<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 1-4095
MCDERMOTT INCORPORATED
(Exact Name of registrant as specified in its charter)
DELAWARE 74-1032246
- --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-4411
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock, par value $1 per share, outstanding as of
January 30, 1996 was 3,600.
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M c D E R M O T T I N C O R P O R A T E D
I N D E X - F O R M 10 - Q
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
December 31, 1995 and March 31, 1995 4
Condensed Consolidated Statement of Income (Loss)
Three and Nine Months Ended December 31, 1995 and 1994 6
Condensed Consolidated Statement of Cash Flows
Nine Months Ended December 31, 1995 and 1994 7
Notes to Condensed Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE> 3
PART I
McDERMOTT INCORPORATED
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
<PAGE> 4
McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
12/31/95 3/31/95
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,957 $ 21,014
Short-term investments 62,324 130,195
Accounts receivable-trade 270,268 233,005
Accounts receivable-other 67,064 54,655
Accounts receivable from affiliates 19,290 19,493
Insurance recoverable-current 114,600 111,188
Contracts in progress 249,344 223,262
Inventories 67,062 61,714
Deferred income taxes 56,103 74,643
Other current assets 6,001 6,840
- -------------------------------------------------------------------------------------------------------------
Total Current Assets 933,013 936,009
- -------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost: 679,668 705,489
Less accumulated depreciation and amortization 393,891 402,500
- -------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 285,777 302,989
- -------------------------------------------------------------------------------------------------------------
Investments - 231,701
- -------------------------------------------------------------------------------------------------------------
Insurance Recoverable 642,469 750,219
- -------------------------------------------------------------------------------------------------------------
Investment in McDermott International, Inc. 600,867 605,242
- -------------------------------------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $95,989,000 at December 31, 1995
and $90,923,000 at March 31, 1995 131,245 136,311
- -------------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 260,952 248,718
- -------------------------------------------------------------------------------------------------------------
Other Assets 196,719 175,240
- -------------------------------------------------------------------------------------------------------------
TOTAL $ 3,051,042 $ 3,386,429
=============================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
12/31/95 3/31/95
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 171,718 $ 296,718
Accounts payable 110,798 132,799
Accounts payable to affiliates 47,430 51,789
Environmental and products liabilities-current 155,768 133,280
Accrued employee benefits 73,386 83,078
Accrued liabilities - other 120,031 128,760
Advanced billings on contracts 132,021 117,584
U.S. and foreign income taxes 3,264 13,581
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 814,416 957,589
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt 422,958 423,150
- -------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 375,869 371,707
- -------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 766,997 913,939
- -------------------------------------------------------------------------------------------------------------
Other Liabilities 90,754 128,258
- -------------------------------------------------------------------------------------------------------------
Contingencies
- -------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stocks:
Series A $2.20 cumulative convertible, $1.00 par value;
at redemption value 88,089 88,089
Series B $2.60 cumulative, $1.00 par value;
at redemption value 85,212 91,162
- -------------------------------------------------------------------------------------------------------------
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 621,187 620,981
Deficit (205,164) (193,380)
Currency translation adjustments (9,280) (15,070)
- -------------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 406,747 412,535
- -------------------------------------------------------------------------------------------------------------
TOTAL $ 3,051,042 $ 3,386,429
=============================================================================================================
</TABLE>
5
<PAGE> 6
McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/95 12/31/94 12/31/95 12/31/94
-------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 502,217 $ 560,994 $ 1,463,956 $ 1,673,471
- -------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 436,172 479,806 1,320,109 1,483,192
Depreciation and amortization 12,722 15,202 35,453 52,949
Selling, general and
administrative expenses 33,474 42,474 105,992 128,325
- -------------------------------------------------------------------------------------------------------------
482,368 537,482 1,461,554 1,664,466
- -------------------------------------------------------------------------------------------------------------
Operating Income before Equity
in Income of Investees 19,849 23,512 2,402 9,005
Equity in Income of Investees 2,043 4,800 38,516 8,930
- -------------------------------------------------------------------------------------------------------------
Operating Income 21,892 28,312 40,918 17,935
- -------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 1,693 2,256 9,541 7,269
Interest expense (13,059) (12,795) (40,033) (33,583)
Other-net (1,703) (4,877) (239) (24,487)
- -------------------------------------------------------------------------------------------------------------
(13,069) (15,416) (30,731) (50,801)
- -------------------------------------------------------------------------------------------------------------
Income (Loss) before Provision for
Income Taxes and Cumulative
Effect of Accounting Change 8,823 12,896 10,187 (32,866)
Provision for Income Taxes 5,943 3,937 11,897 7,968
- -------------------------------------------------------------------------------------------------------------
Income (Loss) before Cumulative
Effect of Accounting Change 2,880 8,959 (1,710) (40,834)
Cumulative Effect of Accounting
Change - - - (512)
- -------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 2,880 $ 8,959 $ (1,710) $ (41,346)
=============================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
12/31/95 12/31/94
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,710) $ (41,346)
- -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 35,453 52,949
Provision for deferred taxes 9,629 45,863
Gain on sale and disposal of assets (2,751) (198)
Equity in income of investees, less dividends 1,520 (3,196)
Other 4,418 5,074
Changes in assets and liabilities:
Accounts receivable (68,042) 14,146
Net contracts in progress and advance billings (11,258) (115,762)
Accounts payable (30,901) 20,067
Accrued interest (1,932) (12,590)
Accrued liabilities (10,222) (10,436)
Income taxes (10,437) (26,379)
Other, net (30,218) (18,896)
Proceeds from insurance for products liabilities claims 84,127 80,550
Payments of products liabilities claims (114,396) (94,213)
- -------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (146,720) (104,367)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale and disposal of assets 18,237 2,250
Acquisition of business (13,083) -
Purchases of property, plant and equipment (24,925) (58,748)
Purchases of short and long-term investments (195,835) (4,023)
Sales of short and long-term investments 497,603 4,494
Other 6,793 1,810
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 288,790 (54,217)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
12/31/95 12/31/94
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowing $ 24,951 $ 164,992
Payment of long-term debt (150,159) (451)
Repurchase of preferred stock (5,743) (17,185)
Dividends paid (10,340) (10,695)
Other (712) 3,026
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (142,003) 139,687
- -------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (124) 309
- -------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (57) (18,588)
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,014 47,364
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,957 $ 28,776
=============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 41,967 $ 46,172
Income taxes (net of refunds) $ 23,902 $ (13,776)
=============================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE> 9
McDERMOTT INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statement information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Such adjustments are of
a normal recurring nature except for favorable worker's compensation cost
adjustments ($3,561,000, net of tax of $2,185,000) included in the three and
nine months ended December 31, 1995; a gain resulting from the sale of two
power purchase contracts ($20,047,000, net of tax of $10,565,000) included in
the nine months ended December 31, 1995; a loss relating to the reduction of
estimated products liability asbestos claims recoveries from insurers
($14,478,000) included in the nine months ended December 31, 1994; a reduction
in accrued interest expense ($5,000,000 and $16,300,000, respectively) due to
the settlement of outstanding tax issues included in the three and nine months
ended December 31, 1994; a favorable worker's compensation cost adjustment
($6,067,000) included in the three and nine months ended December 31, 1994; and
the cumulative effect of the accounting change for the adoption of Statement of
Financial Standards No. 112, "Employers' Accounting for Postemployment
Benefits" included in the nine months ended December 31, 1994. Operating
results for the three and nine months ended December 31, 1995 are not
necessarily indicative of the results that may be expected for the year ended
March 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in McDermott Incorporated's Annual
Report on Form 10-K for the year ended March 31, 1995.
Unless the context otherwise requires, hereinafter, the "Delaware Company" will
be used to mean McDermott Incorporated and its consolidated subsidiaries
(including Babcock & Wilcox Investment Company and its principal subsidiary,
The Babcock & Wilcox Company), and "International" will be used to mean
McDermott International, Inc., a Panamanian corporation. International is the
parent company of the Delaware Company.
9
<PAGE> 10
NOTE 2 - PRODUCTS LIABILITY
At December 31, 1995, the estimated liability for pending and future
non-employee products liability asbestos claims was $881,552,000 (of which
approximately $200,000,000 had been asserted) and estimated insurance
recoveries were $757,069,000. Estimated liabilities for pending and future
non-employee products liability asbestos claims are derived from the Delaware
Company's claims history and constitute management's best estimate of such
future costs. Estimated insurance recoveries are based upon analysis of
insurers providing coverage of the estimated liabilities. Inherent in the
estimate of such liabilities and recoveries are expected trends in claim
severity and frequency and other factors, including recoverability from
insurers, which may vary significantly as claims are filed and settled.
Accordingly, the ultimate loss may differ materially from amounts provided in
the consolidated financial statements.
NOTE 3 - INVENTORIES
Consolidated inventories at December 31, 1995 and March 31, 1995 are summarized
below:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
------------ ---------
(In thousands)
<S> <C> <C>
Materials and Supplies $ 43,621 $ 36,579
Work in Progress 16,013 15,341
Finished Goods 7,428 9,794
- -----------------------------------------------------------------------------------------------------------
$ 67,062 $ 61,714
===========================================================================================================
</TABLE>
NOTE 4 - SALE OF POWER PURCHASE CONTRACTS
During the June 1995 quarter, the Delaware Company's Babcock-Ultrapower West
Enfield and Babcock-Ultrapower Jonesboro 50% owned partnerships sold power
purchase contracts back to a local utility which had previously entered into
agreements with the partnerships to purchase power, and recognized a gain of
$61,324,000. The Delaware Company's equity in the earnings of these
partnerships was $18,000 and $32,883,000 (including its share of the gain) for
the three and nine months ended December 31, 1995.
10
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
During the three and nine months ended December 31, 1995, the Delaware
Company's Canadian operations contributed 46% and 46%, respectively, to total
revenues and $9,729,000 and $25,637,000, respectively, to operating income.
The operating income reflects activity on contracts performed at its Cambridge,
Ontario location (which is included in the B&W Operations business unit below),
principally for the supply of replacement recirculating steam generators to
domestic utilities and work for two government owned utilities located in the
Far East.
Beginning with the June 1995 quarter, management's discussion of revenues and
operating income is discussed on a business unit basis as follows: B&W
Operations business unit (includes the operations of the Babcock & Wilcox Power
Generation and Government Groups) and Engineering, Construction and Industrial
Operations business unit (includes the Delaware Company's Engineering and
Construction Group, and Shipbuilding and Industrial Group). Other business
unit revenues include eliminations between business units. Other business unit
income (loss) includes certain expenses, primarily employee benefit and
insurance programs, and marketing and legal costs, that are not allocated to
the business units. For the three and nine months ended December 31, 1994,
Other revenues and business unit income (loss) includes the results of the
marine construction services business that was sold to International on January
31, 1995 and other businesses disposed of during fiscal year 1995. Prior year
information has been reclassified to conform with the December 31, 1995
presentation.
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/95 12/31/94 12/31/95 12/31/94
--------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES
B&W Operations $ 337,763 $ 327,419 $ 968,645 $ 938,056
Engineering, Construction and
Industrial Operations 179,263 178,015 539,653 556,131
Other (including Transfer Eliminations) (14,809) 55,560 (44,342) 179,284
- -------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 502,217 $ 560,994 $ 1,463,956 $ 1,673,471
=============================================================================================================
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/95 12/31/94 12/31/95 12/31/94
--------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING INCOME
Business Unit Income (Loss):
B&W Operations $ 30,927 $ 21,369 $ 43,014 $ 38,762
Engineering, Construction and
Industrial Operations (2,536) (4,061) (16,755) (18,190)
Other (5,059) 15,317 (8,392) 12,802
- -------------------------------------------------------------------------------------------------------------
TOTAL BUSINESS UNIT INCOME 23,332 32,625 17,867 33,374
- -------------------------------------------------------------------------------------------------------------
Equity in Income (Loss) of Investees:
B&W Operations 1,053 2,778 36,835 5,248
Engineering, Construction and
Industrial Operations 990 (914) 1,681 (748)
Other - 2,936 - 4,430
- -------------------------------------------------------------------------------------------------------------
TOTAL EQUITY IN INCOME
OF INVESTEES 2,043 4,800 38,516 8,930
- -------------------------------------------------------------------------------------------------------------
Corporate G&A Expense (3,483) (9,113) (15,465) (24,369)
- -------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 21,892 $ 28,312 $ 40,918 $ 17,935
=============================================================================================================
</TABLE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1995 VS. THREE MONTHS
ENDED DECEMBER 31, 1994
B&W Operations' revenues increased $10,344,000 to $337,763,000 primarily due to
higher revenues from the Power Generation Group's contracts for replacement
nuclear steam generators for domestic customers manufactured at its Cambridge,
Ontario location and on plant enhancement projects. These increases were
partially offset by lower revenues from fabrication of fossil fuel steam and
environmental control systems. In addition, the Government Group's defense and
space-related products (other than nuclear fuel assemblies and reactor
components) had higher revenues.
Engineering, Construction and Industrial Operations' revenues increased
$1,248,000 to $179,263,000 primarily due to higher revenues from the
Engineering and Construction Group's engineering activities in Canada and the
U.S. In addition, there were higher revenues
12
<PAGE> 13
from the Shipbuilding and Industrial Group's air-cooled heat exchangers. These
increases were partially offset by lower revenues from the Engineering and
Construction Group's repair and alteration of utility and industrial boilers in
the U.S. and the Shipbuilding and Industrial Group's shipyard operations.
Other revenues decreased $70,369,000 primarily due to the inclusion in the
prior year of revenues of $78,159,000 related to the marine construction
services business sold to International on January 31, 1995.
B&W Operations' business unit income increased $9,558,000 to $30,927,000
primarily due to the Power Generation Group's improved margins on its
fabrication of fossil fuel steam and environmental control systems (including a
license buyout agreement of $8,574,000), and on its replacement parts. In
addition, there were higher volume and margins from the Government Group's
defense and space-related products (other than nuclear fuel and reactor
components).
Engineering, Construction and Industrial Operations' business unit loss
decreased $1,525,000 to $2,536,000 primarily due to improved margins from the
Shipbuilding and Industrial Group's shipyard operations and higher volume and
margins on air-cooled heat exchangers. In addition, there was higher volume
from the Engineering and Construction Group's engineering activities in Canada
and the U.S. These increases were partially offset by lower volume and margins
from the Engineering and Construction Group's repair and alteration of utility
and industrial boilers in the U.S.
Other business unit income in the prior period includes income of $13,692,000
related to the marine construction services business sold to International on
January 31, 1995.
B&W Operations' equity in income of investees decreased $1,725,000 to
$1,053,000 primarily due to lower operating results in a domestic joint
venture.
Engineering, Construction and Industrial Operations' equity in income of
investees increased $1,904,000 from a loss of $914,000 to income of $990,000
primarily due to improved results from a domestic fabrication joint venture and
several Canadian joint ventures.
13
<PAGE> 14
Other business unit equity in income of investees in the prior period includes
the results of the CMM Mexican joint venture which is now a part of the marine
construction services business contributed to J. Ray McDermott, S.A. by
International on January 31, 1995.
Interest income decreased $563,000 to $1,693,000 primarily due to decreases in
investments in government obligations and other investments.
Interest expense increased $264,000 to $13,059,000 primarily due to a reduction
in accrued interest on proposed tax deficiencies of $5,000,000 that was
recorded in the prior period and changes in debt obligations and interest
rates prevailing thereon.
Other-net expense decreased $3,174,000 to $1,703,000 primarily due to higher
bank fees and discounts on the sale of certain accounts receivable in the prior
period.
The provision for income taxes increased $2,006,000 to $5,943,000, while income
before the provision for income taxes decreased $4,073,000 to $8,823,000. The
increase in the provision for income taxes is primarily due to an increase in
non U.S. income, partially offset by recognition of income tax benefits on
losses in the U.S. in the current period which was limited in the prior period.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1995 VS. NINE MONTHS
ENDED DECEMBER 31, 1994
B&W Operations' revenues increased $30,589,000 to $968,645,000 primarily due to
higher revenues from the Power Generation Group's contracts for replacement
nuclear steam generators for domestic customers manufactured at its Cambridge,
Ontario location, and on plant enhancement projects. These increases were
partially offset by lower revenues from fabrication of fossil fuel steam and
environmental control systems in the U.S. In addition, the Government Group's
defense and space-related products (other than nuclear fuel assemblies and
reactor components) had higher revenues. These were partially offset by lower
revenues from nuclear fuel assemblies and reactor components for the U.S.
Government.
Engineering, Construction and Industrial Operations' revenues decreased
$16,478,000 to $539,653,000 primarily due to lower revenues the Engineering and
Construction Group's activities relating to the construction, repair and
alteration of utility and industrial boilers in the
14
<PAGE> 15
U.S., and from the Shipbuilding and Industrial Group's shipyard operations.
These decreases were partially offset by higher revenues from the Engineering
and Construction Group's maintenance, construction and engineering activities
in Canada and domestic engineering activities. In addition, there were higher
revenues from the Shipbuilding and Industrial Group's air-cooled heat
exchangers.
Other revenues decreased $223,626,000 primarily due to the inclusion in the
prior year of revenues of $230,061,000 related to the marine construction
services business sold to International on January 31, 1995.
B&W Operations' business unit income increased $4,252,000 to $43,014,000
primarily due to higher volume and margins from the Power Generation Group's
replacement nuclear steam generators and plant enhancement projects and
improved margins from fabrication of fossil fuel steam and environmental
control systems (including a license buyout agreement of $8,574,000). These
increases were partially offset by lower margins from fabrication of industrial
boilers in the U.S. In addition, there were higher volume and margins from the
Government Group's defense and space-related products (other than nuclear fuel
assemblies and reactor components). This was partially offset by lower volume
and margins from nuclear fuel assemblies and reactor components for the U.S.
Government.
Engineering, Construction and Industrial Operations' business unit loss
decreased $1,435,000 to $16,755,000 primarily due to improved margins from the
Shipbuilding and Industrial Group's shipyard operations and higher volume and
margins from air-cooled heat exchangers. These increases were partially offset
by lower volume and margins from the Engineering and Construction Group's
construction, repair and alteration of utility and industrial boilers in the
U.S., including cost overruns on the completion of a contract for one U.S.
customer.
Other business unit income in the prior period includes income of $17,408,000
related to the marine construction services business sold to International on
January 31, 1995.
B&W Operations' equity in income of investees increased $31,587,000 to
$36,835,000 primarily due to the Power Generation Group's sale of power
purchase contracts back to a local utility in the current period and a
provision for a loss on discontinuing a domestic joint venture in the prior
period.
15
<PAGE> 16
Other business unit equity in income of investees in the prior period includes
the results of the CMM Mexican joint venture which is now a part of the marine
construction services business contributed to J. Ray McDermott, S.A. by
International on January 31, 1995.
Interest income increased $2,272,000 to $9,541,000 primarily due to increased
investments in government obligations and other investments.
Interest expense increased $6,450,000 to $40,033,000 primarily due a reduction
in accrued interest on proposed tax deficiencies of $16,300,000 that was
recorded in the prior period and changes in debt obligations and interest rates
prevailing thereon,.
Other-net expense decreased $24,248,000 to $239,000. This decrease was
primarily due to a loss related to the reduction of estimated products
liability asbestos claim recoveries of $14,478,000 from insurers, losses on the
sale of securities and higher bank fees and discounts on the sales of certain
accounts receivable, all in the prior period, and gains of $2,751,000 on the
disposal of assets in the current period.
The provision for income taxes increased $3,929,000 to $11,897,000, while
income (loss) before the provision for income taxes and cumulative effect of
accounting change increased $43,053,000 to income of $10,187,000 from a loss of
$32,866,000. The increase in the provision for income taxes is primarily due
to an increase in non U.S. income, partially offset by recognition of income
tax benefits on losses in the U.S. in the current period which was limited in
the prior period.
Net loss decreased $39,636,000 to $1,710,000 reflecting the cumulative effect
of the adoption of Statement of Financial Accounting Standards ("SFAS") No.
112, "Employers' Accounting for Postemployment Benefits," of $512,000 in the
prior year, in addition to the other items mentioned above.
16
<PAGE> 17
Backlog
<TABLE>
<CAPTION>
12/31/95 3/31/95
---------- ----------
(In thousands)
<S> <C> <C>
Business Unit Backlog:
B&W Operations $ 2,150,747 $ 1,947,226
Engineering, Construction and
Industrial Operations 489,814 619,973
Other (including Transfer Eliminations) (44,751) (102,533)
- -------------------------------------------------------------------------------------------------------------
Total Backlog $ 2,595,810 $ 2,464,666
=============================================================================================================
</TABLE>
B&W Operations' backlog at December 31, 1995 was $2,150,747,000 compared to
$1,947,226,000 at March 31, 1995. B&W Operations' foreign markets for
industrial and utility boilers are expected to remain strong as well as the
U.S. market for replacement nuclear steam generators. Domestic utility markets
remain weak. At December 31, 1995, this business unit's backlog with the U.S.
Government was $807,844,000 (of which $89,411,000 had not been funded). U.S.
Government budget reductions have negatively affected this business unit's
government operations.
Engineering, Construction and Industrial Operations' backlog at December 31,
1995 was $489,814,000 compared to $619,973,000 at March 31, 1995. The current
competitive economic environment in the U.S. has negatively affected demand for
its construction activities. At December 31, 1995, this business unit's
backlog with the U.S. Government was $56,321,000 (of which $6,603,000 had not
been funded).
Liquidity and Capital Resources
During the nine months ended December 31, 1995, the Delaware Company's cash and
cash equivalents decreased $57,000 to $20,957,000 and total debt decreased
$125,192,000 to $594,676,000 primarily through net sales of investments of
$301,768,000. During this period, the Delaware Company used cash of
$146,720,000 in operating activities, $150,159,000 for the repayment of
long-term debt, $24,925,000 for additions to property, plant and equipment,
$13,083,000 for the acquisition of Joy Environmental Technologies, and
$10,340,000 for cash dividends on the Delaware Company's preferred stocks.
17
<PAGE> 18
The increase in accounts receivable is primarily due to a reduction of
approximately $53,000,000 in the amount of qualified accounts receivable sold
under the terms of an agreement with a U.S. bank. Accounts payable were lower
than at March 31, 1995 resulting from payments made on certain of the Power
Generation Group's contracts in its Canadian operations.
Pursuant to an agreement with a majority of its principal insurers, the
Delaware Company negotiates and settles products liability asbestos claims from
non-employees and bills these amounts to the appropriate insurers. As a result
of collection delays inherent in this process, reimbursement is usually delayed
for three months or more. The number of claims had declined moderately since
fiscal year 1990, but have increased during the second half of fiscal year 1995
and the first nine months of fiscal year 1996. Management believes, based on
information currently available, that the recent increase represents an
acceleration in the timing of the receipt of these claims, but does not
represent an increase in its total estimated liability. The average amount of
these claims (historical average of approximately $5,300 per claim over the
last three years) has continued to rise. Claims paid during the nine months
ended December 31, 1995 were $114,396,000, of which $101,952,000 has been
recovered or is due from insurers. At December 31, 1995, receivables of
$52,750,000 were due from insurers for reimbursement of settled claims.
Estimated liabilities for pending and future non-employee products liability
asbestos claims are derived from the Delaware Company's claims history and
constitute management's best estimate of such future costs. Estimated
insurance recoveries are based upon analysis of insurers providing coverage of
the estimated liabilities. Inherent in the estimate of such liabilities and
recoveries are expected trends in claim severity and frequency and other
factors, including recoverability from insurers, which may vary significantly
as claims are filed and settled. Accordingly, the ultimate loss may differ
materially from amounts provided in the consolidated financial statements.
Settlement of the liability is expected to occur over approximately the next 25
years. The collection delays, and the amount of claims paid for which
insurance recovery is not probable, have not had a material adverse effect upon
the Delaware Company's liquidity, and management believes, based on information
currently available, that they will not have a material adverse effect on
liquidity in the future.
18
<PAGE> 19
The Delaware Company's expenditures for property, plant and equipment decreased
$33,823,000 to $24,925,000 for the nine months ended December 31, 1995 as
compared with the same period last year (which included expenditures of
approximately $19,266,000 related to the portion of its marine construction
business sold to International), the majority of which were incurred to
maintain existing facilities.
At December 31 and March 31, 1995, The Babcock & Wilcox Company ("B&W") had
sold, with limited recourse, an undivided interest in a designated pool of
qualified accounts receivable of approximately $122,000,000 and $175,000,000,
respectively, under the terms of an agreement with a U.S. Bank. The maximum
sales limit available under the agreement was reduced during July 1995 from
$225,000,000 to $175,000,000 and during December 1995 to $140,000,000. During
November 1995, B&W and the bank amended the agreement to provide for an annual
renewal of the program.
At December 31 and March 31, 1995, the Delaware Company had available to it
various uncommitted short-term lines of credit from banks totalling
$253,967,000 and $227,903,000, respectively. Borrowings by the Delaware Company
against these lines of credit at December 31 and March 31, 1995 were
$90,345,000 and $33,220,000, respectively. In addition, The Babcock & Wilcox
Company has available to it an unsecured and committed revolving line of credit
facility. During the quarter ended September 30, 1995, the facility was
amended to increase the commitment to $150,000,000 and to extend the agreement
to March 31, 1999. It is a condition to borrowing under this revolving credit
facility that the borrower's tangible net worth, debt to capitalization, and
interest coverage as defined in the agreement meet or exceed certain covenant
requirements. Borrowings outstanding against this facility at December 31, 1995
were $35,000,000, while there were none outstanding at March 31, 1995.
McDermott Engineers & Constructors (Canada) Ltd. (formerly Delta Catalytic
Corporation) had available from a certain Canadian bank, an unsecured and
committed revolving credit facility of $14,925,000. At March 31, 1995
borrowings outstanding against this facility were $7,420,000. In October 1995,
this facility was repaid and cancelled.
The Delaware Company maintains an investment portfolio of government
obligations and other investments which is classified as available for sale
under SFAS No. 115. The fair
19
<PAGE> 20
value of short-term investments at December 31, 1995 was $62,324,000 (amortized
cost $61,800,000). Subsequent to December 31, 1995, $48,726,000 (amortized
cost) of these investments were used to repay short-term debt.
The Delaware Company is restricted, as a result of covenants in certain
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
At December 31, 1995, substantially all of the net assets of the Delaware
Company were subject to such restrictions. The most restrictive of these
covenants with respect to the payment of dividends by the Delaware Company
would prohibit the payment of dividends other than current dividends on
existing preferred stock.
Effective February 1, 1989, the Delaware Company and a subsidiary of
International, McDermott International Investments Co., Inc. ("MIICO"), entered
into a reverse repurchase agreement whereby either party acting as a "buyer"
would purchase for cash certain U. S. Government obligations owned by the other
party acting as a "seller", and, at the date of purchase, the "seller" would
agree to repurchase the same securities at a set price (including accrued
interest) at a future specified date. No amounts were outstanding under this
agreement at December 31 or March 31, 1995.
The Delaware Company and MIICO are parties to an agreement pursuant to which
the Delaware Company may borrow up to $150,000,000 from MIICO at interest rates
computed at the applicable federal rate determined by the IRS. There were no
borrowings against this agreement at December 31 or March 31, 1995.
Working capital increased $140,177,000 from a deficit of $21,580,000 at March
31, 1995 to $118,597,000 at December 31, 1995. During the remainder of fiscal
1996, the Delaware Company expects to obtain funds to meet capital expenditure,
working capital and debt maturity requirements from operating activities, its
short-term investment portfolio and additional borrowings from existing lines
of credit. Leasing agreements for equipment, which are short-term in nature,
are not expected to impact the Delaware Company's liquidity nor capital
resources.
The Delaware Company's quarterly dividends of $0.55 per share on the Series A
$2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series
B $2.60 Cumulative Preferred Stock were the same in December 1995 and 1994.
20
<PAGE> 21
The Delaware Company has provided a valuation allowance for deferred tax assets
which cannot be realized through carrybacks and future reversals of existing
taxable temporary differences. Management believes that remaining deferred tax
assets in all other tax jurisdictions are realizable through carrybacks and
future reversals of existing taxable temporary differences and, if necessary,
the implementation of tax planning strategies involving sales and
sale/leasebacks of appreciated assets. A major uncertainty that affects the
ultimate realization of deferred tax assets is the possibility of declines in
value of appreciated assets involved in identified tax planning strategies.
This factor has been considered in determining the valuation allowance.
Management will continue to assess the adequacy of the valuation allowance on a
quarterly basis.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for fiscal years beginning after December 15, 1995. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No. 121 also applies to similar assets that are held for
disposal, except for the assets of a discontinued operation. The Delaware
Company has not yet finalized its review of the impact of this statement, but
it is not expected to have a material impact on the consolidated financial
statements.
21
<PAGE> 22
PART II
McDERMOTT INCORPORATED
OTHER INFORMATION
No information is applicable to Part II for the current quarter, except as
noted below:
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed during the three
months ended December 31, 1995.
Signatures
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDERMOTT INCORPORATED
February 12, 1996 /s/Daniel R. Gaubert
----------------------------------
By: Daniel R. Gaubert
Vice President, Finance and
Controller
(Principal Accounting Officer)
23
<PAGE> 24
EXHIBIT INDEX
Exhibit Description
Exhibit 27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDCERMOTT
INCORPORATED'S DECEMBER 31, 1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> DEC-31-1995
<CASH> 20,957
<SECURITIES> 62,324
<RECEIVABLES> 278,523
<ALLOWANCES> 8,255
<INVENTORY> 316,406
<CURRENT-ASSETS> 933,013
<PP&E> 679,668
<DEPRECIATION> 393,891
<TOTAL-ASSETS> 3,051,042
<CURRENT-LIABILITIES> 814,416
<BONDS> 422,958
<COMMON> 4
173,301
0
<OTHER-SE> 406,743
<TOTAL-LIABILITY-AND-EQUITY> 3,051,042
<SALES> 1,463,956
<TOTAL-REVENUES> 1,463,956
<CGS> 1,461,554
<TOTAL-COSTS> 1,461,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,033
<INCOME-PRETAX> 10,187
<INCOME-TAX> 11,897
<INCOME-CONTINUING> (1,710)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,710)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
