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 June 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
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(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 July 22, 1994 was 53,638,762.
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
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet - June 30, 1994
and March 31, 1994 4
Consolidated Statement of Income (Loss) and
Deficit - Three Months Ended June 30, 1994
and June 30, 1993 6
Consolidated Statement of Cash Flows - Three Months
Ended June 30, 1994 and June 30, 1993 8
Notes to Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Exhibit 11 - Calculation of Earnings (Loss) Per
Common and Common Equivalent Share 22
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 23
SIGNATURES 24
<page 2>
PART I
McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements
<page 3>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1994
ASSETS
<TABLE>
<CAPTION>
6/30/94 3/31/94
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 54,334 $ 133,809
Short-term investments 149,076 990
Accounts receivable - trade 362,593 370,333
Accounts receivable - other 142,552 113,782
Insurance recoverable - current 114,647 110,200
Contracts in progress 252,914 237,722
Inventories 67,938 66,469
Deferred income taxes 99,018 100,167
Other current assets 58,953 40,474
- ------------------------------------------------------------------------
Total Current Assets 1,302,025 1,173,946
- ------------------------------------------------------------------------
Property, Plant and Equipment, at Cost: 2,153,120 2,150,728
Less accumulated depreciation 1,392,493 1,374,219
- ------------------------------------------------------------------------
Net Property, Plant and Equipment 760,627 776,509
- -----------------------------------------------------------------------
Investments:
Government obligations 372,941 395,556
Other investments 182,524 319,575
- -----------------------------------------------------------------------
Total Investments 555,465 715,131
- -----------------------------------------------------------------------
Insurance Recoverable 843,930 876,846
- -----------------------------------------------------------------------
Prepaid Pension Costs 252,217 246,854
- -----------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $86,236,000 at June 30, 1994
and $84,170,000 at March 31, 1994 156,660 158,726
- -----------------------------------------------------------------------
Other Assets 232,102 275,557
- -----------------------------------------------------------------------
TOTAL $4,103,026 $4,223,569
========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<page 4>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
6/30/94 3/31/94
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 292,410 $ 62,544
Accounts payable 189,893 245,819
Environmental and products liabilities - current 127,227 122,361
Accrued employee benefits 108,832 113,415
Accrued liabilities - other 259,925 300,505
Advance billings on contracts 160,303 181,572
U.S. and foreign income taxes 63,862 79,938
- ----------------------------------------------------------------------------
Total Current Liabilities 1,202,452 1,106,154
- ----------------------------------------------------------------------------
Long-Term Debt 508,434 667,066
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Accumulated Postretirement Benefit Obligation 384,028 380,309
- ----------------------------------------------------------------------------
Environmental and Products Liabilities 975,122 1,013,251
- ----------------------------------------------------------------------------
Other Liabilities 302,990 302,143
- ----------------------------------------------------------------------------
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 15,926 15,716
- ----------------------------------------------------------------------------
Total Minority Interest 195,645 212,388
- ----------------------------------------------------------------------------
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
53,538,762 at June 30, 1994 and
53,444,467 at March 31, 1994 53,539 53,444
Capital in excess of par value 736,269 730,987
Deficit (210,307) (196,216)
Minimum pension liability (931) (931)
Net unrealized loss on investments (8,750) -
Cumulative foreign exchange
translation adjustments (38,340) (47,901)
- ---------------------------------------------------------------------------
Total Stockholders' Equity 534,355 542,258
- ---------------------------------------------------------------------------
TOTAL $4,103,026 $4,223,569
===========================================================================
</TABLE>
<page 5>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND DEFICIT
JUNE 30, 1994
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/94 6/30/93
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Revenues $ 759,808 $703,418
- ------------------------------------------------------------------------
Costs and Expenses:
Cost of operations 645,700 599,870
Depreciation and amortization 36,918 30,427
Selling, general and
administrative expenses 67,661 60,698
- ------------------------------------------------------------------------
750,279 690,995
- ------------------------------------------------------------------------
9,529 12,423
Equity in Income of Investees 6,302 47,049
- ------------------------------------------------------------------------
Operating Income 15,831 59,472
- ------------------------------------------------------------------------
Other Income (Expense):
Interest income 10,398 9,316
Interest expense (12,839) (19,943)
Minority interest (3,857) (3,726)
Other-net (4,019) (5,359)
- ------------------------------------------------------------------------
(10,317) (19,712)
- ------------------------------------------------------------------------
Income before Provision for Income
Taxes and Cumulative Effect
of Accounting Changes 5,514 39,760
Provision for Income Taxes 2,396 14,551
- ------------------------------------------------------------------------
Income before Cumulative Effect
of Accounting Changes 3,118 25,209
Cumulative Effect of Accounting Changes (1,765) (100,750)
- ------------------------------------------------------------------------
Net Income (Loss) 1,353 (75,541)
- ------------------------------------------------------------------------
Deficit - Beginning of Period (196,216) (126,264)
Deduct Cash Dividends
Common stock 13,378 13,152
Preferred stock, Series C 2,066 -
- ------------------------------------------------------------------------
Deficit - End of Period $(210,307) $(214,957)
========================================================================
</TABLE>
<page 6>
Continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/94 6/30/93
------- -------
(Unaudited)
(In thousands, except shares
and per share amounts)
<S> <C> <C>
NET LOSS APPLICABLE TO
COMMON STOCK (AFTER PREFERRED
STOCK DIVIDENDS): $ (713) $ (75,541)
- --------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (PRIMARY AND FULLY DILUTED):
Income before cumulative
effect of accounting changes $ 0.02 $ 0.47
Accounting changes (0.03) (1.89)
- --------------------------------------------------------------------------
Net income (loss) $ (0.01) $ (1.42)
==========================================================================
Weighted average number of common and
common equivalent shares 53,623,686 53,181,016
CASH DIVIDENDS:
Per common share $ 0.25 $ 0.25
Per preferred share $ 0.72 $ -
==========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<page 7>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
JUNE 30, 1994
INCREASE IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED
6/30/94 6/30/93
------- -------
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ 1,353 $(75,541)
- --------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 36,918 30,427
Equity in income of investees,
less dividends 16,377 (15,452)
Provision for deferred taxes 18,358 8,941
Cumulative effect of accounting changes 1,765 100,750
Other 2,397 7,023
Changes in assets and liabilities, net of
effects from acquisition:
Accounts receivable (3,980) 150,481
Net contracts in progress and advance
billings (36,668) 11,825
Accounts payable (56,743) (21,238)
Accrued liabilities (41,206) (62,617)
Income taxes (30,530) 1,052
Other, net (9,035) (4,862)
Proceeds from insurance for products liabilities
claims 28,094 16,364
Payments of products liabilities claims (31,450) (30,332)
- --------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIE (104,350) 116,821
- --------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Delta Catalytic Corporation - (28,249)
Purchases of property, plant and equipment (15,583) (12,447)
Purchases of short and long-term investments (213,483) (123,901)
Sales of short and long-term investments 214,807 190,139
Other 705 248
- --------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (13,554) 25,790
- --------------------------------------------------------------------------
</TABLE>
<page 8>
CONTINUED
INCREASE IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/94 6/30/93
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowing $ 79,028 $ 165
Payment of long-term debt (8,443) (196,765)
Issuance of long-term debt - 87,000
Issuance of common stock 26 1,671
Dividends paid (15,419) (13,034)
Repurchase of subsidiary's preferred stock (16,753) (259)
Other (373) (330)
- --------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 38,066 (121,552)
- --------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 363 (716)
- --------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (79,475) 20,343
- --------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 133,809 139,522
- --------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,334 $159,865
==========================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 21,225 $ 27,521
Income taxes $ 14,893 $ 4,486
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<page 9>
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1994 AND 1993
AND AT JUNE 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 June 30, 1994.
Results for the quarter ended June 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 reduction in accrued interest expense
($3,705,000 net of tax of $1,995,000, or $0.07 per share) due to settlement of
an outstanding tax issue with the IRS during the three months ended June 30,
1994; the cumulative effect of the accounting changes during the three months
ended June 30, 1994 and 1993; and a favorable warranty reserve adjustment
($6,820,000, net of tax of $4,180,000 or $0.13 per share) during the three
months ended June 30, 1993. The results for interim periods are not
necessarily indicative of results to be expected for the year.
<page 10>
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 No. 93-5. EITF 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) in the quarter ending June 30, 1993. The adoption of this
provision of EITF Issue No. 93-5 resulted in a decrease in Income before
Cumulative Effect of Accounting Change and Net Income of $467,000 and
$101,217,000, or $0.01 and $1.89 per share, respectively, for the three months
ending June 30, 1993. McDermott International's estimated future costs
relating to policy year 1979 and certain insolvent insurers are derived from
its loss history and constitute management's best estimate of such future
costs. At June 30, 1994, the estimated amount of future costs allocable to
insolvent insurers and the policy year 1979 was $132,074,000. Inherent in the
estimate of such future costs 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 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 three months ended June 30,
1993, have been restated to conform to the June 30, 1994 presentation. Of
<page 11>
the total estimated liability at June 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 decrease net income 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 June 30, 1994
quarter. Prior to April 1, 1994, McDermott International recognized the cost
of providing most of these benefits on a cash basis. Under the 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 the change
in accounting principle.
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 the 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.
<page 12>
NOTE 3 - INVENTORIES
Consolidated inventories at June 30, 1994 and March 31, 1994 are summarized
below:
<TABLE>
<CAPTION>
June 30, March 31,
1994 1994
------- --------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 39,591 $ 40,281
Work in Progress 18,694 17,566
Finished Goods 9,653 8,622
- -------------------------------------------------------------------------
$ 67,938 $ 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:
<TABLE>
<CAPTION>
THREE THREE
MONTHS ENDED MONTHS ENDED
6/30/94 6/30/93
------- -------
(In thousands)
<S> <C> <C>
Revenues $ 237,285 $ 345,860
- ------------------------------------------------------------------------
Operating Income $ 856 $ 83,221
- ------------------------------------------------------------------------
Income before Income Taxes $ 5,588 $ 86,328
Provision for (Benefit from) Income Taxes (550) 1,124
- ------------------------------------------------------------------------
Net Income $ 6,138 $ 85,204
========================================================================
Equity in Net Income $ 3,051 $ 42,593
========================================================================
</TABLE>
<page 13>
NOTE 5 - SEGMENT REPORTING INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
06/30/94 06/30/93
-------- --------
(In thousands)
REVENUES:
<S> <C> <C>
Power Generation Systems and Equipment $ 404,463 $ 344,437
Marine Construction Services 356,715 359,297
Intersegment Transfer Eliminations (1,370) (316)
- --------------------------------------------------------------------------
Total Revenues $ 759,808 $ 703,418
==========================================================================
OPERATING INCOME:
Segment Operating Income:
Power Generation Systems and Equipment $ 12,417 $ 6,837
Marine Construction Services 9,440 20,327
- --------------------------------------------------------------------------
Total Segment Operating Income 21,857 27,164
- --------------------------------------------------------------------------
Equity in Income of Investees:
Power Generation Systems and Equipment 2,843 3,517
Marine Construction Services 3,459 43,532
- --------------------------------------------------------------------------
Total Equity in Income of Investees 6,302 47,049
- --------------------------------------------------------------------------
General Corporate Expenses (12,328) (14,741)
- --------------------------------------------------------------------------
Total Operating Income $ 15,831 $ 59,472
==========================================================================
</TABLE>
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.
Terms of the transaction are still being negotiated, and are subject to the
approval of the Boards of Directors of both companies, as well as the
shareholders of OPI and of certain regulatory bodies.
<page 14>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1994 VS. THREE MONTHS
ENDED JUNE 30, 1993
Power Generation Systems and Equipment's revenues increased $60,026,000 to
$404,463,000. 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, and replacement parts.
Power Generation Systems and Equipment's segment operating income increased
$5,580,000 to $12,417,000. The increase was primarily due to higher volume
and margins on fabrication and erection of fossil fuel steam and environmental
control systems and nuclear fuel assemblies and reactor components for the U.
S. Government. These increases were partially offset by a favorable warranty
reserve adjustment recorded in the prior year and lower volume and margins on
extended scope of supply and fabrication of industrial boilers.
Power Generation Systems and Equipment's equity in income of investees
decreased $674,000 to $2,843,000 primarily due to lower operating results in a
foreign joint venture.
Backlog for this segment at June 30, 1994 was $2,202,350,000 compared to
$3,057,831,000 at June 30, 1993. At June 30, 1994, this segment's backlog
with the U.S. Government was $714,698,000 (of which $17,055,000 had not been
funded). U. S. Government budget reductions have negatively affected this
segment's government operations and backlog at June 30, 1994 reflects the
impact of Congressional budget reductions on the advanced solid rocket motor
<page 15>
and super conducting super collider projects. The current competitive
economic environment 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 slightly by $2,582,000 to
$356,715,000, as lower volume in foreign marine and domestic fabrication
operations, and in procured materials was offset by the inclusion of revenues
resulting from the acquisitions of Delta Catalytic Corporation ("DCC") during
June 1993 and Northern Ocean Services Limited ("NOS") in February 1994.
Marine Construction Services' segment operating income decreased $10,887,000
to $9,440,000 primarily due to lower volume and higher operating expenses,
despite higher margins, in foreign marine operations. The decrease was also
due to lower volume in domestic fabrication operations.
Marine Construction Services' equity in income of investees decreased
$40,073,000 to $3,459,000, primarily due to lower operating results of the
HeereMac joint venture. In fiscal year 1995, the contribution from these
<page 16>
joint ventures will be significantly less compared to the prior two fiscal
years due to lower volume and margins.
Backlog for this segment at June 30, 1994 was $929,034,000 (including
$36,947,000 for NOS). Excluding NOS, backlog of $892,087,000 at June 30, 1994
was down from backlog of $1,256,298,000 at June 30, 1993. Not included in
backlog at both June 30, 1994 and 1993, was backlog relating to contracts to
be performed by unconsolidated foreign joint ventures of approximately
$700,000,000. All of this segment's markets were down in the three months
ended June 30, 1994. 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 will continue to result in a
competitive environment and put pressure on profit margins.
General corporate expenses decreased $2,413,000 to $12,328,000, primarily due
to timing of expenses, and non-recurring charges related to certain cost
reduction initiatives in the June 1993 quarter.
Interest income increased $1,082,000 to $10,398,000, primarily due to
increased investments in government securities and other investments.
Interest expense decreased $7,104,000 to $12,839,000, primarily due to a
reduction in accrued interest on proposed tax deficiencies.
Other-net expense decreased $1,340,000 to $4,019,000. This decrease was
primarily due to lower bank fees and discounts on the sale of certain accounts
receivable and lower foreign currency transaction losses, partially offset by
losses on the sale of investments.
The provision for income taxes decreased $12,155,000 to $2,396,000, while
income from operations before provision for income taxes and cumulative
effect of accounting change decreased $34,246,000 to $5,514,000. The decrease
in the provision for income taxes is due primarily to a decrease in income
from operations.
Net income increased $76,894,000 to $1,353,000 from a loss of $75,541,000
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
<page 17>
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 three months ended June 30, 1994, McDermott International's cash
and cash equivalents decreased $79,475,000 to $54,334,000 and total debt
increased $71,234,000 to $800,844,000, primarily from short-term borrowings of
$79,028,000. During this period, McDermott International used cash of
$104,350,000 in operating activities; $15,419,000 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;
$8,443,000 for repayment of long-term debt; and $15,583,000 for additions to
property, plant and equipment. Decreases in contracts in progress and
advance billings, and accounts payable are primarily due to lower volume in
the Power Generation System and Equipment segment.
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 than $3,000 per
claim) has continued to rise. Claims paid during the quarter ended June 30,
1994 were $31,450,000, including $1,894,000 applicable to insolvent insurers
and $1,085,000 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 June
30, 1994, Accounts receivable - other includes receivables of $29,455,000 that
have been billed to insurers for reimbursement of settled claims. McDermott
International's estimated future costs relating to policy year 1979 and
<page 18>
certain insolvent insurers are derived from its loss history and constitute
management's best estimate of such future costs. At June 30, 1994, the
estimated amount of future costs allocable to insolvent insurers and the
policy year 1979 was $132,074,000. 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 upon
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.
McDermott International's expenditures for property, plant and equipment
increased $3,136,000 to $15,583,000 for the three months ended June 30, 1994
compared with the same period last year, the majority of which were incurred
to maintain existing facilities. During July 1994, a subsidiary of
International purchased a barge which was formerly leased for approximately
$15,000,000.
At June 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 an
agreement with a certain U.S. bank. The maximum sales limit available under
the agreement, which expires on December 31, 1995, is $225,000,000.
At June 30 and March 31, 1994, McDermott International had available to it
various uncommitted short-term lines of credit from banks totaling
$250,219,000 and $246,412,000, respectively. Borrowings by McDermott
International against these lines of credit at June 30 and March 31, 1994 were
$113,336,000 and $37,512,000, respectively. In addition, The Babcock &
Wilcox Company had available to it a $128,000,000 unsecured and committed
revolving line of 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.
There were no borrowings outstanding against this facility at June 30, and
<page 19>
March 31, 1994. DCC had available from a certain Canadian bank an unsecured
and committed revolving credit facility of $14,493,000 which expires on May
31, 1997. At June 30, 1994 borrowings outstanding against this facility were
$3,261,000. 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 at June 30, 1994 was
$704,541,000 (amortized cost $713,291,000). The net unrealized loss on the
current and long-term investment portfolio was $8,750,000 at June 30, 1994.
At June 30, 1994, approximately $166,771,000 fair value (amortized cost of
$166,474,000) 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 June 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.
Working capital increased $31,781,000 to $99,573,000 at June 30, 1994 from
March 31, 1994. During the remainder of fiscal year 1995, McDermott
International expects to obtain funds to meet working capital, capital
expenditure and debt maturity requirements from operating activities and
additional borrowings. Leasing agreements for equipment, which are short-
term in nature, are not expected to impact McDermott International's liquidity
or capital resources.
McDermott International has provided a valuation allowance ($28,724,000 at
June 30, 1994) for deferred tax assets related primarily to net operating loss
carryforwards which cannot be realized through carrybacks and future reversals
of existing taxable temporary differences. Management believes that remaining
deferred tax assets ($571,948,000 at June 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
<page 20>
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.
<page 21>
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 MONTHS ENDED
6/30/94 6/30/93
------- -------
<S> <C> <C>
Income before cumulative effect of
accounting changes $ 3,118 $ 25,209
Less dividend requirements of preferred stock,
Series C (2,066) -
- ------------------------------------------------------------------------
Income before cumulative effect applicable to
common stock 1,052 25,209
Cumulative effect of accounting changes (1,765) (100,750)
- ------------------------------------------------------------------------
Net loss for primary computation $ (713) $(75,541)
========================================================================
Weighted average number of common
shares outstanding during the period 53,478,556 52,381,471
Common stock equivalents of stock appreciation
rights based on "treasury stock" method 145,130 799,545
- ------------------------------------------------------------------------
Weighted average number of common
shares outstanding during the period 53,623,686 53,181,016
========================================================================
Earnings (Loss) per common and
common equivalent share: (1)
Income before cumulative effect of
accounting changes $ 0.02 $ 0.47
Accounting changes (0.03) (1.89)
- -----------------------------------------------------------------------
Net income (loss) $ (0.01) $ (1.42)
=======================================================================
</TABLE>
(1) Earnings (Loss) per common and common equivalent share assuming full
dilution are the same for the periods presented.
<page 22>
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 22
(b) Reports on Form 8-K
Report on Form 8-K, Item 5 was filed on June 10, 1994.
Signatures
<page 23>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDERMOTT INTERNATIONAL, INC.
----------------------------
(REGISTRANT)
Date: 8/2/94 By: s/ Brock A. Hattox
--------------------
(SIGNATURE)
Brock A. Hattox
Senior Vice President and
Chief Financial Officer
<page 24>
