<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 1-4095
MCDERMOTT INCORPORATED
- --------------------------------------------------------------------------------
(Exact Name of registrant as specified in its charter)
DELAWARE 74-1032246
- --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-4411
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---
The number of shares of Common Stock, par value $1 per share, outstanding as of
October 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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PAGE
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PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
September 30, 1997 and March 31, 1997 4
Condensed Consolidated Statement of Income (Loss)
Three and Six Months Ended September 30, 1997
and 1996 6
Condensed Consolidated Statement of Cash Flows
Six Months Ended September 30, 1997 and 1996 7
Notes to Condensed Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
- ---------------------------
Item 4 - Submission of Matters to a Vote of Security Holders 21
Item 6 - Exhibits and Reports on Form 8-K 21
SIGNATURES 22
Exhibit 27 - Financial Data Schedule 24
2
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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
SEPTEMBER 30, 1997
ASSETS
9/30/97 3/31/97
------- -------
(Unaudited)
(In thousands)
Current Assets:
Cash and cash equivalents $ 13,348 $ 56,782
Accounts receivable-trade 286,097 286,011
Accounts receivable-other 135,183 139,949
Insurance recoverable-current 175,442 183,000
Contracts in progress 206,678 244,231
Inventories 58,485 59,894
Deferred income taxes 60,370 56,359
Other current assets 4,175 15,053
---------- ----------
Total Current Assets 939,778 1,041,279
---------- ----------
Property, Plant and Equipment, at Cost: 527,191 533,942
Less accumulated depreciation 321,286 314,600
---------- ----------
Net Property, Plant and Equipment 205,905 219,342
---------- ----------
Insurance Recoverable 642,404 720,913
---------- ----------
Investment in McDermott International,
Inc. 595,372 595,982
---------- ----------
Excess of Cost Over Fair Value of Net
Assets of Purchased Businesses Less
Accumulated Amortization of
$108,240,000 at September 30, 1997
and $104,960,000 at March 31, 1997 107,699 119,077
---------- ----------
Prepaid Pension Costs 275,045 266,837
---------- ----------
Other Assets 155,012 173,740
---------- ----------
TOTAL $2,921,215 $3,137,170
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
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LIABILITIES AND STOCKHOLDER'S EQUITY
9/30/97 3/31/97
------- -------
(Unaudited)
(In thousands)
Current Liabilities:
Notes payable and current maturities of
long-term debt $137,964 $ 313,692
Note payable to International 7,674 -
Accounts payable 119,331 116,452
Accounts payable to affiliates 24,616 9,182
Environmental and products liabilities-current 207,934 210,352
Accrued employee benefits 76,227 79,573
Advance billings on contracts 153,143 109,736
Other current liabilities 138,688 131,008
---------- ----------
Total Current Liabilities 865,577 969,995
---------- ----------
Long-Term Debt 352,482 379,487
---------- ----------
Accumulated Postretirement Benefit Obligation 368,035 373,232
---------- ----------
Environmental and Products Liabilities 806,599 903,379
---------- ----------
Other Liabilities 95,119 95,500
---------- ----------
Contingencies
---------- ----------
Redeemable Preferred Stocks:
Series A $2.20 cumulative convertible,
$1.00 par value; at redemption value 88,084 88,087
Series B $2.60 cumulative, $1.00 par value;
at redemption value 78,165 82,896
---------- ----------
Total Redeemable Preferred Stocks 166,249 170,983
---------- ----------
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 693,138 691,605
Deficit (403,202) (422,123)
Minimum pension liability (1,655) (1,655)
Currency translation adjustments (21,131) (23,237)
---------- ----------
Total Stockholder's Equity 267,154 244,594
---------- ----------
TOTAL $2,921,215 $3,137,170
========== ==========
5
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McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/97 9/30/96 9/30/97 9/30/96
------- ------- ------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $422,868 $453,662 $876,048 $936,172
--------- --------- -------- --------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 364,999 419,259 756,258 867,558
Depreciation and amortization 10,378 11,587 20,782 23,240
Selling, general and
administrative expenses 25,909 35,116 51,760 68,144
--------- --------- -------- --------
401,286 465,962 828,800 958,942
--------- --------- -------- --------
Gain (Loss) on Asset Disposals and
Impairments-net 27,882 (1,250) 27,977 (217)
--------- --------- -------- --------
Operating Income (Loss) before Equity
in Income of Investees 49,464 (13,550) 75,225 (22,987)
Equity in Income of Investees 2,220 1,623 4,451 5,963
--------- --------- -------- --------
Operating Income (Loss) 51,684 (11,927) 79,676 (17,024)
--------- --------- -------- --------
Other Expense:
Interest expense (12,820) (12,974) (28,320) (26,090)
Other-net (475) (427) (991) (1,210)
--------- --------- -------- --------
(13,295) (13,401) (29,311) (27,300)
--------- --------- -------- --------
Income (Loss) before Provision for
(Benefit from) Income Taxes 38,389 (25,328) 50,365 (44,324)
Provision for (Benefit from) Income
Taxes 17,256 (6,848) 25,074 (9,521)
--------- --------- -------- --------
Net Income (Loss) $ 21,133 $ (18,480) $ 25,291 $(34,803)
========= ========= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SEPTEMBER 30, 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED
9/30/97 9/30/96
------- -------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 25,291 $(34,803)
-------- --------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 20,782 23,240
Provision for (benefit from) deferred taxes 8,871 4,496
Equity in income of investees, less dividends (1,153) 326
(Gain) loss on asset disposals and
impairments-net (27,977) 217
Other 961 3,269
Changes in assets and liabilities:
Accounts receivable 4,385 15,152
Net contracts in progress and advance billings 80,916 (26,963)
Accounts payable 20,584 (13,974)
Accrued and other current liabilities 2,392 (13,518)
Other, net 10,400 (5,387)
Proceeds from insurance for products liabilities claims 68,944 55,395
Payments of products liabilities claims (94,554) (79,859)
-------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 119,842 (72,409)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from asset disposals 52,093 14,863
Purchases of property, plant and equipment (6,752) (12,809)
Investment in equity investees (2,805) -
Other 331 223
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 42,867 2,277
-------- --------
7
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CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED
9/30/97 9/30/96
------- -------
(Unaudited)
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowing $(167,582) $ 92,948
Increase (decrease) in short-term borrowing
from International 7,674 (65,363)
Payment of long-term debt (35,012) (12)
Dividends paid (6,469) (6,646)
Capital contribution from International - 50,000
Redemption of preferred stock (4,513) -
Other (220) (30)
--------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (206,122) 70,897
--------- --------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (21) 84
--------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (43,434) 849
--------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 56,782 22,886
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,348 $ 23,735
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 31,876 $ 25,451
Income taxes (refunds) - net $ (26,438) $ 3,240
========= ========
See accompanying notes to condensed consolidated financial statements.
8
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McDERMOTT INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1 - BASIS OF PRESENTATION
McDermott Incorporated is a majority owned subsidiary of McDermott
International, Inc. ("International").
The accompanying unaudited condensed consolidated 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 a gain of $33,072,000 from the sale of
McDermott Incorporated's interest in Universal Fabricators Incorporated during
the three and six months ended September 30, 1997 and an asset impairment loss
of $7,295,000 included in the three and six months ended September 30, 1996.
Certain amounts previously reported have been reclassified to conform with the
presentation at September 30, 1996. Operating results for the three and six
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended March 31, 1998. 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, 1997.
NOTE 2 - PRODUCTS LIABILITY
At September 30, 1997, the estimated liability for pending and future non-
employee products liability asbestos claims was $988,228,000 (of which
approximately $276,000,000 had been asserted) and estimated insurance recoveries
were $817,846,000. Estimated liabilities for pending and future non-employee
products liability asbestos claims are derived from McDermott Incorporated's
claims history and constitute management's best estimate of such future costs.
Estimated insurance recoveries are based upon 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
9
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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
Inventories at September 30 and March 31, 1997 are summarized below:
September 30, March 31,
1997 1997
-------------- ---------
(Unaudited)
(In thousands)
Materials and Supplies $43,680 $44,395
Work in Progress 7,727 8,498
Finished Goods 7,078 7,001
------- -------
$58,485 $59,894
======= =======
NOTE 4 - INVESTIGATIONS
International and its majority owned subsidiary, J. Ray McDermott, S.A. ("JRM"),
are conducting an internal investigation, with the assistance of outside
counsel, of allegations of wrongdoing by a limited number of former employees of
International and JRM and by others. International and JRM notified the
appropriate authorities of their investigation in April 1997. In June 1997,
International received a federal grand jury subpoena for documents relating
principally to an investigation of possible anti-competitive activity in the
heavy-lift barge service business of JRM. In October 1997, International
received, from the same grand jury, a subpoena for documents relating
principally to an investigation of possible anti-competitive activity in the
marine construction service business of JRM in the Middle East. In July 1997,
International received an informal request from the Securities and Exchange
Commission for the voluntary production of documents. The allegations which are
the subject of the internal investigation, if true, and the outcome of the grand
jury proceedings, could result in civil and/or criminal liability. At this time,
International and JRM do not have sufficient information to predict the ultimate
outcome of this matter. Subsequent to the formation of JRM and its acquisition
of Offshore Pipelines, Inc. in January 1995, McDermott Incorporated does not
participate in the heavy lift barge service business.
10
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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
it is unable to match the foreign currency receipts and disbursements related to
its contracts, McDermott Incorporated enters into forward exchange contracts to
hedge foreign currency transactions, which reduces the impact of foreign
exchange rate movements on operating results.
During the three and six months ended September 30, 1997, McDermott
Incorporated's Canadian operations contributed $82,291,000 and $195,676,000 to
total revenues and ($760,000) and $6,747,000 to operating income (loss),
respectively. During the three and six months ended September 30, 1996,
McDermott Incorporated's Canadian operations contributed $151,180,000 and
$324,050,000 to total revenues and $512,000 and ($3,515,000) to operating
income (loss), respectively. These results reflect activity on contracts
performed at The Babcock & Wilcox Company's ("B&W") Cambridge, Ontario location,
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: Power Generation Systems (includes the
operations of the Babcock & Wilcox Power Generation Group), Government
Operations (includes the operations of BWX Technologies, Inc., formerly the
Babcock & Wilcox Government Group) and Other (includes McDermott Incorporated's
Engineering and Construction operations, other non-core businesses and certain
adjustments which are not allocated to the business units). The results of
operations for the three and six months ended September 30, 1996 have been
restated to
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reflect the reclassification of certain operations from B&W Operations to Power
Generations Systems and Government Operations and Marine Construction Services
to Other to conform with the presentation at September 30, 1997. Results for
the three and six months ended September 30, 1996 have also been restated to
include gains and losses on asset disposals and impairments in Operating Income.
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/97 9/30/96 9/30/97 9/30/96
-------- -------- -------- ---------
(In thousands)
REVENUES
Power Generation Systems $259,022 $255,817 $544,059 $511,983
Government Operations 80,550 90,326 164,072 179,233
Other 86,415 111,455 174,648 254,574
Eliminations (3,119) (3,936) (6,731) (9,618)
-------- -------- -------- --------
TOTAL REVENUES $422,868 $453,662 $876,048 $936,172
======== ======== ======== ========
OPERATING INCOME (LOSS)
Business Unit Income (Loss):
Power Generation Systems $ 13,721 $ (470) $ 33,284 $ (4,802)
Government Operations 9,849 8,196 19,784 13,518
Other 2,359 (12,982) 3,742 (17,774)
-------- -------- -------- --------
TOTAL 25,929 (5,256) 56,810 (9,058)
-------- -------- -------- --------
Gain (Loss) on Asset Disposals and Impairments-Net:
Power Generation Systems (15) 4,623 20 4,883
Government Operations 2 8 2 88
Other 27,799 (6,339) 27,551 (5,755)
Corporate 96 458 404 567
-------- --------- -------- --------
TOTAL 27,882 (1,250) 27,977 (217)
-------- --------- -------- --------
Equity in Income of Investees:
Power Generation Systems 1,093 462 1,656 3,315
Government Operations 519 375 1,099 987
Other 608 786 1,696 1,661
-------- --------- -------- --------
TOTAL 2,220 1,623 4,451 5,963
-------- --------- -------- --------
Corporate G&A Expense (4,347) (7,044) (9,562) (13,712)
-------- --------- -------- --------
TOTAL OPERATING
INCOME (LOSS) $ 51,684 $ (11,927) $79,676 $(17,024)
======== ========= ======== ========
12
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RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1996
Power Generation Systems
Revenues increased $3,205,000 to $259,022,000, primarily due to higher revenues
from fabrication and erection of fossil fuel steam environmental control
systems, boiler cleaning equipment and plant enhancement projects. These
increases were partially offset by lower revenues from replacement nuclear steam
generators and repair and alteration of existing fossil fuel systems.
Business unit income (loss) increased $14,191,000 from a loss of $470,000 to
income of $13,721,000, primarily due to higher volume and margins from plant
enhancement projects and boiler cleaning equipment. In addition, there were
lower selling and general and administrative expenses. These increases were
partially offset by lower volume from replacement nuclear steam generators.
Gain (loss) on asset disposals and impairments-net decreased $4,638,000 from a
gain of $4,623,000 to a loss of $15,000. The prior year included the sale of a
tool rental business.
Equity in income of investees increased $631,000 to $1,093,000. This represents
the results of approximately six active joint ventures. The increase was
primarily due to a provision for a loss on a domestic joint venture in the prior
year. This increase was partially offset by lower operating results from a
domestic joint venture.
Government Operations
Revenues decreased $9,776,000 to $80,550,000, primarily due to lower revenues
from nuclear fuel assemblies and reactor components for the U.S. Government and
commercial nuclear environmental services. These decreases were partially
offset by higher revenues from operation and management contracts for U.S.
Government owned facilities.
Business unit income increased $1,653,000 to $9,849,000, primarily due to higher
volume from operation and management contracts for U.S. Government owned
facilities and lower operating and general and administrative expenses. These
increases were partially offset by lower volume and margins from commercial
nuclear environmental services.
13
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Other
Revenues decreased $25,040,000 to $86,415,000, primarily due to lower revenues
from engineering and construction activities in Canadian operations. In
addition, there were lower revenues as a result of the disposition of non-core
businesses (shipyard and ordnance operations) in the prior year. These
decreases were partially offset by higher revenues from air cooled heat
exchangers and Canadian maintenance and domestic engineering activities.
Business unit income (loss) increased $15,341,000 from a loss of $12,982,000 to
income of $2,359,000, primarily due to cost overruns on engineering and
construction contracts in the prior year. In addition, there were lower
operating and general and administrative expenses. Also, the prior year
included losses in non-core businesses (shipyard and ordnance operations).
Gain (loss) on asset disposals and impairments-net increased $34,138,000 from a
loss of $6,339,000 to a gain of $27,799,000, primarily due to the sale of
McDermott Incorporated's interest in Universal Fabricators Incorporated.
Other Income Statement Items
The provision for (benefit from) income taxes increased $24,104,000 to a
provision of $17,256,000 from a benefit of $6,848,000, while income (loss)
before the provision for (benefit from) income taxes increased $63,717,000 to
income of $38,389,000 from a loss of $25,328,000. The increase in the provision
for income taxes is primarily due to the increase in income.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1997 VS. SIX MONTHS ENDED
SEPTEMBER 30, 1996
Power Generation Systems
Revenues increased $32,076,000 to $544,059,000, primarily due to higher revenues
from fabrication and erection of fossil fuel steam and environmental control
systems, boiler cleaning equipment and replacement parts. These increases were
partially offset by lower revenues from repair and alteration of existing fossil
fuel steam systems, replacement nuclear steam generators, industrial boilers and
plant enhancement projects.
14
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Business unit income increased $38,086,000 from a loss of $4,802,000 to income
of $33,284,000, primarily due to higher volume and margins from replacement
parts and boiler cleaning equipment, higher margins from plant enhancement
projects and replacement nuclear steam generators and higher volume from
fabrication and erection of fossil fuel steam and environmental control systems.
In addition, there were lower operating, selling and general and administrative
expenses. These increases were partially offset by lower volume and margins
from industrial boilers and repair and alteration of existing fossil fuel steam
systems.
Gain on asset disposals and impairments-net decreased $4,863,000 to $20,000.
The prior year included the sale of a tool rental business.
Equity in income of investees decreased $1,659,000 to $1,656,000. This
represents the results of approximately six active joint ventures. The decrease
was primarily due to a favorable termination settlement by a domestic joint
venture in the prior year and lower operating results from two domestic joint
ventures in the current year. These decreases were partially offset by a
provision for a loss on a domestic joint venture in the prior year.
Government Operations
Revenues decreased $15,161,000 to $164,072,000, primarily due to lower revenues
from commercial nuclear environmental services and nuclear fuel assemblies and
reactor components for the U.S. Government. These decreases were partially
offset by higher revenues from operation and management contracts for U.S.
Government owned facilities.
Business unit income increased $6,266,000 to $19,784,000, primarily due to
higher volume from operation and management contracts for U.S. Government owned
facilities and higher margins on other related operations. In addition, there
were lower general and administrative expenses. These increases were partially
offset by lower volume and margins from commercial nuclear environmental
services.
Other
Revenues decreased $79,926,000 to $174,648,000, primarily due to lower revenues
from engineering and construction activities in Canadian operations. In
addition, there were lower
15
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revenues as a result of the disposition of non-core businesses (shipyard and
ordnance operations) in the prior year. These decreases were partially offset
by higher revenues from air cooled heat exchangers and domestic engineering
activities.
Business unit income (loss) increased $21,516,000 from a loss of $17,774,000 to
income of $3,742,000, primarily due to cost overruns on engineering and
construction contracts in the prior year. In addition, there were higher
volumes on air cooled heat exchangers and domestic engineering activities and
lower operating and general and administrative expenses. Also, the prior year
included losses in non-core businesses (shipyard and ordnance operations).
Gain (loss) on asset disposals and impairments-net increased $33,306,000 from a
loss of $5,755,000 to a gain of $27,551,000, primarily due to the sale of the
Company's interest in Universal Fabricators Incorporated.
Other Income Statement Items
Interest expense increased $2,230,000 to $28,320,000 primarily due to changes in
debt obligations and interest rates prevailing thereon.
The provision for (benefit from) income taxes increased $34,595,000 to a
provision of $25,074,000 from a benefit of $9,521,000, while income (loss)
before the provision for (benefit from) income taxes increased $94,689,000 to
income of $50,365,000 from a loss of $44,324,000. The increase in the provision
for income taxes is primarily due to the increase in income.
Backlog
- -------
9/30/97 3/31/97
------- -------
(Unaudited)
(In thousands)
Power Generation Systems $1,399,452 $1,554,125
Government Operations 766,838 797,764
Other 375,126 364,722
Eliminations (186,445) (264,158)
---------- ----------
Total Backlog $2,354,971 $2,452,453
========== ==========
In general, McDermott Incorporated is capital intensive and relies on large
contracts for a substantial amount of its revenues.
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Power Generation Systems' foreign markets (excluding Southeast Asia) for
industrial and utility boilers remain strong and the U. S. market for
replacement nuclear steam generators is expected to make significant
contributions to operating income into the foreseeable future. However, the
domestic market for industrial and utility boilers remains weak.
At September 30, 1997, Government Operations' backlog with the U.S. Government
was $670,992,000 (of which $23,791,000 had not been funded). This business
unit's backlog is not expected to experience any significant growth as a result
of reductions in the defense budget over the past several years. It is expected
to remain relatively constant since B&W is the sole source provider of nuclear
fuel assemblies and nuclear reactor components for the U. S. Government.
Liquidity and Capital Resources
During the six months ended September 30, 1997, McDermott Incorporated's cash
and cash equivalents decreased $43,434,000 to $13,348,000 and total debt
decreased $195,059,000 to $498,120,000 primarily due to a net decrease in short-
term borrowings of $159,908,000 and payment of long-term debt of $35,012,000.
During this period, McDermott Incorporated provided cash of $119,842,000 from
operating activities; received cash of $52,093,000 from asset disposals; and
used cash of $6,752,000 for purchases of property, plant and equipment,
$6,469,000 for cash dividends on McDermott Incorporated's preferred stocks, and
$4,513,000 for the redemption of preferred stock. Decreases in net contracts in
progress and advance billings were primarily due to the timing of billings on
Power Generation Systems' contracts.
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. The average amount of these claims (historical average of
approximately $6,100 per claim over the last three years) has continued to rise.
Claims paid during the six months ended September 30, 1997 were $94,554,000, of
which $86,063,000 has been recovered or is due from insurers. At September 30,
1997, receivables of $97,204,000 were due from insurers for reimbursement of
settled claims. Estimated liabilities for pending and future non-employee
products liability asbestos claims are derived from McDermott Incorporated's
claims history and constitute
17
<PAGE>
management's best estimate of such future costs. Settlement of the liability is
expected to occur over approximately the next 15 years. 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. 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 $6,057,000 to
$6,752,000 for the six months ended September 30, 1997 as compared with the same
period in the prior year. The majority of expenditures were incurred to
maintain existing facilities.
At September 30 and March 31, 1997, B&W had sold, with limited recourse, an
undivided interest in a designated pool of qualified accounts receivable of
approximately $88,969,000 and $93,769,000, respectively, under the terms of an
agreement with a U.S. Bank. The maximum sales limit available under the
agreement was reduced during October 1997 from $125,000,000 to $100,000,000.
Depending on the amount of qualified accounts receivable available for the pool,
the amount sold to the bank can vary (but not to greater than the maximum sales
limit available) from time to time. The existing agreement will expire on
January 31, 1998; however, B&W expects to negotiate renewal of the agreement.
McDermott Incorporated accounts for these sales as secured borrowings. On
October 24, 1997, B&W reduced the amount of receivables sold by $43,186,000 to
$45,783,000.
McDermott Incorporated and a subsidiary of International, McDermott
International Investments Co., Inc. ("MIICO"), are parties to an agreement
pursuant to which McDermott Incorporated may borrow up to $150,000,000 from
MIICO at interest rates computed at the applicable federal rate determined by
the IRS. At September 30, 1997, McDermott Incorporated had borrowed $7,674,000
against this agreement. There were no borrowings against this agreement at
March 31, 1997.
18
<PAGE>
At September 30 and March 31, 1997, McDermott Incorporated had available to it
various uncommitted short-term lines of credit from banks totalling $92,673,000
and $134,695,000, respectively. Borrowings by McDermott Incorporated against
these lines of credit at September 30 and March 31, 1997 were $11,774,000 and
$24,555,000, respectively. In addition, at March 31, 1997, there were
borrowings of $150,000,000 under the $150,000,000 unsecured and committed
revolving credit facility of B&W (the "B&W Revolver"). During May and June
1997, B&W repaid all amounts outstanding under the B&W Revolver primarily with
the proceeds of a loan of $115,000,000 from MIICO to McDermott Incorporated
during May 1997. There were no borrowings against this facility at September
30, 1997.
McDermott Incorporated is restricted, as a result of covenants in certain
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
At September 30, 1997, 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.
Working capital increased $2,917,000 to $74,201,000 at September 30, 1997.
During the remainder of fiscal year 1998, McDermott Incorporated expects to
obtain funds to meet capital expenditure, working capital and debt maturity
requirements from operating activities additional borrowings and, if required,
capital contributions from International. Leasing agreements for equipment,
which are short-term in nature, are not expected to impact McDermott
Incorporated's liquidity nor capital resources.
McDermott Incorporated's quarterly dividends of $0.55 per share on the Series A
$2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series B
$2.60 Cumulative Preferred Stock were the same in September 1997 and 1996.
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 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. An
19
<PAGE>
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 June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
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.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires that certain financial
information be reported on the basis that it is reported internally for
evaluating segment performance and deciding how to allocate resources to
segments. International anticipates adopting this standard during the last
quarter of fiscal year 1998. Because this Statement addresses how supplemental
financial information is disclosed in annual and interim reports, the adoption
will have no material impact on the consolidated financial statements.
At its July 1997 meeting, the Emerging Issues Task Force reached a final
consensus on Issue 96-16, "Investor's Accounting for an Investee When the
Investor has a Majority of the Voting Interest but the Minority Shareholder or
Shareholders Have Certain Approval or Veto Rights." This issue addresses
whether to consolidate a majority owned investee when the rights of the minority
make it unclear if the majority owner actually has control, and establishes
criteria for making this decision. For existing investment agreements, the
guidance is effective for fiscal years ending after December 15, 1998.
McDermott Incorporated has not yet finalized its review of the impact of this
guidance.
20
<PAGE>
PART II
McDERMOTT INCORPORATED
OTHER INFORMATION
No information is applicable to Part II for the current quarter, except as noted
below:
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 2, 1997, McDermott International, Inc. as holder of all of
the outstanding 3,000 shares of the Voting Common Stock of McDermott
Incorporated, which shares represent approximately 93% of the voting power
of the outstanding capital stock of McDermott Incorporated, elected, by
written consent, S. Wayne Murphy, Roger E. Tetrault and Richard Woolbert
as directors of the company for a one year term.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
There were no current reports on Form 8-K filed during the three months
ended September 30, 1997.
Signatures
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDERMOTT INCORPORATED
November 10, 1997 By: /s/Daniel R. Gaubert
--------------------------------------------
Daniel R. Gaubert
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer and Duly Authorized Representative)
22
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INCORPORATED'S SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 13,348
<SECURITIES> 98
<RECEIVABLES> 328,875
<ALLOWANCES> 42,778
<INVENTORY> 265,163
<CURRENT-ASSETS> 939,778
<PP&E> 527,191
<DEPRECIATION> 321,286
<TOTAL-ASSETS> 2,921,215
<CURRENT-LIABILITIES> 865,577
<BONDS> 352,482
166,249
0
<COMMON> 4
<OTHER-SE> 267,150
<TOTAL-LIABILITY-AND-EQUITY> 2,921,215
<SALES> 876,048
<TOTAL-REVENUES> 876,048
<CGS> 828,800
<TOTAL-COSTS> 828,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,320
<INCOME-PRETAX> 50,365
<INCOME-TAX> 25,074
<INCOME-CONTINUING> 25,291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,291
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
