<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 September 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT 1934
For the transition period from ______________to______________
Commission File No. 1-8430
McDERMOTT INTERNATIONAL, INC.
- - - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
- - - --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
Post Office Box 61961, New Orleans, Louisiana 70161-1961
- - - --------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
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 21, 1994 was 53,780,646.
<PAGE> 2
M c D E R M O T T I N T E R N A T I O N A L , I N C.
I N D E X - F O R M 1 0 - Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
- - - ------------------------------
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet - September 30, 1994
and March 31, 1994 4
Consolidated Statement of Income (Loss) and
Deficit - Three Months Ended and Six Months
Ended September 30, 1994 and September 30, 1993 6
Consolidated Statement of Cash Flows - Six Months
Ended September 30, 1994 and September 30, 1993 8
Notes to Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Exhibit 11 - Calculation of Earnings (Loss) Per
Common and Common Equivalent Share 26
PART II - OTHER INFORMATION
- - - ---------------------------
Item 6 - Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
2
<PAGE> 3
PART I
McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
3
<PAGE> 4
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1994
ASSETS
<TABLE>
<CAPTION>
9/30/94 3/31/94
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 92,129 $ 133,809
Short-term investments 129,532 990
Accounts receivable - trade 392,181 370,333
Accounts receivable - other 108,296 113,782
Insurance recoverable - current 113,194 110,200
Contracts in progress 257,778 237,722
Inventories 68,068 66,469
Deferred income taxes 102,154 100,167
Other current assets 69,519 40,474
- - - ---------------------------------------------------------------------------------------------------------------
Total Current Assets 1,332,851 1,173,946
- - - ---------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost: 2,176,499 2,150,728
Less accumulated depreciation 1,405,918 1,374,219
- - - ---------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 770,581 776,509
- - - ---------------------------------------------------------------------------------------------------------------
Investments:
Government obligations 391,532 395,556
Other investments 180,818 319,575
- - - ---------------------------------------------------------------------------------------------------------------
Total Investments 572,350 715,131
- - - ---------------------------------------------------------------------------------------------------------------
Insurance Recoverable 805,048 876,846
- - - ---------------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 260,723 246,854
- - - ---------------------------------------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $88,316,000 at September 30, 1994
and $84,170,000 at March 31, 1994 154,580 158,726
- - - ---------------------------------------------------------------------------------------------------------------
Other Assets 237,481 275,557
- - - ---------------------------------------------------------------------------------------------------------------
TOTAL $ 4,133,614 $4,223,569
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
9/30/94 3/31/94
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 382,811 $ 62,544
Accounts payable 168,744 245,819
Environmental and products liabilities - current 128,693 122,361
Accrued employee benefits 112,370 113,415
Accrued liabilities - other 284,854 300,505
Advance billings on contracts 145,936 181,572
U.S. and foreign income taxes 45,130 79,938
- - - ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,268,538 1,106,154
- - - ---------------------------------------------------------------------------------------------------------------
Long-Term Debt 510,184 667,066
- - - ---------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 387,204 380,309
- - - ---------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 942,144 1,013,251
- - - ---------------------------------------------------------------------------------------------------------------
Other Liabilities 307,369 302,143
- - - ---------------------------------------------------------------------------------------------------------------
Contingencies
- - - ---------------------------------------------------------------------------------------------------------------
Minority Interest:
Subsidiary's 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 91,630 108,583
Other minority interest 15,583 15,716
- - - ---------------------------------------------------------------------------------------------------------------
Total Minority Interest 195,302 212,388
- - - ---------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, authorized 25,000,000 shares;
outstanding 2,875,000 Series C $2.875 cumulative
convertible, par value $1.00 per share,
(liquidation preference $143,750,000) 2,875 2,875
Common stock, par value $1.00 per share,
authorized 150,000,000 shares; outstanding
53,677,386 at September 30, 1994 and
53,444,467 at March 31, 1994 53,677 53,444
Capital in excess of par value 738,798 730,987
Deficit (229,047) (196,216)
Minimum pension liability (931) (931)
Net unrealized loss on investments (10,124) -
Cumulative foreign exchange translation adjustments (32,375) (47,901)
- - - ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 522,873 542,258
- - - ---------------------------------------------------------------------------------------------------------------
TOTAL $4,133,614 $4,223,569
===============================================================================================================
</TABLE>
5
<PAGE> 6
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND DEFICIT
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/94 9/30/93 9/30/94 9/30/93
------- ------- ------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 724,065 $ 777,459 $1,483,873 $1,480,877
- - - ---------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations 627,343 669,684 1,273,043 1,269,554
Depreciation and amortization 25,065 26,203 61,983 56,630
Selling, general and
administrative expenses 66,534 66,386 134,195 127,084
- - - ---------------------------------------------------------------------------------------------------------------
718,942 762,273 1,469,221 1,453,268
- - - ---------------------------------------------------------------------------------------------------------------
5,123 15,186 14,652 27,609
Equity in Income of Investees 14,646 46,316 20,948 93,365
- - - ---------------------------------------------------------------------------------------------------------------
Operating Income 19,769 61,502 35,600 120,974
- - - ---------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 15,744 9,762 26,142 19,078
Interest expense (14,101) (16,747) (26,940) (36,690)
Minority interest (1,151) (4,699) (5,008) (8,425)
Other-net (15,917) 2,444 (19,936) (2,915)
- - - ---------------------------------------------------------------------------------------------------------------
(15,425) (9,240) (25,742) (28,952)
- - - ---------------------------------------------------------------------------------------------------------------
Income before Provision for Income
Taxes and Cumulative Effect of
Accounting Changes 4,344 52,262 9,858 92,022
Provision for Income Taxes 7,606 14,674 10,002 29,225
- - - ---------------------------------------------------------------------------------------------------------------
Income (Loss) before Cumulative Effect
of Accounting Changes (3,262) 37,588 (144) 62,797
Cumulative Effect of Accounting
Changes - - (1,765) (100,750)
- - - ---------------------------------------------------------------------------------------------------------------
Net Income (Loss) (3,262) 37,588 (1,909) (37,953)
- - - ---------------------------------------------------------------------------------------------------------------
Deficit - Beginning of Period (210,307) (214,957) (196,216) (126,264)
Deduct Cash Dividends
Common stock 13,411 13,275 26,789 26,427
Preferred stock, Series C 2,067 1,951 4,133 1,951
- - - ---------------------------------------------------------------------------------------------------------------
Deficit - End of Period $(229,047) $(192,595) $ (229,047) $ (192,595)
===============================================================================================================
</TABLE>
6
<PAGE> 7
CONTINUED
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/94 9/30/93 9/30/94 9/30/93
------- ------- ------- -------
(Unaudited)
(In thousands, except shares and per share amounts)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK (AFTER PREFERRED
STOCK DIVIDENDS): $ (5,329) $ 35,637 $ (6,042) $ (39,904)
- - - -------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (PRIMARY AND FULLY DILUTED):
Income (loss) before cumulative
effect of accounting changes $ (0.10) $ 0.66 $ (0.08) $ 1.14
Accounting changes - - (0.03) (1.89)
---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.10) $ 0.66 $ (0.11) $ (0.75)
=====================================================================================================================
Weighted average number of
common and common
equivalent shares 53,568,530 53,616,326 53,523,543 53,398,672
CASH DIVIDENDS:
Per common share $ 0.25 $ 0.25 $ 0.50 $ 0.50
Per preferred share $ 0.72 $ 0.68 $ 1.44 $ 0.68
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SEPTEMBER 30, 1994
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
9/30/94 9/30/93
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,909) $ (37,953)
- - - -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 61,983 56,630
Equity in income of investees,
less dividends 19,179 (39,382)
Provision for deferred taxes 44,488 24,499
Cumulative effect of accounting changes 1,765 100,750
Other 3,156 (588)
Changes in assets and liabilities, net of
effects from acquisition:
Accounts receivable (11,864) 158,966
Net contracts in progress and advance billings (55,184) (14,894)
Accounts payable (79,192) (55,377)
Accrued liabilities (17,252) (73,991)
Income taxes (51,657) (23,348)
Other, net (14,693) 5,831
Proceeds from insurance for products liabilities claims 53,823 49,663
Payments of products liabilities claims (61,557) (55,797)
- - - -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (108,914) 95,009
- - - -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Delta Catalytic Corporation - (28,249)
Purchases of property, plant and equipment (47,149) (33,214)
Purchases of short and long-term investments (322,510) (562,833)
Sales of short and long-term investments 325,190 514,238
Other (4,044) 4,617
- - - -------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (48,513) (105,441)
- - - -------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CONTINUED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
9/30/94 9/30/93
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (9,587) $ (198,527)
Issuance of long-term debt - 92,475
Increase (decrease) in short-term borrowing 172,217 (3,074)
Issuance of common stock 130 17,585
Issuance of preferred stock - 140,156
Dividends paid (30,863) (26,186)
Repurchase of subsidiary's preferred stock (16,753) (3,586)
Other (668) (667)
- - - --------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 114,476 18,176
- - - --------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 1,271 (1,407)
- - - --------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (41,680) 6,337
- - - --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 133,809 139,522
- - - --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 92,129 $ 145,859
==============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 35,040 $ 38,267
Income taxes $ 26,719 $ 12,467
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 10
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
AND AT SEPTEMBER 30 AND MARCH 31, 1994
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements are presented in U.S. Dollars in
accordance with accounting principles generally accepted in the United States.
The consolidated financial statements include the accounts of McDermott
International, Inc. and all subsidiaries and controlled joint ventures.
Investments in joint venture and other entities in which McDermott
International, Inc. has a 20% to 50% interest are accounted for on the equity
method. Differences between the cost of equity method investments and the
amount of underlying equity in net assets of the investees are amortized
systematically to income. All significant intercompany transactions and
accounts have been eliminated. Certain amounts previously reported have been
reclassified or restated to conform with the presentation at September 30,
1994. Results for the three and six months ended September 30, 1993 have been
restated to reflect the adoption of Emerging Issues Task Force ("EITF") Issue
No. 93-5 (See Note 2).
Unless the context otherwise requires, hereinafter "International" will be used
to mean McDermott International, Inc., a Panamanian corporation; the "Delaware
Company" will be used to mean McDermott Incorporated, a Delaware corporation
which is a subsidiary of International, and its consolidated subsidiaries
(including Babcock & Wilcox Investment Company and its principal subsidiary,
The Babcock & Wilcox Company); and "McDermott International" will be used to
mean the consolidated enterprise.
In the opinion of management, all adjustments necessary for a fair statement of
the results have been recorded. Such adjustments are of a normal, recurring
nature except for a loss related to the reduction of estimated products
liability asbestos claim recoveries from insurers ($14,478,000 or $0.27 per
share) included in the three and six months ended September 30, 1994; a
reduction in accrued interest expense ($5,600,000 and $11,300,000, or $0.10 and
$0.21 per share, respectively) due to the settlement of outstanding tax issues
included in the three and six months ended September 30, 1994; a favorable
warranty reserve adjustment ($6,820,000, net of tax of $4,180,000 or $0.13
10
<PAGE> 11
per share) included in the six months ended September 30, 1993; and the
cumulative effect of the accounting changes included in the six months ended
September 30, 1994 and 1993. The results for interim periods are not
necessarily indicative of results to be expected for the year.
NOTE 2 - CHANGES IN ACCOUNTING POLICIES
Products Liability - McDermott International has an agreement with a majority
of its principal insurers concerning the method of allocation of products
liability asbestos claim payments to the years of coverage. However, amounts
allocable to policy year 1979 are excluded from this agreement, and McDermott
International's ability to recover these amounts, and amounts allocable to
certain insolvent insurers, is only reasonably possible. Thus, a provision for
these estimated future costs was recognized during the third quarter of fiscal
year 1994, effective April 1, 1993, as a change in accounting principle,
reflecting McDermott International's adoption of EITF Issue No. 93-5. EITF
Issue No. 93-5 no longer permits companies to offset, for recognition purposes,
reasonably possible recoveries against probable losses, which had been
McDermott International's prior practice. The cumulative effect of the
accounting change at April 1, 1993 was a charge of $100,750,000 (net of income
taxes of $54,250,000). The adoption of this provision of EITF Issue No. 93-5
resulted in an increase in Income before Cumulative Effect of Accounting Change
and a decrease in Net Income of $7,513,000 and $93,237,000, or $0.14 and $1.75
per share, respectively, for the six months ended September 30, 1993 and an
increase in Net Income of $7,980,000, or $0.14 per share, for the quarter ended
September 30, 1993. In addition, McDermott International has received notice
that provisional liquidators have been appointed to a London-based products
liability asbestos insurer and certain of its subsidiaries. As a result, a
loss of $14,478,000 related to the reduction of estimated products liability
asbestos claim recoveries was recognized in the September 30, 1994 quarter, and
was included in Other-net expense. McDermott International's estimated future
costs relating to policy year 1979 and insolvent insurers are derived from its
loss history and constitute management's best estimate of such future costs.
At September 30, 1994, the estimated amount of future costs allocable to
insolvent insurers and the policy year 1979 was $142,304,000. Inherent in the
estimate of such future costs are expected trends in claim severity and
frequency and other factors,
11
<PAGE> 12
including recoverability from insurers, which may vary significantly as claims
are filed and settled. Accordingly, the ultimate loss may differ materially
from the amount provided in the consolidated financial statements.
During the first quarter of fiscal year 1995, McDermott International adopted
the provisions of Financial Accounting Standards Board ("FASB") Interpretation
No. 39, which requires McDermott International to present separately in the
balance sheet its estimated liabilities for pending and future non-employee
products liability asbestos claims and related estimated insurance recoveries.
Accordingly, the accompanying consolidated balance sheet at March 31, 1994 and
the consolidated statement of cash flows for the six months ended September 30,
1993, have been restated to conform to the September 30, 1994 presentation.
Of the total estimated liability at September 30, 1994, less than $100,000,000
has been asserted. The adoption of FASB Interpretation No. 39 did not have any
effect on earnings.
Postemployment Benefits - Effective April 1, 1994, McDermott International
adopted Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits," in accounting for
disability benefits and other types of benefits paid to employees, their
beneficiaries and covered dependents after active employment, but before
retirement. The cumulative effect as of April 1, 1994 of this change in
accounting was to increase net loss by $1,765,000 (net of income taxes of
$287,000) or $0.03 per share. Other than the cumulative effect, the accounting
change had no material effect on the results of the six months ended September
30, 1994. Prior to April 1, 1994, McDermott International recognized the cost
of providing most of these benefits on a cash basis. Under this new principle
of accounting, the cost of these benefits is accrued when it becomes probable
that such benefits will be paid and when sufficient information exists to make
reasonable estimates of the amounts to be paid. As required by the Statement,
prior period financial statements have not been restated to reflect this change
in accounting principle.
12
<PAGE> 13
Investments - In May 1993, the FASB issued SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." McDermott International
adopted the provisions of this new standard for investments held as of or
acquired after April 1, 1994. Based on current portfolio management practices,
McDermott International's investments are classified as available for sale and
are reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity. The
opening balance of stockholders' equity was decreased by $4,095,000 to reflect
the net unrealized holding losses on McDermott International's investment
securities which were previously carried at amortized cost. In accordance
with the Statement, prior period financial statements have not been restated to
reflect this change in accounting principle.
NOTE 3 - INVENTORIES
Consolidated inventories at September 30, 1994 and March 31, 1994 are
summarized below:
<TABLE>
<CAPTION>
September 30, March 31,
1994 1994
------------- ---------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 40,456 $ 40,281
Work in Progress 18,033 17,566
Finished Goods 9,579 8,622
- - - --------------------------------------------------------------------------------------------------------
$ 68,068 $ 66,469
========================================================================================================
</TABLE>
NOTE 4 - SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATES
The combined financial results of McDermott International's equity investments
in Marine Construction Services' HeereMac and McDermott ETPM-West, Inc. joint
ventures are summarized below. Each of these ventures was significant as
defined by applicable SEC regulations in fiscal year 1994. The following
summarizes the combined income statements:
13
<PAGE> 14
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/94 9/30/93 9/30/94 9/30/93
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 186,860 $ 237,782 $ 424,145 $ 583,642
- - - ------------------------------------------------------------------------------------------------------------------------
Operating Income $ 18,913 $ 80,630 $ 19,769 $ 163,851
- - - ------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes $ 22,768 $ 86,323 $ 28,356 $ 172,651
Provision for (Benefit from) Income Taxes (342) 1,670 (892) 2,794
- - - ------------------------------------------------------------------------------------------------------------------------
Net Income $ 23,110 $ 84,653 $ 29,248 $ 169,857
========================================================================================================================
Equity in Net Income $ 11,504 $ 42,315 $ 14,555 $ 84,908
========================================================================================================================
</TABLE>
NOTE 5 - SEGMENT REPORTING INFORMATION
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/94 9/30/93 9/30/94 9/30/93
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Power Generation Systems and Equipment $ 379,315 $ 391,841 $ 783,778 $ 736,278
Marine Construction Services 344,988 387,211 701,703 746,508
Intersegment Transfer Eliminations (238) (1,593) (1,608) (1,909)
- - - -----------------------------------------------------------------------------------------------------------------------
Total Revenues $ 724,065 $ 777,459 $ 1,483,873 $ 1,480,877
=======================================================================================================================
OPERATING INCOME:
Segment Operating Income:
Power Generation Systems and Equipment $ 1,311 $ 12,298 $ 13,728 $ 19,135
Marine Construction Services 17,158 16,615 26,598 36,942
- - - -----------------------------------------------------------------------------------------------------------------------
Total Segment Operating Income 18,469 28,913 40,326 56,077
- - - -----------------------------------------------------------------------------------------------------------------------
Equity in Income of Investees:
Power Generation Systems and Equipment 1,132 3,632 3,975 7,149
Marine Construction Services 13,514 42,684 16,973 86,216
- - - -----------------------------------------------------------------------------------------------------------------------
Total Equity in Income of Investees 14,646 46,316 20,948 93,365
- - - -----------------------------------------------------------------------------------------------------------------------
General Corporate Expenses (13,346) (13,727) (25,674) (28,468)
- - - -----------------------------------------------------------------------------------------------------------------------
Total Operating Income $ 19,769 $ 61,502 $ 35,600 $ 120,974
=======================================================================================================================
</TABLE>
14
<PAGE> 15
NOTE 6 - PROPOSED MERGER AGREEMENT
On June 2, 1994, International announced a plan to form a new company, J. Ray
McDermott, S. A., that would combine the worldwide marine construction
businesses of McDermott International with those of Offshore Pipelines, Inc.
("OPI"). Under the terms of the proposed agreement, International would
contribute substantially all of its marine construction assets and businesses,
including those of the Delaware Company. International has completed due
diligence and is currently holding discussions with regulatory agencies, and
OPI has filed preliminary documents with the Securities and Exchange Commission
in connection with this proposed transaction. The proposed transaction is
subject to the approval of OPI shareholders and these regulatory agencies.
15
<PAGE> 16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1994 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1993
Power Generation Systems and Equipment's revenues decreased $12,526,000 to
$379,315,000. This was primarily due to lower revenues from defense and
space-related products (other than nuclear fuel assemblies and reactor
components), extended scope of supply and fabrication of industrial boilers,
and plant enhancement projects. These decreases were partially offset by
higher revenues from fabrication and erection of fossil fuel steam and
environmental control systems.
Power Generation Systems and Equipment's segment operating income decreased
$10,987,000 to $1,311,000. The decrease was primarily due to lower volume and
margins on extended scope of supply and fabrication of industrial boilers, and
defense and space-related products (other than nuclear fuel assemblies and
reactor components). There were also lower margins on replacement parts,
nuclear fuel assemblies and reactor components for the U. S. Government and
fabrication and erection of fossil fuel steam and environmental control
systems. These decreases were partially offset by favorable margins on plant
enhancement projects.
Power Generation Systems and Equipment's equity in income of investees
decreased $2,500,000 to $1,132,000 primarily due to a provision for loss on
discontinuing a domestic joint venture.
Backlog for this segment at September 30, 1994 was $2,060,170,000 compared to
$2,790,052,000 at September 30, 1993. At September 30, 1994, this segment's
backlog with the U.S. Government was $701,840,000 (of which $20,690,000 had not
been funded). U. S. Government budget reductions have negatively affected
this segment's government operations, and backlog at September 30, 1994 and
1993 reflects the impact of Congressional budget reductions on the advanced
solid rocket motor and super conducting super collider projects. The current
competitive economic environment
16
<PAGE> 17
has also negatively affected demand for other industrial related product lines
and these markets are expected to remain very competitive.
The current competitive economic environment and uncertainties created by the
passage of the Energy Policy Act of 1992 and the Clean Air Act Amendments of
1990 have caused U. S. utilities to defer repairs and refurbishments on
existing plants. However, the Clean Air Act has created demand for
environmental control equipment and related plant enhancements. Most electric
utilities have already purchased equipment to comply with Phase I of the Clean
Air Act, and they will purchase equipment to comply with Phase II deadlines in
a gradual manner, spread out over the next several years as various deadlines
approach. Electric utilities in Asia are active purchasers of large, new
baseload generating units, due to the rapid growth of the Pacific Rim economies
and to the small existing stock of electrical generating capacity in most
developing countries.
Marine Construction Services' revenues decreased $42,223,000 to $344,988,000,
primarily due to lower volume in foreign marine and domestic fabrication
operations. In addition, revenues from Delta Catalytic Corporation's ("DCC")
operations were lower in the current period. These decreases were partially
offset by the inclusion of revenues as a result of the acquisition of Northern
Ocean Services Limited ("NOS") in February 1994 and higher volume in domestic
marine operations.
Marine Construction Services' segment operating income increased $543,000 to
$17,158,000 primarily due to higher margins in foreign marine operations,
higher volume and margins in domestic marine operations, and the inclusion of
the operating results of NOS. These increases were partially offset by higher
domestic operating expenses and lower margins in foreign engineering
operations.
Marine Construction Services' equity in income of investees decreased
$29,170,000 to $13,514,000, primarily due to lower operating results of the
HeereMac joint venture. In fiscal year 1995, the contribution from joint
ventures will be significantly less compared to the prior two fiscal years due
to lower volume and margins.
17
<PAGE> 18
Backlog for this segment at September 30, 1994 was $1,047,370,000 (including
$45,110,000 for NOS). Excluding NOS, backlog of $1,002,260,000 at September
30, 1994 was down from backlog of $1,216,180,000 at September 30, 1993. Not
included in backlog at September 30, 1994 and 1993 was backlog relating to
contracts to be performed by unconsolidated joint ventures of approximately
$500,000,000 and $900,000,000, respectively. U. S. markets are expected to
remain at a low level during fiscal year 1995 while international markets are
expected to vary. In all areas, the overcapacity of marine equipment and
constraints on customer capital spending programs will continue to result in a
competitive environment and put pressure on profit margins.
Interest income increased $5,982,000 to $15,744,000, primarily due to
recognition of interest on a receivable from an equity investee, and settlement
of a claim for interest on certain foreign tax refunds.
Interest expense decreased $2,646,000 to $14,101,000 primarily due to a
reduction in accrued interest on proposed tax deficiencies.
Other-net decreased $18,361,000 from income of $2,444,000 to expense of
$15,917,000 primarily due to a loss related to the reduction of estimated
products liability asbestos claim recoveries from insurers and higher bank fees
and discounts on the sale of certain accounts receivable in the current period,
and gains on the sale of investments in the prior period, partially offset by
settlement of a lawsuit in the prior period.
Minority interest expense decreased $3,548,000 to $1,151,000 primarily due to
minority shareholder participation in the losses of the McDermott-ETPM East
joint venture and DCC in the current period, compared with minority interest
expense applicable to DCC in the prior period.
The provision for income taxes decreased $7,068,000 to $7,606,000, while income
before provision for income taxes decreased $47,918,000 to $4,344,000. The
decrease in the provision for income taxes is due primarily to a decrease in
income from operations and varying results in different tax jurisdictions with
various means and rates of taxation.
18
<PAGE> 19
In addition, the provision for income taxes reflects a limitation on the
recognition of income tax benefits on losses in the U. S.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1994 VS. SIX MONTHS
ENDED SEPTEMBER 30, 1993
Power Generation Systems and Equipment's revenues increased $47,500,000 to
$783,778,000. This was primarily due to higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems, repair and
alteration of existing fossil fuel steam systems, and nuclear fuel assemblies
and reactor components for the U.S. Government. These increases were
partially offset by lower revenues from extended scope of supply and
fabrication of industrial boilers, defense and space-related products (other
than nuclear fuel assemblies and reactor components), plant enhancement
projects and replacement parts.
Power Generation Systems and Equipment's segment operating income decreased
$5,407,000 to $13,728,000. The decrease was primarily due to lower volume and
margins on extended scope of supply and fabrication of industrial boilers, and
defense and space-related products (other than nuclear fuel assemblies and
reactor components). There were also lower margins on replacement parts,
repair and alteration of existing fossil steam systems as well as a favorable
warranty reserve adjustment recorded in the prior year. These decreases were
partially offset by higher volume on fabrication and erection of fossil fuel
steam and environmental control systems and higher volume and margins on
nuclear fuel assemblies and reactor components for the U. S. Government.
Power Generation Systems and Equipment's equity in income of investees
decreased $3,174,000 to $3,975,000 primarily due to a provision for loss on
discontinuing a domestic joint venture and lower operating results in a foreign
joint venture.
Marine Construction Services' revenues decreased $44,805,000 to $701,703,000
primarily due to lower volume in foreign marine and domestic fabrication
operations. These decreases were partially offset by the inclusion of revenues
as a result of the acquisitions of DCC and NOS and higher volume in domestic
marine operations.
19
<PAGE> 20
Marine Construction Services' segment operating income decreased $10,344,000 to
$26,598,000 primarily due to higher worldwide operating expenses, lower volume
and margins in domestic fabrication operations, and lower margins in worldwide
engineering operations. These decreases were partially offset by the inclusion
of the operating results of NOS and higher volume and margins in domestic
marine operations.
Marine Construction Services' equity in income of investees decreased
$69,243,000 to $16,973,000 primarily due to lower operating results of the
HeereMac joint venture. In fiscal year 1995, the contribution from joint
ventures will be significantly less compared to the prior two fiscal years due
to lower volume and margins.
General corporate expenses decreased $2,794,000 to $25,674,000 primarily due to
timing of expenses, and non-recurring charges related to certain cost reduction
initiatives in the prior period.
Interest income increased $7,064,000 to $26,142,000 primarily due to
recognition of interest on a receivable from an equity investee, and settlement
of a claim for interest on certain foreign tax refunds.
Interest expense decreased $9,750,000 to $26,940,000 primarily due to a
reduction in accrued interest on proposed tax deficiencies.
Minority interest expense decreased $3,417,000 to $5,008,000 primarily due to
minority shareholder participation in increased losses of the McDermott-ETPM
East joint venture, and in losses of DCC.
Other-net expense increased $17,021,000 to $19,936,000 primarily due to a loss
related to the reduction of estimated products liability asbestos claim
recoveries from insurers and losses on the sale of investments in the current
period and gains on the sale of investments in the prior period. These
increases were partially offset by foreign currency transaction losses and the
settlement of a lawsuit in the prior period.
20
<PAGE> 21
The provision for income taxes decreased $19,223,000 to $10,002,000, while
income before provision for income taxes and cumulative effect of accounting
change decreased $82,164,000 to $9,858,000. The decrease in the provision for
income taxes is due primarily to a decrease in income from operations and
varying results in different tax jurisdictions with various means and rates of
taxation. In addition, the provision for income taxes reflects a limitation on
the recognition of income tax benefits on losses in the U.S.
Net loss decreased $36,044,000 from a loss of $37,953,000 to a loss of
$1,909,000 reflecting the cumulative effect of the adoption of SFAS No. 112,
"Employers' Accounting for Postretirement Benefits" of $1,765,000 in the
current year and the cumulative effect of accounting change for non-employee
products liability asbestos claims of $100,750,000 in the prior year, in
addition to the other items described above.
Liquidity and Capital Resources
During the six months ended September 30, 1994, McDermott International's cash
and cash equivalents decreased $41,680,000 to $92,129,000 and total debt
increased $163,385,000 to $892,995,000. During this period, McDermott
International used cash of $108,914,000 in operating activities; $30,863,000
for dividends on International's common and preferred stock; $16,753,000 for
the repurchase of a subsidiary's preferred stock to satisfy future sinking fund
requirements; $9,587,000 for repayment of long-term debt and $47,149,000 for
additions to property, plant and equipment. Increases in net contracts in
progress and advance billings resulted primarily from the timing of billings
and costs incurred on Power Generation Systems and Equipment segment contracts,
both foreign and domestic. Decreases in accounts payable are primarily due to
lower volume in both the Marine Construction Services and Power Generation
segments, and also include the settlement of certain charter obligations to the
HeereMac joint venture and subcontract costs on a foreign offshore contract.
21
<PAGE> 22
Pursuant to an agreement with a majority of its principal insurers, McDermott
International 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, which management
believes peaked in fiscal year 1990, has declined moderately. However, the
average amount of these claims (historical average of less the $3,000 per
claim) has continued to rise. Claims paid during the three and six months
ended September 30, 1994 were $30,107,000 and $61,557,000, respectively,
including $3,013,000 and $4,907,000, respectively, applicable to insolvent
insurers and $1,235,000 and $2,320,000, respectively, relating to the policy
year 1979. As a result of the adoption of FASB Interpretation No. 39 (See
Note 2 to the consolidated financial statements), McDermott International has
presented separately in the balance sheet its estimated liabilities for pending
and future non-employee products liability asbestos claims and related
estimated insurance recoveries. At September 30, 1994, Accounts
receivable-other includes receivables of $29,586,000 that have been billed to
insurers for reimbursement of settled claims. In addition, McDermott
International has received notice that provisional liquidators have been
appointed to a London-based products liability asbestos insurer and certain of
its subsidiaries. As a result, a loss of $14,478,000 related to the reduction
of estimated product liability asbestos claim recoveries was recognized in the
September 30, 1994 quarter, and was included in Other-net expense. McDermott
International's estimated future costs relating to policy year 1979 and
insolvent insurers are derived from its loss history and constitute
management's best estimate of such future costs. At September 30, 1994, the
estimated amount of future costs allocable to insolvent insurers and the policy
year 1979 was $142,304,000. Inherent in the estimate of such future costs are
assumptions which may vary significantly as claims are filed and settled.
Accordingly, the amount ultimately paid may differ materially from the amount
provided in the consolidated financial statements. Settlement of the liability
is expected to occur over the next 30 years. The collection delays, and the
amount of claims paid that are related to insolvent insurance carriers and the
policy year 1979 have not had a material adverse effect on McDermott
International's liquidity, and management believes, based on information
currently available, that they will not have a material adverse effect on
liquidity in the future.
22
<PAGE> 23
McDermott International's expenditures for property, plant and equipment were
$47,149,000 for the six months ended September 30, 1994 compared with
$33,214,000 for the prior year and were incurred primarily for the purchase of
a barge, which was formerly leased by a subsidiary of International, for
$15,010,000 and to maintain existing facilities.
At September 30, and March 31, 1994, The Babcock & Wilcox Company had sold,
with limited recourse, an undivided interest in a designated pool of qualified
accounts receivable of approximately $170,000,000, under the terms of its
agreement with a U.S. bank. The maximum sales limit available under the
agreement, which expires on December 31, 1997, is $225,000,000.
At September 30, and March 31, 1994, International and the Delaware Company
have available to them jointly various uncommitted short-term lines of credit
totaling $252,649,000 and $246,412,000, respectively. Borrowings by McDermott
International against these lines of credit at September 30 and March 31, 1994
were $160,736,000 and $37,512,000, respectively. In addition, The Babcock &
Wilcox Company had available to it a $128,000,000 unsecured and committed
revolving credit facility. Loans outstanding under the revolving credit
facility may not exceed the banks' commitments thereunder. In addition, it is
a condition to borrowing under the revolving credit facility that the
borrower's consolidated net tangible assets exceed a certain level. At
September 30, 1994, The Babcock & Wilcox Company had borrowings against this
line of credit of $45,000,000. There were no borrowings outstanding against
this facility at March 31, 1994. DCC had available from a certain Canadian
bank an unsecured and committed revolving credit facility of $14,925,000 which
expires on May 31, 1997. At September 30, 1994, borrowings outstanding against
this facility were $3,358,000. There were no borrowings outstanding against
this facility at March 31, 1994.
McDermott International maintains an investment portfolio of government
obligations and other investments which is held primarily for long-term
investment purposes and is classified as available for sale under SFAS No. 115
(See Note 2 to the consolidated financial statements). The fair value of
short-term investments and the long-term portfolio
23
<PAGE> 24
at September 30, 1994 was $701,882,000 (amortized cost $712,557,000). The net
unrealized loss on the current and long-term investment portfolio, net of
income tax effect, was $10,124,000 at September 30, 1994. At September 30,
1994, approximately $153,838,000 fair value (amortized cost of $162,245,374) of
these obligations were pledged to secure a letter of credit in connection with
a long-term loan and certain reinsurance agreements.
The Delaware Company is restricted, as a result of covenants in certain credit
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
At September 30, 1994, substantially all of the net assets of the Delaware
Company were subject to such restrictions. It is not expected that these
restrictions will have any significant effect on International's liquidity.
As described in Note 6 to the consolidated financial statements, International
plans to contribute substantially all of its marine construction assets and
businesses (including those currently held by the Delaware Company) to a
newly-formed company, J. Ray McDermott S.A., in connection with the combination
of McDermott International's marine construction businesses with those of
Offshore Pipelines, Inc. When this transaction is complete, J. Ray McDermott,
S.A., will be a subsidiary of International. In order to consummate the
transaction, International will, among other things, purchase marine
construction assets from the Delaware Company for approximately $230,000,000.
After the purchase, the proceeds will be held by the Delaware Company and will
only be available to International subject to the covenant restrictions
described above. After consummation of the transaction, International's
principal sources of cash will include dividends and interest payments on
securities of J. Ray McDermott, S.A., dividends from other subsidiaries of
International (other than the Delaware Company), the remaining investment
portfolio, and borrowings under the short-term lines of credit described
above. International expects that J. Ray McDermott, S.A., will finance its
operations on an independent basis.
Working capital decreased by $3,479,000 to $64,313,000 at September 30, 1994
from March 31, 1994. During the remainder of fiscal year 1995, McDermott
International
24
<PAGE> 25
expects to obtain funds to meet working capital and capital expenditure
requirements from additional borrowings, if needed. Leasing agreements for
equipment, which are short-term in nature, are not expected to impact McDermott
International's liquidity nor capital resources.
McDermott International has provided a valuation allowance ($42,024,000 at
September 30, 1994) 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 ($787,704,000 at
September 30, 1994) 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. Major uncertainties that affect the ultimate realization of deferred
tax assets include the risks of incurring operating losses in the future and
the possibility of declines in value of appreciated assets involved in
identified tax planning strategies. These factors have been considered in
determining the valuation allowance. Management will continue to assess the
adequacy of the valuation allowance on a quarterly basis.
McDermott International adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective April 1, 1992 for all
domestic plans. McDermott International plans to adopt SFAS No. 106 for
foreign plans during fiscal year 1996, and the adoption is not expected to have
a material effect on the consolidated financial statements of McDermott
International. The new standard does not have any impact on the cash
requirements of any domestic or foreign postretirement health and welfare plan.
25
<PAGE> 26
PART II
MCDERMOTT INTERNATIONAL, INC.
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) Exhibit 11 - Calculation of Earnings (Loss) Per
Common and Common Equivalent Share - Page 26
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed
during the three months ended September 30, 1994.
Signatures
26
<PAGE> 27
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 INTERNATIONAL, INC.
(REGISTRANT)
Date: 11/14/94 By: /s/ BROCK A. HATTOX
(SIGNATURE)
Brock A. Hattox
Senior Vice President and
Chief Financial Officer
27
<PAGE> 1
EXHIBIT 11
MCDERMOTT INTERNATIONAL, INC.
CALCULATION OF EARNINGS (LOSS)
PER COMMON AND COMMON EQUIVALENT SHARE
(In thousands, except shares and per share amounts)
PRIMARY AND FULLY DILUTED
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/94 9/30/93 9/30/94 9/30/93
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income (Loss) before Cumulative Effect of
Accounting Changes $ (3,262) $ 37,588 $ (144) $ 62,797
Less Dividend Requirements of Preferred
Stock Series C 2,067 1,951 4,133 1,951
- - - --------------------------------------------------------------------------------------------------------------------
Income (Loss) before Cumulative Effect of
Accounting Changes Applicable to
Common Stock (5,329) 35,637 (4,277) 60,846
Cumulative Effect of Accounting Changes - - (1,765) (100,750)
- - - --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (5,329) $ 35,637 $ (6,042) $ (39,904)
====================================================================================================================
Weighted average number of common
shares outstanding during the period 53,568,530 52,922,908 53,523,543 52,652,190
Common stock equivalents of stock options
and stock appreciation rights based on
"treasury stock" method - 693,418 - 746,482
- - - --------------------------------------------------------------------------------------------------------------------
Weighted average number of common
and common equivalent shares
outstanding during the period 53,568,530 53,616,326 53,523,543 53,398,672
====================================================================================================================
Earnings (Loss) per common and
common equivalent share: (1)
Income (Loss) before Cumulative Effect
of Accounting Changes $ (0.10) $ 0.66 $ (0.08) $ 1.14
Accounting Changes - - (0.03) (1.89)
Net Income (Loss) $ (0.10) $ 0.66 $ (0.11) $ (0.75)
</TABLE>
(1) Earnings (Loss) per common and common equivalent share assuming full
dilution are the same for the periods presented.
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INTERNATIONALS SEPTEMBER 30, 1994 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> SEP-30-1994
<CASH> 92,129
<SECURITIES> 129,532
<RECEIVABLES> 438,038
<ALLOWANCES> 45,857
<INVENTORY> 325,846
<CURRENT-ASSETS> 1,332,851
<PP&E> 2,176,499
<DEPRECIATION> 1,405,918
<TOTAL-ASSETS> 4,133,614
<CURRENT-LIABILITIES> 1,268,538
<BONDS> 510,184
<COMMON> 53,677
0
2,875
<OTHER-SE> 466,321
<TOTAL-LIABILITY-AND-EQUITY> 4,133,614
<SALES> 1,483,873
<TOTAL-REVENUES> 1,483,873
<CGS> 1,469,221
<TOTAL-COSTS> 1,469,221
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,940
<INCOME-PRETAX> 9,858
<INCOME-TAX> 10,002
<INCOME-CONTINUING> (144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,765)
<NET-INCOME> (1,909)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
