the Delaware Company recognized the cost of providing most of these benefits on
a cash basis.
Investments - Effective April 1, 1994, the Delaware Company adopted SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities" for
investments held as of or acquired after April 1, 1994. The adoption of SFAS
No. 115 resulted in a decrease in the opening balance of stockholder's equity
of $1,480,000 to reflect the net unrealized holding losses on the Delaware
Company's investment securities which were previously carried at amortized
cost.
At March 31, 1996 and 1995, the Delaware Company's investments, primarily
government obligations and other debt securities, are classified as
available-for-sale and are carried at fair value, with the unrealized gains and
losses, net of tax, reported in a separate component of shareholder's equity.
Management determines the appropriate classifications of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. Investment securities available for current operations are classified in
the balance sheet as current assets while securities held for long-term
investment purposes are classified as non-current assets. The amortized cost
of debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses are included in other income. The cost of securities
sold is based on the specific identification method. Interest on securities is
included in interest income.
Income Taxes
Income taxes have been provided using the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes."
Foreign Currency Translation
Assets and liabilities of foreign operations, other than operations in highly
inflationary economies, are translated into U. S. Dollars at current exchange
rates and income statement items are translated at average exchange rates for
the year. Adjustments resulting from the translation of foreign currency
financial statements are recorded in a separate component of equity. Foreign
currency transaction adjustments are reported in income. Included in Other
Income (Expense) are transaction gains (losses) of $(750,000), $(384,000), and
$1,695,000 for fiscal years 1996, 1995 and 1994, respectively.
Contracts and Revenue Recognition
Contract revenues and related costs are principally recognized on a percentage
of completion method for individual contracts or components thereof based upon
work performed or a cost to cost method, as applicable to the product or
activity involved. Revenues and related costs so recorded, plus accumulated
contract costs that exceed amounts invoiced to customers under the terms of the
contracts, are included in Contracts in Progress. Billings that exceed
accumulated contract costs and revenues and costs recognized under percentage
of completion are included in Advance Billings on Contracts. Most long-term
contracts have
34
<PAGE> 39
provisions for progress payments. There are no unbilled revenues which will
not be billed. Contract price and cost estimates are reviewed periodically as
the work progresses and adjustments proportionate to the percentage of
completion are reflected in income in the period when such estimates are
revised. Provisions are made currently for all known or anticipated losses.
Variations from estimated contract performance could result in a material
adjustment to operating results for any fiscal quarter or year. Claims for
extra work or changes in scope of work are included in contract revenues when
collection is probable. Included in Accounts Receivable and Contracts in
Progress are approximately $46,627,000 and $46,717,000 relating to commercial
and U. S. Government contracts claims whose final settlement is subject to
future determination through negotiations or other procedures which had not
been completed at March 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(In thousands)
<S> <C> <C>
Included in Contracts in Progress are:
Costs Incurred less costs of revenue recognized $ 25,406 $ 24,853
Revenues recognized less billings to customers 250,082 198,409
- --------------------------------------------------------------------------------------------------------------
Contracts in Progress $ 275,488 $ 223,262
==============================================================================================================
Included in Advance Billings on Contracts are:
Billings to customer less revenues recognized $ 154,121 $ 144,430
Costs incurred less cost of revenue recognized (4,876) (26,846)
- --------------------------------------------------------------------------------------------------------------
Advance Billings on Contracts $ 149,245 $ 117,584
==============================================================================================================
</TABLE>
The Delaware Company is usually entitled to financial settlements relative to
the individual circumstances of deferrals or cancellations of Power Generation
Systems and Equipment contracts. The Delaware Company does not recognize such
settlements or claims for additional compensation until final settlement is
reached.
Included in accounts receivable - trade are amounts representing retainages on
contracts as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(In thousands)
<S> <C> <C>
Retainages $ 46,181 $ 51,393
==============================================================================================================
Retainages expected to be collected after one year $ 17,699 $ 41,355
==============================================================================================================
</TABLE>
Of its long-term retainages at March 31, 1996, the Delaware Company anticipates
collection of $13,541,000 in fiscal year 1998 and $4,012,000 in fiscal year
1999.
35
<PAGE> 40
Inventories
Inventories are carried at the lower of cost or market. Cost is determined on
an average cost basis except for certain materials inventories, for which the
last-in-first-out (LIFO) method is used. The cost of approximately 15% and 18%
of total inventories was determined using the LIFO method at March 31, 1996 and
1995, respectively. Consolidated inventories at March 31, 1996 and 1995 are
summarized below:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 39,604 $ 36,579
Work in Progress 17,305 15,341
Finished Goods 12,830 9,794
- --------------------------------------------------------------------------------------------------------------
$ 69,739 $ 61,714
==============================================================================================================
</TABLE>
Warranty Expense
Estimated warranty expense which may be required to satisfy contractual
requirements, primarily of the Power Generation Systems and Equipment segment,
is accrued relative to revenue recognition on the respective contracts. In
addition, specific provisions are made where the costs of warranty are expected
to significantly exceed such accruals.
Environmental Clean-up Costs
The Delaware Company accrues for future decommissioning and decontamination of
its nuclear facilities that will permit the release of these facilities to
unrestricted use at the end of each facility's life, which is a condition of
its licenses from the Nuclear Regulatory Commission. Such accruals are based
on the estimated cost of those activities over the economic useful life of each
facility, which is estimated at 40 years.
Research and Development
The cost of research and development which is not performed on specific
contracts is charged to operations as incurred. Such expense was approximately
$21,491,000, $19,455,000 and $19,583,000 in fiscal years 1996, 1995 and 1994,
respectively. In addition, expenditures on research and development activities
of approximately $45,106,000, $44,240,000 and $48,112,000 in fiscal years 1996,
1995 and 1994, respectively, were paid for by customers of the Delaware
Company.
Depreciation, Maintenance and Repairs
Property, plant and equipment is depreciated on the straight-line method, using
estimated economic useful lives of 8 to 40 years for buildings and 2 to 28
years for machinery and equipment. Maintenance, repairs and renewals which do
not materially prolong the useful life of an asset are expensed as incurred.
Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased
Businesses
Excess of the cost over fair value of net assets of purchased businesses
primarily pertains to the acquisition of The Babcock & Wilcox Company, which is
being amortized on a straight-line
36
<PAGE> 41
basis over 40 years and the acquisition of McDermott Engineers and Constructors
(Canada) Ltd. which is being amortized on a straight-line basis over 10 years.
Management periodically reviews goodwill to assess recoverability, and
impairments would be recognized in operating results if a permanent diminution
in value were to occur.
Capitalization of Interest Cost
In fiscal years 1996, 1995 and 1994, total interest cost incurred was
$53,511,000, $43,919,000 and $55,187,000, respectively, of which $601,000,
$2,583,000 and $1,317,000, respectively, was capitalized.
Cash Equivalents
Cash equivalents are highly liquid investments, with maturities of three months
or less when purchased, which are not held as part of the investment portfolio.
Derivative Financial Instruments
Derivatives, primarily forward exchange contracts, are utilized to minimize
exposure and reduce risk from foreign exchange fluctuations in the regular
course of business. Gains and losses related to qualifying hedges of firm
commitments are deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transactions occur. Gains and losses on
forward exchange contracts which hedge foreign currency assets or liabilities
are recognized in income as incurred. Such amounts effectively offset gains
and losses on the foreign currency assets or liabilities that are hedged.
Accounting for Long-Lived Assets
The Delaware Company is currently reviewing SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets to Be Disposed Of," effective for fiscal years
beginning after December 15, 1995. SFAS No. 121 established financial
accounting and reporting standards for long-lived assets and certain
identifiable intangibles. 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.
NOTE 2 - SALE OF MARINE CONSTRUCTION SERVICES BUSINESSES
In connection with the merger of Offshore Pipelines, Inc. into J. Ray
McDermott, S.A., ("JRM") a subsidiary of International, on January 31, 1995,
the Delaware Company sold a portion of its marine construction services
business having a net book value of $187,622,000 (which included property,
plant and equipment of $190,780,000) to International and received marketable
securities having an aggregate fair value of $230,173,000. The excess of the
sales price over the net book value of net assets sold to International of
$29,015,000 (net of tax of $13,536,000) was included in Capital in Excess of
Par Value.
Revenues and operating income, respectively, of the portion of the marine
construction services business sold were $243,959,000 and $7,324,000 in fiscal
year 1995 and $295,125,000 and $22,752,000 in fiscal year 1994.
37
<PAGE> 42
NOTE 3 - ACQUISITIONS
During the three years ended March 31, 1996, the Delaware Company made the
acquisitions described below which were accounted for by the purchase method.
Operating results have been included in the Consolidated Statement of Loss from
the acquisition dates. Pro forma results of operations have not been presented
because the effects of these acquisitions were not significant.
During fiscal year 1996, the Delaware Company acquired the assets of Joy
Environmental Technologies, which specialized in technologies used by electric
utilities and other industrial companies to comply with clean air regulations.
The purchase price was $13,083,000 of which approximately $6,457,000 was
assigned to excess of cost over fair value of net assets acquired and is being
amortized over a period of twenty years.
During June 1993, the Delaware Company acquired a controlling interest in
McDermott Engineers and Constructors (Canada) Ltd. ("MECL"), formerly Delta
Catalytic Corporation, for $28,249,000. Of the purchase price, $17,170,000
was assigned to excess of cost over fair value of net assets acquired and is
being amortized over a period of 10 years. International acquired the minority
ownership interest in MECL in fiscal year 1996. Included in Other-net is
minority interest income of $7,277,000 relating to International's share of
MECL's net loss.
NOTE 4 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
Investments in entities which are accounted for on the equity method were
$40,958,000 and $35,524,000 at March 31, 1996 and 1995, respectively.
Transactions with entities for which investments are accounted for on the
equity method included sales to ($37,487,000, $5,693,000 and $5,443,000 in
fiscal years 1996, 1995 and 1994, respectively) and purchases from ($378,000,
$195,000 and $3,510,000 in fiscal years 1996, 1995 and 1994, respectively)
these entities. Included in Accounts payable at March 31, 1996 and 1995 are
$9,192,000 and $3,180,000, respectively of payables to unconsolidated
affiliates. Dividends received from unconsolidated investees were $39,734,000,
$9,681,000 and $5,749,000 in fiscal years 1996, 1995 and 1994, respectively.
Undistributed earnings in unconsolidated affiliates were $13,523,000 and
$11,339,000, respectively, at March 31, 1996 and 1995.
38
<PAGE> 43
Summarized combined balance sheet and income statement information based on the
most recent financial information for equity investments in joint ventures and
other entities (25% to 50% owned) are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Current Assets $ 76,789 $ 103,941
Non-Current Assets 266,017 341,425
- ----------------------------------------------------------------------------------------------------------------
Total Assets $ 342,806 $ 445,366
================================================================================================================
Current Liabilities $ 56,179 $ 79,817
Non-Current Liabilities 199,498 269,173
Owners' Equity 87,129 96,376
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities and Owners'
Equity $ 342,806 $ 445,366
================================================================================================================
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues $ 198,735 $ 221,438 $ 147,394
Gross Profit $ 26,906 $ 67,116 $ 23,253
Income before Provision for Income Taxes $ 81,541 $ 32,729 $ 13,117
Provision for Income Taxes 4,843 3,581 2,672
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 76,698 $ 29,148 $ 10,445
================================================================================================================
</TABLE>
39
<PAGE> 44
NOTE 5 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of March 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accrued warranty expense $ 13,725 $ 12,796
Accrued vacation pay 8,227 8,574
Accrued liabilities for self-insurance (including
postretirement health care benefits) 166,467 167,454
Accrued liabilities for executive and
employee incentive compensation 14,884 16,103
Investments in joint ventures and affiliated companies 8,014 7,317
Environmental and products liabilities 344,839 410,588
Other 22,443 35,244
- --------------------------------------------------------------------------------------------------------------
Total deferred tax assets 578,599 658,076
- --------------------------------------------------------------------------------------------------------------
Valuation allowance for deferred tax assets (14,673) (13,852)
- --------------------------------------------------------------------------------------------------------------
Deferred tax assets -net 563,926 644,224
- --------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment 29,917 29,006
Prepaid pension costs 99,997 94,834
Investments in joint ventures and affiliated companies 11,261 27,346
Insurance recoverable 282,065 336,429
Other 1,867 7,429
- --------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 425,107 495,044
- --------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 138,819 $ 149,180
==============================================================================================================
</TABLE>
Loss before provision for (benefit from) income taxes and cumulative effect of
accounting changes was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
U. S. $ (33,241) $ (120,005) $ (57,555)
Other than U. S. 829 16,736 32,154
- --------------------------------------------------------------------------------------------------------------
$ (32,412) $ (103,269) $ (25,401)
==============================================================================================================
</TABLE>
40
<PAGE> 45
The provision for (benefit from) income taxes consists of:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ (18,163) $ (36,266) $ (15,083)
State and local (3,810) (4,405) 1,804
Foreign 6,343 9,413 13,448
- --------------------------------------------------------------------------------------------------------------
Total current (15,630) (31,258) 169
==============================================================================================================
Deferred:
Federal 14,703 916 1,268
State and local (3,009) 2,776 (4,392)
Foreign (1,333) (1,823) 3,870
- --------------------------------------------------------------------------------------------------------------
Total deferred 10,361 1,869 746
- --------------------------------------------------------------------------------------------------------------
Provision for (Benefit from) Income Taxes $ (5,269) $ (29,389) $ 915
==============================================================================================================
</TABLE>
The effective income tax rate is reconciled to the statutory federal income tax
rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
PERCENT PERCENT PERCENT
------- ------- -------
<S> <C> <C> <C>
Statutory federal tax rate (35.0) (35.0) (35.0)
State and local income tax effect (1.6) (0.6) 0.8
Foreign operations 10.6 1.9 15.3
Excess of cost over fair value of net assets
of purchased businesses 7.3 2.3 8.7
Non-deductible business expenses 4.9 1.2 3.0
Dividends from affiliates 1.7 1.8 7.4
Minority interest (6.9) (0.5) 3.3
Other 2.7 0.4 0.1
- --------------------------------------------------------------------------------------------------------------
Effective Income Tax Rate (16.3) (28.5) 3.6
==============================================================================================================
</TABLE>
Undistributed earnings of consolidated foreign subsidiaries amounted to
approximately $61,800,000 at March 31, 1996. These earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state and local income taxes has been provided. Upon distribution of those
earnings, the Delaware Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes
payable to the foreign jurisdictions. The unrecognized deferred income tax
liability is estimated to be approximately $24,100,000. Withholding taxes of
$5,800,000 would be payable upon remittance of all previously unremitted
earnings at March 31, 1996.
During fiscal year 1995, settlements were reached with the Internal Revenue
Service ("IRS") concerning the Delaware Company's U.S. income tax liability for
the fiscal years ended March 31, 1983 through March 31, 1988 disposing of all
U.S. Federal income tax issues for those
41
<PAGE> 46
years. These settlements resulted in a reduction in accrued interest expense
of $26,300,000 during fiscal year 1995. The IRS has issued notices for fiscal
years ended March 31, 1989 and March 31,1990 asserting deficiencies in the
amount of taxes reported. The deficiencies are based on issues substantially
similar to those of earlier years. The Delaware Company believes that any
income taxes ultimately assessed will not exceed amounts already provided.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Delaware Company has material transactions with International and its other
subsidiaries occurring in the normal course of operations. Transactions which
are included in the Delaware Company's revenues include the sales of
engineering and design services and fabrication services ($40,718,000,
$13,257,000, and $7,415,000 in fiscal years 1996, 1995 and 1994 respectively)
and the leasing of equipment ($4,215,000, and $16,107,000, in fiscal years 1995
and 1994, respectively). Other transactions include the allocation of general
and administrative and other costs to International ($11,900,000, $7,309,000
and $8,491,000 in fiscal years 1996, 1995 and 1994, respectively), placing
certain insurance coverage (at prices determined on an annual basis of
$15,213,000, $28,024,000, and $24,582,000 in fiscal years 1996, 1995 and 1994,
respectively) through commercial insurance carriers which in turn substantially
reinsure such exposure to a wholly-owned subsidiary of International, and the
management of certain of the investments of the Delaware Company and its
pension plans by a wholly-owned subsidiary of International for which the
Delaware Company paid fees of $2,901,000, $2,949,000 and $2,528,000 in fiscal
years 1996, 1995 and 1994, respectively.
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. At March 31, 1996 and
1995, there were no obligations outstanding under the agreement. Interest
income recognized from these reverse repurchase agreements was $560,000 for
fiscal year 1994.
The Delaware Company and MIICO are parties to an agreement pursuant to which
the Delaware Company may borrow up to $150,000,000. At March 31, 1996, the
Delaware Company had borrowed $65,363,000 against this agreement, all of which
was repaid in April 1996. There were no borrowings against this agreement at
March 31, 1995.
Under a reorganization during the fiscal year ended March 31, 1983,
International became the parent of the McDermott group of companies, which
includes the Delaware Company which prior to the reorganization was the parent
company. The Delaware Company's investment in International represents its
right to the undistributed earnings of International existing at the time of
the reorganization less subsequent distributions by International to the
Delaware Company. In order to preserve the Delaware Company's right to the
undistributed earnings and provide for the distribution of such earnings to the
Delaware Company should either the Delaware Company or International elect not
to keep these earnings invested with International, the Delaware Company
retained its ownership of 100,000 shares of International Common Stock,
received 100,000 shares of International Series A Participating Preferred Stock
and 100,000 shares of International Series B Non-Voting Preferred Stock, and
entered
42
<PAGE> 47
into a stock purchase and sale agreement with International (the "Intercompany
Agreement"). Both Series A and Series B Preferred Stocks have certain rights
in the event of liquidation of International. Series B Preferred Stock is
currently callable by International at $275 per share and 10,000 shares are to
be redeemed by International each year at $250 per share. Such redemption began
in November 1992. The Series A and Series B Preferred Stocks are entitled to
annual per share dividends of $10 (but no more than ten times the amount of per
share dividends paid by International on its Common Stock) and $20,
respectively, and such dividends are cumulative to the extent not paid. Shares
of Series A Preferred Stock are also entitled to additional dividends whenever
dividends in excess of $3 per International Common Share are declared in any
fiscal year. Dividends and proceeds from redemption of Series B Preferred
Stock received from International have been accounted for as a reduction of the
Delaware Company's investment in International.
Pursuant to the Intercompany Agreement, the Delaware Company has the right to
sell to International and International has the right to buy from the Delaware
Company, 100,000 units, each unit consisting of one share of International
Common Stock and one share of International Series A Participating Stock, at a
price based primarily upon the stockholders' equity of McDermott International
at the close of the fiscal year preceding the date at which the right to sell
or buy, as the case may be, is exercised, and, to a limited extent, upon the
price-to-book value of the Dow Jones Industrial Average. If a unit is sold to
International upon the Delaware Company's exercise of its right to sell under
the Intercompany Agreement, the purchase price of such unit will be 90% of the
then current value of the unit (the "current unit value"). If a unit is sold
to International pursuant to an exercise by International of its right to
purchase under the Intercompany Agreement, the purchase price of such unit will
be 110% of the current unit value. At April 1, 1996, the current unit value
was $2,529 and the aggregate current unit value for the Delaware Company's
100,000 units was $252,886,000. Both parties intend to preserve the Delaware
Company's right to the undistributed earnings by not exercising any rights
under the Intercompany Agreement that would result in a loss to the Delaware
Company. The net proceeds to the Delaware Company from the exercise of any
rights under the Intercompany Agreement would be subject to U.S. federal, state
and other applicable taxes. No tax provisions have been established, since
there is no present intention by either party to exercise such rights.
The Delaware Company maintains the Thrift Plan for Employees of McDermott
Incorporated and Participating Subsidiary and Affiliated Companies (the "Thrift
Plan"), which is a defined contribution plan that includes a cash or deferred
arrangement. Monthly employer contributions are equal to 50% of the first 6%
of compensation (as defined in the plan) contributed by participants, and may
be made, at the discretion of the Delaware Company, in cash or in common stock
of International. When monthly employer contributions are made in stock, the
Delaware Company pays cash to International and shares of common stock are
issued to the Thrift Plan from the authorized but unissued share capital of
International. The number of such shares is determined based on the closing
price on the last business day of the month as reported on the New York Stock
Exchange Composite Tape with fractional shares paid in cash. During fiscal
years 1996, 1995 and 1994, respectively, 300,951, 312,883 and 300,391 shares
were purchased by the Delaware Company for $6,347,000, $7,713,000 and
$7,984,000.
43
<PAGE> 48
Certain officers and employees of the Delaware Company participate in certain
benefit plans which involve the issuance of International Common Stock.
NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE
<TABLE>
<CAPTION>
Long-term debt consists of: 1996 1995
---- ----
(In thousands)
<S> <C> <C>
Unsecured Debt:
Series A Medium-Term Notes (maturities ranging
from 1 to 7 years; interest at various
rates ranging from 7.92% to 9.00%) $ 75,000 $ 75,000
Series B Medium-Term Notes (maturities ranging
from 2 to 27 years; interest at various
rates ranging from 6.50% to 8.75%) 101,000 101,000
9.375% Notes due 2002 ($225,000,000 face value) 224,538 224,482
10.25% Notes due June 1, 1995 - 150,000
Other notes payable through 2009 (interest at
various rates ranging to 6.80%) 19,310 17,700
Secured Debt:
Other notes payable through 2012 and
capitalized lease obligations 5,346 5,356
- --------------------------------------------------------------------------------------------------------------
425,194 573,538
Less: Amounts due within one year 1,312 150,388
- --------------------------------------------------------------------------------------------------------------
$ 423,882 $ 423,150
==============================================================================================================
</TABLE>
Notes payable and current maturities of long-term debt consist of:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Short-term lines of credit:
Unsecured $ 108,314 $ 40,640
Repurchase Agreements - 105,690
Current Maturities of long-term debt 1,312 150,388
- --------------------------------------------------------------------------------------------------------------
$ 109,626 $ 296,718
==============================================================================================================
Weighted average interest rate on short-term borrowings 5.97% 7.15%
==============================================================================================================
</TABLE>
The Indenture for the 9.375% Notes due 2002 and the Series A and B Medium Term
Notes contain certain covenants which restrict the amount of funded
indebtedness that the Delaware Company may incur, and place limitations on
certain restricted payments, certain transactions between affiliates, the
creation of certain liens and the amendment of the Intercompany Agreement.
44
<PAGE> 49
Maturities of long-term debt during the five fiscal years subsequent to March
31, 1996 are as follows: 1997 - $1,312,000; 1998 - $46,132,000; 1999 -
$27,189,000; 2000 - $30,665,000; 2001 - $25,000.
The Delaware Company is restricted, as a result of covenants in certain credit
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
At March 31, 1996, substantially all of the net assets of the Delaware Company
were subject to such restrictions. At March 31, 1996, 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 the current
dividends on existing preferred stock.
At March 31, 1996 and 1995, the Delaware Company had available to it various
uncommitted short-term lines of credit from banks totalling $285,859,000 and
$247,903,000, respectively. Borrowings against these lines of credit at March
31, 1996 and 1995 were $58,314,000 and $33,220,000, respectively. In addition,
The Babcock & Wilcox Company had available to it an unsecured and committed
revolving line of credit facility, which was amended during fiscal year 1996 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 borrowings of $50,000,000 against this facility at
March 31, 1996 and none at March 31, 1995.
45
<PAGE> 50
NOTE 8 - PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans - The Delaware Company provides retirement benefits, primarily
through non-contributory pension plans, for substantially all of its regular
full-time employees, except certain non-resident alien employees of foreign
subsidiaries who are not citizens of a European Community country or who do not
earn income in the United States, Canada, or the United Kingdom. Salaried plan
benefits are based on final average compensation and years of service, while
hourly plan benefits are based on a flat benefit rate and years of service.
The Delaware Company's funding policy is to fund applicable pension plans to
meet the minimum funding requirements of the Employee Retirement Income
Security Act of 1974 (ERISA) and, generally, to fund other pension plans as
recommended by the respective plan actuary and in accordance with applicable
law. At January 1, 1996 and 1995, approximately one-half of total plan assets
were invested in listed stocks and bonds. The remaining assets were held in
foreign equity funds, U.S. Government securities and investments of a
short-term nature.
U.S. Pension Plans
The net periodic pension benefit for fiscal years 1996, 1995 and 1994 included
the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 18,475 $ 22,686 $ 20,268
Interest cost on projected benefit obligation 66,282 62,534 60,610
Actual return on plan assets (212,411) 16,701 (162,021)
Net amortization and deferral 119,898 (114,434) 78,928
- ---------------------------------------------------------------------------------------------------------------
Net periodic pension benefit $ (7,756) $ (12,513) $ (2,215)
===============================================================================================================
</TABLE>
Due to the sale of a domestic entity, loss before cumulative effect of
accounting change in fiscal year 1995, includes a net after-tax gain of
$732,000 resulting from the recognition of a curtailment of a related plan.
46
<PAGE> 51
The following table sets forth the U.S. plans' funded status and amounts
recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
Plans for Which Plans for Which
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 763,561 $ 534,093 $ 30,445 $ 132,971
==============================================================================================================
Accumulated benefit obligation $ 824,121 $ 584,938 $ 30,445 $ 161,544
==============================================================================================================
Projected benefit obligation $ 930,558 $ 654,066 $ 33,755 $ 163,816
Plan assets at fair value 1,156,121 912,329 - 117,606
- --------------------------------------------------------------------------------------------------------------
Projected benefit obligation
(in excess of) or less
than plan assets 225,563 258,263 (33,755) (46,210)
Unrecognized net (gain) loss 32,286 40,295 5,294 (6,002)
Unrecognized prior service cost 13,936 (25,796) 3,081 19,555
Unrecognized transition asset (32,342) (38,669) (148) (2,127)
Adjustment required
to recognize minimum
liability - - (4,917) (9,596)
- --------------------------------------------------------------------------------------------------------------
Prepaid pension cost (pension
liability) $ 239,443 $ 234,093 $ (30,445) $ (44,380)
==============================================================================================================
</TABLE>
The assumptions used in determining the funded status of the U.S. plans were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Actuarial assumptions:
Discount rate 7.25% 8.25% 7.5%
- ----------------------------------------------------------------------------------------------------------------
Rate of increase in future
compensation levels 5.0% 5.0% 4.5%
- ----------------------------------------------------------------------------------------------------------------
Expected long-term rate of
return on plan assets 8.5% 8.5% 8.5%
================================================================================================================
</TABLE>
Effective April 1, 1995, the Delaware Company transferred to JRM an accrued
pension liability of approximately $4,585,000 relating to certain former
employees who are now covered under JRM's plan and transferred to JRM's plan
assets, which were equal to the projected benefit obligation, of approximately
$40,456,000.
47
<PAGE> 52
The projected benefit obligation increase at March 31, 1996 was primarily due
to the change in the discount rate for the U.S. plans ($107,600,000) and
changes to actuarial assumptions relative to mortality and retirement.
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for
Pensions," the Delaware Company recorded, during 1996 and 1995, an additional
minimum liability for certain of its U.S. pension plans of $4,917,000 and
$9,596,000, respectively. These liabilities resulted in recognition of
intangible assets of $3,744,000 and $9,536,000 and reductions in stockholders'
equity of $763,000 and $39,000 in fiscal years 1996 and 1995, respectively.
The two principal U.S. ERISA pension plans provide that, subject to certain
limitations, any excess assets in such plans would be used to increase pension
benefits if certain events occurred within a 60-month period following a change
in control of International.
Non-U.S Pension Plans
The net periodic pension cost for fiscal years 1996, 1995, and 1994 included
the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 2,468 $ 2,403 $ 1,846
Interest cost on projected benefit obligation 6,068 5,518 5,117
Actual return on plan assets (16,579) (3,554) (14,328)
Net amortization and deferral 9,669 (3,859) 7,851
- --------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 1,626 $ 508 $ 486
==============================================================================================================
</TABLE>
48
<PAGE> 53
The following table sets forth the plans' funded status (assets exceed
accumulated benefits) and amounts recognized in the Delaware Company's
consolidated financial statements:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested Benefit Obligation $ 72,481 $ 60,893
==============================================================================================================
Accumulated Benefit Obligation $ 74,219 $ 62,240
==============================================================================================================
Projected Benefit Obligation $ 84,294 $ 70,254
Plan assets at fair value 89,270 73,478
- --------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 4,976 3,224
Unrecognized net loss 15,169 16,370
Unrecognized prior service cost 4,262 3,339
Unrecognized transition asset (7,510) (9,051)
- --------------------------------------------------------------------------------------------------------------
Net prepaid pension cost $ 16,897 $ 13,882
==============================================================================================================
</TABLE>
The assumptions used in determining the funded status of the non-U.S. plans
were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Actuarial assumptions:
Discount rate 7.75-8.25% 8.0-8.25% 7.0-8.0%
- --------------------------------------------------------------------------------------------------------------
Rate of increase in future compensation levels 5.0% 5.0% 5.0-6.0%
- --------------------------------------------------------------------------------------------------------------
Expected long-term rate of return on plan assets 8.5% 8.5-9.0% 8.0-9.0%
==============================================================================================================
</TABLE>
The changes in the discount rate for the non-U.S. plans increased the projected
benefit obligation at March 31, 1996 by $1,008,000.
Multiemployer Plans - One of the Delaware Company's subsidiaries contributes to
various multiemployer plans. The plans generally provide defined benefits to
substantially all unionized workers in this subsidiary. Amounts charged to
pension cost and contributed to the plans were $4,441,000, $9,838,000, and
$8,367,000 in fiscal years 1996, 1995 and 1994, respectively.
Postretirement Health Care and Life Insurance Benefits - The Delaware Company
offers postretirement health care and life insurance benefits to substantially
all of its retired regular full-time employees, including those associated with
discontinued operations, except certain non-resident alien retired employees
who are not citizens of a European Community country
49
<PAGE> 54
or who, while employed, did not earn income in the United States, Canada or the
United Kingdom. The Delaware Company shares the cost of providing these
benefits with all affected retirees, except for certain life insurance plans.
Postretirement health care and life insurance benefits are offered under
separate defined benefit postretirement plans to union and non-union employees.
The health care plans are contributory and contain cost-sharing provisions such
as deductibles and coinsurance; the life insurance plans are contributory and
non-contributory. The Delaware Company does not fund any of its plans.
The following table sets forth the amounts recognized in the consolidated
financial statements at March 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $ 335,213 $ 311,699
Fully eligible active participants 15,725 14,885
Other active plan participants 63,904 53,416
- --------------------------------------------------------------------------------------------------------------
414,842 380,000
Unrecognized net gain (loss) (9,907) 19,185
- --------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 404,935 $ 399,185
==============================================================================================================
Weighted-average discount rate 7.25% 8.25%
==============================================================================================================
</TABLE>
The accumulated postretirement benefit obligation in the above table includes
$373,027,000 and $340,899,000 for the Delaware Company's health care plans and
$41,815,000 and $39,101,000 for the Delaware Company's life insurance plans at
March 31, 1996 and 1995, respectively. The changes in the accumulated
postretirement benefit obligation and the unrecognized net gain (loss) at March
31, 1996 were primarily attributable to the decrease in the discount rate.
Net periodic postretirement benefit cost for fiscal years 1996, 1995 and 1994
included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost $ 3,120 $ 4,488 $ 3,489
Interest cost 29,895 31,659 31,721
Net amortization and deferral (1,370) 2,944 19
- --------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 31,645 $ 39,091 $ 35,229
==============================================================================================================
</TABLE>
For measurement purposes, a weighted-average annual assumed rate of increase in
the per capita cost of covered health care claims of 10-3/4% was assumed for
1996, 11-1/2% for 1995 and 12-1/2% for 1994. For 1997, a rate of 9-3/4% was
assumed. In all years, the rate was assumed to decrease gradually to 5% in
2005 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as
of March 31, 1996
50
<PAGE> 55
by $24,343,000 and the aggregate of the service cost and interest cost
components of net periodic postretirement benefit costs for fiscal year 1996 by
$2,065,000.
NOTE 9 - SALE OF ACCOUNTS RECEIVABLE
The Babcock & Wilcox Company has an agreement with a U. S. bank, whereby it
can sell with limited recourse, an undivided interest in a designated pool of
qualified accounts receivable. Under the terms of the agreement, new
receivables are added to the pool as collections reduce previously sold
accounts receivable. The maximum sales limit under the agreement was reduced
during fiscal year 1996 from $225,000,000 to $140,000,000. At March 31, 1996
and 1995 approximately $107,000,000 and $175,000,000, respectively, of
receivables had been sold for cash under this agreement. Receivables sold
under this agreement are presented as a reduction of accounts receivable on the
accompanying balance sheets. Included in Other-net income were expenses
recorded on the sale of receivables which represent bank fees and discounts of
$8,518,000, $9,709,000 and $8,699,000 in fiscal years 1996, 1995 and 1994,
respectively. Discounts are based on the bank's cost of issuing commercial
paper and bank fees are a fixed amount based on the maximum limit which may be
sold.
NOTE 10 - REDEEMABLE PREFERRED STOCKS
At March 31, 1996 and 1995, 13,000,000 shares of Delaware Company Preferred
Stock, with a par value of $1 per share, were authorized. Of the authorized
shares, 2,818,780 shares of Series A Preferred Stock, and 2,726,860 and
2,917,236 shares of Series B Preferred Stock, respectively, were outstanding
(in each case, exclusive of shares owned by the Delaware Company) at March 31,
1996 and 1995. The outstanding shares are entitled to $31.25 per share in
liquidation. Both series of Preferred Stock are entitled to general voting
rights of one-half vote for each share. The Board of Directors of the Delaware
Company may authorize additional series of Preferred Stock, and may set terms
of each new series except that the Delaware Company cannot create any series of
stock senior to the existing Series A and Series B Preferred Stock without the
consent of the holders of at least 50% of the shares of such Preferred Stock.
Each share of the outstanding Series A Preferred Stock is convertible into one
share of Common Stock of International plus $0.10 cash. Series A and Series B
Preferred Stock are redeemable at the option of the Delaware Company at $31.25
per share, plus accrued dividends. On March 31, 1997 and each subsequent year
through March 31, 2008, the Delaware Company is obligated to redeem, at a
redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A
Preferred Stock. On March 31 of fiscal years 1997 through 2006, and March 31
of fiscal years 2007 and 2008, the Delaware Company is obligated to redeem
252,702 and 189,526 shares, respectively, of Series B Preferred Stock. For the
five fiscal years subsequent to March 31, 1996, the obligation to redeem the
Series A and B Preferred Stock is $17,706,000 for each of the fiscal years 1997
through 2001. The Delaware Company may apply to the mandatory sinking fund
obligations any Series A or B Preferred Stock reacquired, redeemed or
surrendered for conversion which have not been previously credited against the
mandatory sinking fund obligations. The Delaware Company applied 313,878
shares of Series A Preferred Stock and 252,702 shares of Series B Preferred
Stock that it owned to satisfy the March 31, 1996 mandatory sinking fund
obligations. During fiscal year 1996 and 1995, 190,376 and 557,416 shares,
respectively, of Series B
51
<PAGE> 56
Preferred Stock were purchased in the open market. At March 31, 1996, 49,637
shares of Series A Preferred Stock have been converted to date and the Delaware
Company owned 947,749 and 179,213 shares of Series A and Series B Preferred
Stock, respectively.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Litigation - The Delaware Company and certain of its officers, directors and
subsidiaries are defendants in numerous legal proceedings. Management believes
that the outcome of these proceedings will not have a material adverse effect
upon the consolidated financial position of the Delaware Company.
Products Liabilities - At March 31, 1996 and 1995, the estimated liability for
pending and future non-employee products liability asbestos claims was
$843,986,000 (of which approximately $208,000,000 had been asserted) and
$995,948,000 and estimated insurance recoveries were $723,243,000 and
$861,407,000, respectively. Certain B&W insurers have refused to reimburse B&W
for amounts paid to settle claims under applicable policies. At March 31,
1996, receivables outstanding from these insurers were $21,050,000. 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 for all future payments up to
full policy limits. During fiscal year 1995, the Delaware Company received
notice that provisional liquidators had been appointed to a London-based
products liability asbestos insurer and, as a result, a loss of $14,478,000
related to the reduction of estimated insurance recoveries was recognized.
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, 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.
Environmental Matters - During fiscal year 1995, a decision was made to close
certain nuclear manufacturing facilities and a provision of $41,724,000 for the
decontamination, decommissioning and the closing of these facilities was
recognized. Previously, decontamination and decommissioning costs were being
accrued over these facilities' remaining expected life. Decontamination will
proceed as permitted by the existing NRC license, while funding support will be
sought and a decommissioning plan will be submitted for review and approval as
required by the NRC. B&W expects to have reached agreement with the NRC in
fiscal year 1997 on the plan that will provide for the completion of facilities
dismantlement and soil restoration by the end of fiscal year 2001. B&W expects
to request approval from the NRC to release the site for unrestricted use at
that time.
At March 31, 1996 and 1995, the Delaware Company had total environmental
reserves of $37,578,000 and $51,271,000 (including the provision discussed
above), respectively, of which $9,824,000 and $8,780,000 were included in
current liabilities.
52
<PAGE> 57
The Delaware Company has been identified as a potentially responsible party at
various clean up sites under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended. The Delaware Company has not been
determined to be a major contributor of wastes to these sites. However, each
potentially responsible party or contributor may face assertions of joint and
several liability. Generally, however, a final allocation of costs is made
based on its relative contribution of wastes to each site. Based on its
relative contribution of waste to each site, the Delaware Company's share of
the ultimate liability for the various sites is not expected to have a material
effect on its consolidated financial position.
The Department of Environmental Resources of the Commonwealth of Pennsylvania,
("PADER"), by letter dated March 19, 1994, advised B&W that it will seek
monetary sanctions, and remedial and monitoring relief, related to B&W's Parks
Facilities in Parks Township, Armstrong County, Pennsylvania. The relief
sought relates to potential groundwater contamination related to the previous
operations of the facilities. B&W is currently negotiating with PADER and
expects to reach a settlement without having to resort to litigation. Any
sanctions ultimately assessed are not expected to have a material effect on the
consolidated financial statements of the Delaware Company.
Operating Leases - Future minimum payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year at
March 31, 1996 are as follows: 1997 - $8,369,000; 1998 - $7,887,000; 1999 -
$7,785,000; 2000 - $7,718,000; 2001 -$7,025,000; and thereafter - $14,604,000.
Total rental expense for fiscal years 1996, 1995 and 1994 was $21,937,000,
$52,684,000 and $64,515,000, respectively. These expense figures include
contingent rentals and are net of sublease income, both of which are not
material.
Other - The Delaware Company performs significant amounts of work for the U. S.
Government under both prime contracts and subcontracts and thus is subject to
continuing reviews by governmental agencies.
The Delaware Company maintains liability and property insurance that it
considers normal in the industry. However, certain risks are either not
insurable or insurance is available only at rates which the Delaware Company
considers uneconomical.
Commitments for capital expenditures amounted to approximately $8,069,000 at
March 31, 1996, all of which relates to fiscal year 1997.
The Delaware Company is contingently liable under standby letters of credit
totaling $256,471,000 at March 31, 1996, issued in the normal course of
business.
NOTE 12 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The Delaware Company's Power Generation Systems and Equipment customers are
principally the electric power generation industry (including government-owned
utilities and independent power producers), the U. S. Government (including its
contractors), and the pulp and paper and other process industries, such as oil
refineries and steel mills. The principal customers of the Marine Construction
Services segment are the large oil and gas companies and the U. S. and other
governments. These concentrations of customers may impact the Delaware
53
<PAGE> 58
Company's overall exposure to credit risk, either positively or negatively, in
that the customers may be similarly affected by changes in economic or other
conditions. However, the Delaware Company's management believes that the
portfolio of receivables is well diversified and that such diversification
minimizes any potential credit risk. Receivables are generally not
collateralized.
The Delaware Company believes that its provision for possible losses on
uncollectible accounts receivable is adequate for its credit loss exposure. At
March 31, 1996 and 1995, the allowance for possible losses deducted from
Accounts receivable-trade on the balance sheet was $13,234,000 and $7,425,000,
respectively.
NOTE 13 - INVESTMENTS
At March 31, 1996, all of the Delaware Companies available-for-sale securities
were debt securities with a cost of $439,000 that approximated estimated fair
value.
The following is a summary of available-for-sale securities at March 31, 1995:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ------------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies $ 177,250 $ 1,085 $ - $ 178,335
Corporate notes and bonds 157,667 346 1,146 156,867
Other debt securities 26,877 - 183 26,694
- --------------------------------------------------------------------------------------------------------------
Total $ 361,794 $ 1,431 $ 1,329 $ 361,896
==============================================================================================================
</TABLE>
Proceeds, gross realized gains and gross realized losses on sales of available
for sale securities were approximately $146,254,000, $3,651,000 and $275,000,
respectively for fiscal year 1996 and proceeds and gross realized losses were
$20,283,000 and $320,000, respectively for fiscal year 1995. At March 31,
1996, all of the Delaware Company's available-for-sale debt securities were due
in one year or less.
NOTE 14 - DERIVATIVE FINANCIAL INSTRUMENTS
The Delaware Company operates internationally giving rise to exposure to market
risks from changes in foreign exchange rates. Derivative financial
instruments, primarily forward exchange contracts, are utilized to reduce those
risks. The Delaware Company does not hold or issue financial instruments for
trading purposes.
Forward exchange contracts are entered into primarily as hedges of certain firm
purchase and sale commitments denominated in foreign currencies. At March 31,
1996, the Delaware Company had forward exchange contracts to purchase
$172,599,000 in foreign currencies (primarily Canadian Dollars), and to sell
$70,636,000 in foreign currencies (primarily Canadian
54
<PAGE> 59
Dollars), at varying maturities from fiscal year 1997 through 2000. At March
31, 1995, the Delaware Company had forward exchange contracts to purchase
$234,233,000 in foreign currencies (primarily Canadian Dollars and Japanese
Yen), and to sell $135,138,000 in foreign currencies (primarily Canadian
Dollars and Japanese Yen), at varying maturities from fiscal year 1996 through
2000.
Deferred realized and unrealized gains and losses from hedging firm purchase
and sale commitments are included on a net basis in the balance sheet as a
component of either contracts in progress or advance billings on contracts.
They are recognized in income as part of the purchase or sale transaction when
it is recognized, or as other gains or losses when a hedged transaction is no
longer expected to occur. At March 31, 1996 and 1995, the Delaware Company had
deferred gains of $4,183,000 and $1,694,000, respectively, and deferred losses
of $1,059,000 and $9,294,000, respectively, related to forward exchange
contracts which will be recognized in accordance with the percentage of
completion method of accounting.
The Delaware Company is exposed to credit-related losses in the event of
nonperformance by counterparties to derivative financial instruments, but it
does not anticipate nonperformance by any of these counterparties. The amount
of such exposure is generally the unrealized gains in such contracts.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Delaware Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
Investment securities: The fair value of investments are estimated based on
quoted market prices. For investments for which there are no quoted market
prices, fair values are derived from available yield curves for investments of
similar quality and terms.
Long and short-term debt: The fair value of debt instruments are based on
quoted market prices or, where quoted prices are not available, on estimated
prices based on current yields for debt issues of similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred
stocks are based on quoted market prices.
Foreign currency exchange contracts: The fair values of foreign currency
forward exchange contracts are estimated by obtaining quotes from brokers. At
March 31, 1996 and 1995, the Delaware Company had net forward exchange
contracts outstanding to purchase foreign currencies with notional values of
$101,963,000 and $99,095,000 and fair values of $104,471,000 and $89,613,000,
respectively.
55
<PAGE> 60
The estimated fair values of the Delaware Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
-------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Instruments
- -------------------------
Cash and cash equivalents $ 22,886 $ 22,886 $ 21,014 $ 21,014
Investment securities 439 439 361,896 361,896
Note payable to McDermott
International, Inc. 65,363 65,363 - -
Debt excluding capital leases 533,015 570,622 719,390 738,385
Redeemable preferred stocks 173,301 166,362 179,251 174,108
</TABLE>
NOTE 16 - SEGMENT REPORTING
The Delaware Company operates in two industry segments - Power Generation
Systems and Equipment, and Marine Construction Services.
Power Generation Systems and Equipment's principal businesses are the supply of
fossil-fuel and nuclear steam generating equipment to the electric power
generation industry, and nuclear reactor components to the U.S. Navy.
Marine Construction Services supplies design, engineering, and project and
construction management services to offshore oil and gas exploration and
production and hydrocarbon processing industries, and to other marine
construction companies. This segment also provides maintenance and
construction services for a variety of marine vessels and the fabrication of
structures and equipment for offshore drilling and production operations.
Intersegment sales are accounted for at prices which are generally established
by reference to similar transactions with unaffiliated customers. Identifiable
assets by industry segment are those assets that are used in the Delaware
Company's operations in each segment. Corporate assets are principally cash
and cash equivalents, short-term investments, marketable securities and prepaid
pension costs.
In fiscal years 1996, 1995 and 1994, the U. S. Government accounted for
approximately 19%, 16%, and 17%, respectively, of the Delaware Company's total
revenues. These revenues are principally included in the Power Generation
Systems and Equipment segment.
A gain resulting from the sale of two power purchase contracts resulted in an
increase in the Power Generation Systems and Equipment segment's equity in
income of investees of $30,612,000. In fiscal year 1996, the write-off of an
insurance claim due to an unfavorable arbitration ruling resulted in a decrease
in the Power Generation Systems and Equipment segment operating income of
$12,600,000. The provisions for the closing of certain facilities in fiscal
year 1995 resulted in a decrease in the Power Generation Systems and Equipment
segment operating income of $46,489,000. The adoption of EITF Issue No. 93-5
in fiscal year 1994 resulted in an increase in the Power Generation Systems and
Equipment segment operating income of $19,947,000.
56
<PAGE> 61
Segment Information For the Three Fiscal Years Ended March 31, 1996.
1. Information about the Delaware Company's Operations in Different Industry
Segments.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C>
REVENUES (1)
- --------
Power Generation Systems
and Equipment $ 1,708,274 $ 1,663,017 $ 1,613,954
Marine Construction Services (2) 329,583 559,950 632,242
Intersegment Transfer Eliminations (9,882) (577) (2,830)
- --------------------------------------------------------------------------------------------------------------
Total Revenues $ 2,027,975 $ 2,222,390 $ 2,243,366
==============================================================================================================
OPERATING INCOME (LOSS)
- -----------------------
Segment Operating Income (Loss): (3)
Power Generation Systems
and Equipment $ 17,176 $ 17,642 $ 49,614
Marine Construction Services (2) (26,931) (34,619) 5,668
- --------------------------------------------------------------------------------------------------------------
Total Segment Operating Income (Loss) (9,755) (16,977) 55,282
==============================================================================================================
Equity in Income of Investees:
Power Generation Systems
and Equipment 31,747 5,856 8,635
Marine Construction Services 4,534 4,478 445
- --------------------------------------------------------------------------------------------------------------
Total Equity in Income of Investees 36,281 10,334 9,080
- --------------------------------------------------------------------------------------------------------------
General Corporate Expenses (3) (22,761) (34,972) (32,369)
- --------------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $ 3,765 $ (41,615) $ 31,993
==============================================================================================================
(1) Segment revenues include intersegment transfers as follows:
Power Generation Systems and Equipment $ 5,742 $ 272 $ 2,439
Marine Construction Services 4,140 305 391
----------------------------------------------------------------------------------------------------------
Total $ 9,882 $ 577 $ 2,830
==========================================================================================================
</TABLE>
(2) See Note 2 regarding the sale of a portion of the marine construction
service business during fiscal year 1995.
(3) Fiscal years 1995 and 1994 have been restated to reflect the allocation of
certain expenses to the business segments which were previously included in
General Corporate Expenses. This restatement reduced Segment Operating
Income and General Corporate Expenses by $10,009,000 and $10,690,000 in
fiscal years 1995 and 1994, respectively, from amounts previously reported.
57
<PAGE> 62
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
- --------------------
Power Generation Systems
and Equipment $ 27,322 $ 45,306 $ 47,898
Marine Construction Services(1) 10,562 25,322 45,038
Corporate 1,227 1,165 851
- ----------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 39,111 $ 71,793 $ 93,787
================================================================================================================
DEPRECIATION AND AMORTIZATION
- -----------------------------
Power Generation Systems
and Equipment $ 41,835 $ 34,828 $ 36,567
Marine Construction Services 6,506 30,054 29,256
Corporate 1,939 1,222 1,002
- ----------------------------------------------------------------------------------------------------------------
Total Depreciation and
Amortization $ 50,280 $ 66,104 $ 66,825
================================================================================================================
IDENTIFIABLE ASSETS
- -------------------
Power Generation Systems
and Equipment $ 2,085,202 $ 2,078,995 $ 2,180,358
Marine Construction Services 153,452 236,823 440,546
Corporate 781,126 1,070,611 879,822
- ----------------------------------------------------------------------------------------------------------------
Total Identifiable Assets $ 3,019,780 $ 3,386,429 $ 3,500,726
================================================================================================================
</TABLE>
(1) Fiscal year 1994 includes property, plant and equipment of $14,887,000 of
MECL (See Note 3) and the purchase of a fabrication yard financed by a note
payable of $16,250,000.
58
<PAGE> 63
2. Information about the Delaware Company's Operations in Different
Geographic Areas.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Revenues(1) - United States $ 1,115,510 $ 1,455,778 $ 1,632,236
- Canada 890,788 751,214 588,728
- Other Foreign 21,677 15,398 22,402
- ----------------------------------------------------------------------------------------------------------------
Total $ 2,027,975 $ 2,222,390 $ 2,243,366
================================================================================================================
Segment Operating
Income (Loss) by
Geographic Area (2) - United States $ (30,597) $ (40,462) $ 17,551
- Canada 18,655 25,431 35,941
- Other Foreign 2,187 (1,946) 1,790
- ----------------------------------------------------------------------------------------------------------------
Total $ (9,755) $ (16,977) $ 55,282
================================================================================================================
Identifiable
Assets - United States $ 1,861,367 $ 1,940,949 $ 2,332,683
- Canada 357,465 348,527 267,803
- Other Foreign 19,822 26,342 20,418
- Corporate 781,126 1,070,611 879,822
- ----------------------------------------------------------------------------------------------------------------
Total $ 3,019,780 $ 3,386,429 $ 3,500,726
================================================================================================================
</TABLE>
(1) Net of inter-geographic area revenues in fiscal years 1996, 1995 and 1994
as follows: United States - $38,908,000, $61,797,000 and $20,702,000;
Canada - $16,485,000, $2,288,000 and $8,167,000; and Other Foreign -
$79,000, $151,000 and $281,000, respectively.
(2) Fiscal years 1995 and 1994 have been restated to reflect the allocation of
certain expenses to the geographic areas which were previously included in
General Corporate Expenses.
59
<PAGE> 64
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
----
Q U A R T E R E N D E D
-----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 505,610 $ 456,129 $ 502,217 $ 564,019
Operating income (loss) 27,960 (8,934) 21,892 (37,153)
Net income (loss) 6,541 (11,131) 2,880 (25,433)
</TABLE>
Pretax results for the quarter ended June 30, 1995 include an equity income
gain of $30,612,000 resulting from the sale of two power purchase contracts.
Results for the quarter ended December 31, 1995 include a favorable worker's
compensation cost adjustment of $5,746,000. Results for the quarter ended
March 31, 1996 include the write-off of an insurance claim of $12,600,000 due
to an unfavorable arbitration ruling related to the recovery of cost incurred
for corrective action in certain utility and industrial installations.
<TABLE>
<CAPTION>
1995
----
Q U A R T E R E N D E D
-----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 568,692 $ 543,785 $ 560,994 $ 548,919
Operating income (loss) 2,099 (12,476) 28,312 (59,550)
Income (loss) before
cumulative effect of
accounting change (8,998) (40,795) 8,959 (33,046)
Net income (loss) (9,510) (40,795) 8,959 (33,046)
</TABLE>
Pretax results for the quarter ended June 30, 1994 include a reduction in
accrued interest expense of $5,700,000 due to settlement an outstanding tax
issue with the IRS. Results for the quarter ended September 30, 1994 include a
loss related to the reduction of estimated products liability asbestos claims
recoveries from insurance carriers of $14,478,000 and a reduction in accrued
interest expense of $5,600,000 due to settlement of outstanding tax issues.
Results for the quarter ended December 31, 1994 include a reduction in accrued
interest expense of $5,000,000 due to settlement of outstanding tax issues and
favorable worker's compensation cost adjustments of $6,067,000. Results for
the quarter ended March 31, 1995 include provisions of $46,489,000 for the
closing of certain facilities and a reduction in accrued interest expense of
$10,000,000 due to settlement of outstanding tax issues.
60
<PAGE> 65
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
61
<PAGE> 66
P A R T I I I
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no family relationships between any of the executive officers,
directors or persons nominated to be such, and no executive officer was elected
to his position pursuant to any arrangement or understanding between himself
and any other person.
Information required by this item is incorporated by reference to the material
appearing under the heading "Election of Directors" in the Information
Statement for action to be taken by the Delaware Company without a meeting of
stockholders on August 6, 1996.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Stock Compensation of Executive Officers" and
"Certain Transactions" in the Information Statement for action to be taken by
the Delaware Company without a meeting of stockholders on August 6, 1996.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material
appearing under the heading "Security Ownership of Directors and Executive
Officers" and "Security Ownership of Certain Beneficial Owners" in the
Information Statement for action to be taken by the Delaware Company without a
meeting of stockholders on August 6, 1996.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the material
appearing under the heading "Compensation of Executive Officers" and "Certain
Transactions" in the Information Statement for action to be taken by the
Delaware Company without a meeting of stockholders on August 6, 1996.
62
<PAGE> 67
P A R T I V
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference.
1. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheet March 31, 1996 and 1995
Consolidated Statement of Loss For the Three Fiscal Years
Ended March 31, 1996
Consolidated Statement of Stockholder's Equity For the Three
Fiscal Years Ended March 31, 1996
Consolidated Statement of Cash Flows For the Three Fiscal
Years Ended March 31, 1996
Notes to Consolidated Financial Statements For the Three Fiscal
Years Ended March 31, 1996
2. CONSOLIDATED FINANCIAL SCHEDULES
All required schedules will be filed by amendment to this Form 10-K on
Form 10-K/A.
3. EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3 Articles of Incorporation and By-Laws (Item 3(a) is
incorporated by reference to Exhibit 3 to the Delaware
Company's annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1983; Item 3(b) is incorporated by
reference to Exhibit 3 to the Company's annual report on Form
10-K for the fiscal year ended March 31, 1981).
(a) The Delaware Company's Restated Articles of
Incorporation
(b) The Delaware Company's By-Laws
63
<PAGE> 68
4 Indentures with respect to certain of the Delaware Company's
long-term debt are not filed as exhibits hereto inasmuch as
the securities authorized under any such Indenture do not
exceed 10% of the Delaware Company's total assets. The
Delaware Company agrees to furnish a copy of each such
Indenture to the Securities and Exchange Commission upon
request.
10 Material Contracts (Exhibit 10(b) is incorporated by reference
to Exhibit 10 to the Delaware Company's annual report on Form
10-K for the fiscal year ended March 31, 1981; Exhibit 10(c)
is incorporated by reference to Exhibit 10 to the Delaware
Company's annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1983; and Exhibit 10(d) is
incorporated by reference to Exhibit 10 to the Delaware
Company's annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1987; Exhibit 10(e) is
incorporated by reference to Exhibit 10 to the Delaware
Company's annual report on Form 10-K for the fiscal year ended
March 31, 1990).
(a) Supplemental Executive Retirement Plan
(b) Restoration of Retirement Income Plan for Certain
Participants in the Retirement Plan for Employees
of McDermott Incorporated
(c) Intercompany Agreement
(d) Trust for Supplemental Executive Retirement Plan
(e) Variable Supplemental Compensation Plan
22 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
FORM 8-K REPORTS
There were no reports on Form 8-K filed during the three months ended March 31,
1996
64
<PAGE> 69
SIGNATURES OF THE REGISTRANT
Pursuant to the requirements of Sections 13 or 15(d) 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
June 4, 1996 By: s/Robert E. Howson
------------------------------
Robert E. Howson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
s/Robert E. Howson Chairman of the Board and Chief
- ----------------------------- Executive Officer, and Director
Robert E. Howson (Principal Executive Officer)
s/Brock A. Hattox Executive Vice President and
- ----------------------------- Chief Financial Officer, and
Brock A. Hattox Director (Principal Financial Officer)
s/Daniel R. Gaubert Vice President, Finance and
- ----------------------------- Controller (Principal Accounting Officer)
Daniel R. Gaubert
</TABLE>
June 4, 1996
65
<PAGE> 70
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3 Articles of Incorporation and By-Laws (Item 3(a) is incorporated by
reference to Exhibit 3 to the Delaware Company's annual report on
Form 10-K, as amended, for the fiscal year ended March 31, 1983;
Item 3(b) is incorporated by reference to Exhibit 3 to the Company's
annual report on Form 10-K for the fiscal year ended March 31,
1981).
(a) The Delaware Company's Restated Articles of Incorporation
(b) The Delaware Company's By-Laws
4 Indentures with respect to certain of the Delaware Company's
long-term debt are not filed as exhibits hereto inasmuch as the
securities authorized under any such Indenture do not exceed 10% of
the Delaware Company's total assets. The Delaware Company agrees to
furnish a copy of each such Indenture to the Securities and Exchange
Commission upon request.
10 Material Contracts (Exhibit 10(b) is incorporated by reference to
Exhibit 10 to the Delaware Company's annual report on Form 10-K for
the fiscal year ended March 31, 1981; Exhibit 10(c) is incorporated
by reference to Exhibit 10 to the Delaware Company's annual report
on Form 10-K, as amended, for the fiscal year ended March 31, 1983;
and Exhibit 10(d) is incorporated by reference to Exhibit 10 to the
Delaware Company's annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1987; Exhibit 10(e) is incorporated by
reference to Exhibit 10 to the Delaware Company's annual report on
Form 10-K for the fiscal year ended March 31, 1990).
(a) Supplemental Executive Retirement Plan
(b) Restoration of Retirement Income Plan for Certain Participants
in the Retirement Plan for Employees of McDermott Incorporated
(c) Intercompany Agreement
(d) Trust for Supplemental Executive Retirement Plan
(e) Variable Supplemental Compensation Plan
21 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
66
<PAGE> 1
EXHIBIT 21
MCDERMOTT INCORPORATED
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
FISCAL YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PERCENTAGE
ORGANIZED OF
UNDER THE OWNERSHIP
NAME OF COMPANY LAWS OF INTEREST
<S> <C> <C>
Delta Hudson Engineering Corporation Delaware 100
Hudson Engineering (Canada), Ltd. Canada 100
McDermott Engineers & Constructors (Canada) Ltd. Canada 50
Delta Catalytic Constructors Ltd. Canada 100
Delta Hudson International, Ltd. Delaware 75
McDermott Shipbuilding, Inc. Delaware 100
Babcock & Wilcox Investment Company Delaware 100
B&W Nuclear Environmental Services, Inc. Delaware 100
Babcock & Wilcox Idaho, Inc. Delaware 100
The Babcock & Wilcox Company Delaware 100
Americon, Inc. Delaware 100
Babcock & Wilcox Equity Investments, Inc. Delaware 100
Babcock & Wilcox Ebensburg Power, Inc. Delaware 100
Babcock & Wilcox Jonesboro Power, Inc. Delaware 100
Babcock & Wilcox West Enfield Power, Inc. Delaware 100
Babcock & Wilcox Industries Ltd. Canada 100
Hudson Products Corporation Texas 100
Power Systems Operations, Inc. Delaware 100
</TABLE>
The subsidiaries omitted from the foregoing list do not, considered in the
aggregate, constitute a significant subsidiary.
67
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-54940) of McDermott Incorporated and in the related Prospectus
of our report dated May 15, 1996 with respect to the consolidated financial
statements of McDermott Incorporated, included in this Annual Report (Form
10-K) for the year ended March 31, 1996.
ERNST & YOUNG LLP
New Orleans, Louisiana
June 10, 1996
68
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from McDermott
Incorporated's March 31, 1996 Financial Statements and is qualified in its
entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 22,886
<SECURITIES> 439
<RECEIVABLES> 298,747
<ALLOWANCES> 41,653
<INVENTORY> 345,227
<CURRENT-ASSETS> 953,066
<PP&E> 667,156
<DEPRECIATION> 388,111
<TOTAL-ASSETS> 3,019,780
<CURRENT-LIABILITIES> 860,980
<BONDS> 423,882
<COMMON> 4
173,301
0
<OTHER-SE> 372,915
<TOTAL-LIABILITY-AND-EQUITY> 3,019,780
<SALES> 2,027,975
<TOTAL-REVENUES> 2,027,975
<CGS> 2,060,491
<TOTAL-COSTS> 2,060,491
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,910
<INCOME-PRETAX> (32,412)
<INCOME-TAX> (5,269)
<INCOME-CONTINUING> (27,143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,143)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
