<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended December 31, 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
January 20, 1995 was 53,858,796.
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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
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<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet - December 31, 1994
and March 31, 1994 4
Consolidated Statement of Income (Loss) and
Deficit - Three Months Ended and Nine Months
Ended December 31, 1994 and December 31, 1993 6
Consolidated Statement of Cash Flows - Nine Months
Ended December 31, 1994 and December 31, 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
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PART I
McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
3
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McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<CAPTION>
12/31/94 3/31/94
-------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 99,873 $ 133,809
Short-term investments 128,833 990
Accounts receivable - trade 357,273 370,333
Accounts receivable - other 103,987 113,782
Insurance recoverable - current 112,341 110,200
Contracts in progress 316,360 237,722
Inventories 75,632 66,469
Deferred income taxes 86,928 100,167
Other current assets 35,977 40,474
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 1,317,204 1,173,946
- ---------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost 2,175,564 2,150,728
Less accumulated depreciation 1,411,660 1,374,219
- ---------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 763,904 776,509
- ---------------------------------------------------------------------------------------------------------------
Investments:
Government obligations 391,841 395,556
Other investments 181,081 319,575
- ---------------------------------------------------------------------------------------------------------------
Total Investments 572,922 715,131
- ---------------------------------------------------------------------------------------------------------------
Insurance Recoverable 777,327 876,846
- ---------------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 265,522 246,854
- ---------------------------------------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $90,397,000 at December 31, 1994
and $84,170,000 at March 31, 1994 152,499 158,726
- ---------------------------------------------------------------------------------------------------------------
Other Assets 242,667 275,557
- ---------------------------------------------------------------------------------------------------------------
TOTAL $ 4,092,045 $ 4,223,569
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
12/31/94 3/31/94
-------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 405,935 $ 62,544
Accounts payable 217,202 245,819
Environmental and products liabilities - current 129,320 122,361
Accrued employee benefits 111,011 113,415
Accrued liabilities - other 255,023 300,505
Advance billings on contracts 122,993 181,572
U.S. and foreign income taxes 47,998 79,938
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,289,482 1,106,154
- ---------------------------------------------------------------------------------------------------------------
Long-Term Debt 487,405 667,066
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Accumulated Postretirement Benefit Obligation 390,458 380,309
- ---------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 907,884 1,013,251
- ---------------------------------------------------------------------------------------------------------------
Other Liabilities 298,084 302,143
- ---------------------------------------------------------------------------------------------------------------
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 91,162 108,583
Other minority interest 14,193 15,716
- ---------------------------------------------------------------------------------------------------------------
Total Minority Interest 193,444 212,388
- ---------------------------------------------------------------------------------------------------------------
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
53,758,796 at December 31, 1994 and
53,444,467 at March 31, 1994 53,759 53,444
Capital in excess of par value 741,208 730,987
Deficit (214,733) (196,216)
Minimum pension liability (931) (931)
Net unrealized loss on investments (18,342) -
Cumulative foreign exchange translation adjustments (38,548) (47,901)
- ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 525,288 542,258
- ---------------------------------------------------------------------------------------------------------------
TOTAL $ 4,092,045 $ 4,223,569
===============================================================================================================
</TABLE>
5
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McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND DEFICIT
DECEMBER 31, 1994
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/94 12/31/93 12/31/94 12/31/93
-------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 715,525 $ 798,886 $ 2,199,398 $ 2,279,763
- ---------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations 585,506 697,226 1,858,549 1,966,780
Depreciation and amortization 23,275 20,230 85,258 76,860
Selling, general and
administrative expenses 66,877 63,058 201,072 190,142
- ---------------------------------------------------------------------------------------------------------------
675,658 780,514 2,144,879 2,233,782
- ---------------------------------------------------------------------------------------------------------------
39,867 18,372 54,519 45,981
Equity in Income of Investees 13,701 14,845 34,649 108,210
- ---------------------------------------------------------------------------------------------------------------
Operating Income 53,568 33,217 89,168 154,191
- ---------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 13,657 9,995 39,799 29,073
Interest expense (16,619) (16,803) (43,559) (53,493)
Minority interest (4,530) (4,956) (9,538) (13,381)
Other-net (5,446) 1,118 (25,382) (1,797)
- ---------------------------------------------------------------------------------------------------------------
(12,938) (10,646) (38,680) (39,598)
- ---------------------------------------------------------------------------------------------------------------
Income before Provision for Income
Taxes and Cumulative Effect of
Accounting Changes 40,630 22,571 50,488 114,593
Provision for Income Taxes 10,816 7,194 20,818 36,419
- ---------------------------------------------------------------------------------------------------------------
Income before Cumulative Effect
of Accounting Changes 29,814 15,377 29,670 78,174
Cumulative Effect of Accounting
Changes - - (1,765) (100,750)
- ---------------------------------------------------------------------------------------------------------------
Net Income (Loss) 29,814 15,377 27,905 (22,576)
- ---------------------------------------------------------------------------------------------------------------
Deficit - Beginning of Period (229,047) (192,595) (196,216) (126,264)
Deduct Cash Dividends
Common stock 13,434 13,295 40,223 39,722
Preferred stock, Series C 2,066 2,067 6,199 4,018
- ---------------------------------------------------------------------------------------------------------------
Deficit - End of Period $ (214,733) $ (192,580) $ (214,733) $ (192,580)
===============================================================================================================
</TABLE>
6
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CONTINUED
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/94 12/31/93 12/31/94 12/31/93
-------- -------- -------- --------
(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): $ 27,748 $ 13,310 $ 21,706 $ (26,594)
- ---------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (PRIMARY AND FULLY DILUTED):
Income before cumulative
effect of accounting changes $ 0.51 $ 0.25 $ 0.43 $ 1.39
Accounting changes - - (0.03) (1.89)
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.51 $ 0.25 $ 0.40 $ (0.50)
===============================================================================================================
Weighted average number of
common and common
equivalent shares 53,974,434 53,566,764 53,722,217 53,454,702
CASH DIVIDENDS:
Per common share $ 0.25 $ 0.25 $ 0.75 $ 0.75
Per preferred share $ 0.72 $ 0.72 $ 2.16 $ 1.40
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
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McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 1994
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
12/31/94 12/31/93
-------- --------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ 27,905 $ (22,576)
- ---------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 85,258 76,860
Equity in income of investees,
less dividends 26,444 (44,834)
Provision for (benefit from) deferred taxes 42,200 (27,931)
Cumulative effect of accounting changes 1,765 100,750
Other 7,317 1,922
Changes in assets and liabilities, net of
effects from acquisition:
Accounts receivable 18,567 100,552
Net contracts in progress and advance billings (140,861) 58,198
Accounts payable (28,063) (75,661)
Accrued liabilities (45,286) (87,920)
Income taxes (24,077) 31,523
Other, net (18,157) 1,591
Proceeds from insurance for products liabilities claims 80,550 76,638
Payments of products liabilities claims (94,213) (85,478)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (60,651) 103,634
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Delta Catalytic Corporation - (28,249)
Purchases of property, plant and equipment (68,317) (52,370)
Purchases of short and long-term investments (356,399) (742,711)
Sales of short and long-term investments 351,133 695,997
Other 402 5,910
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (73,181) (121,423)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
8
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CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
12/31/94 12/31/93
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (18,256) $ (215,838)
Issuance of long-term debt - 92,475
Increase in short-term borrowing 181,522 27,910
Issuance of common stock 384 16,227
Issuance of preferred stock - 140,322
Dividends paid (46,341) (41,412)
Repurchase of subsidiary's preferred stock (17,185) (3,586)
Other (915) (952)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 99,209 15,146
- ---------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 687 (1,016)
- ---------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (33,936) (3,659)
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 133,809 139,522
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 99,873 $ 135,863
===============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 58,422 $ 57,886
Income taxes $ 37,298 $ 13,660
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 10
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND 1993
AND AT DECEMBER 31 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 December 31, 1994.
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 ($5,000,000 and
$16,300,000, or $0.09 and $0.30 per share, respectively) due to the settlement
of outstanding tax issues included in the three and nine months ended December
31, 1994; favorable worker's compensation cost adjustments ($14,886,000, or
$0.28 per share) in the three and nine months ended December 31, 1994 and
($8,582,000, net of tax of $3,419,000, or $0.16 per share) in the three and
nine months ended December 31, 1993; 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 nine months ended December 31,
1994; a favorable warranty
10
<PAGE> 11
reserve adjustment ($6,710,000, net of tax of $4,290,000 or $0.13 per share)
included in the nine months ended December 31, 1993; and the cumulative
effect of the accounting changes included in the nine months ended December 31,
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 $10,560,000 and $90,190,000, or $0.20 and $1.69
per share, respectively, for the nine months ended December 31, 1993 and a
decrease in Net Income of $3,047,000, or $0.06 per share, for the quarter ended
December 31, 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 December 31, 1994, the estimated amount of future costs allocable to
insolvent insurers and the policy year 1979 was $138,219,000. 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 nine months ended December 31,
1993, have been restated to conform to the December 31, 1994 presentation. Of
the total estimated liability at December 31, 1994, approximately $115,000,000
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 reduce 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 nine months ended December
31, 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. In accordance with the
Statement, prior period financial statements have not been restated to reflect
this change in accounting principle.
12
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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 December 31, 1994 and March 31, 1994 are summarized
below:
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
--------------- --------------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 44,532 $ 40,281
Work in Progress 21,944 17,566
Finished Goods 9,156 8,622
- ---------------------------------------------------------------------------------------------------------------
$ 75,632 $ 66,469
===============================================================================================================
</TABLE>
NOTE 4 - SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATES
The combined financial results of McDermott International's equity investments
in the 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
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<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/94 12/31/93 12/31/94 12/31/93
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 136,026 $ 130,026 $ 560,171 $ 713,668
- ------------------------------------------------------------------------------------------------------------------------
Operating Income $ 17,400 $ 22,946 $ 37,169 $ 186,797
- ------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes $ 22,103 $ 25,264 $ 50,459 $ 197,915
Provision for (Benefit from) Income Taxes 5,070 1,324 4,178 4,118
- ------------------------------------------------------------------------------------------------------------------------
Net Income $ 17,033 $ 23,940 $ 46,281 $ 193,797
========================================================================================================================
Equity in Net Income $ 8,438 $ 11,925 $ 22,993 $ 96,833
========================================================================================================================
</TABLE>
NOTE 5 - SEGMENT REPORTING INFORMATION
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/94 12/31/93 12/31/94 12/31/93
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Power Generation Systems and Equipment $ 419,946 $ 423,081 $ 1,203,724 $ 1,159,359
Marine Construction Services 300,971 378,548 1,002,674 1,125,056
Intersegment Transfer Eliminations (5,392) (2,743) (7,000) (4,652)
- ------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 715,525 $ 798,886 $ 2,199,398 $ 2,279,763
========================================================================================================================
OPERATING INCOME:
Segment Operating Income:
Power Generation Systems and Equipment $ 31,185 $ 9,715 $ 44,913 $ 28,850
Marine Construction Services 23,152 20,881 49,750 57,823
- ------------------------------------------------------------------------------------------------------------------------
Total Segment Operating Income 54,337 30,596 94,663 86,673
- ------------------------------------------------------------------------------------------------------------------------
Equity in Income of Investees:
Power Generation Systems and Equipment 3,283 3,041 7,258 10,190
Marine Construction Services 10,418 11,804 27,391 98,020
- ------------------------------------------------------------------------------------------------------------------------
Total Equity in Income of Investees 13,701 14,845 34,649 108,210
- ------------------------------------------------------------------------------------------------------------------------
General Corporate Expenses (14,470) (12,224) (40,144) (40,692)
- ------------------------------------------------------------------------------------------------------------------------
Total Operating Income $ 53,568 $ 33,217 $ 89,168 $ 154,191
========================================================================================================================
</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., ("JRM") that would combine the worldwide marine construction
businesses of McDermott International with those of Offshore Pipelines, Inc.
("OPI"). Under the terms of the agreement, International would contribute
substantially all of its marine construction services' assets and businesses,
including those of the Delaware Company into JRM. The consummation of the
transaction is subject to various conditions, the most significant of which is
the approval of OPI common stockholders at a special meeting of such
stockholders on January 30, 1995.
15
<PAGE> 16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1994 VS. THREE MONTHS
ENDED DECEMBER 31, 1993
Power Generation Systems and Equipment's revenues decreased $3,135,000 to
$419,946,000. This was primarily due to lower revenues from replacement parts,
defense and space-related products (including nuclear fuel assemblies and
reactor components for the U. S. Government) and extended scope of supply and
fabrication of industrial boilers. These decreases were partially offset by
higher revenues from replacement nuclear steam generators and fabrication and
erection of fossil fuel steam and environmental control systems.
Power Generation Systems and Equipment's segment operating income increased
$21,470,000 to $31,185,000. The increase was primarily due to higher margins
on repair and alteration of existing fossil fuel steam systems, higher volume
on replacement nuclear steam generators, lower administrative expenses, and
favorable workers' compensation cost adjustments. These increases were
partially offset by lower volume on replacement parts.
Power Generation Systems and Equipment's equity in income of investees
increased $242,000 to $3,283,000 primarily due to improved results in domestic
joint ventures partially offset by lower results in a foreign joint venture.
Backlog for this segment at December 31, 1994 was $2,148,925,000 compared to
$2,547,666,000 at December 31, 1993. At December 31, 1994, this segment's
backlog with the U.S. Government was $686,862,000 (of which $20,619,000 had not
been funded). U. S. Government budget reductions have negatively affected this
segment's government operations, and backlog at December 31, 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 has also negatively affected demand for other
industrial related product lines and these markets are expected to remain very
competitive.
16
<PAGE> 17
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 $77,577,000 to $300,971,000,
primarily due to lower volume in foreign marine and domestic fabrication and
marine operations. In addition, revenues from Delta Catalytic Corporation's
("DCC") operations were lower in the current period. These decreases were
partially offset by higher volume of procured materials and foreign fabrication
and engineering operations.
Marine Construction Services' segment operating income increased $2,271,000 to
$23,152,000 primarily due to higher volume in foreign fabrication operations
and higher margins in foreign marine operations. These increases were
partially offset by higher operating expenses and lower operating results from
DCC's operations.
Marine Construction Services' equity in income of investees decreased
$1,386,000 to $10,418,000 primarily due to lower operating results of the
McDermott-ETPM West, Inc. joint venture partially offset by the improved
operating results of a Mexican joint venture. The equity in income of
investees will be significantly lower during fiscal years 1995 and 1996 than in
fiscal years 1993 and 1994.
Backlog for this segment at December 31, 1994 was $1,266,447,000, including
$98,846,000 for Northern Ocean Services ("NOS"). Excluding NOS, backlog of
$1,167,601,000 at December 31, 1994 was down from backlog of $1,375,245,000 at
December 31, 1993. Not included in backlog at December 31, 1994 and 1993 was
17
<PAGE> 18
backlog relating to contracts to be performed by unconsolidated joint ventures
of approximately $650,000,000 and $800,000,000, respectively. U. S. markets are
expected to remain at a low level during the remainder of 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 an increasingly competitive environment and
put pressure on profit margins.
Interest income increased $3,662,000 to $13,657,000, primarily due to higher
interest rates on investments in government obligations and other investments
and settlement of claims for interest relating to foreign tax refunds and
contract claims.
Interest expense decreased $184,000 to $16,619,000 primarily due to a reduction
in accrued interest on proposed tax deficiencies, which was mostly offset by
changes in debt obligations and interest rates prevailing thereon.
Other-net decreased $6,564,000 from income of $1,118,000 to expense of
$5,446,000 primarily due to higher bank fees and higher discounts on the sale
of certain accounts receivable and higher foreign currency transactions losses.
The provision for income taxes increased $3,622,000 to $10,816,000, while
income before provision for income taxes increased $18,059,000 to $40,630,000.
The increase in the provision for income taxes is due primarily to an increase
in income from operations and varying results in different tax jurisdictions
with various means and rates of taxation.
18
<PAGE> 19
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1994 VS. NINE MONTHS
ENDED DECEMBER 31, 1993
Power Generation Systems and Equipment's revenues increased $44,365,000 to
$1,203,724,000. 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 replacement nuclear steam
generators. 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), replacement parts and plant enhancement projects.
Power Generation Systems and Equipment's segment operating income increased
$16,063,000 to $44,913,000. The increase was primarily due to higher volume
and margins on repair and alteration of existing fossil fuel steam systems,
higher volume on fabrication and erection of fossil fuel steam and
environmental control systems, lower administrative expenses, and favorable
workers' compensation cost adjustments. These increases were partially offset
by 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). These increases were also offset by
lower volume on replacement parts and a favorable warranty reserve adjustment
recorded in the prior year.
Power Generation Systems and Equipment's equity in income of investees
decreased $2,932,000 to $7,258,000 primarily due to a provision for loss on
discontinuing a domestic joint venture and lower operating results in a foreign
joint venture. These results were partially offset by improved results in a
domestic joint venture.
Marine Construction Services' revenues decreased $122,382,000 to $1,002,674,000
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 NOS in February 1994 ($58,776,000) and DCC
in June 1993 ($175,316,000 and $152,468,000 for the nine months ended December
31, 1994 and 1993, respectively), and higher volume of procured materials and
foreign engineering operations.
19
<PAGE> 20
Marine Construction Services' segment operating income decreased $8,073,000 to
$49,750,000 primarily due to higher operating expenses and lower operating
results from DCC's operations. These decreases were partially offset by the
inclusion of the operating results of NOS, higher volume of procured materials
and higher volume and margins in domestic marine operations.
Marine Construction Services' equity in income of investees decreased
$70,629,000 to $27,391,000 primarily due to lower operating results of the
McDermott ETPM-West, Inc. and HeereMac joint ventures. The equity in income
of investees will be significantly lower during fiscal years 1995 and 1996 than
in fiscal years 1993 and 1994.
Interest income increased $10,726,000 to $39,799,000 primarily due to
recognition of interest on a receivable from an equity investee, settlement of
claims for interest relating to foreign tax refunds and contract claims, and
higher interest rates on investments in government obligations and other
investments.
Interest expense decreased $9,934,000 to $43,559,000 primarily due to a
reduction in accrued interest on proposed tax deficiencies, which was mostly
offset by changes in debt obligations and interest rates prevailing thereon.
Minority interest expense decreased $3,843,000 to $9,538,000 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 $23,585,000 to $25,382,000 primarily due to a loss
related to the reduction of estimated products liability asbestos claim
recoveries from insurers, higher fees and higher discounts on the sale of
accounts receivables and losses on the sale of investments in the current
period. In addition, there were gains on the sale of investments in the prior
period.
The provision for income taxes decreased $15,601,000 to $20,818,000, while
income before provision for income taxes and cumulative effect of accounting
change decreased $64,105,000 to $50,488,000. The decrease in the provision for
income taxes is due
20
<PAGE> 21
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 income increased $50,481,000 from a loss of $22,576,000 to income of
$27,905,000 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 nine months ended December 31, 1994, McDermott International's cash
and cash equivalents decreased $33,936,000 to $99,873,000 and total debt
increased $163,730,000 to $893,340,000. During this period, McDermott
International used cash of $60,651,000 in operating activities; $46,341,000
for dividends on International's common and preferred stock; $17,185,000 for
the repurchase of a subsidiary's preferred stock to satisfy future sinking fund
requirements; $18,256,000 for repayment of long-term debt and $68,317,000 for
additions to property, plant and equipment. On January 26, 1995, McDermott
International elected to pay in advance a note payable of $16,250,000.
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 segments contracts, both foreign and domestic.
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 approximately $3,000
21
<PAGE> 22
per claim) has continued to rise. Claims paid during the three and nine months
ended December 31, 1994 were $32,656,000 and $94,213,000, respectively,
including $2,765,000 and $7,672,000, respectively, applicable to insolvent
insurers and $1,320,000 and $3,640,000, 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 December 31, 1994, Accounts
receivable-other includes receivables of $31,431,000 that are due from 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 December 31, 1994, the
estimated amount of future costs allocable to insolvent insurers and the policy
year 1979 was $138,219,000. 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.
McDermott International's expenditures for property, plant and equipment were
$68,317,000 for the nine months ended December 31, 1994 compared with
$52,370,000 for the prior year and were incurred primarily to maintain existing
facilities and for the purchase of a barge for $15,010,000, which was formerly
leased by a subsidiary of International.
22
<PAGE> 23
At December 31 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 $200,000,000 and $170,000,000,
respectively, 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 December 31 and March 31, 1994, International and the Delaware Company had
available to them jointly various uncommitted short-term lines of credit
totaling $282,465,000 and $246,412,000, respectively. Borrowings by McDermott
International against these lines of credit at December 31 and March 31, 1994
were $171,751,000 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
December 31, 1994, The Babcock & Wilcox Company had borrowings against this
line of credit of $40,000,000. 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 $14,184,000 which
expires on May 31, 1997. At December 31, 1994, borrowings outstanding against
this facility were $5,223,000. 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 December 31, 1994 was
$701,755,000 (amortized cost $720,972,000). The net unrealized loss on the
current and long-term investment portfolio, net of income tax effect, was
$18,342,000 at December 31, 1994. At December 31, 1994, approximately
$152,837,000 fair value (amortized cost of $157,914,000) of these obligations
were pledged to secure a letter of credit in connection with a long-term loan
and certain reinsurance agreements.
23
<PAGE> 24
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 December 31, 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 services'
assets and businesses (including those currently held by the Delaware Company)
to a newly-formed company, J. Ray McDermott S.A., ("JRM") in connection with
the combination of McDermott International's marine construction businesses
with those of Offshore Pipelines, Inc. When this transaction is complete, JRM
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 (subject to purchase
price adjustments) of marketable securities . After the purchase, the
securities will be held by the Delaware Company and will only be available to
International subject to the covenant restrictions described above. The
Delaware Company intends to use these securities to secure the refinancing of
existing short-term notes payable to banks. In addition, if needed,
International will provide JRM $50,000,000 in temporary financing for working
capital requirements for a period of 90 days following the merger. After
consummation of the transaction, International's principal sources of cash will
include dividends, interest and principal payments on securities of JRM;
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. Other than the temporary financing
discussed above, International expects that JRM will finance its operations on
an independent basis.
Working capital decreased by $40,070,000 to $27,722,000 at December 31, 1994
from March 31, 1994. During the remainder of fiscal year 1995, McDermott
International expects to obtain funds to meet working capital and capital
expenditure requirements from operating activities and 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.
24
<PAGE> 25
McDermott International has provided a valuation allowance ($40,685,000 at
December 31, 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 ($772,156,000 at
December 31, 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.
25
<PAGE> 26
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 NINE
MONTHS ENDED MONTHS ENDED
12/31/94 12/31/93 12/31/94 12/31/93
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income (Loss) before Cumulative Effect of
Accounting Changes $ 29,814 $ 15,377 $ 29,670 $ 78,174
Less Dividend Requirements of Preferred
Stock Series C 2,066 2,067 6,199 4,018
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) before Cumulative Effect of
Accounting Changes Applicable to
Common Stock 27,748 13,310 23,471 74,156
Cumulative Effect of Accounting Changes - - (1,765) (100,750)
- ------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 27,748 $ 13,310 $ 21,706 $ (26,594)
========================================================================================================================
Weighted average number of common
shares outstanding during the period 53,707,031 53,152,008 53,584,706 52,818,796
Common stock equivalents of stock options
and stock appreciation rights based on
"treasury stock" method 267,403 414,756 137,511 635,906
- ------------------------------------------------------------------------------------------------------------------------
Weighted average number of common
and common equivalent shares
outstanding during the period 53,974,434 53,566,764 53,722,217 53,454,702
========================================================================================================================
Earnings (Loss) per common and
common equivalent share: (1)
Income (Loss) before Cumulative Effect
of Accounting Changes $ 0.51 $ 0.25 $ 0.43 $ 1.39
Accounting Changes - - (0.03) (1.89)
- ------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 0.51 $ 0.25 0.40 $ (0.50)
========================================================================================================================
</TABLE>
(1) Earnings (Loss) per common and common equivalent share assuming full
dilution are the same for the periods presented .
26
<PAGE> 27
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 December 31, 1994.
Signatures
27
<PAGE> 28
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: 01/27/95 By: /s/ Brock A. Hattox
(SIGNATURE)
Brock A. Hattox
Senior Vice President and
Chief Financial Officer
28
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INTERNATIONALS DECEMBER 31, 1994 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> DEC-31-1994
<CASH> 99,873
<SECURITIES> 128,833
<RECEIVABLES> 393,880
<ALLOWANCES> 36,607
<INVENTORY> 391,992
<CURRENT-ASSETS> 1,317,204
<PP&E> 2,175,564
<DEPRECIATION> 1,411,660
<TOTAL-ASSETS> 4,092,045
<CURRENT-LIABILITIES> 1,289,482
<BONDS> 487,405
<COMMON> 53,759
0
2,875
<OTHER-SE> 468,654
<TOTAL-LIABILITY-AND-EQUITY> 4,092,045
<SALES> 2,199,398
<TOTAL-REVENUES> 2,199,398
<CGS> 2,144,879
<TOTAL-COSTS> 2,144,879
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,559
<INCOME-PRETAX> 50,488
<INCOME-TAX> 20,818
<INCOME-CONTINUING> 29,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,765)
<NET-INCOME> 27,905
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
