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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 1-4095
MCDERMOTT INCORPORATED
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 74-1032246
________________________________________________________________________________
(State of Incorporation) (I.R.S. Employer Identification)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
________________________________________________________________________________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-4411
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock, par value $1 per share, outstanding as of
January 24, 1997 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
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PART I - FINANCIAL INFORMATION
______________________________
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
December 31, 1996 and March 31, 1996 4
Condensed Consolidated Statement of Income (Loss)
Three and Nine Months Ended December 31, 1996 and 1995 6
Condensed Consolidated Statement of Cash Flows
Nine Months Ended December 31, 1996 and 1995 7
Notes to Condensed Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
___________________________
Item 6 - Exhibits and Reports on Form 8-K 22
SIGNATURES 23
Exhibit 27 - Financial Data Schedule 25
2
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PART I
McDERMOTT INCORPORATED
FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
3
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McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
12/31/96 3/31/96
-------- -------
(Unaudited)
(In thousands)
Current Assets:
Cash and cash equivalents $ 18,603 $ 22,886
Accounts receivable-trade 165,917 257,094
Accounts receivable-other 138,831 82,145
Accounts receivable from affiliates 15,465 38,698
Insurance recoverable-current 184,237 116,280
Contracts in progress 285,761 275,488
Inventories 66,930 69,739
Deferred income taxes 66,234 82,381
Other current assets 15,707 8,355
_______________________________________________________________________________
Total Current Assets 957,685 953,066
________________________________________________________________________________
Property, Plant and Equipment, at Cost: 596,725 667,156
Less accumulated depreciation 354,329 388,111
________________________________________________________________________________
Net Property, Plant and Equipment 242,396 279,045
________________________________________________________________________________
Insurance Recoverable 414,287 606,963
________________________________________________________________________________
Investment in McDermott International, Inc. 596,087 600,292
________________________________________________________________________________
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $103,065,000 at December 31, 1996
and $97,814,000 at March 31, 1996 125,850 135,877
________________________________________________________________________________
Prepaid Pension Costs 264,864 256,802
________________________________________________________________________________
Other Assets 188,997 187,735
________________________________________________________________________________
TOTAL $2,790,166 $3,019,780
================================================================================
See accompanying notes to condensed consolidated financial statements.
4
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LIABILITIES AND STOCKHOLDER'S EQUITY
12/31/96 3/31/96
-------- -------
(Unaudited)
(In thousands)
Current Liabilities:
Notes payable and current maturities
of long-term debt $ 181,368 $ 109,626
Note payable to International 23,050 65,363
Accounts payable 78,065 145,779
Accounts payable to affiliates 41,622 4,410
Environmental and products liabilities-current 213,675 159,824
Accrued employee benefits 69,367 72,173
Advance billings on contracts 124,276 149,245
Other current liabilities 114,995 154,560
________________________________________________________________________________
Total Current Liabilities 846,418 860,980
________________________________________________________________________________
Long-Term Debt 388,586 423,882
________________________________________________________________________________
Accumulated Postretirement Benefit Obligation 377,149 377,457
________________________________________________________________________________
Environmental and Products Liabilities 524,840 721,740
________________________________________________________________________________
Other Liabilities 93,632 89,501
________________________________________________________________________________
Contingencies
________________________________________________________________________________
Redeemable Preferred Stocks:
Series A $2.20 cumulative convertible,
$1.00 par value; at redemption value 88,087 88,087
Series B $2.60 cumulative, $1.00 par value;
at redemption value 84,096 85,214
________________________________________________________________________________
Total Redeemable Preferred Stocks 172,183 173,301
________________________________________________________________________________
Stockholder's Equity:
Common stock, par value $1.00 per share,
3,700 shares authorized and issued,
3,600 shares outstanding 4 4
Capital in excess of par value 691,545 625,841
Deficit (286,162) (234,838)
Currency translation adjustments (18,029) (18,088)
_______________________________________________________________________________
Total Stockholder's Equity 387,358 372,919
________________________________________________________________________________
TOTAL $2,790,166 $3,019,780
================================================================================
5
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McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
DECEMBER 31, 1996
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/96 12/31/95 12/31/96 12/31/95
-------- -------- -------- --------
(Unaudited)
(In thousands)
Revenues $ 424,629 $ 502,217 $1,360,801 $1,463,956
________________________________________________________________________________
Costs and Expenses:
Cost of operations (excluding
depreciation and
amortization) 376,113 436,172 1,243,835 1,320,109
Depreciation and amortization 10,975 12,722 34,215 35,453
Selling, general and
administrative expenses 33,349 33,474 101,493 105,992
________________________________________________________________________________
420,437 482,368 1,379,543 1,461,554
________________________________________________________________________________
Gain (Loss) on Asset Disposals
and Impairments-net 1,037 (684) 820 2,751
________________________________________________________________________________
Operating Income (Loss) before
Equity in Income of Investees 5,229 19,165 (17,922) 5,153
Equity in Income of Investees 485 2,043 6,448 38,516
________________________________________________________________________________
Operating Income (Loss) 5,714 21,208 (11,474) 43,669
________________________________________________________________________________
Other Income (Expense):
Interest income 876 1,693 1,820 9,541
Interest expense (13,062) (13,059) (39,152) (40,033)
Other-net (1,620) (1,019) (3,610) (2,990)
________________________________________________________________________________
(13,806) (12,385) (40,942) (33,482)
________________________________________________________________________________
Income (Loss) before Provision for
(Benefit from) Income Taxes (8,092) 8,823 (52,416) 10,187
Provision for (Benefit from)
Income Taxes (1,539) 5,943 (11,060) 11,897
________________________________________________________________________________
Net Income (Loss) $ (6,553) $ 2,880 $ (41,356) $ (1,710)
================================================================================
See accompanying notes to condensed consolidated financial statements.
6
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McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED
12/31/96 12/31/95
-------- --------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (41,356) $ (1,710)
________________________________________________________________________________
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 34,215 35,453
Provision for deferred taxes 4,994 9,629
Equity in income of investees, less dividends 205 1,520
Other (9,787) 1,667
Changes in assets and liabilities:
Accounts receivable 85,078 (68,042)
Net contracts in progress and advance billings (39,917) (11,258)
Accounts payable (28,474) (30,901)
Accrued and other current liabilities (34,729) (12,154)
Other, net 25,428 (40,655)
Proceeds from insurance for products
liabilities claims 91,585 84,127
Payments of products liabilities claims (137,337) (114,396)
_______________________________________________________________________________
NET CASH USED IN OPERATING ACTIVITIES (50,095) (146,720)
________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from asset disposals 16,110 18,237
Acquisition - (13,083)
Purchases of property, plant and equipment (17,001) (24,925)
Purchases of investments - (195,835)
Sales and maturities of investments - 497,603
Other 2,919 6,793
_______________________________________________________________________________
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,028 288,790
________________________________________________________________________________
7
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CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED
12/31/96 12/31/95
-------- --------
(Unaudited)
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowing $ 36,706 $ 24,951
Decrease in note payable to International (42,313) -
Payment of long-term debt (159) (150,159)
Redemption of preferred stock (1,069) (5,743)
Dividends paid (9,968) (10,340)
Capital contribution from International 61,000 -
Other (738) (712)
________________________________________________________________________________
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 43,459 (142,003)
________________________________________________________________________________
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 325 (124)
________________________________________________________________________________
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,283) (57)
________________________________________________________________________________
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,886 21,014
________________________________________________________________________________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,603 $ 20,957
================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 35,556 $ 41,967
Income taxes (net of refunds) $ (9,176) $ 23,902
================================================================================
See accompanying notes to condensed consolidated financial statements.
8
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McDERMOTT INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - BASIS OF PRESENTATION
McDermott Incorporated is a majority owned subsidiary of McDermott
International, Inc. ("International").
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statement information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Such adjustments are of a
normal, recurring nature except for (i) favorable workers' compensation cost
adjustments ($7,857,000, net of tax of $4,231,000) included in the three and
nine months ended December 31, 1996; (ii) an asset impairment loss ($4,742,000,
net of tax of $2,553,000) included in the nine months ended December 31, 1996;
(iii) favorable workers' compensation cost adjustments ($3,561,000, net of tax
of $2,185,000) included in the three and nine months ended December 31, 1995;
and (iv) 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. Certain amounts previously reported have been reclassified to
conform with the presentation at December 31, 1996. Operating results for the
three and nine months ended December 31, 1996 are not necessarily indicative of
the results that may be expected for the year ending March 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in McDermott Incorporated's annual report on Form 10-K for the
year ended March 31, 1996.
NOTE 2 - PRODUCTS LIABILITY
At December 31, 1996, the estimated liability for pending and future non-
employee products liability asbestos claims was $706,649,000 (of which
approximately $250,000,000 had been asserted) and estimated insurance recoveries
were $598,524,000. Estimated liabilities for pending and future non-employee
products liability asbestos claims are derived from McDermott Incorporated's
claims history and constitute management's best estimate of such
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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.
NOTE 3 - INVENTORIES
Consolidated inventories at December 31, 1996 and March 31, 1996 are summarized
below:
December 31, March 31,
1996 1996
------------ ---------
(Unaudited)
(In thousands)
Raw Materials and Supplies $ 44,510 $ 39,604
Work in Progress 15,492 17,305
Finished Goods 6,928 12,830
________________________________________________________________________________
$ 66,930 $ 69,739
================================================================================
NOTE 4 - SUBSEQUENT EVENT
On January 27, 1997, McDermott Incorporated announced that its McDermott
Shipbuilding, Inc. subsidiary had reached an agreement to sell its shipyard near
Amelia, Louisiana to Bollinger Shipyards, Inc. of Lockport, Louisiana. The sale
will include the assets of the shipyard including its current backlog of work.
The transaction is expected to be completed in the near future.
10
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
McDermott Incorporated is a majority owned subsidiary of McDermott
International, Inc. ("International"). A significant portion of McDermott
Incorporated's revenues and operating results are derived from its foreign
operations, which are primarily located in Canada. As a result, McDermott
Incorporated's operations and financial results are affected by international
factors, such as changes in foreign currency exchange rates. McDermott
Incorporated attempts to minimize its exposure to changes in foreign currency
exchange rates by attempting to match foreign currency contract receipts with
like foreign currency disbursements. To the extent that McDermott Incorporated
is unable to match the foreign currency receipts and disbursements related to
its contracts, it enters into forward exchange contracts to hedge foreign
currency transactions, which reduce the impact of foreign exchange rate
movements on operating results.
During the three and nine months ended December 31, 1996, McDermott
Incorporated's Canadian operations contributed $118,284,000 and $442,334,000,
respectively, to total revenues and $997,000 and $4,519,000, respectively, to
operating loss. During the three and nine months ended December 31, 1995, the
Canadian operations contributed $227,259,000 and $663,249,000, respectively, to
total revenues and $9,682,000 and $25,397,000, respectively, to operating
income. These results reflect activity on contracts performed at B&W's
Cambridge, Ontario location (which is included in the B&W Operations business
unit below), principally for the supply of replacement recirculating steam
generators to domestic utilities and work for government owned utilities located
in the Middle and Far East, and contracts performed by McDermott Engineers &
Constructors (Canada) Ltd., which is based in Calgary, Alberta, Canada.
Management's discussion of revenues and operating income is presented on a
business unit basis as follows: the B&W Operations business unit (includes the
operations of the Babcock & Wilcox Power Generation and Government Groups) and
the Industrial Operations business unit (includes McDermott Incorporated's
engineering and construction operations, barge construction, ship repair and
other industrial operations). Other business unit revenues include combining
adjustments and eliminations resulting from inter-business unit contracts. Other
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business unit income (loss) includes certain adjustments which are not allocated
to the business units, including retiree benefit and legal costs, as well as the
impact of combining adjustments on margins of inter-business unit contracts.
Business unit revenues and income (loss) for the three and nine months ended
December 31, 1995 have been restated to reflect the reclassification of certain
operations to B&W Operations from the Industrial Operations business unit; and
the allocation of certain expenses to the B&W Operations and the Industrial
Operations business units from Other to conform with the presentation at
December 31, 1996.
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/96 12/31/95 12/31/96 12/31/95
--------- --------- ---------- ----------
(In thousands)
REVENUES:
- ---------
B&W Operations $ 326,797 $ 371,126 $1,018,227 $1,082,341
Industrial Operations 101,733 133,688 359,087 388,044
Other (including Transfer
Eliminations) (3,901) (2,597) (16,513) (6,429)
________________________________________________________________________________
TOTAL REVENUES $ 424,629 $ 502,217 $1,360,801 $1,463,956
================================================================================
OPERATING INCOME (LOSS)
Business Unit Income (Loss):
B&W Operations $ 17,869 $ 29,741 $ 26,848 $ 33,357
Industrial Operations (7,032) (6,217) (23,638) (15,351)
Other 2,729 (192) 1,134 (139)
________________________________________________________________________________
TOTAL BUSINESS UNIT INCOME 13,566 23,332 4,344 17,867
________________________________________________________________________________
Gain (Loss) on Asset Disposals
and Impairments-net 1,037 (684) 820 2,751
________________________________________________________________________________
Equity in Income (Loss) of
Investees:
B&W Operations (477) 1,053 3,825 36,835
Industrial Operations 962 990 2,623 1,681
________________________________________________________________________________
TOTAL EQUITY IN INCOME
OF INVESTEES 485 2,043 6,448 38,516
________________________________________________________________________________
Corporate General &
Administrative Expense (9,374) (3,483) (23,086) (15,465)
________________________________________________________________________________
TOTAL OPERATING
INCOME (LOSS) $ 5,714 $ 21,208 $ (11,474) $ 43,669
================================================================================
12
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RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1996 VS. THREE MONTHS
ENDED DECEMBER 31, 1995
B&W Operations' revenues decreased $44,329,000 to $326,797,000 reflecting
weaknesses in essentially all of the Power Generation Group's basic businesses.
These decreases were primarily due to lower revenues from the Power Generation
Group's replacement nuclear steam generators manufactured at B&W's Cambridge,
Ontario location, fabrication and erection of fossil fuel steam and
environmental control systems, replacement parts and Canadian nuclear services.
These decreases were partially offset by higher revenues from the Government
Group's commercial nuclear environmental services and defense and space-related
products (other than nuclear fuel assemblies and reactor components).
Industrial Operations' revenues decreased $31,955,000 to $101,733,000, primarily
due to lower revenues from engineering and construction activities in domestic
and Canadian operations. These decreases were partially offset by increased
barge construction activities in shipyard operations and increased shipbuilding
activities.
B&W Operations' business unit income decreased $11,872,000 to $17,869,000,
primarily due to the Power Generation Group's lower volume and margins on the
fabrication and erection of fossil fuel steam and environmental control systems
and replacement parts, lower volume from replacement nuclear steam generators
and lower margins on plant enhancement projects. In addition, the prior year
included income from a license buyout agreement. There were also lower margins
from the Government Group's nuclear fuel assemblies and reactor components for
the U.S. Government, partially offset by higher volumes and margins from
commercial nuclear environmental services and from defense and space-related
products (other than nuclear fuel assemblies and reactor components). There were
also lower sales and marketing expenses.
Other business unit income (loss) increased $2,921,000 from a loss of $192,000
to income of $2,729,000, primarily due to lower employee benefit expenses.
Gain (loss) on asset disposals and impairments-net increased $1,721,000 from a
loss of $684,000 to a gain of $1,037,000, primarily due to a gain on the sale of
certain land, compared to a loss on disposal of a certain office building and
land in the prior year.
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B&W Operations' equity in income (loss) of investees decreased $1,530,000 from
income of $1,053,000 to a loss of $477,000, primarily due to lower operating
results in a Canadian joint venture.
Corporate general and administrative expense increased primarily due to the
timing of cost allocations with International.
Interest income decreased $817,000 to $876,000, primarily due to decreases in
investments in government obligations and other investments.
Other-net expense increased $601,000 to $1,620,000, primarily due to certain
reimbursed costs in the prior year. This increase was partially offset by
foreign currency gains compared to foreign currency losses in the prior year.
The provision for (benefit from) income taxes decreased $7,482,000 from a
provision of $5,943,000 to a benefit of $1,539,000, while income (loss) before
the provision for (benefit from) income taxes decreased $16,915,000 to a loss of
$8,092,000 from income of $8,823,000. The decrease in the provision for
(benefit from) income taxes is primarily due to the decrease in income.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1996 VS. NINE MONTHS
ENDED DECEMBER 31, 1995
B&W Operations' revenues decreased $64,114,000 to $1,018,227,000 reflecting
weaknesses in essentially all of the Power Generation Group's basic businesses.
These decreases were primarily due to lower revenues from the Power Generation
Group's fabrication and erection of fossil fuel steam and environmental control
systems, replacement nuclear steam generators manufactured at B&W's Cambridge,
Ontario location, Canadian nuclear services and replacement parts. These
decreases were partially offset by higher revenues from the repair and
alteration of existing fossil fuel steam systems and plant enhancement projects.
In addition, the Government Group had higher revenues in its commercial nuclear
environmental services.
Industrial Operations' revenues decreased $28,957,000 to $359,087,000, primarily
due to lower revenues from engineering and construction activities in domestic
and Canadian
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operations. These decreases were partially offset by increased barge
construction activities in shipyard operations and increased shipbuilding
activities.
B&W Operations' business unit income decreased $6,509,000 to $26,848,000,
primarily due to the Power Generation Group's lower volume and margins on the
fabrication and erection of fossil fuel steam and environmental control systems,
lower margins on plant enhancement projects and lower volume on replacement
nuclear steam generators. In addition, the prior year included income from a
license buyout agreement. These decreases were partially offset by higher
margins on industrial boilers and higher volume and margins on the repair and
alteration of existing fossil fuel steam systems. In addition, there were higher
margins from the Government Group's nuclear fuel assemblies and reactor
components for the U. S. Government and higher volume and margins on commercial
nuclear environmental services and lower sales and marketing expenses.
Industrial Operations' business unit loss increased $8,287,000 to $23,638,000,
primarily due to cost overruns on an engineering, procurement and construction
contract for a cogeneration plant and cost overruns on barge construction
operations. The loss was partially offset by lower general and administrative
expenses.
Other business unit income (loss) increased $1,273,000 from a loss of $139,000
to income of $1,134,000, primarily due to lower employee benefit expenses.
Gain on asset disposals and impairments-net decreased $1,931,000 to $820,000,
primarily due to an asset impairment loss on an office building, partially
offset by a gain on the sale of a certain product line.
B&W Operations' equity in income of investees decreased $33,010,000 to
$3,825,000. This represents the results of approximately ten active joint
ventures. The decrease is primarily due to a nonrecurring gain of $30,612,000
resulting from the sale of power purchase contracts back to a local utility in
June 1995 and lower operating results in a Canadian joint venture.
Corporate general and administrative expense increased primarily due to the
timing of allocations with International.
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Interest income decreased $7,721,000 to $1,820,000, primarily due to decreases
in interest income on investments in government obligations and other
investments.
Interest expense decreased $881,000 to $39,152,000, primarily due to changes in
debt obligations and interest rates prevailing thereon.
Other-net expense increased $620,000 to $3,610,000, primarily due to gains on
sales of securities and certain reimbursed costs in the prior year. This
increase was partially offset by lower bank fees and discounts on sales of
certain accounts receivable.
The provision for (benefit from) income taxes decreased $22,957,000 to a benefit
of $11,060,000 from a provision of $11,897,000, while income (loss) before the
provision for (benefit from) income taxes decreased $62,603,000 to a loss of
$52,416,000 from income of $10,187,000. The decrease in the provision for
(benefit from) income taxes is primarily due to the decrease in income.
Backlog
12/31/96 3/31/96
-------- -------
(Unaudited)
(In thousands)
Business Unit Backlog:
B&W Operations $ 2,248,642 $ 2,164,507
Industrial Operations 312,010 315,669
Other (including Transfer Eliminations) (8,407) (15,915)
________________________________________________________________________________
Total Backlog $ 2,552,245 $ 2,464,261
================================================================================
In general, McDermott Incorporated's business units are capital intensive and
rely on large contracts for a substantial amount of their revenues.
B&W Operations' backlog at December 31, 1996 was $2,248,642,000 compared to
$2,164,507,000 at March 31, 1996. At December 31, 1996, this business unit's
backlog with the U.S. Government was $859,882,000 (of which $44,939,000 had not
been funded) and included orders for nuclear fuel assemblies and reactor
components for the U.S. Navy. This business unit's foreign markets for
industrial and utility boilers remain strong and the U.S. market for replacement
nuclear steam generators is expected to continue to make significant
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contributions to operating income in the foreseeable future. However, the
domestic market for industrial and utility boilers remains weak.
Industrial Operations' backlog at December 31, 1996 was $312,010,000, compared
to $315,669,000 at March 31, 1996, and included the backlog at its shipyard of
$110,361,000 (see Note 5 to the condensed consolidated financial statements
regarding the sale of the shipyard). At December 31, 1996, this business unit's
backlog with the U.S. Government was $37,583,000 (of which $1,901,000 had not
been funded).
Liquidity and Capital Resources
During the nine months ended December 31, 1996, McDermott Incorporated's cash
and cash equivalents decreased $4,283,000 to $18,603,000 and total debt
decreased $5,867,000 to $593,004,000 primarily due to a net reduction in short-
term borrowings of $5,607,000. During this period, McDermott Incorporated used
cash of $50,095,000 in operating activities, $17,001,000 for additions to
property, plant and equipment, and $9,968,000 for cash dividends on McDermott
Incorporated's preferred stocks. Also during the nine months ended December 31,
1996, McDermott Incorporated received cash capital contributions from
International of $61,000,000 which was used to repay short-term borrowings and
cash proceeds of $16,110,000 from asset disposals.
Pursuant to an agreement with a majority of its principal insurers, McDermott
Incorporated negotiates and settles products liability asbestos claims from non-
employees and bills these amounts to the appropriate insurers. As a result of
collection delays inherent in this process, reimbursement is usually delayed for
three months or more. While the number of claims received had declined during
the last six months of fiscal year 1996, they have increased during the first
nine months of fiscal year 1997, but not to the levels experienced from October
1994 to September 1995. Management is currently investigating and evaluating
the basis for this increase in the number of claims. The average amount of
these claims (historical average of approximately $5,900 per claim over the last
three years) has continued to rise. Claims paid during the nine months ended
December 31, 1996 were $137,337,000, of which $123,869,000 has been recovered or
is due from insurers. At December 31, 1996, receivables of $95,507,000 were due
from insurers for reimbursement of settled claims. The increase in amounts
classified as current for products liability asbestos claims and the
17
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insurance recoverable at December 31, 1996 reflects management's intention to
reduce the level of unpaid asserted claims over the next several quarters.
Estimated liabilities for pending and future non-employee products liability
asbestos claims are derived from McDermott Incorporated's claims history and
constitute management's best estimate of such future costs. Estimated insurance
recoveries are based upon an 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 for 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 McDermott
Incorporated's liquidity, and management believes, based on information
currently available, that they will not have a material adverse effect on
liquidity in the future.
Expenditures for property, plant and equipment decreased $7,924,000 to
$17,001,000 for the nine months ended December 31, 1996. The majority of
expenditures were incurred to maintain existing facilities.
At December 31 and March 31, 1996, B&W had sold, with limited recourse, an
undivided interest in a designated pool of qualified accounts receivable of
approximately $103,000,000 and $107,000,000, respectively, under the terms of an
agreement with a U.S. bank. The maximum sales limit available under the
agreement was reduced during December 1996 from $140,000,000 to $125,000,000.
Depending on the amount of qualified accounts receivable available for the pool,
the amount sold to the bank can vary (but not greater than the maximum sales
limit available) from time to time. The existing agreement will expire on
March 31, 1997; however, B&W expects to negotiate an annual renewal of the
agreement.
At December 31 and March 31, 1996, McDermott Incorporated had available to it
various uncommitted short-term lines of credit from banks totalling $219,419,000
and $285,859,000, respectively. Borrowings by McDermott Incorporated against
these lines of credit at December 31 and March 31, 1996 were $45,020,000 and
$58,314,000, respectively. In addition, B&W had available to it an unsecured
and committed revolving line
18
<PAGE>
of credit facility of $150,000,000. Borrowings against this facility at
December 31 and March 31, 1996 were $100,000,000 and $50,000,000, respectively.
It is a condition to borrowing under this revolving credit facility that the
borrower's tangible net worth, debt to capitalization, and interest coverage as
defined in the agreement meet or exceed certain covenant requirements. Although
B&W did not meet one such requirement at December 31, 1996, it has received a
waiver of compliance through March 30, 1997 and anticipates negotiating a new
committed bank facility with new covenants applicable thereafter.
McDermott Incorporated is restricted, as a result of covenants in certain
agreements, in its ability to transfer funds to International and its other
subsidiaries through cash dividends or through unsecured loans or investments.
At December 31, 1996, substantially all of the net assets of McDermott
Incorporated were subject to such restrictions. The most restrictive of these
covenants with respect to the payment of dividends by McDermott Incorporated
would prohibit the payment of dividends other than current dividends on existing
preferred stock.
McDermott Incorporated and a subsidiary of International, McDermott
International Investments Co., Inc. ("MIICO"), are parties to an agreement
pursuant to which McDermott Incorporated may borrow up to $150,000,000 from
MIICO at interest rates computed at the applicable federal rate determined by
the Internal Revenue Service. At December 31 and March 31, 1996, McDermott
Incorporated had borrowed $23,050,000 and $65,363,000, respectively, against
this agreement.
Working capital increased $19,181,000 from $92,086,000 at March 31, 1996 to
$111,267,000 at December 31, 1996. During the remainder of fiscal 1997,
McDermott Incorporated expects to obtain funds to meet capital expenditure,
working capital and debt maturity requirements from operating activities, sale
of non-strategic assets and additional borrowings from existing lines of credit.
Leasing agreements for equipment, which are short-term in nature, are not
expected to impact McDermott Incorporated's liquidity or capital resources.
McDermott Incorporated's quarterly dividends of $0.55 per share on its Series A
$2.20 Cumulative Convertible Preferred Stock and $0.65 per share on its Series B
$2.60 Cumulative Preferred Stock were the same in December 1996 and 1995.
19
<PAGE>
McDermott Incorporated has provided a valuation allowance for deferred tax
assets which cannot be realized through carrybacks and future reversals of
existing taxable temporary differences. Management believes that remaining
deferred tax assets in all other tax jurisdictions are realizable through
carrybacks and future reversals of existing taxable temporary differences and,
if necessary, the implementation of tax planning strategies involving sales of
appreciated assets. A major uncertainty that affects the ultimate realization
of deferred tax assets is the possibility of declines in value of appreciated
assets involved in identified tax planning strategies. This factor has been
considered in determining the valuation allowance. Management will continue to
assess the adequacy of the valuation allowance on a quarterly basis.
On October 7, 1996, International announced that its Board of Directors had
directed management to implement a series of steps to improve International's
financial and operating performance. Management was directed to focus
International on its core business lines and dispose of non-core businesses and
underperforming assets. Core business lines include McDermott Incorporated's B&W
power generation and government operations. Management was also directed to
realign the operations of B&W's Power Generation Group consistent with the
current demands of the worldwide power generation market. This included the
rationalization of manufacturing overcapacity and continued reduction in
personnel. Finally, management was directed to continue efforts to reduce
personnel and other costs at the operating and corporate headquarters of
McDermott Incorporated. Although business and asset disposals associated with
this directive have not been completed, these disposals may negatively impact
near term operating results, while having a positive long-term impact on
operations. It is anticipated that these disposals will have a positive impact
on liquidity, both upon disposition and long-term.
New Accounting Standard
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," effective
for transactions occurring after December 31, 1996. SFAS No. 125 established
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. This statement also provides
consistent standards for distinguishing transfers of financial assets that are
sales
20
<PAGE>
from transfers that are secured borrowings. McDermott Incorporated has not yet
finalized its review of the impact of this statement, but it is not expected to
have a material impact on the consolidated financial statements.
21
<PAGE>
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, 1996.
Signatures
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDERMOTT INCORPORATED
February 7, 1997 By: /s/Daniel R. Gaubert
______________________________
Daniel R. Gaubert
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer and Duly
Authorized Representative)
23
<PAGE>
EXHIBIT INDEX
Exhibit Description
27 Financial Data Schedule
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MCDERMOTT INCORPORATED'S DECEMBER 31, 1996 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-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 18,603
<SECURITIES> 260
<RECEIVABLES> 207,848
<ALLOWANCES> 41,931
<INVENTORY> 352,691
<CURRENT-ASSETS> 957,685
<PP&E> 596,725
<DEPRECIATION> 354,329
<TOTAL-ASSETS> 2,790,166
<CURRENT-LIABILITIES> 846,418
<BONDS> 388,586
4
172,183
<COMMON> 0
<OTHER-SE> 387,354
<TOTAL-LIABILITY-AND-EQUITY> 2,790,166
<SALES> 1,360,801
<TOTAL-REVENUES> 1,360,801
<CGS> 1,379,543
<TOTAL-COSTS> 1,379,543
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,152
<INCOME-PRETAX> (52,416)
<INCOME-TAX> (11,060)
<INCOME-CONTINUING> (41,356)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,256)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
