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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended March 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the transition period from _____________________ to ____________________
Commission File Number 1-8430
McDERMOTT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1450 POYDRAS STREET
NEW ORLEANS, LOUISIANA 70112-6050
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code (504) 587-5400
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
Common Stock, $1.00 par value New York Stock Exchange
Rights to Purchase Common Stock New York Stock Exchange
(Currently Traded with Common Stock)
Securities registered pursuant to Section 12(g) of the Act: None
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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
---
The aggregate market value of voting stock held by non-affiliates of the
registrant was $1,119,910,148 as of April 28, 1994.
The number of shares outstanding of the Company's Common Stock at April 28,
1994 was 53,544,467.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 1994 Annual Meeting of Shareholders is incorporated
by reference into Part III of this report.
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McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-K
PART 1
PAGE
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Power Generation Systems and Equipment
General 3
Foreign Operations 4
Raw Materials 4
Customers and Competition 5
Backlog 5
Factors Affecting Demand 6
C. Marine Construction Services
General 7
Foreign Operations 10
Raw Materials 11
Customers and Competition 11
Backlog 11
Factors Affecting Demand 11
D. Patents and Licenses 12
E. Research and Development Activities 12
F. Insurance 12
G. Employees 14
H. Environmental Regulations and Matters 14
I. Divestitures and Discontinued Operations 15
Item 3. LEGAL PROCEEDINGS 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
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INDEX - FORM 10-K
PART II
PAGE
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS 19
Item 6. SELECTED FINANCIAL DATA 20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year 1994 vs Fiscal Year 1993 22
Fiscal Year 1993 vs Fiscal Year 1992 24
Effects of Inflation and Changing Prices 25
Liquidity and Capital Resources 26
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Company Report on Consolidated Financial Statements 30
Report of Independent Auditors 31
Consolidated Balance Sheet - March 31, 1994 and 1993 32
Consolidated Statement of Income (Loss) and Retained
Earnings (Deficit) for the Three Fiscal Years ended
March 31, 1994 34
Consolidated Statement of Cash Flows for the Three
Fiscal Years ended March 31, 1994 36
Notes to Consolidated Financial Statements 38
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 76
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 77
Item 11. EXECUTIVE COMPENSATION 77
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 77
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 77
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INDEX - FORM 10-K
PART IV
PAGE
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
Exhibit 11 - Statement Re Computation of
Per Share Earnings (Loss) 81
Exhibit 22 - Significant Subsidiaries of
the Registrant 82
Exhibit 24 - Consent of Independent Auditors 83
Signatures of the Registrant 84
Signatures of Directors 85
- III -
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PART I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott International, Inc. ("International") was incorporated under the laws
of the Republic of Panama in 1959. International is the parent company of the
McDermott group of companies, which includes McDermott Incorporated.
International's Common Stock and McDermott Incorporated's Series A $2.20
Cumulative Convertible Preferred Stock and Series B $2.60 Cumulative
Preferred Stock are publicly traded.
Unless the context otherwise requires, hereinafter "International" will be used
to mean McDermott International, Inc., a Panama corporation; the "Delaware
Company" will be used to mean McDermott Incorporated, a Delaware corporation
which is a subsidiary of International, and its consolidated subsidiaries; and
"McDermott International" will be used to mean the consolidated enterprise.
McDermott International operates in two business segments:
o Power Generation Systems and Equipment, whose principal businesses are the
supply of fossil-fuel and nuclear steam generating systems and equipment to
the electric power generation industry, and nuclear reactor components to
the U. S. Navy; and
o Marine Construction Services, which supplies worldwide services for the
offshore oil, natural gas and hydrocarbon processing industries, and to
other marine construction companies. Principal activities include the
design, engineering, fabrication and installation of marine pipelines and
offshore structures and subsea production systems for development drilling
and production, and onshore construction and maintenance services.
The business of the Power Generation Systems and Equipment segment is conducted
primarily through a subsidiary of McDermott Incorporated, Babcock & Wilcox
Investment Company, the principal subsidiary of which is The Babcock & Wilcox
Company. Unless the context otherwise requires, hereinafter "B&W" will be used
to mean Babcock & Wilcox Investment Company and its consolidated subsidiaries,
including The Babcock & Wilcox Company.
McDermott International has a continuing program of reviewing joint venture,
acquisition and disposition opportunities.
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The following tables show revenues and operating income from the continuing
operations of McDermott International for the three fiscal years ended March
31, 1994. See Note 14 to the consolidated financial statements for additional
information with respect to McDermott International's business segments and
operations in different geographic areas.
REVENUES
(Dollars in Millions)
FOR FISCAL YEARS ENDED MARCH 31,
1994 1993 1992
----------------------- ---------------------- ---------------------
Power Generation Systems
and Equipment (1) $ 1,614.2 53% $ 1,523.5 48% $ 1,593.5 45%
Marine Construction Services (2)(3) 1,452.5 47% 1,649.7 52% 1,936.6 55%
Intersegment Transfer
Eliminations (6.8) - (0.6) - (5.6) -
- - -------------------------------------------------------------------------------------------------------------------
Total Revenues $ 3,059.9 100% $ 3,172.6 100% $ 3,524.5 100%
===================================================================================================================
OPERATING INCOME
(Dollars in Millions)
FOR FISCAL YEARS ENDED MARCH 31,
1994 1993 1992
----------------------- ---------------------- ---------------------
Segment Operating Income:
Power Generation Systems
and Equipment(1) $ 49.9 53% $ 56.5 46% $ 109.8 66%
Marine Construction Services(2)(3) 44.4 47% 67.6 54% 55.9 34%
- - -------------------------------------------------------------------------------------------------------------------
Total Segment Operating Income 94.3 100% 124.1 100% 165.7 100%
- - -------------------------------------------------------------------------------------------------------------------
Equity in Income of Investees:
Power Generation Systems
and Equipment(1) 12.1 10% 8.7 9% 13.9 -
Marine Construction Services(2) 107.8 90% 85.4 91% (6.6) -
- - -------------------------------------------------------------------------------------------------------------------
Total Equity in Income
of Investees 119.9 100% 94.1 100% 7.3 -
- - -------------------------------------------------------------------------------------------------------------------
General Corporate Expenses (54.4) - (52.8) - (51.9) -
- - -------------------------------------------------------------------------------------------------------------------
Total Operating Income $ 159.8 - $ 165.4 - $ 121.1 -
===================================================================================================================
(1) See Note 3 to the consolidated financial statements regarding the
deconsolidation of B&W Fuel Company to a cost method Investment and
the change in B&W Nuclear Service Company from an equity method to a
cost method Investment during fiscal year 1992.
(2) See Note 3 to the consolidated financial statements regarding the
deconsolidation of the McDermott-ETPM West joint venture during fiscal
year 1992.
(3) See Note 2 to the consolidated financial statements regarding
the acquisition of Northern Ocean Services Limited and Delta Catalytic
Corporation during fiscal year 1994.
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B. POWER GENERATION SYSTEMS AND EQUIPMENT
GENERAL
The Power Generation Systems and Equipment segment provides engineered products
and services for energy conversion worldwide. The segment supplies
individually engineered complete fossil fuel steam generating systems for
electric power generation and for industrial processes. This segment also
provides replacement parts and engineered plant enhancements for existing
fossil fuel steam generating systems and specially engineered accessories and
components, such as air heaters and cleaning systems for heat transfer
surfaces. It also supplies process recovery boilers and environmental control
systems for the process and power industries, air- cooled heat exchangers and
condensing heat exchangers. This segment also provides non-boiler related
equipment and services usually in connection with the construction of turnkey
power generation projects. It is also engaged in the erection of electric
power plants and industrial facilities and the repair and alteration of such
existing equipment.
This segment is actively involved in the market for providing power through
cogeneration, refuse-fueled power units and other independent power producing
plants. It is participating in this market as an equipment supplier, as an
operations and maintenance contractor and through ownership interests.
The Power Generation Systems and Equipment segment also provides nuclear fuel
assemblies and nuclear reactor components to the U. S. Navy for the Naval
Reactors Program. Revenues from the U. S. Government related to this activity
were approximately 9%, 8% and 9% of McDermott International's total revenues
for fiscal years 1994, 1993 and 1992, respectively. This activity has made
significant contributions to the operating income of McDermott International in
all three fiscal years. B&W, in addition to its Naval Reactors Program
business, is a supplier of ordnance, missile and torpedo metal parts and other
equipment and services to the U. S. Government and is proceeding with new,
non-defense Government projects and exploring new programs which require the
technological capabilities it developed as a Government contractor for the
Naval Reactors Program. Recent U. S. Government budget reductions, including
the cancellation of the advanced solid rocket motor and super conducting super
collider projects, have negatively affected this segment's government
operations.
B&W is a major supplier of nuclear steam generating equipment, including
critical heat exchangers and replacement recirculating steam generators, in the
Canadian, U. S. and international markets from its Cambridge, Ontario
location. Although no new contracts for nuclear steam generating systems have
been awarded in the United States for a number of years, this facility was
awarded three contracts during fiscal year 1993 valued at approximately
$280,000,000 to supply replacement recirculating steam generators to three
domestic utilities. B&W also supplies field repair and refurbishment services
to the Canadian and international markets from this location.
The principal plants of this segment, which are owned by B&W, are located at
Little Rock, Arkansas; Indianapolis and Mount Vernon, Indiana; West Point,
Mississippi; Barberton and Lancaster, Ohio; Beasley and Paris, Texas;
Lynchburg, Virginia; and Cambridge, Ontario,
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Canada. Less than majority-owned (equity investees) foreign plants are located
in China, Indonesia and India. All these plants are well maintained, have
suitable equipment and are of adequate size.
FOREIGN OPERATIONS
The amounts of Power Generation Systems and Equipment's revenues, including
intersegment revenues, and segment operating income derived from operations
outside of the United States, and the approximate percentages of those revenues
and segment operating income to McDermott International's total revenues and
total segment operating income, respectively, follow:
REVENUES SEGMENT OPERATING INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
1994 $ 372,727 12% $ 30,362 32%
1993 246,181 8% 11,107 9%
1992 195,274 6% 6,146 4%
B&W primarily conducts its foreign business from its Cambridge, Ontario
location, which also serves the United States market. Products for
international installation are engineered and built in B&W's United States and
Canadian facilities, as well as in the facilities of less than majority-owned
joint venture companies (equity investees) in China, Indonesia and India.
RAW MATERIALS
The principal raw materials used by this segment to construct power generation
systems and equipment consist of carbon and alloy steels in various forms, such
as plate, forgings, structurals, bars, sheet, strip, heavy wall pipe and tubes.
Significant amounts of components and accessories are also purchased for
assembly for supplied systems and equipment. These raw materials and
components generally are purchased as needed for individual contracts.
Although shortages of certain of these raw materials have existed from time to
time, no serious shortage exists at the present time. In addition, this
segment is not sole source dependent for any significant raw materials except
for the uranium for the nuclear fuel assemblies supplied to the Naval Reactors
Program, which is furnished and owned by the U.S. Government.
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CUSTOMERS AND COMPETITION
The principal customers of this segment are the electric power generation
industry (including government-owned utilities and independent power
producers), the U. S. Government (including its contractors), and the pulp and
paper and other process industries such as oil refineries and steel mills. The
electric power generation industry accounted for approximately 26%, 18% and 14%
of McDermott International's total revenues for fiscal years 1994, 1993 and
1992, respectively. U. S. Government business with this segment, excluding
government-owned utilities, accounted for approximately 13%, 12% and 14% of
McDermott International's total revenues for such periods.
Steam generating system orders are customarily awarded after competitive bids
have been submitted as proposals based on the estimated cost of each job.
Within the United States, a number of domestic and foreign based companies,
specializing in steam generating equipment, compete with B&W in the fossil
fuel steam generating system business. In international markets, these
companies plus additional foreign-based companies compete with B&W. B&W also
manufactures and sells components such as replacement recirculating steam
generators, which are incorporated into nuclear steam generating systems
designed by other firms. In the sale of these nuclear steam generating
systems, B&W competes with a small number of companies. A number of companies
are in competition with B&W in environmental control equipment, related
specialized industrial equipment and the independent power producing business.
Other suppliers of fossil fuel steam systems, as well as many other businesses,
compete for replacement parts, repair and alteration, and other services
required to backfit and maintain existing systems.
In regard to the Naval Reactors Program, B&W is the sole supplier of nuclear
fuel assemblies and reactor components to the U. S. Navy. As a result, B&W
was awarded significant new orders for aircraft carrier components and will
retain its prototype design and manufacturing capability for a new generation
of reactors for the submarine program. B&W is the sole supplier to the U.S.
Navy for all major nuclear steam system equipment for the Naval Reactors
Program. There are a small number of suppliers of small nuclear components
with B&W being the largest based on revenues.
BACKLOG
Backlog as of March 31, 1994 and 1993 for the Power Generation Systems and
Equipment segment was $2,398,285,000 and $2,614,708,000, or approximately 69%
and 70%, respectively, of McDermott International's backlog. Of the March 31,
1994 backlog, it is expected that approximately $1,042,181,000 will be
recognized in revenues in fiscal year 1995, $565,773,000 in fiscal year 1996
and $790,331,000 thereafter, of which approximately 90% will be recognized in
fiscal years 1997 through 1999. At March 31, 1994, this segment's backlog with
the U. S. Government was $775,909,000 (of which $17,055,000 had not yet been
funded), or approximately 22% of McDermott International's total backlog. The
impact of Congressional budget reductions on the advanced solid rocket motor
and super conducting super collider projects are reflected in these amounts.
Backlog at March 31, 1994 and 1993 included $5,190,000 and $153,726,000,
respectively, relating to these projects.
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During fiscal year 1994, B&W was awarded a $400,000,000 contract from
Perusahaan Umum Listrik Negara ("PLN"), the state utility of Indonesia, for
work on the expansion of the Suralaya power station in West Java. The project
is for three 600 megawatt coal-fired boilers for phase three of PLN's Suralaya
development program to expand Indonesia's electrical system. Also during
fiscal year 1994, B&W was awarded a $123,000,000 contract from Taiwan Power
Company to supply a wet flue gas desulphurization system to the utility's
Taichung Station, units 5-8. The steam generators and selective catalytic
reduction systems for these four 550 megawatt units were awarded to B&W in
fiscal year 1992 under a separate contract. In addition, B&W was awarded an
$80,000,000 contract by the Egyptian Electric Authority to supply two 600
megawatt gas and oil fired boilers, plus all accessories, at El-Kureimat, the
utility's new power station.
If in management's judgment it becomes doubtful whether contracts will proceed,
the backlog is adjusted accordingly. If contracts are deferred or cancelled,
B&W is usually entitled to a financial settlement related to the individual
circumstances of the contract. Operations and maintenance contracts, which are
performed over an extended period, are included in backlog based upon an
estimate of the revenues from these contracts.
B&W attempts to cover increased costs of anticipated changes in labor, material
and service costs of long-term contracts either through an estimation of such
changes, which is reflected in the original price, or through price escalation
clauses. Most long- term contracts have provisions for progress payments.
FACTORS AFFECTING DEMAND
Electrical consumption has grown moderately in the United States in recent
years. Electric utilities have deferred ordering large, new baseload units
because of continuing uncertainties over fuel prices, rate regulation and
environmental rules. When electric utilities are in need of peaking capacity,
many are purchasing combustion turbines with short lead-times or they are
purchasing electricity from other utilities and non-regulated sources, such as
cogenerators and independent power producers.
The current competitive economic environment and uncertainties created by the
passage of the Energy Policy Act of 1992, which deregulated the electric power
generation industry by allowing independent power producers and other companies
access to its transmission and distribution systems, 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 pollution 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.
Steam generation equipment is purchased most frequently by firms in the
energy-intensive industries, including pulp and paper, oil refining, chemicals,
primary metals, and food processing. Sales into the U. S. by foreign companies
competing in these industries have limited any expansion in steam generating
capacity by the pulp and paper, chemicals and primary metal industries. The
modest outlook for population growth has limited the needs of the food
processing industry for additional steam generation capacity. In addition,
environmental regulations have required the oil refining, pulp and paper,
chemicals, and utility industries to invest in pollution control equipment,
which has limited the investment available
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for additional steam generation capacity. These factors and the current
economic environment has affected demand for industrial- related product lines
and these markets are expected to remain very competitive.
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.
With the maturing of the U. S. Navy's shipbuilding program and U. S. Government
defense budget reductions, the demand for nuclear fuel assemblies and reactor
components for the U. S. Navy has been declining since the mid-1980's.
However, B&W became the sole source provider of these assemblies in fiscal year
1991, and supplies nuclear fuel assemblies due to reload requirements. The
backlog of orders for U. S. Navy nuclear fuel assemblies and nuclear reactor
components comprised a substantial portion of this segment's backlog with the
U. S. Government at March 31, 1994 and this activity is expected to continue to
be a significant, but declining, part of such backlog. Also, U. S. Government
budget reductions, including the cancellation of the advanced solid rocket
motor and super conducting super collider projects, have negatively affected
this segment's other government operations.
B&W has applied its technological capabilities by supplying new products for
power generation applications. It has diversified into new markets and
activities not related to power generation that require complex engineering and
machining. Examples of these markets include environmental restoration
services, computer integrated manufacturing products and services, and the
management of government owned facilities. Currently, a majority-owned
subsidiary of B&W manages and operates a government owned facility at the
Department of Energy's Idaho National Engineering Laboratory.
C. MARINE CONSTRUCTION SERVICES
GENERAL
The Marine Construction Services segment consists of the design, construction
and installation of specialized offshore fixed platforms and marine pipelines
used for development drilling, production and transportation of oil and gas.
Marine Construction Services also includes engineering and construction
services for oil production in shoreline and marshland areas (principally in
Louisiana and Texas); the engineering and construction of processing plants for
the oil, gas and hydrocarbon processing and mineral industries; and vessel
chartering operations, principally to McDermott International's joint ventures.
This segment's shipyard facility supplies complete maintenance and construction
facilities and is a builder of a variety of marine vessels, including ferries,
barges, tugboats, container ships, bulk carriers, and other specialized
vessels.
Fixed platforms, which are fastened to the seafloor by pilings driven through
their structural legs, have been installed by McDermott International in water
depths of more than 1,000 feet. These platforms have been engineered to
withstand increasingly greater weights and stresses as the search for oil and
gas has expanded into deeper water and into areas subject to severe weather
conditions. In addition, this segment is capable of fabricating and installing
tension-leg platforms, floating production systems and subsea templates.
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In order to compete effectively in markets with overcapacity for offshore
marine construction equipment, McDermott International participates in joint
ventures with other marine contractors. McDermott International owns 50% of
the HeereMac joint venture, formed with Heerema Offshore Construction Group,
Inc., to provide heavy-lift marine installation services to the petroleum
industry on a worldwide basis, especially in harsh environments. Each party
charters to the joint venture, on a long-term basis, 2 semi- submersible
derrick barges, with the largest being McDermott International's Derrick Barge
102 ("DB-102") with a lift capacity of 13,200 tons.
McDermott International's joint venture with ETPM S.A. ("McDermott-ETPM")
provides general marine construction services to the petroleum industry in the
Middle East, India, West Africa and South America; it also provides offshore
marine installation services in the North Sea. McDermott International owns
67.2% of McDermott-ETPM East and 49.9% of McDermott-ETPM West. McDermott-ETPM
East operates in the Middle East and India; and McDermott-ETPM West operates in
the North Sea, West Africa and South America. McDermott- ETPM utilizes 3
combination derrick-pipelaying barges and 1 semi-submersible lay barge which
are owned by McDermott International. McDermott International also provides
fabrication facilities located at Jebel Ali and Ras-al-Khaimah in the U.A.E.,
and at Warri, Nigeria. ETPM S.A. charters to this joint venture 4 combination
derrick-pipelaying barges and provides fabrication facilities at Sharjah,
U.A.E. and Tchengue, Gabon.
McDermott International also owns a 49% interest in a Mexican joint venture
that operates 2 self-propelled combination derrick- pipelaying barges (1
capable of lifting 2,000 tons) and 1 pipelaying barge.
The Marine Construction Services segment has its principal domestic fabrication
yard and offshore base located on approximately 1,114 acres of land, under
lease, near Morgan City, Louisiana. This segment also owns a fabrication yard
on approximately 218 acres of land in Nueces County, Texas, and operates
fabrication yards on leased property in Indonesia at Batam Island and on
company-owned property in Scotland, near Inverness. It also operates a
shipyard on approximately 58 acres of leased land near Morgan City.
The equipment used at these yards, which is capable of fabricating a full range
of offshore structures, consists principally of cranes, welding equipment,
machine tools, and robotic and other automated equipment, in addition to other
fabrication equipment, most of which is movable.
Expiration dates, including renewal options, of leases covering land for the
shipyard and fabrication yards, follow:
Ras-al-Khaimah, U.A.E. Year 1994
Morgan City, Louisiana Years 2001-2032
Jebel Ali, U.A.E. Year 2005
Batam Island, Indonesia Year 2008
Warri, Nigeria Year 2065
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McDermott International expects to renew the lease at Ras-al-Khaimah, U.A.E.,
which is negotiated on an annual basis.
McDermott International owns the largest fleet of marine equipment used in
major offshore construction. The nucleus of a "construction spread" is a large
derrick barge, pipelaying barge or combination derrick-pipelaying barge capable
of offshore operations for an extended period of time in remote locations.
McDermott International owns 6 derrick barges, 3 pipelaying barges and 8
combination derrick-pipelaying barges. The lifting capacities of the derrick
and combination derrick-pipelaying barges range from 700 tons to 13,200 tons.
These barges, which range in length from 400 feet to 661 feet, are fully
equipped with revolving cranes, auxiliary cranes, welding equipment, pile
driving hammers, anchor winches and a variety of additional gear.
The largest of these vessels are the DB-102, which is one of the world's
largest semi-submersible derrick barges in both size and lifting capacity and
provides quarters for approximately 750 workers, and a semi-submersible lay
barge capable of laying 60-inch diameter pipe (including concrete coating) and
operating in water depths of up to 2,000 feet. The HeereMac joint venture has
used the DB-102 for a lift of 10,700 tons, a record module lift in the North
Sea. This segment has also installed one of the deepest pipelines in over
1,400-ft. waters in the Gulf of Mexico.
In addition, McDermott International owns and operates a shearleg crane capable
of lifting up to 5,000 tons and has a long-term lease on a derrick barge with a
lifting capacity of approximately 4,000 tons. It also owns or leases a
substantial number of other vessels, such as tugboats, utility boats and cargo
barges to support the major marine vessels.
In connection with its construction and pipelaying activities, this segment
conducts diving operations which, because of the water depths involved, require
sophisticated equipment, including diving bells and an underwater habitat.
In February 1994, McDermott International acquired Northern Ocean Services
Limited ("NOS"). NOS owns and operates 2 major marine construction vessels and
specialized construction equipment for providing subsea and trenching services
to industries worldwide; including oil, gas, marine construction and
hydrocarbon processing.
During June 1993, the Delaware Company acquired a controlling interest in Delta
Catalytic Corporation ("DCC") in the first step of a two step transaction which
will be completed during fiscal 1997, when the Delaware Company intends to
acquire the balance of DCC. DCC provides engineering, procurement,
construction and maintenance services to industries worldwide; including oil,
gas, marine construction and hydrocarbon processing.
During March 1994, McDermott International and the JSC Amur Shipbuilding Plant
announced the formation of two joint ventures for marine construction,
shipbuilding and the fabrication of ship components at the Amur shipyard in the
Khabarovsk Region of the Russian Far East. The joint venture McAmur
Construction Services Company will provide fabrication services for marine
construction projects in the Russian Far East. The second joint venture,
McAmur Shipbuilding Company will market the shipbuilding and ship component
fabrication capabilities of the Amur shipyard on a world-wide basis. The
shipyard is located in the city of Komsomolsk on the Amur River and is the
largest shipyard in the Russian Far East.
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During fiscal year 1992, McDermott International, Mitsui & Co., Ltd., and
Marathon Oil Company formed a consortium to pursue and acquire hydrocarbon
rights and the right to explore, develop and produce hydrocarbons in certain
oil and gas fields lying offshore Sakhalin Island, Russian Federation. In
fiscal year 1993, Shell Development Sakhalin B.V. and Mitsubishi Corporation
joined the consortium specifically to pursue the development of the Piltun
Astohskoye and Lunskoye fields. During fiscal year 1994, negotiations between
the consortium and representatives of the central and regional governments
continued.
In May 1994, McDermott International and the State Oil Company of the
Azerbaijan Republic announced agreements to form two joint ventures, both of
which will be located in or near Baku, Azerbaijan. The joint venture MacShelf
Marine Construction Company, Ltd. will provide engineering, procurement, and
marine and onshore construction services to the oil and gas industry in the
Caspian Sea region. The other joint venture, MacDock Shipyard Company, Ltd.,
will repair, upgrade and maintain vessels and drill rigs.
Also, in June 1993, McDermott International, Amoco Caspian Sea Petroleum
Company, BP Exploration (Caspian Sea) Limited/Den Norske Oljeselskap a.s.,
Pennzoil Caspian Corporation/Ramco Energy Limited, Unocal Khazar Limited and
Turkish Petroleum Corporation agreed to a declaration promulgated by the State
Oil Company of the Azerbaijan Republic providing for the joint development of
the Guneshli, Chirag and Azeri fields by all the companies. McDermott
International and these companies are continuing negotiations with the
Azerbaijan government regarding a production sharing agreement for these
fields.
FOREIGN OPERATIONS
The amount of Marine Construction Services' revenues, including intersegment
revenues, and segment operating income derived from operations outside of the
United States, and the approximate percentages of those revenues and segment
operating income to McDermott International's total revenues and total segment
operating income, respectively, follows:
REVENUES SEGMENT OPERATING INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
1994 $ 1,076,610 35% $ 51,026 54%
1993 1,269,290 40% 59,756 48%
1992 1,372,082 39% 31,867 19%
Revenues and segment operating income presented above do not include the
operating results of this segment's less than majority- owned joint ventures
(equity investees), which include HeereMac and McDermott-ETPM West. Equity
income recognized from these joint ventures has contributed substantially to
this segment's results during fiscal years 1994 and 1993, but McDermott
International anticipates that these joint ventures will perform at
significantly lower levels in 1995.
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15
RAW MATERIALS
The raw materials used by this segment, such as carbon and alloy steel in
various forms, welding gases, concrete, fuel oil and gasoline, are available
from many sources and this segment is not dependent upon any single supplier or
source. Although shortages of certain of these raw materials and fuels have
existed from time to time, no serious shortage exists at the present time.
CUSTOMERS AND COMPETITION
This segment's principal customers are oil and gas companies (including foreign
government owned companies). Customers generally contract with this segment
for the design, construction and installation of specific platforms, pumping
stations, marine pipelines, and production networks and the construction of
marine vessels. Contracts are usually awarded on a competitive bid basis.
There are a number of companies which compete effectively with McDermott
International, HeereMac and McDermott-ETPM in each of the separate marine
construction phases in various parts of the world.
BACKLOG
As of March 31, 1994 and 1993, the Marine Construction Services' backlog
amounted to $1,054,142,000 (including $233,299,000 from DCC and $57,373,000
from NOS), and $1,129,577,000, or approximately 31% and 30%, respectively, of
McDermott International's total backlog. Excluding DCC and NOS, backlog of
$763,470,000 at March 31, 1994 was down from the level of backlog at March 31,
1993, but remains above the levels experienced during most of the 1980's. Of
the March 31, 1994 backlog, it is expected that approximately $825,861,000 will
be recognized in revenues in fiscal year 1995, $194,244,000 in fiscal year
1996, and $34,037,000 thereafter.
Not included in Marine Construction Services' backlog at March 31, 1994 and
1993 was backlog relating to contracts to be performed by unconsolidated
foreign joint ventures of approximately $840,000,000 and $900,000,000,
respectively.
Work is performed on a fixed price, cost plus or day rate basis or combination
thereof. This segment attempts to cover increased costs of anticipated changes
in labor, material and service costs of long-term contracts either through an
estimation of such changes, which is reflected in the original price, or
through price escalation clauses. Most long-term contracts have provisions
for progress payments.
FACTORS AFFECTING DEMAND
The activity of the Marine Construction Services' segment depends mainly on the
capital expenditures of oil and gas companies and foreign governments for
developmental construction. These expenditures are influenced by the selling
price of oil and gas along with the cost of production and delivery, the terms
and conditions of offshore leases, the discovery rates of new reserves
offshore, the ability of the oil and gas industry to raise capital, and local
and international political and economic conditions.
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16
Oil company capital expenditure budgets in calendar year 1994 are moderately
higher than 1993 as expenditures in North America are expected to increase,
while international expenditures are expected to decline slightly. World oil
prices in calendar year 1994 are generally expected to be below the average
price in 1993. If oil prices remain under pressure this could have a further
negative impact on this segment's, HeereMac's and McDermott-ETPM West's
backlog. The composite spot price for natural gas in the United States was
higher in calendar year 1993 than in 1992 and is expected to be similar or
higher in 1994.
This segment's markets are expected to be at a low level in the U. S. during
fiscal year 1995 while international markets are varied. In all areas, the
overcapacity of marine equipment will continue to result in a competitive
environment and put pressure on profit margins.
D. PATENTS AND LICENSES
Many U. S. and foreign patents have been issued to McDermott International and
it has many pending patent applications. Patents and licenses have been
acquired and licenses have been granted to others when advantageous to
McDermott International. While McDermott International regards its patents and
licenses to be of value, no single patent or license or group of related
patents or licenses is believed to be material in relation to its business as a
whole.
E. RESEARCH AND DEVELOPMENT ACTIVITIES
McDermott International conducts its principal research and development
activities at its research centers in Alliance, Ohio and Lynchburg, Virginia;
and also conducts development activities at its various manufacturing plants
and engineering and design offices. During the fiscal years ended March 31,
1994, 1993 and 1992, approximately $69,148,000, $61,541,000 and $88,400,000,
respectively, was spent by McDermott International on research and development
activities, of which approximately $48,112,000, $42,082,000 and $67,100,000,
respectively, was paid for by customers of McDermott International. Research
and development activities were related to development and improvement of new
and existing products and equipment and conceptual and engineering evaluation
for translation into practical applications. A new multi-million dollar clean
environment development facility is in progress at its Alliance, Ohio location
and is expected to be completed by March 31, 1995. The test facility is being
undertaken in response to present and future emission pollution standards in
the U. S. and worldwide. Approximately 241 employees were engaged full time in
research and development activities at March 31, 1994.
F. INSURANCE
McDermott International maintains liability and property insurance that it
considers normal in the industry. However, certain risks are either not
insurable or insurance is available only at rates which McDermott International
considers uneconomical. Among such risks are war and confiscation of property
in certain areas of the world, pollution liability in excess of relatively low
limits and, in recent years, asbestos liability. Depending on competitive
conditions and other factors, McDermott International endeavors to obtain
contractual protection against uninsured risks from its customers.
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McDermott International's insurance policies do not insure against liability
and property damage losses resulting from nuclear accidents at reactor
facilities of its utility customers. To protect against liability for damage
to customer's property, McDermott International has obtained waivers of
subrogation from the customer and its insurer and is generally named as an
additional insured under the utility customer's nuclear property policy. To
protect against liability from claims brought by third parties, McDermott
International is insured under the utility customer's nuclear liability
policies and has the benefit of the indemnity and limitation of any applicable
liability provision of the Price-Anderson Act, as amended ("the Act"). The Act
limits the public liability of manufacturers and operators of licensed nuclear
facilities and other parties who may be liable in respect of, and indemnifies
them against, all claims in excess of an amount which is determined by the sum
of commercially available liability insurance plus certain retrospective
premium assessments payable by operators of commercial nuclear reactors. For
those sites where McDermott International provides environmental remediation
services, it seeks the same protection from its customers as it does for its
other nuclear activities.
Although McDermott International does not own or operate any nuclear reactors,
it has coverage under commercially available nuclear liability and property
insurance for four of its five facilities which are licensed to maintain
special nuclear materials. The fifth facility operates primarily as a
conventional research center. However, this facility is licensed to possess
special nuclear material and has a small and limited amount of special nuclear
material on the premises. Two of the four owned facilities are located at
McDermott International's Lynchburg, Virginia site. These facilities are
insured under a nuclear liability policy which also insures the facility of B&W
Fuel Company ("BWFC") that was sold during fiscal year 1993. All three
facilities share the same nuclear liability insurance limit as the commercial
insurer would not allow BWFC to obtain a separate nuclear liability insurance
policy. Due to the type or quantity of nuclear material present, two of the
five facilities have the benefit of the indemnity and limitation of liability
provisions of the Act, pursuant to agreements entered into with the U. S.
Government. In addition, contracts to manufacture and supply nuclear fuel or
nuclear components to the U. S. Government generally contain contractual
indemnity clauses, which become effective at the time of shipment, whereby the
U. S. Government has assumed the risks of public liability claims.
McDermott International's offshore construction business is subject to the
usual risks of operations at sea, with additional exposure due to the
utilization of expensive construction equipment, sometimes under extreme
weather conditions, often in remote areas of the world. In addition, McDermott
International operates in many cases on or in proximity to existing offshore
facilities which are subject to damage by McDermott International and such
damage could result in the escape of oil and gas into the sea.
The insurance coverage of McDermott International for products liability and
employers' liability claims is subject to varying insurance limits which are
dependent upon the year involved. The Babcock & Wilcox Company 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. Pursuant to the agreement, The Babcock & Wilcox Company negotiates
and settles these claims and bills these amounts to the appropriate insurers.
However, amounts allocable to policy year 1979 are excluded from this
agreement, and
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Babcock & Wilcox Company's ability to recover these amounts, and amounts
allocable to certain insolvent insurers, is only reasonably possible.
Accordingly, a provision for these estimated future costs has been recognized
for financial reporting purposes. 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. Inherent in the estimate of such future costs are assumptions 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.
McDermott International has two wholly-owned insurance subsidiaries. To date,
these subsidiaries have written policies concerning general and automobile
liability, builders' risk within certain limits, marine hull, and workers'
compensation for McDermott International, Inc. and its subsidiaries. No
significant amounts of insurance have been written for unrelated parties.
G. EMPLOYEES
At March 31, 1994, McDermott International employed, under its direct
supervision in continuing operations, approximately 23,000 persons compared
with 26,000 at March 31, 1993. Approximately 5,000 employees were members of
labor unions at March 31, 1994 as compared with approximately 4,000 at March
31, 1993. The majority of B&W's manufacturing facilities operate under union
contracts which customarily are renewed every two to three years. There are no
major union contracts expiring during the next year. McDermott International
considers its relationship with its employees to be satisfactory.
H. ENVIRONMENTAL REGULATIONS AND MATTERS
Like other companies, McDermott International is subject to the existing and
evolving standards relating to the environment. McDermott International's
compliance with U. S. federal, state and local environmental protection
regulations necessitated capital expenditures of $843,000 in fiscal year 1994,
and it expects to spend another $6,420,000 on capital expenditures over the
next five years. However, McDermott International cannot predict all of the
environmental requirements or circumstances which will exist in the future but
it anticipates that environmental control standards will become increasingly
stringent and costly. Complying with existing environmental regulations
resulted in a charge against income before taxes of approximately $11,404,000
in fiscal year 1994.
McDermott International has been identified as a potentially responsible party
at various cleanup sites under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended. McDermott International has not
been determined to be a major contributor of wastes to these sites. However,
each potentially responsible party or contributor may face assertions of joint
and several liability. Generally, however, a final allocation of costs is made
based on relative contributions of wastes to each site. Based on its relative
contribution of waste to each site, McDermott International's share of the
ultimate liability for the various sites is not expected to have a material
adverse effect on McDermott International's consolidated financial position.
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19
Remediation projects have been or may be undertaken at certain of McDermott
International's current and former plant sites, and, during fiscal year 1994,
B&W completed subject to Nuclear Regulatory Commission ("NRC") certification,
the decommissioning and decontamination of its former nuclear fuel processing
plant at Apollo, Pennsylvania. All fabrication and support buildings have been
removed, and virtually all contaminated soil has been shipped to authorized
disposal facilities. B&W is in the final stage of obtaining approval from the
NRC to have the site released for unrestricted use.
The Department of Environmental Resources of the Commonwealth of Pennsylvania,
("PADER"), by letter dated March 19, 1994, advised B&W that it will seek
monetary sanctions, and remedial and monitoring relief, related to B&W's Parks
Facilities in Parks Township, Armstrong County, Pennsylvania. The relief
sought relates to potential groundwater contamination related to the previous
operations of the facilities. B&W is currently evaluating PADER's consent order
and expects to negotiate a settlement without having to resort to litigation.
Any sanctions ultimately assessed are not expected to have a material adverse
effect on the consolidated financial statements of McDermott International.
McDermott International performs significant amounts of work for the U. S.
Government under both prime contracts and subcontracts and operates certain
facilities that are licensed to possess and process special nuclear materials
and thus are subject to continuing reviews by governmental agencies, including
the Environmental Protection Agency and the Nuclear Regulatory Commission.
Decommissioning regulations promulgated by the U.S. Nuclear Regulatory
Commission require B&W to provide financial assurance that it will be able to
pay the expected cost of decommissioning its facilities at the end of their
service lives. B&W will provide financial assurance of approximately
$11,000,000 required by July 29, 1994 by issuing either a surety bond or a
letter of credit, or by funding a trust to provide for the ultimate
decommissioning of all its licensed facilities, except one. This facility,
which represents the largest portion of B&W's eventual decommissioning costs,
has provisions in its government contracts pursuant to which all of its
decommissioning costs and financial assurance obligations are covered by the U.
S. Government.
Compliance with existing government regulations controlling the discharge of
materials into the environment, or otherwise relating to the protection of the
environment (including decommissioning), does not have, nor is it expected to
have, a material adverse effect upon the consolidated financial position of
McDermott International.
I. DIVESTITURES AND DISCONTINUED OPERATIONS
During fiscal year 1993, McDermott International concluded the sale of its
remaining interests in the B&W Fuel Company ("BWFC") to a consortium of U. S.
subsidiaries of three French companies and its remaining interest in the B&W
Nuclear Service Company ("BWNSC") to a U. S. subsidiary of Framatome S. A.,
which is also one of the French companies that participated in BWFC. These
businesses consisted of fuel assemblies for refueling, engineering, field
repair and refurbishment services, and computer services for existing nuclear
reactors.
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20
During fiscal year 1992, McDermott International sold its Welded Tubular
Products Division in Alliance, Ohio, to Alliance Tubular Products, Co., a
wholly-owned subsidiary of J. H. Roberts Industries, Inc., of Des Plaines,
Illinois. The facility had previously produced specialty tubing for mechanical
and pressure applications.
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Item 3. LEGAL PROCEEDINGS
Due to the nature of its business, McDermott International is, from time to
time, involved in litigation. It is management's opinion that none of this
litigation will have a material adverse effect on the consolidated financial
position of McDermott International.
For a discussion of McDermott International's potential liability for
non-employee products liability asbestos claims see Item 1F and Note 1 to the
consolidated financial statements.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the solicitation of proxies
or otherwise.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
International's Common Stock is traded on the New York Stock Exchange. High
and low stock prices and dividends declared for the years ended March 31, 1994
and 1993 follow:
FISCAL YEAR 1993
----------------
SALES PRICE CASH
----------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- - ------------- ---- --- ---------
June 30, 1992 25 - 3/4 18 - 1/2 $0.25
September 30, 1992 23 - 1/8 17 - 1/2 $0.25
December 31, 1992 23 - 5/8 20 - 1/8 $0.25
March 31, 1993 29 - 1/2 22 - 1/4 $0.25
FISCAL YEAR 1994
----------------
SALES PRICE CASH
----------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- - ------------- ---- --- ---------
June 30, 1993 31 - 3/4 24 - 3/4 $0.25
September 30, 1993 32 - 3/4 27 - 1/4 $0.25
December 31, 1993 29 - 5/8 24 - 3/4 $0.25
March 31, 1994 27 - 1/2 20 $0.25
As of March 31, 1994, the approximate number of record holders of Common Stock
was 7,005.
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Item 6. SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDED MARCH 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(In thousands except for per share amounts)
Revenues $ 3,059,912 $ 3,172,555 $ 3,524,482 $ 3,069,849 $ 2,584,184
Income (Loss)
From Continuing
Operations before
Extraordinary Items and
Cumulative Effect of
Accounting Changes $ 89,956 $ 67,323 $ 80,537 $ (87,697) $ (103,298)
Net Income (Loss) $ (10,794) $ (188,732) $ 77,169 $ (69,525) $ (10,201)
Primary and Fully
Diluted Earnings
(Loss) Per
Common Share:
Continuing
Operations before
Extraordinary Items and
Cumulative Effect of
Accounting Changes $ 1.57 $ 1.29 $ 1.75 $ (2.00) $ (2.76)
Net Income (Loss) $ (0.32) $ (3.63) $ 1.67 $ (1.58) $ (0.27)
Total Assets $ 3,208,948 $ 3,092,963 $ 3,126,195 $ 3,341,138 $ 3,248,578
Long-Term
Obligations $ 667,066 $ 583,211 $ 765,053 $ 639,645 $ 873,321
Subsidiary's
Redeemable
Preferred Stock 196,672 204,482 204,482 204,482 204,487
----------- ------------ ------------ ------------- ------------
Total $ 863,738 $ 787,693 $ 969,535 $ 844,127 $ 1,077,808
Cash Dividends Per
Common Share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
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25
In fiscal year 1994, Net Income (Loss) includes a cumulative effect of an
accounting change of $100,750,000 due to the adoption of Emerging Issues Task
Force Issue No. 93-5 which resulted in a provision for estimated future costs
resulting from possible gaps in insurance coverage with respect to non-employee
products liability asbestos claims. Inherent in the estimate of such future
costs are assumptions which may vary significantly as claims are filed and
settled, and accordingly, the ultimate loss may differ materially from the
amount provided. In fiscal year 1993, Net Income (Loss) includes a cumulative
effect of an accounting change of $249,351,000 due to the adoption of Statement
of Financial Accounting Standards ("SFAS") No. 106. See Note 1 to the
consolidated financial statements regarding the above and the adoption of SFAS
No. 109 in fiscal year 1993, Note 2 regarding the acquisition of Northern Ocean
Services Limited and Delta Catalytic Corporation, and Note 13 regarding
discontinued operations.
In fiscal years 1993 and 1992, Income (Loss) from Continuing Operations before
Extraordinary Items and Cumulative Effect of Accounting Changes includes after
tax gains from the sale of McDermott International's interests in its two
commercial nuclear joint ventures of $15,667,000 and $35,436,000, respectively
(see Note 3 to the consolidated financial statements).
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26
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
FISCAL YEAR 1994 VS FISCAL YEAR 1993
Power Generation Systems and Equipment's revenues increased $90,730,000 to
$1,614,206,000. This was primarily due to higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems, replacement
nuclear steam generators, 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 air cooled heat exchangers.
Power Generation Systems and Equipment's segment operating income decreased
$6,526,000 to $49,941,000. This was primarily due to lower volume and margins
on extended scope of supply and fabrication of industrial boilers as well as
defense and space-related products other than nuclear fuel assemblies and
reactor components. There were also lower margins on plant enhancements,
replacement parts, and repair and alteration of existing fossil fuel steam
systems, as well as higher royalty income recorded in the prior year. These
decreases were partially offset by higher volume and margins on replacement
nuclear steam generators, nuclear fuel assemblies and reactor components for
the U. S. Government and higher volume on fabrication and erection of fossil
fuel steam and environmental control systems. There were also lower general
and administrative expenses, and lower warranty expense primarily due to net
favorable warranty reserve adjustments (See Note 15 to the consolidated
financial statements).
Power Generation Systems and Equipment's equity in income of investees
increased $3,341,000 to $12,032,000 primarily due to improved results in a
foreign joint venture and in three domestic joint ventures which own and
operate a cogeneration plant and two small power plants, partially offset by
unfavorable results in another foreign joint venture.
Backlog for this segment at March 31, 1994 was $2,398,285,000 compared to
$2,614,708,000 at March 31, 1993. At March 31, 1994, this segment's backlog
with the U.S. Government was $775,909,000 (of which $17,055,000 had not been
funded). These amounts reflect the impact of Congressional budget reductions
on the advanced solid rocket motor and super conducting super collider
projects. Also, additional U. S. Government budget reductions have negatively
affected this segment's other government operations. 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
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27
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 $197,156,000 to
$1,452,497,000, primarily due to lower volume in worldwide fabrication and
engineering operations, foreign marine operations and procured materials.
These decreases were partially offset by the acquisition of Delta Catalytic
Corporation ("DCC").
Marine Construction Services' segment operating income decreased $23,258,000 to
$44,394,000, primarily due to lower volume in worldwide fabrication and
engineering operations and lower volume in procured materials. These decreases
were partially offset by the acquisition of DCC, higher margins in foreign
marine operations, the accelerated depreciation and write-off of certain
fabrication facilities and marine construction equipment in the prior year, and
reduced operating costs.
Marine Construction Services' equity in income of investees increased
$22,461,000 to $107,828,000. This increase was principally due to improved
operating results of the HeereMac joint venture. In 1995, this segment
anticipates that its joint ventures will perform at significantly lower levels.
Backlog for this segment at March 31, 1994 was $1,054,142,000 (including
$233,299,000 from DCC and $57,373,000 from NOS). Excluding DCC and NOS, backlog
of $763,470,000 at March 31, 1994 was down from backlog of $1,129,577,000 at
March 31, 1993, but remains above the levels experienced during most of the
1980's. Not included in backlog at March 31, 1994 and 1993, was backlog
relating to contracts to be performed by unconsolidated foreign joint ventures
of approximately $840,000,000 and $900,000,000, respectively. This segment's
markets are expected to be at a low level in the U. S. during 1995 while
international markets are varied. In all areas, the overcapacity of marine
equipment will continue to result in a competitive environment and put pressure
on profit margins.
Interest income decreased $1,640,000 to $38,751,000. This decrease was
primarily due to lower interest rates on investments in government securities
and other long-term investments.
Interest expense decreased $26,365,000 to $63,975,000, primarily due to changes
in debt obligations and interest rates prevailing thereon. The decrease
reflects the redemption of high coupon debt during April and June 1993, and a
reduction in accrued interest on proposed tax deficiencies.
Minority interest expense decreased $2,952,000 to $15,251,000 primarily due to
minority shareholder participation in the losses of the McDermott-ETPM East
joint venture in the current year and income in the prior year, partially
offset by participation in the results of DCC since its acquisition in June
1993 (See Note 2 to the consolidated financial statements).
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28
Other-net decreased $14,562,000 to a loss of $4,365,000 from income of
$10,197,000. This decrease was primarily due to gains on the sale of interests
in two commercial nuclear joint ventures (See Note 3 to the consolidated
financial statements), a foreign marine asset casualty gain and gains on the
sale of nineteen tugboats, all in the prior period.
Provision for income taxes decreased $15,101,000 to $24,998,000, while income
from continuing operations before provision for income taxes, extraordinary
items, and cumulative effect of accounting changes increased $7,532,000 to
$114,954,000. The decrease in the provision for income taxes is primarily due
to a reduction in a provision of taxes due to the settlement of outstanding
issues and higher non-taxable earnings.
Net loss decreased $177,938,000 to $10,794,000 reflecting the cumulative effect
of the change in accounting for non-employee products liability asbestos claims
of $100,750,000 in the current year and the cumulative effect of the adoption
of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," of $249,351,000 in the prior year, in addition to other items
described above.
FISCAL YEAR 1993 VS FISCAL YEAR 1992
Power Generation Systems and Equipment's revenues decreased $70,025,000 to
$1,523,476,000. This was primarily due to lower revenues from nuclear fuel
assemblies and reactor components for the U. S. Government and plant
enhancements. Additionally, the segment's controlling interest in its
commercial nuclear fuel joint venture was sold during December 1991, and
revenue from this activity is no longer included in this segment's revenues.
These decreases were partially offset by higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems and extended
scope of supply and fabrication of industrial boilers.
Power Generation Systems and Equipment's segment operating income decreased
$53,307,000 to $56,467,000. This was primarily due to non-recurring items
which benefitted 1992's results. These items included a Department of Energy
grant for decommissioning and restoration of an inactive nuclear facility, a
favorable adjustment to workers' compensation costs related to prior years, the
inclusion of the commercial nuclear fuel joint venture's results through
December 1991, and the reduction of a provision to relocate a manufacturing
plant. The decrease was also due to lower volume and margins on plant
enhancements and lower volume from nuclear fuel assemblies and reactor
components for the U. S. Government. This decrease was partially offset by
higher volume and margins on fabrication and erection of fossil fuel steam and
environmental control systems and higher margins on defense and space-related
products other than nuclear fuel assemblies and reactor components.
Marine Construction Services' revenues decreased $286,965,000 to $1,649,653,000
primarily due to the December 1991 deconsolidation of the McDermott-ETPM West
joint venture. There was lower volume in domestic fabrication and offshore
operations and in fabrication operations in Scotland. There was higher volume
on foreign turnkey projects.
Marine Construction Services' segment operating income increased $11,744,000 to
$67,652,000 primarily due to improved margins on domestic offshore operations
and on foreign turnkey projects, and contract loss provisions in 1992. These
were partially offset
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29
by the deconsolidation of the McDermott-ETPM West joint venture. There was
also lower volume in domestic fabrication and offshore operations and lower
margins on domestic fabrication operations.
Equity in income of investees increased $86,816,000 to $94,058,000. This
increase was principally due to improved operating results of the HeereMac
joint venture and both improved operating results and foreign currency
transaction gains in the McDermott-ETPM West joint venture.
Interest income decreased $13,377,000 to $40,391,000. This decrease was
principally due to lower interest rates on short-term investments and
investments in government securities and other long-term investments.
Interest expense decreased $11,981,000 to $90,340,000, resulting from a
reduction in the provision for interest on proposed tax deficiencies, lower
interest expense resulting from interest rate swap agreements, and changes in
debt obligations and interest rates prevailing thereon.
Minority interest decreased $862,000 to $18,203,000 due to the deconsolidation
of the McDermott-ETPM West joint venture and the reacquisition of McDermott
Scotland's minority shareholder's interest, both in 1991, mostly offset by
minority shareholder participation in the improved results of McDermott-ETPM
East.
Other-net decreased $60,172,000 to income of $10,197,000. This decrease was
principally due to lower gains on the sale of its interests in two commercial
nuclear joint ventures (see Note 3 to the consolidated financial statements),
lower marine casualty gains, and gains from the sale of certain marine assets
to the HeereMac joint venture in 1992. This was partially offset by a gain of
$4,762,000 from the sale of nineteen tugboats in 1993.
Provision for income taxes decreased $3,170,000 to $40,099,000, while income
from continuing operations before provision for income taxes, extraordinary
items, and cumulative effect of accounting changes decreased $16,384,000 to
$107,422,000. The decrease in the provision for income taxes is due primarily
to the decrease in income.
Net income (loss) decreased $265,901,000 to a loss of $188,732,000 from income
of $77,169,000 reflecting the cumulative effect of the adoption of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
of $249,351,000, in addition to other items described above.
Effect of Inflation and Changing Prices
McDermott International's financial statements are prepared in accordance with
generally accepted accounting principles, using historical dollar accounting
(historical cost). Statements based on historical cost, however, do not
adequately reflect the cumulative effect of increasing costs and changes in the
purchasing power of the dollar, especially during times of significant and
continued inflation.
- 25 -
30
The management of McDermott International is cognizant of the effects of
inflation and, in order to minimize the negative impact of inflation on its
operations, attempts to cover the increased cost of anticipated changes in
labor, material and service costs, either through an estimation of such
changes, which is reflected in the original fixed price, or through price
escalation clauses in its contracts.
Liquidity and Capital Resources
During 1994, McDermott International's cash and cash equivalents decreased
$5,713,000 to $133,809,000 and total debt decreased $63,789,000 to
$729,610,000. During this period, McDermott International provided cash of
$219,524,000 from operating activities; $92,841,000 from the issuance of
long-term debt; $16,441,000 from the issuance of common stock; and $140,066,000
from the issuance of Series C convertible preferred stock; and used cash of
$56,773,000 for dividends on International's common and preferred stock;
$85,894,000 for the acquisitions of Northern Ocean Services Limited ("NOS") and
Delta Catalytic Corporation ("DCC") (See Note 2 to the consolidated financial
statements); $222,646,000 for repayment of long-term debt and $76,321,000 for
additions to property, plant and equipment.
Lower accounts receivable are primarily due to lower volume and the timing of
Marine Construction Services' foreign offshore contract billings and
collections, and the acceleration of collections of retainage billings on the
Naval Reactors program, partially offset by collection delays on a certain
foreign Power Generation Systems and Equipment segment contract. Lower accrued
liabilities are primarily due to settlement of subcontract costs on a certain
foreign offshore contract. Decreases in net contracts in progress and advance
billings are primarily due to lower volume.
Pursuant to an agreement with the 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 the process, reimbursement is usually delayed
for three months or more. McDermott International has outstanding receivables
of $29,079,000 at March 31, 1994 from its insurers for reimbursement of these
claims. 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 in fiscal year 1994 were $112,271,000, including $7,810,000
applicable to insolvent insurers and $3,315,000 relating to the policy year
1979 (see Note 1 to the consolidated financial statements). Settlement of the
estimated liability of $135,053,000 at March 31, 1994 for future costs relating
to insolvent insurers and policy year 1979 is expected to occur over the next
30 years. 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. 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. 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.
- 26 -
31
McDermott International's expenditures for property, plant and equipment
decreased $5,713,000 to $76,321,000 in 1994. While the majority of these
expenditures were incurred to maintain and replace existing facilities and
equipment, $5,000,000 was expended in connection with the purchase of a
fabrication yard in Nueces County, Texas and $8,098,000 was expended on the
construction a new combustion and emission test facility at its Alliance, Ohio
research center. McDermott International has committed to make capital
expenditures of approximately $65,692,000 during fiscal 1995. In addition to
maintaining McDermott International's existing facilities, these expenditures
include $38,560,000 for a new concept steam generator facility for the Naval
Reactor Program in Lynchburg, Virginia, the anticipated purchase of a barge
currently leased, and the completion of a new combustion and emission facility
in Alliance, Ohio.
During April and May 1993, the Delaware Company issued $87,000,000 of Series B
Medium Term Notes at maturities ranging from four to twenty-nine years and
interest rates ranging from 6.50% to 8.75%. These notes have an average
maturity of approximately twenty years and an average interest rate of
approximately 7.95%.
At March 31, 1994 and 1993, 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 an agreement with a certain U.
S. bank. The maximum sales limit available under this agreement was
$225,000,000 at March 31, 1994 (See Note 7 to the consolidated financial
statements).
At March 31, 1994 and 1993, McDermott International had available to it various
uncommitted short-term lines of credit from banks totaling $246,412,000 and
$129,734,000, respectively. Borrowings by McDermott International against
these lines of credit at March 31, 1994 and 1993 were $37,512,000 and $775,000,
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, which commitments are subject to reduction based upon
the ratio of the borrower's consolidated net tangible assets to specified
indebtedness plus unused commitments. 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 against
this facility at March 31, 1994 and 1993. 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. No borrowings were outstanding
against this facility at March 31, 1994.
McDermott International maintains an investment portfolio of government
obligations and other investments which is held for long- term investment
purposes. The amortized cost of the long-term portfolio at March 31, 1994 was
$715,131,000 (market value of $711,036,000). At March 31, 1994, approximately
$157,065,000 amortized cost (market value of $158,200,000) of this portfolio
was pledged to secure a letter of credit in connection with a long-term loan
and reinsurance agreements.
The Delaware Company is restricted, as a result of covenants in credit
agreements, in its ability to transfer funds to International through cash
dividends or through unsecured loans or investments. At March 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.
- 27 -
32
During July 1993, International sold 2,875,000 shares of Series C Cumulative
Convertible Preferred Stock, and received net proceeds of $140,066,000.
Working capital decreased $117,486,000, to a deficit of $1,422,000 at March 31,
1994 from $116,064,000 at March 31, 1993. During 1995, McDermott International
expects to obtain funds to meet capital expenditure, working capital 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.
International's quarterly dividends of $0.25 per share on its Common Stock and
the Delaware Company's quarterly dividends of $0.55 per share on the Series A
$2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series
B $2.60 Cumulative Preferred Stock were at the same rates in 1994 and 1993. At
March 31, 1994, International's quarterly dividend rate was $0.71875 per share
on its Series C Cumulative Convertible Preferred Stock.
At March 31, 1994 the ratio of long-term debt to total common stock and other
stockholders' equity was 1.23 as compared with 1.27 at March 31, 1993.
McDermott International accounts for income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". This standard requires, among other things, recognition of future tax
benefits, measured by enacted tax rates, attributable to deductible temporary
differences between the financial statement and income tax basis of assets and
liabilities and to tax net operating loss carryforwards to the extent that
realization of such benefits is more likely than not.
McDermott International has provided a valuation allowance ($26,576,000 at
March 31, 1994) for deferred tax assets related primarily to net operating loss
carryforwards which can not be realized through carrybacks and future reversals
of existing taxable temporary differences. Management believes that remaining
deferred tax assets ($364,193,000 at March 31, 1994) in all other tax
jurisdictions are realizable through carrybacks and future reversals of
existing taxable temporary differences and, if necessary, the implementation of
tax planning strategies involving sales 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.
New Accounting Standards
McDermott International adopted SFAS No. 106 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.
- 28 -
33
In November 1992, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 112, "Employers' Accounting for Postemployment Benefits," effective for
fiscal years beginning after December 15, 1993. SFAS No. 112 requires accrual
accounting, under certain conditions, for the estimated cost of benefits
provided by an employer to former or inactive employees after employment but
before retirement. The new standard will have no impact on the cash
requirements for any postemployment benefits, and will not have a material
effect on the consolidated financial statements of McDermott International.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective for fiscal years beginning after
December 15, 1993. SFAS No. 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. Based on its current portfolio
management practices, McDermott International will report its investments at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity. The initial adoption
of the new standard will not have a material effect on the consolidated
financial statements of McDermott International.
- 29 -
34
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPANY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
International has prepared the consolidated financial statements and related
financial information included in this report. International has the primary
responsibility for the financial statements and other financial information and
for ascertaining that the data fairly reflects the financial position and
results of operations of McDermott International. The financial statements
were prepared in accordance with generally accepted accounting principles, and
necessarily reflect informed estimates and judgments by appropriate officers of
McDermott International with appropriate consideration given to materiality.
McDermott International believes that it maintains an internal control
structure designed to provide reasonable assurance that assets are safeguarded
against loss or unauthorized use and that the financial records are adequate
and can be relied upon to produce financial statements in accordance with
generally accepted accounting principles. The concept of reasonable assurance
is based on the recognition that the cost of an internal control structure must
not exceed the related benefits. Although internal control procedures are
designed to achieve these objectives, it must be recognized that errors or
irregularities may nevertheless occur. McDermott International seeks to assure
the objectivity and integrity of its accounts by its selection of qualified
personnel, by organizational arrangements that provide an appropriate division
of responsibility and by the establishment and communication of sound business
policies and procedures throughout the organization. McDermott International
believes that its internal control structure provides reasonable assurance that
errors or irregularities that could be material to the financial statements are
prevented or would be detected.
McDermott International's accompanying consolidated financial statements have
been audited by its independent auditors, who provide McDermott International
with expert advice on the application of U. S. generally accepted accounting
principles to McDermott International's business and also provide an objective
assessment of the degree to which McDermott International meets its
responsibility for the fairness of financial reporting. They regularly
evaluate the internal control structure and perform such tests and other
procedures as they deem necessary to reach and express an opinion on the
fairness of the financial statements. The report of the independent auditors
appears elsewhere herein.
The Board of Directors pursues its responsibility for McDermott International's
consolidated financial statements through its Audit Committee, which is
composed solely of directors who are not officers or employees of McDermott
International. The Audit Committee meets periodically with the independent
auditors and management to review matters relating to the quality of financial
reporting and internal control structure and the nature, extent and results of
the audit effort. In addition, the Audit Committee is responsible for
recommending the engagement of independent auditors for McDermott International
to the Board of Directors, who in turn submit the engagement to the
stockholders for their approval. The independent auditors have free access to
the Audit Committee.
May 10, 1994
- 30 -
35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
McDermott International, Inc.
We have audited the accompanying consolidated balance sheet of McDermott
International, Inc. as of March 31, 1994 and 1993, and the related consolidated
statements of income (loss) and retained earnings (deficit) and cash flows for
each of the three years in the period ended March 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McDermott
International, Inc. at March 31, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
has provided for estimated future costs for non- employee products liability
asbestos claims. Inherent in the estimate of such future costs are assumptions
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.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for recoveries of products liability claims
in 1994 and income taxes and postretirement benefits other than pensions in
1993.
ERNST & YOUNG
New Orleans, Louisiana
May 9, 1994
- 31 -
36
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1994 and 1993
ASSETS
1994 1993
---- ----
(In thousands)
Current Assets:
Cash and cash equivalents $ 133,809 $ 139,522
Short-term investments, at amortized
cost, which approximates market 990 179,444
Accounts receivable - trade 370,333 478,028
Accounts receivable - other 113,782 130,535
Contracts in progress 237,722 250,569
Inventories 66,469 65,376
Deferred income taxes 100,167 101,969
Other current assets 12,899 10,545
- - -------------------------------------------------------------------------------------------------------------
Total Current Assets 1,036,171 1,355,988
- - -------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land 32,683 18,547
Buildings 247,388 256,042
Machinery and equipment 1,825,482 1,745,623
Property under construction 45,175 36,934
- - -------------------------------------------------------------------------------------------------------------
2,150,728 2,057,146
Less accumulated depreciation 1,374,219 1,334,853
- - -------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 776,509 722,293
Investments:
Government obligations 395,556 362,042
Other investments 319,575 125,174
- - -------------------------------------------------------------------------------------------------------------
Total Investments 715,131 487,216
- - -------------------------------------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets of
Purchased Businesses Less Accumulated Amortization
of $84,170,000 at March 31, 1994
and $77,828,000 at March 31, 1993 158,726 132,236
- - -------------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 246,854 231,778
- - -------------------------------------------------------------------------------------------------------------
Other Assets 275,557 163,452
- - -------------------------------------------------------------------------------------------------------------
TOTAL $ 3,208,948 $ 3,092,963
=============================================================================================================
See accompanying notes to consolidated financial statements.
- 32 -
37
LIABILITIES AND STOCKHOLDERS' EQUITY
1994 1993
---- ----
(In thousands)
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 62,544 $ 210,188
Accounts payable 245,819 264,552
Accrued employee benefits 113,415 109,994
Accrued interest 47,283 55,471
Accrued liabilities - other 265,383 311,160
Advance billings on contracts 181,572 173,709
U.S. and foreign income taxes 121,577 114,850
- - --------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,037,593 1,239,924
- - --------------------------------------------------------------------------------------------------------------
Long-Term Debt 667,066 583,211
- - --------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 380,309 369,502
- - --------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 136,405 11,867
- - --------------------------------------------------------------------------------------------------------------
Other Liabilities 232,929 219,013
- - --------------------------------------------------------------------------------------------------------------
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 108,583 116,393
Other minority interest 15,716 4,546
- - --------------------------------------------------------------------------------------------------------------
Total Minority Interest 212,388 209,028
- - --------------------------------------------------------------------------------------------------------------
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 -
Common stock, par value $1.00 per share,
authorized 150,000,000 shares; outstanding
53,444,467 at March 31, 1994 and
52,211,961 at March 31, 1993 53,444 52,212
Capital in excess of par value 730,987 568,329
Deficit (196,216) (126,264)
Minimum pension liability (931) (74)
Cumulative foreign exchange
translation adjustments (47,901) (33,785)
- - --------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 542,258 460,418
- - --------------------------------------------------------------------------------------------------------------
TOTAL $ 3,208,948 $ 3,092,963
==============================================================================================================
- 33 -
38
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
1994 1993 1992
---- ---- ----
(In thousands)
Revenues $ 3,059,912 $ 3,172,555 $ 3,524,482
- - --------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations 2,657,712 2,742,260 3,025,998
Depreciation and amortization 99,393 121,508 125,812
Selling, general and
administrative expenses 262,873 237,468 258,859
- - --------------------------------------------------------------------------------------------------------------
3,019,978 3,101,236 3,410,669
- - --------------------------------------------------------------------------------------------------------------
39,934 71,319 113,813
Equity in Income of Investees 119,860 94,058 7,242
- - --------------------------------------------------------------------------------------------------------------
Operating Income 159,794 165,377 121,055
- - --------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 38,751 40,391 53,768
Interest expense (63,975) (90,340) (102,321)
Minority interest (15,251) (18,203) (19,065)
Other-net (4,365) 10,197 70,369
- - --------------------------------------------------------------------------------------------------------------
(44,840) (57,955) 2,751
- - --------------------------------------------------------------------------------------------------------------
Income from Continuing Operations
before Provision for Income Taxes,
Extraordinary Items and Cumulative
Effect of Accounting Changes 114,954 107,422 123,806
Provision for Income Taxes 24,998 40,099 43,269
- - --------------------------------------------------------------------------------------------------------------
Income from Continuing Operations
before Extraordinary Items and Cumulative
Effect of Accounting Changes 89,956 67,323 80,537
- - --------------------------------------------------------------------------------------------------------------
Loss from Discontinued Operations - - (3,368)
- - --------------------------------------------------------------------------------------------------------------
Income before Extraordinary Items and
Cumulative Effect of Accounting Changes 89,956 67,323 77,169
Extraordinary Items - (10,431) -
Cumulative Effect of Accounting Changes (100,750) (245,624) -
- - --------------------------------------------------------------------------------------------------------------
Net Income (Loss) (10,794) (188,732) 77,169
- - --------------------------------------------------------------------------------------------------------------
Retained Earnings (Deficit) - Beginning of Year (126,264) 114,204 82,919
Deduct Cash Dividends
Common stock 53,074 51,736 45,884
Preferred stock, Series C 6,084 - -
- - --------------------------------------------------------------------------------------------------------------
Retained Earnings (Deficit) - End of Year $ (196,216) $ (126,264) $ 114,204
==============================================================================================================
- 34 -
39
CONTINUED
1994 1993 1992
---- ---- ----
(In thousands, except for per share amounts)
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK (AFTER PREFERRED
STOCK DIVIDENDS): $ (16,878) $ (188,732) $ 77,169
- - --------------------------------------------------------------------------------------------------------------
PRIMARY AND FULLY DILUTED:
Earnings (Loss) Per Common and
Common Equivalent Share:
Continuing operations before
extraordinary items and
cumulative effect of
accounting changes $ 1.57 $ 1.29 $ 1.75
Discontinued operations - - (0.08)
Extraordinary items - (0.20) -
Accounting changes (1.89) (4.72) -
---------------------------------------------------------------------------------------------------
Net income (loss) $ (0.32) $ (3.63) $ 1.67
===================================================================================================
CASH DIVIDENDS:
Per common share $ 1.00 $ 1.00 $ 1.00
Per preferred share $ 2.12 $ - $ -
- - --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- 35 -
40
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1994 1993 1992
---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (10,794) $ (188,732) $ 77,169
- - --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 99,393 121,508 125,812
Equity in income of investees
less dividends (54,646) (88,258) 5,104
Gain on sale and disposal of assets (4,369) (34,459) (77,950)
Cumulative effect of accounting changes 100,750 245,624 -
Extraordinary items - 10,431 -
Provision for (benefit from) deferred taxes 3,875 10,466 (71,973)
Other 9,724 3,614 (10,514)
Changes in assets and liabilities, net of effects
from acquisitions and divestitures:
Accounts receivable 162,092 37,099 (169,142)
Accounts payable (34,944) 25,876 22,580
Inventories 1,768 18,858 5,230
Net contracts in progress and advance
billings 54,768 42,746 (22,073)
Income taxes (8,004) (50,256) 52,494
Accrued interest (8,184) (53,399) 9,506
Accrued liabilities (68,127) 30,300 13,744
Other, net (23,778) 23,528 (32,118)
- - --------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 219,524 154,946 (72,131)
- - --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of Delta Catalytic Corporation
and Northern Ocean Services Limited (85,894) - -
Purchases of property, plant and
equipment (76,321) (82,034) (76,321)
Purchases of short-term investments,
government obligations and
other investments (3,617,903) (1,488,843) (3,632,562)
Sales of short-term investments,
government obligations and
other investments 3,570,183 1,505,653 3,701,142
Proceeds from sale and disposal of assets 6,539 74,635 112,785
Proceeds from sale of discontinued
operations - - 20,368
Acquisition of minority interest - - (10,267)
Other (5,395) (1,105) (45)
- - --------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (208,791) 8,306 115,100
- - --------------------------------------------------------------------------------------------------------------
- 36 -
41
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1994 1993 1992
---- ---- ----
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (222,646) $ (119,684) $ (239,621)
Issuance of long-term debt 92,841 89,000 263,818
Increase (decrease) in short-term
borrowing 16,639 (9,781) (190,109)
Issuance of common stock 16,441 8,034 102,963
Issuance of preferred stock 140,066 - -
Dividends paid (56,773) (51,528) (44,075)
Other (950) (2,287) (2,604)
- - --------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (14,382) (86,246) (109,628)
- - --------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES
ON CASH (2,064) (9,069) (1,395)
- - --------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (5,713) 67,937 (68,054)
- - --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 139,522 71,585 139,639
- - --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 133,809 $ 139,522 $ 71,585
==============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 72,159 $ 143,739 $ 93,145
Income taxes $ 26,640 $ 82,581 $ 67,300
- - --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- 37 -
42
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
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 to conform with the presentation at March 31, 1994. The notes to
the consolidated financial statements are presented on the basis of continuing
operations, unless otherwise stated.
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.
Changes in Accounting Policies
Products Liability - As a result of the consensus reached on Emerging Issues
Task Force ("EITF") Issue No. 93-5, a company is no longer permitted to offset,
for recognition purposes, reasonably possible recoveries against probable
losses which had been McDermott International's practice with respect to
estimated future costs for non-employee products liability asbestos claims.
During the third quarter of fiscal year 1994, and effective April 1, 1993,
McDermott International adopted this provision of EITF Issue No. 93-5 as a
change in accounting principle and provided for estimated future costs to the
extent that recovery from its insurers is not determined to be probable.
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 has been recognized. 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. As of March 31, 1994, the estimated amount of liabilities arising from
all pending and future asbestos claims for non-employees was in excess of
$1,100,000,000, of which less than $100,000,000 has been asserted. The
estimated amount of future costs allocable to insolvent insurers and the policy
year 1979 was $135,053,000. Inherent in the estimate
- 38 -
43
of such future liabilities and 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.
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), or $1.89 a share, in fiscal
year 1994. The adoption of this provision of EITF Issue No. 93-5 resulted in a
increase in Income before Cumulative Effect of Accounting Change of
$19,947,000, or $0.37 per share, in fiscal year 1994, as costs that would have
been recognized under McDermott International's prior practice are included in
the cumulative effect of the accounting change. Pro forma amounts reflecting
the effect of retroactive application of the accounting change to prior periods
are not presented because the amounts are not determinable.
Postretirement Health Care Benefits - During the fourth quarter of 1993 and
effective April 1, 1992, McDermott International adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The Statement requires the
accrual method of accounting for the costs of providing postretirement health
and welfare benefits and expanded postretirement health and welfare plan
disclosures. In accordance with the Statement, McDermott International
elected immediate recognition of its transition obligation and recorded
$249,351,000 (net of income tax benefit of $136,228,000), or $4.79 per share,
as the cumulative effect of an accounting change. In fiscal year 1993, other
than the cumulative effect of the accounting change, the adoption of SFAS No.
106 resulted in a decrease in Income before Extraordinary Items and Cumulative
Effect of Accounting Changes of $4,688,000, or $0.09 per share. Postretirement
benefit cost for prior years has not been restated and was recognized by
expensing the insurance programs' premiums, the self-insured program's claims
paid, and the estimated unpaid liability for claims incurred by plan
participants. The aggregate cost, including discontinued operations, was
$25,458,000 in fiscal year 1992.
Income Taxes - Effective April 1, 1992, McDermott International adopted SFAS
No. 109, "Accounting for Income Taxes". This statement establishes new
accounting and reporting standards for the effects of income taxes. It
continues the liability approach provided by its predecessor standard, SFAS No.
96, which was adopted by McDermott International in fiscal year 1989, but
contains new requirements for asset recognition. It also contains new
requirements regarding balance sheet classification and prior business
combinations. The cumulative effect of the accounting change reflects the
impact of the net reduction in enacted tax rates on temporary differences
resulting from adjustments of remaining assets and liabilities acquired in the
acquisition of The Babcock & Wilcox Company in 1978 from net of tax to pre-tax
amounts. The cumulative effect of the accounting change on prior years at
April 1, 1992 was $3,727,000, or $0.07 a share. Other than the cumulative
effect, the accounting change had no material effect on fiscal year 1993.
- 39 -
44
Foreign Currency Translation
Assets and liabilities of foreign operations, other than operations in highly
inflationary economies, are translated into U.S. Dollars at current exchange
rates and income statement items are translated at average exchange rates for
the year. Adjustments resulting from the translation of foreign currency
financial statements are recorded in a separate component of equity; an
analysis of these adjustments follows:
(In thousands)
Balance March 31, 1991 $ (8,869)
Translation adjustments for fiscal year 1992 (3,335)
- - --------------------------------------------------------------------------------
Balance March 31, 1992 (12,204)
Translation adjustments for fiscal year 1993 (21,581)
- - --------------------------------------------------------------------------------
Balance March 31, 1993 (33,785)
Translation adjustments for fiscal year 1994 (14,116)
- - --------------------------------------------------------------------------------
Balance March 31, 1994 $(47,901)
================================================================================
Foreign currency transaction adjustments are reported in income. Included in
Other Income (Expense) are transaction losses of $2,260,000, $3,747,000, and
$6,744,000 for fiscal years 1994, 1993 and 1992, respectively.
- 40 -
45
Contracts and Revenue Recognition
Contract revenues and related costs are principally recognized on a percentage
of completion method for individual contracts or components thereof based upon
work performed or a cost to cost method, as applicable to the product or
activity involved. Revenues and related costs so recorded, plus accumulated
contract costs that exceed amounts invoiced to customers under the terms of the
contracts, are included in Contracts in Progress. Billings that exceed
accumulated contract costs and revenues and costs recognized under percentage
of completion are included in Advance Billings on Contracts. Most long-term
contracts have provisions for progress payments. Contract price and cost
estimates are reviewed periodically as the work progresses and adjustments
proportionate to the percentage of completion are reflected in income in the
period when such estimates are revised. There are no unbilled revenues which
will not be billed. Provisions are made currently for all known or anticipated
losses. Claims for extra work or changes in scope of work are included in
contract revenues when collection is probable. Included in Accounts Receivable
and Contracts in Progress are approximately $56,873,000 and $54,668,000
relating to commercial and U.S. Government contracts claims whose final
settlement is subject to future determination through negotiations or other
procedures which had not been completed at March 31, 1994 and 1993,
respectively. International and certain of its subsidiaries keep books and
file tax returns on the completed contract method of accounting.
1994 1993
---- ----
(In thousands)
Included in Contracts in Progress are:
Costs incurred less costs of revenue recognized $ 99,456 $ 100,144
Revenues recognized less billings to customers 138,266 150,425
- - ------------------------------------------------------------------------------------------------
Contracts in Progress $ 237,722 $ 250,569
================================================================================================
Included in Advance Billings on Contracts are:
Billings to customers less revenues recognized $ 190,501 $ 218,640
Costs incurred less costs of revenue recognized (8,929) (44,931)
- - ------------------------------------------------------------------------------------------------
Advance Billings on Contracts $ 181,572 $ 173,709
================================================================================================
McDermott International is usually entitled to financial settlements relative
to the individual circumstances of deferrals or cancellations of Power
Generation Systems and Equipment contracts. McDermott International does not
recognize such settlements or claims for additional compensation until final
settlement is reached.
- 41 -
46
Included in accounts receivable - trade are amounts representing retainages on
contracts as follows:
1994 1993
---- ----
(In thousands)
Retainages $ 109,056 $ 148,124
================================================================================================
Retainages expected to be collected after one year $ 39,370 $ 56,250
================================================================================================
Of its long-term retainages at March 31, 1994, McDermott International
anticipates collection as follows: $18,704,000 in fiscal year 1996,
$17,452,000 in fiscal year 1997, $3,214,000 in fiscal year 1998.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined on
an average cost basis except for certain materials inventories, for which the
last-in first-out (LIFO) method is used. The cost of approximately 21% and 18%
of total inventories was determined using the LIFO method at March 31, 1994 and
1993, respectively. Consolidated inventories at March 31, 1994 and 1993 are
summarized below:
1994 1993
---- ----
(In thousands)
Raw Materials and Supplies $ 40,281 $ 36,320
Work in Progress 17,566 17,678
Finished Goods 8,622 11,378
- - ------------------------------------------------------------------------------------------------
$ 66,469 $ 65,376
================================================================================================
Warranty Expense
Estimated warranty expense which may be required to satisfy contractual
requirements, primarily of the Power Generation Systems and Equipment segment,
is accrued relative to revenue recognition on the respective contracts. In
addition, specific provisions are made where the costs of warranty are expected
to significantly exceed such accruals.
- 42 -
47
Environmental Clean-up Costs
McDermott International accrues for future decommissioning and decontamination
of its nuclear facilities that will permit the release of these facilities to
unrestricted use at the end of each facility's life, which is a condition of
its licenses from the Nuclear Regulatory Commission. Such accruals are based
on the estimated cost of those activities over the economic useful life of each
facility, which is estimated at 40 years. During fiscal year 1992, the
provision was reduced $14,900,000 as a result of a Department of Energy grant
for one facility.
Research and Development
The cost of research and development which is not performed on specific
contracts is charged to operations as incurred. Such expense was approximately
$21,036,000, $19,459,000 and $21,300,000 in fiscal years 1994, 1993 and 1992,
respectively. In addition, expenditures on research and development activities
of approximately $48,112,000, $42,082,000 and $67,100,000 in fiscal years 1994,
1993 and 1992, respectively, were paid for by customers of McDermott
International.
Depreciation, Maintenance and Repairs and Drydocking Expenses
Except for major marine vessels, property, plant and equipment is depreciated
on the straight-line method, using estimated economic useful lives of 8 to 40
years for buildings and 2 to 28 years for machinery and equipment.
Major marine vessels are depreciated on the units-of-production method based on
the utilization of each vessel. Depreciation expense calculated under the
units-of-production method may be less than, equal to, or greater than
depreciation expense calculated under the straight-line method in any period.
The annual depreciation based on utilization of each vessel will not be less
than the greater of 25% of annual straight-line depreciation, or 50% of
cumulative straight-line depreciation.
Maintenance, repairs and renewals which do not materially prolong the useful
life of an asset are expensed as incurred except for drydocking costs for the
marine fleet, which are estimated and accrued over the period of time between
drydockings, and such accruals are charged to operations currently.
Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased
Businesses
Excess of the cost over fair value of net assets of purchased businesses
primarily pertains to The Babcock & Wilcox Company, which is being amortized on
a straight-line basis over forty years.
- 43 -
48
Capitalization of Interest Cost
In fiscal years 1994, 1993 and 1992, total interest cost incurred was
$65,296,000, $92,111,000 and $104,946,000, respectively, of which $1,321,000,
$1,771,000 and $2,625,000, respectively, was capitalized.
Earnings Per Share
Primary earnings per share are based on the weighted average number of common
and common equivalent shares outstanding during the year. Fully diluted
earnings per share include the dilutive effect of stock options and
appreciation rights.
Cash Equivalents
Cash equivalents are highly liquid investments, with maturities of three months
or less when purchased, which are not held as part of the long-term investment
portfolio.
Investments
Investments in government obligations and other investments (principally debt
investments) held as a long-term investment are carried at amortized cost. At
March 31, 1994 the market and face values of the government obligations were
$393,331,000 and $397,300,000, and other investments were $317,705,000 and
$339,016,000, respectively. See Management's Discussion and Analysis of
Financial Condition and Results of Operations regarding the future adoption of
FASB Statement No. 115, "Accounting for Investments in Debt and Equity
Securities".
Forward Exchange Contracts
McDermott International enters into forward exchange contracts primarily as
hedges relating to identifiable currency positions. These financial
instruments are designed to minimize exposure and reduce risk from exchange
rate fluctuations in the regular course of business. Gains and losses on
forward exchange contracts which hedge exposures on firm foreign currency
commitments are deferred and recognized as adjustments to the bases of those
assets. Gains and losses on forward exchange contracts which hedge foreign
currency assets or liabilities are recognized in income as incurred. Such
amounts effectively offset gains and losses on the foreign currency assets or
liabilities that are hedged.
At March 31, 1994, McDermott International had forward exchange contracts to
purchase $328,881,000 in foreign currencies (primarily Canadian Dollars and
Dutch Guilders), and to sell $281,787,000 in foreign currencies (primarily
Canadian Dollars, Japanese Yen, Dutch Guilders, British Pounds, and Saudi
Riyals), at varying maturities from fiscal year 1995 through 1998.
- 44 -
49
NOTE 2 - ACQUISITIONS
On February 28, 1994, McDermott International acquired Northern Ocean Services
Limited ("NOS") for $57,645,000. NOS owns and operates 2 major marine
construction vessels and specialized construction equipment for providing
subsea and trenching services to industries worldwide; including oil, gas,
marine construction and hydrocarbon processing. The purchase has been reflected
in the consolidated balance sheet of McDermott International. Results of NOS's
operations from the date of acquisition to March 31, 1994 have been included in
McDermott International's consolidated results and are included in the Marine
Construction Services' segment. Results for the one month ended March 31, 1994
were not material to the consolidated financial statements of McDermott
International.
During June 1993, the Delaware Company acquired a controlling interest in Delta
Catalytic Corporation ("DCC") of Calgary, Alberta, Canada for $28,249,000.
This was the first step in a two-step transaction which will be completed
during fiscal year 1997, when the Delaware Company intends to acquire the
balance of DCC. The purchase price for the second step in fiscal year 1997
will be determined based upon DCC's earnings for the period from November 1992
to October 1996. DCC provides engineering, procurement, construction and
maintenance services to industries worldwide; including oil, gas, marine
construction and hydrocarbon processing. The purchase has been reflected in
the consolidated balance sheet of McDermott International. Results of DCC's
operations from the date of acquisition to March 31, 1994 have been included in
McDermott International's consolidated results and are included in the Marine
Construction Services' segment. Revenues, segment operating income and net
income were $228,822,000, $7,207,000, and $182,000, respectively, for the ten
months ended March 31, 1994.
The following pro forma income statement information for McDermott
International is presented as though the acquisitions of NOS and DCC had
occurred on April 1, 1992.
FISCAL YEAR ENDED
3/31/94 3/31/93
------- -------
(Unaudited)
(In thousands)
Revenues $ 3,164,468 $ 3,709,911
Income before Extraordinary Items and
Cumulative Effect of Accounting Changes $ 94,704 $ 64,428
Net Income (Loss) $ (6,046) $ (191,627)
Earnings (Loss) Per Common and Common
Equivalent Share:
Income before extraordinary items and
cumulative effect of accounting changes $ 1.66 $ 1.24
Net income (loss) $ (0.23) $ (3.68)
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the
- 45 -
50
acquisitions of NOS and DCC been consummated as of the above dates, nor are
they necessarily indicative of future operating results.
The acquisitions were accounted for under the purchase method. The excess of
cost over fair value of net assets of purchased businesses of DCC and NOS is
being amortized over a period of 10 years. The purchase price of DCC has been
allocated to the underlying assets and liabilities based on fair values at the
date of acquisition, while the purchase price of NOS has been allocated to the
underlying assets and liabilities based on estimated fair values at the date of
acquisition. Such estimates may be revised at a later date. A summary of
the purchase price allocation for DCC and NOS is as follows:
(In thousands)
Net Working Capital $ (602)
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses 32,832
Net Property, Plant and Equipment 68,003
Other Non-Current Liabilities, Net (14,339)
- - ----------------------------------------------------------------------
Total $ 85,894
======================================================================
NOTE 3 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
During December 1991, McDermott International reduced its participation in the
nuclear fuel assembly and commercial nuclear services business by selling a
portion of its interests in B&W Fuel Company ("BWFC") and B&W Nuclear Service
Company ("BWNSC") to a consortium of U. S. subsidiaries of three French
companies and the U. S. subsidiary of Framatome S.A. ("Framatome"),
respectively. McDermott International retained a 25% interest in BWFC and
BWNSC. Both joint ventures were accounted for on a cost basis after the sale
as McDermott International no longer exercised significant influence over these
joint ventures. Prior to the sale, BWFC was part of McDermott International's
consolidated financial statements and BWNSC was accounted for as an equity
investment. Under the terms of the December 1991 sales agreements, Framatome
purchased a 25% interest in BWNSC for $45,000,000 and the three French
companies, which included Framatome, purchased a 26% interest in BWFC for
$13,800,000. In addition, McDermott International was paid $17,000,000
relating to fees earned from, and the termination of, a management services
agreement and received $33,820,000 in loan proceeds. On March 30, 1993,
McDermott International sold its remaining interests in BWFC and BWNSC to the
same parties for $10,150,000 and $32,440,000, respectively, and loans of
$33,820,000 were repaid.
Included in the Consolidated Statement of Income (Loss) and Retained Earnings
(Deficit) are revenues of $44,639,000 and a loss of $419,000 applicable to BWFC
operations, for the fiscal year ended March 31, 1992. Included in Equity in
Income of Investees was income applicable to BWNSC of $5,179,000 for the fiscal
year ended March 31, 1992. Included in Other-net were gains on the sales of
$23,968,000 and $57,397,000 for the fiscal years ended March 31, 1993 and
1992, respectively, and income from management fees and services applicable to
these operations of $8,446,000 for the fiscal year ended March 31, 1992.
- 46 -
51
During December 1991, McDermott International and ETPM S.A. negotiated the
internal reorganization of the ETPM joint venture. As a result of these
negotiations, McDermott International's ownership of McDermott-ETPM East
increased from 56.8% to 67.2% and ownership of McDermott-ETPM West decreased
from 56.8% to 49.9%. McDermott-ETPM East operates in the Middle East and
India; McDermott-ETPM West operates in the North Sea, West Africa and South
America. Since December 17, 1991, McDermott International's investment in
McDermott-ETPM West, has been accounted for on the equity method.
Included in the Consolidated Statement of Income (Loss) and Retained Earnings
(Deficit), during fiscal year 1992, are revenues of $302,766,000 and income of
$4,104,000 applicable to McDermott-ETPM West operations, prior to
deconsolidation in December 1991. After deconsolidation, a loss of $6,058,000
was included in Equity in Income of Investees in fiscal year 1992.
McDermott International's investments in joint ventures and other entities,
which are accounted for on the equity method, were $128,006,000 and $76,996,000
at March 31, 1994 and 1993, respectively. Transactions with entities for which
investments are accounted for by the equity method included sales to
($89,123,000, $91,448,000 and $79,061,000 in fiscal years 1994, 1993 and 1992,
respectively), including approximately $49,121,000, $47,535,000 and $33,681,000
attributable to leasing activities in fiscal years 1994, 1993 and 1992,
respectively, and purchases from ($137,942,000, $76,396,000, and $35,279,000 in
fiscal years 1994, 1993 and 1992, respectively) these entities. Included in
Accounts receivable-trade at March 31, 1994 and 1993 are $29,883,000 and
$45,954,000 of receivables with unconsolidated investees.
In fiscal year 1994, McDermott International recognized revenues of
$131,000,000 for work subcontracted to HeereMac. In fiscal year 1992, McDermott
International recognized a gain of $5,100,000 on the sale of certain ancillary
marine equipment (cost of $14,918,000 and accumulated depreciation of
$14,851,000) to HeereMac for $10,267,000. During fiscal year 1992, additional
investments of $18,498,000 were made in the HeereMac joint venture. HeereMac
subsequently used these funds to settle amounts owed to McDermott International
for equipment charters.
At March 31, 1994 and 1993, property, plant and equipment included $409,952,000
and $464,101,000, and accumulated depreciation included $221,503,000 and
$247,920,000, respectively, of marine equipment that is leased to
unconsolidated investees. Dividends received from unconsolidated investees
were $65,214,000, $33,202,000 (including a return of capital of $27,402,000),
and $12,346,000, in fiscal years 1994, 1993 and 1992, respectively.
- 47 -
52
Summarized combined balance sheet and income statement information based on the
most recent financial information for McDermott International's equity
investments in joint ventures and other entities are presented below:
1994 1993
---- ----
(In thousands)
Current Assets $ 608,053 $ 486,029
Non-Current Assets 359,678 338,392
----------------------------------------------------------------------------------------------
Total Assets $ 967,731 $ 824,421
==============================================================================================
Current Liabilities $ 461,306 $ 366,834
Non-Current Liabilities 244,640 317,244
Owners' Equity 261,785 140,343
----------------------------------------------------------------------------------------------
Total Liabilities and
Owners' Equity $ 967,731 $ 824,421
==============================================================================================
1994 1993 1992
---- ---- ----
(In thousands)
Revenues $ 1,160,363 $ 1,299,364 $ 619,259
Gross Profit $ 361,699 $ 393,241 $ 146,350
Income (Loss) before Provision for
Income Taxes $ 232,366 $ 203,592 $ (6,700)
Provision for Income Taxes 13,539 4,754 1,973
----------------------------------------------------------------------------------------------------
Net Income (Loss) $ 218,827 $ 198,838 $ (8,673)
====================================================================================================
NOTE 4 - INCOME TAXES
Income taxes have been provided based upon the tax laws and rates in the
countries in which operations are conducted. All income has been earned
outside of Panama and McDermott International is not subject to income tax in
Panama on income earned outside of Panama. Therefore, there is no expected
relationship between the provision for, or benefit from, income taxes and
income, or loss, before income taxes. The major reason for the variations in
such relationships is that income is earned within and subject to the taxation
laws of various countries, each of which has a regime of taxation which varies
from that of any other country (not only with respect to nominal rate but also
with respect to the allowability of deductions, credits and other benefits) and
because the proportional extent to which income is earned in, and subject to
tax by, any particular country or countries varies from year to year.
- 48 -
53
Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of March 31, 1994 and 1993
were as follows:
1994 1993
---- ----
(In thousands)
Deferred tax assets:
Accrued warranty expense $ 11,745 $ 13,968
Accrued provisions for facility
closings and dispositions 2,647 4,360
Accrued vacation pay 9,726 9,680
Accrued liabilities for self-insurance
(including postretirement health
care benefits) 186,146 181,892
Accrued liabilities for executive and
employee incentive compensation 14,621 13,620
Accrued pension liability 7,260 5,260
Accrued interest on proposed tax
deficiencies 11,874 12,710
Allowance for doubtful accounts 1,402 6,566
Long-term contracts 35,461 7,611
Investments in joint ventures 7,111 6,799
Net operating loss carryforwards 19,773 34,277
Environmental and products liabilities 57,293 6,388
Other 25,710 26,132
--------------------------------------------------------------------------------------------------------
Total deferred tax assets 390,769 329,263
Valuation allowance for deferred tax assets (26,576) (29,524)
--------------------------------------------------------------------------------------------------------
Net deferred tax assets 364,193 299,739
--------------------------------------------------------------------------------------------------------
- 49 -
54
1994 1993
---- ----
(In thousands)
Deferred tax liabilities:
Property, plant and equipment $ 92,671 $ 90,906
Long-term contracts 13,047 9,751
Prepaid pension costs 94,274 85,597
Investments in joint ventures 28,056 27,463
Other 1,818 1,781
-----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 229,866 215,498
-----------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 134,327 $ 84,241
===========================================================================================================
Income from continuing operations before provision for income taxes,
extraordinary items and cumulative effect of accounting changes was as follows:
1994 1993 1992
---- ---- ----
(In thousands)
U. S. $ (53,574) $ (40,505) $ 55,795
Other than U. S. 168,528 147,927 68,011
- - ---------------------------------------------------------------------------------------------------------------
$ 114,954 $ 107,422 $ 123,806
===============================================================================================================
The provision for income taxes consists of:
1994 1993 1992
---- ---- ----
(In thousands)
Current:
U. S. - Federal $ (15,029) $ (9,823) $ 85,899
U.S. - State and local 1,804 630 15,939
Other than U. S. 34,348 38,826 13,404
- - ---------------------------------------------------------------------------------------------------------------
Total current 21,123 29,633 115,242
- - ---------------------------------------------------------------------------------------------------------------
Deferred:
U. S. - Federal (1,798) 4,909 (67,386)
U. S. - State and local (4,392) 1,115 (7,374)
Other than U. S. 10,065 4,442 2,787
- - ---------------------------------------------------------------------------------------------------------------
Total deferred 3,875 10,466 (71,973)
- - ---------------------------------------------------------------------------------------------------------------
Provision for Income Taxes $ 24,998 $ 40,099 $ 43,269
===============================================================================================================
The current provision for other than U. S. income taxes in 1994 and 1993
includes a reduction of $22,515,000 and $26,606,000, respectively, for the
benefit of net operating loss carryforwards.
- 50 -
55
During fiscal year 1992, a decision was entered in the United States Tax Court
concerning the Delaware Company's U.S. income tax liability for the fiscal year
ended March 31, 1983 disposing of all significant U.S. federal income tax
issues for that year. The IRS has issued notices for fiscal years 1984 through
1988 asserting deficiencies in the amounts of net operating losses and taxes
reported. The deficiencies are based on issues substantially similar to those
of earlier years. The Delaware Company believes that any income taxes
ultimately assessed will not exceed amounts already provided.
Pursuant to a stock purchase and sale agreement (the "Intercompany Agreement"),
the Delaware Company has the right to sell to International and International
has the right to buy from the Delaware Company, 100,000 units, each unit
consisting of one share of International Common Stock and one share of
International Series A Participating Preferred Stock, at a price based
primarily upon the stockholders' equity of McDermott International at the close
of the fiscal year preceding the date at which the right to sell or buy, as the
case may be, is exercised, and, to a limited extent, upon the price-to-book
value of the Dow Jones Industrial Average. At April 1, 1994, the current unit
value was $2,039 and the aggregate current unit value for the Delaware
Company's 100,000 units was $203,943,000. The net proceeds to the Delaware
Company from the exercise of any rights under the Intercompany Agreement would
be subject to U. S. federal, state and other applicable taxes. No tax
provisions have been established, since there is no present intention by either
party to exercise such rights.
- 51 -
56
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of: 1994 1993
---- ----
(In thousands)
Unsecured Debt:
Series A Medium Term Notes (maturities ranging
from 3 to 9 years; interest at various rates ranging
from 7.92% to 9.00%) $ 75,000 $ 75,000
Series B Medium Term Notes (maturities ranging
from 4 to 29 years; interest at various rates ranging
from 6.50% to 8.75%) 101,000 14,000
9.375% Notes due 2002 ($225,000,000 face value) 224,428 224,386
10.25% Notes due June 1995 150,000 150,000
12.25% Senior subordinated notes due 1998 - 189,400
Other notes payable through 2009 (interest at
various rates ranging to 6.80%) 26,306 26,187
Secured Debt:
10.375% Note payable due 1998 90,400 105,400
Other notes payable through 2012 and
capitalized lease obligations 24,964 8,251
- - ----------------------------------------------------------------------------------------------------------------
692,098 792,624
Less: Amounts due within one year 25,032 209,413
- - ----------------------------------------------------------------------------------------------------------------
$ 667,066 $ 583,211
================================================================================================================
- 52 -
57
As defined in the Indenture, the 10.25% Notes due 1995 may be redeemed at the
option of the holders upon a change of control of International. The
Indenture, and the Indenture for the 9.375% Notes due 2002 and the Series A and
B Medium Term Notes, contain certain covenants which restrict the amount of
funded indebtedness that the Delaware Company may incur, and place limitations
on certain restricted payments, certain transactions between affiliates, the
creation of certain liens and the amendment of the Intercompany Agreement.
Pursuant to its right of redemption, on March 31, 1993, the Delaware Company
deposited cash into trusts for the purpose of redeeming its 9.625% Sinking Fund
Debentures, 10% Subordinated Debentures, and 10.20% Sinking Fund Debentures.
These redemptions resulted in an extraordinary loss of $2,429,000 (net of
income tax benefit of $1,252,000), in fiscal year 1993. Also on March 31,
1993, pursuant to its redemption option, McDermott International provided for
the loss associated with the redemption and subsequent extinguishment of its
12.25% Senior Subordinated Notes due in 1998 resulting in an extraordinary loss
of $7,392,000 (net of income tax benefit of $3,808,000). Additionally, during
October 1992, the Delaware Company repurchased $10,600,000 aggregate principal
amount of its 12.25% Senior Subordinated Notes due 1998 resulting in an
extraordinary loss of $610,000 (net of income tax benefit of $314,000).
In management of its net interest costs (expense on debt and income on
investments), McDermott International entered into interest rate swap
agreements with certain banks which effectively change the fixed interest rates
on certain long-term notes payable. Net amounts to be paid or received as a
result of these agreements are accrued as adjustments to interest expense over
the terms of these contracts. Gains realized as a result of terminating
agreements in fiscal year 1993 were deferred and were recognized as reductions
of interest expense over the original terms of the agreements. Interest rate
swaps resulted in a reduction of interest expense of $5,782,000 and $6,961,000
in fiscal year 1994 and 1993, respectively. At March 31, 1994, McDermott
International had an interest rate swap outstanding on the current notional
principal of $90,400,000 of its 10.375% note payable due 1998. This interest
rate swap effectively changes the fixed rate to a variable rate based on the
London Interbank Offered Rate and is expected to effectively reduce interest
costs on the note over the remaining term to maturity.
McDermott International's 10.375% Note payable due 1998 is secured by a letter
of credit issued by a U. S. bank. The letter of credit was secured by
$100,906,000 amortized cost (market value of $100,160,000) of McDermott
International's long term portfolio at March 31, 1994. The outstanding
principal is repayable in semi-annual payments with the final installment due
June 20, 1998. The letter of credit and collateral amounts decline as the loan
principal is repaid.
Maturities of long-term debt during the five fiscal years subsequent to March
31, 1994 are as follows: 1995 - $25,032,000; 1996 - $174,571,000; 1997 -
$26,216,000; 1998 - $73,467,000; 1999 - $42,462,000.
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 March 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.
- 53 -
58
At March 31, 1994 and 1993, McDermott International had available to it various
uncommitted short-term lines of credit from banks totaling $246,412,000 and
$129,734,000, respectively. Borrowings by McDermott International against
these lines of credit at March 31, 1994 and 1993 were $37,512,000 and $775,000,
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, which commitments are subject to reduction based upon
the ratio of the borrower's consolidated net tangible assets to specified
indebtedness plus unused commitments. 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 against
this facility at March 31, 1994 and 1993. 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. No borrowings were outstanding
against this facility at March 31, 1994.
- 54 -
59
NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans - McDermott International provides retirement benefits, primarily
through non-contributory pension plans, for substantially all of its regular
full-time employees, except certain non-resident alien employees of foreign
subsidiaries who are not citizens of a European Community country or who do not
earn income in the United States, Canada, or the United Kingdom. Salaried plan
benefits are based on final average compensation and years of service, while
hourly plan benefits are based on a flat benefit rate and years of service.
McDermott International's funding policy is to fund applicable pension plans to
meet the minimum funding requirements of the Employee Retirement Income
Security Act of 1974 (ERISA) and, generally, to fund other pension plans as
recommended by the respective plan actuary and in accordance with applicable
law. At January 1, 1994 and 1993, approximately one- half of total plan assets
were invested in listed stocks and bonds. The remaining assets were held in
foreign equity funds, U. S. Government securities and investments of a
short-term nature.
U. S. Pension Plans:
The net periodic pension cost (benefit) for fiscal years 1994, 1993 and 1992
included the following components:
1994 1993 1992
---- ---- ----
(In thousands)
Service cost - benefits earned
during the period $ 21,035 $ 20,443 $ 18,467
Interest cost on projected
benefit obligation 62,827 57,259 52,462
Actual return on plan assets (166,978) (59,897) (165,702)
Net amortization and deferral 81,509 (27,687) 94,959
- - ----------------------------------------------------------------------------------------------------------------
Net periodic pension cost (benefit) $ (1,607) $ (9,882) $ 186
================================================================================================================
Due to the sale of its welded tubular line of business, the loss from
discontinued operations in fiscal year 1992 includes a net after-tax gain of
$1,659,000 resulting from the recognition of a curtailment and settlement of a
related hourly pension plan.
Due to the sale of interests in its two nuclear joint ventures, income from
continuing operations in fiscal year 1992 includes a net after-tax gain of
$1,615,000 resulting from the curtailment and settlement of a related salaried
pension plan. The remeasurement of net periodic pension cost increased pre-tax
income from continuing operations by $2,074,000.
- 55 -
60
The following table sets forth the U. S. plans' funded status and amounts
recognized in McDermott International's consolidated financial statements:
Plans for Which Plans for Which
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
------------------------- ---------------------
1994 1993 1994 1993
---- ---- ---- ----
(In thousands)
Actuarial present value of
benefit obligations:
Vested benefit
obligation $ 532,205 $ 453,129 $ 129,862 $ 98,545
=============================================================================================================
Accumulated benefit
obligation $ 596,595 $ 500,753 $ 160,974 $ 119,838
=============================================================================================================
Projected benefit
obligation $ 690,970 $ 608,901 $ 165,075 $ 125,187
Plan assets at fair value 964,646 871,476 119,493 81,829
- - -------------------------------------------------------------------------------------------------------------
Projected benefit obliga-
tion (in excess of) or
less than plan assets 273,676 262,575 (45,582) (43,358)
Unrecognized net gain (1,464) (12,986) (3,989) (25)
Unrecognized prior service cost (14,462) 5,372 18,356 15,847
Unrecognized transition asset (45,157) (53,722) (2,091) (180)
Adjustment required to
recognize minimum
liability - - (8,414) (11,220)
- - -------------------------------------------------------------------------------------------------------------
Prepaid pension cost
(pension liability) $ 212,593 $ 201,239 $ (41,720) $ (38,936)
=============================================================================================================
The assumptions used in determining the funded status of the U. S. plans were:
1994 1993 1992
---- ---- ----
Actuarial assumptions:
Discount rate 7.5% 8.5% 8.5%
- - -----------------------------------------------------------------------------------------------------
Rate of increase in future
compensation levels 4.5% 5.0% 5.0%
- - -----------------------------------------------------------------------------------------------------
Expected long-term rate of
return on assets 8.5% 8.5% 8.5%
- - -----------------------------------------------------------------------------------------------------
- 56 -
61
The changes in the discount rate and the rate of increase in future
compensation levels for the U. S. plans increased the projected benefit
obligation at March 31, 1994. This net increase includes an increase of
$101,960,000 due to the change in discount rate and a decrease of $15,233,000
due to the change in the rate of increase in future compensation levels.
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for
Pensions," McDermott International recorded, during 1994 and 1993, an
additional minimum liability for certain of its U. S. plans of $8,414,000 and
$11,220,000, respectively. These liabilities resulted in recognition of
intangible assets of $7,457,000 and $11,144,000 and reductions in stockholders'
equity of $931,000 and $74,000, respectively, in fiscal year 1994 and 1993.
The two principal U. S. ERISA pension plans provide that, subject to certain
limitations, any excess assets in such plans would be used to increase pension
benefits if certain events occurred within a 60 month period following a change
in control of International.
Non-U. S. Pension Plans:
The net periodic pension benefit for fiscal years 1994, 1993 and 1992 included
the following components:
1994 1993 1992
---- ---- ----
(In thousands)
Service cost - benefits earned
during the period $ 3,816 $ 6,442 $ 5,448
Interest cost on projected
benefit obligation 10,027 10,710 10,688
Actual return on plan assets (32,477) (28,480) (12,180)
Net amortization and deferral 12,297 10,090 (5,409)
- - ------------------------------------------------------------------------------------------------------------------
Net periodic pension benefit $ (6,337) $ (1,238) $ (1,453)
==================================================================================================================
Due to a reduction in workforce at one of its foreign subsidiaries, income from
continuing operations before cumulative effect of accounting change in fiscal
year 1994 includes a net after-tax loss of $1,456,000 resulting from the
curtailment of a related plan.
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62
The following table sets forth the non-U. S. plans' funded status (assets
exceed accumulated benefits) and amounts recognized in McDermott
International's consolidated financial statements:
1994 1993
---- ----
(In thousands)
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 117,612 $ 85,191
============================================================================================================
Accumulated benefit obligation $ 126,387 $ 92,797
============================================================================================================
Projected benefit obligation $ 146,850 $ 119,491
Plan assets at fair value 203,797 184,630
- - ------------------------------------------------------------------------------------------------------------
Projected benefit obligation (in
excess of) or less than plan
assets 56,947 65,139
Unrecognized net (gain) loss 1,765 (5,687)
Unrecognized prior service cost 4,138 4,712
Unrecognized transition asset (28,891) (33,625)
- - ------------------------------------------------------------------------------------------------------------
Net prepaid pension cost $ 33,959 $ 30,539
============================================================================================================
The assumptions used in determining the funded status of the non-U. S. plans
were:
1994 1993 1992
---- ---- ----
Actuarial assumptions:
Discount rate 7.5-8.0% 8.5-9.5% 8.5-9.5%
- - ------------------------------------------------------------------------------------------------------------
Rate of increase in future
compensation levels 4.5-6.0% 5.0-7.5% 5.0-7.5%
- - ------------------------------------------------------------------------------------------------------------
Expected long-term rate of
return on plan assets 8.0-9.0% 8.5-9.0% 8.5-9.0%
- - ------------------------------------------------------------------------------------------------------------
The changes in the discount rate and the rate of increase in future
compensation levels for the non-U. S. plans increased the projected benefit
obligation at March 31, 1994. This net increase includes an increase of
$40,257,000 due to the change in discount rate and a decrease of $10,767,000
due to the change in the rate of increase in future compensation levels.
- 58 -
63
Multiemployer Plans - One of McDermott International's subsidiaries contributes
to various multiemployer plans. The plans generally provide defined benefits
to substantially all unionized workers in this subsidiary. Amounts charged to
pension cost and contributed to the plans were $8,367,000, $4,687,000 and
$4,886,000 in fiscal years 1994, 1993 and 1992, respectively.
Postretirement Health Care and Life Insurance Benefits - McDermott
International offers postretirement health care and life insurance benefits to
substantially all of its retired regular full-time employees, including those
associated with discontinued operations, except certain non-resident alien
retired employees who are not citizens of a European Community country or who,
while employed, did not earn income in the United States, Canada or the United
Kingdom. McDermott International shares the cost of providing these benefits
with all affected retirees, except for certain life insurance plans.
Postretirement health care and life insurance benefits are offered under
separate defined benefit postretirement plans to union and non-union employees.
The health care plans are contributory and contain cost-sharing provisions such
as deductibles and coinsurance; the life insurance plans are contributory and
non-contributory. McDermott International does not fund any of its plans.
The following table sets forth the amounts recognized in the consolidated
financial statements at March 31:
1994 1993
---- ----
(In thousands)
Accumulated Postretirement Benefit Obligation:
Retirees $ 359,624 $ 327,612
Fully eligible active participants 20,038 17,907
Other active plan participants 72,039 52,355
- - ---------------------------------------------------------------------------------------------------------------
451,701 397,874
Unrecognized net loss (43,294) (274)
- - ---------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 408,407 $ 397,600
===============================================================================================================
Weighted-average discount rate 7.5% 8.5%
===============================================================================================================
The accumulated postretirement benefit obligation in the above table includes
$408,675,000 and $362,403,000 for McDermott International's health care plans
and $43,026,000 and $35,471,000 for McDermott International's life insurance
plans at March 31, 1994 and 1993, respectively. The increase in the
unrecognized net loss at March 31, 1994 was primarily attributable to the
change in the discount rate.
- 59 -
64
Net periodic postretirement benefit cost for fiscal years 1994 and 1993
included the following components:
1994 1993
---- ----
(In thousands)
Service cost $ 3,570 $ 3,292
Interest cost 32,507 32,000
Net amortization and deferral 19 -
- - ---------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 36,096 $ 35,292
===============================================================================================================
For measurement purposes, a weighted-average annual assumed rate of increase in
the per capita cost of covered health care claims of 12-1/2% was assumed for
1994 and 13-1/2% for 1993. In both years, the rate was assumed to decrease
gradually to 5% in 2005 and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of March 31, 1994 by $26,947,000 and the aggregate of the
service cost and interest cost components of net periodic postretirement
benefit cost for fiscal 1994 by $2,393,000.
Employees of McDermott International who are not U.S. citizens and located in
certain foreign countries are covered by various foreign postretirement benefit
arrangements. McDermott International has not yet adopted SFAS No. 106 for
these foreign plans. The effect of initial adoption will be reported as the
cumulative effect of an accounting change and is not expected to have a
material effect on the consolidated financial statements of McDermott
International.
Postretirement Benefits - See Management's Discussion and Analysis of Financial
Condition and Results of Operations regarding future adoption of FASB Statement
No. 112, "Employers' Accounting for Postemployment Benefits."
- 60 -
65
NOTE 7 - SALE OF ACCOUNTS RECEIVABLE
In December 1992, The Babcock & Wilcox Company renewed an agreement for an
additional period of three years with a certain U.S. bank, whereby it can
sell, up to a maximum limit of $225,000,000, with limited recourse, an
undivided interest in a designated pool of qualified accounts receivable.
Under the terms of the agreement, new receivables are added to the pool as
collections reduce previously sold accounts receivable. At March 31, 1994,
approximately $170,000,000 of receivables had been sold for cash under this
agreement. Included in Other-net income were expenses recorded on the sale of
receivables which represent bank fees and discounts of $8,699,000, $7,851,000
and $12,564,000 for the fiscal years ended March 31, 1994, 1993 and 1992,
respectively.
NOTE 8 - SUBSIDIARY'S REDEEMABLE PREFERRED STOCKS
At March 31, 1994 and 1993, 13,000,000 shares of Delaware Company Preferred
Stock, with a par value of $1 per share, were authorized. Of the authorized
shares, 2,818,780 shares of Series A Preferred Stock, and 3,474,652 and
3,724,629 shares of Series B Preferred Stock, respectively, were outstanding
(in each case, exclusive of shares owned by the Delaware Company) at March 31,
1994 and 1993. The outstanding shares are entitled to $31.25 per share in
liquidation. Preferred dividends of approximately $15,900,000 are classified
as minority interest in Other Income (Expense) in each of the fiscal years
1994, 1993 and 1992. Both series of Preferred Stock are entitled to general
voting rights of one-half vote for each share. The Board of Directors of the
Delaware Company may authorize additional series of Preferred Stock, and may
set terms of each new series except that the Delaware Company cannot create any
series of stock senior to the existing Series A and Series B Preferred Stock
without the consent of the holders of at least 50% of the shares of such
Preferred Stock.
Each share of the outstanding Series A Preferred Stock is convertible into one
share of Common Stock of International plus $0.10 cash. Series A and Series B
Preferred Stock are redeemable at the option of the Delaware Company at $31.25
per share plus accrued dividends. On March 31, 1995 and each subsequent year
through March 31, 2008, the Delaware Company is obligated to redeem, at a
redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A
Preferred Stock. On March 31, 1995, March 31 of the fiscal years 1996 through
2006, and March 31 of the fiscal years 2007 and 2008, the Delaware Company is
obligated to redeem 315,877, 252,702 and 189,526 shares of Series B Preferred
Stock, respectively. For the five fiscal years subsequent to March 31, 1994,
the obligation to redeem the Series A and B Preferred Stock is $19,680,000 for
fiscal year 1995 and $17,706,000 for each of the fiscal years 1996 through
1999. The Delaware Company may apply to the mandatory sinking fund obligations
any Series A or B Preferred Stock it has reacquired, redeemed or surrendered
for conversion which have not been previously credited against the mandatory
sinking fund obligations. The Delaware Company applied 313,878 shares of
Series A Preferred Stock and 180,700 shares of Series B Preferred Stock that it
owned and redeemed 135,177 shares of Series B Preferred Stock to satisfy the
March 31, 1994 mandatory sinking fund obligations. During fiscal year 1994,
114,800 shares of Series B Preferred Stock were purchased on the open market.
At March 31, 1994, 49,637 shares of Series A Preferred Stock have been
converted to date and the Delaware Company owned 1,575,505 shares of Series A
Preferred Stock.
- 61 -
66
NOTE 9 - CAPITAL STOCK
Common Stock - Changes in Common and Series C Preferred Stock during the three
years ended March 31, 1994 are summarized below:
COMMON STOCK
SERIES C ------------ CAPITAL IN
PREFERRED PAR EXCESS OF
STOCK SHARES VALUE PAR VALUE
----- ------ ----- -----------
(In thousands except for share data)
Balance, March 31, 1991 $ - 44,069,349 $ 44,069 $ 451,935
- - ------------------------------------------------------------------------------------------------------------------
Shares issued upon exercise of
stock options - 145,357 145 1,992
Stock plan restricted stock
purchases (net of forfeitures) - 124,860 125 -
Shares issued in public offering - 6,900,000 6,900 93,801
Contributions to Company Thrift Plan - 115,787 116 2,231
Deferred career executive stock
plan expense - - - 1,831
- - ------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1992 - 51,355,353 51,355 551,790
- - ------------------------------------------------------------------------------------------------------------------
Shares issued upon exercise of
stock options - 367,309 368 7,524
Stock plan restricted stock
purchases (net of forfeitures) - 142,245 142 -
Contributions to Company Thrift Plan - 347,054 347 7,642
Deferred career executive stock
plan expense - - - 1,373
- - ------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1993 - 52,211,961 52,212 568,329
- - ------------------------------------------------------------------------------------------------------------------
Preferred shares issued 2,875 - - 137,191
Shares issued upon exercise of
stock options - 783,285 783 15,509
Stock plan restricted stock
purchases (net of forfeitures) - 148,830 149 -
Contributions to Company Thrift Plan - 300,391 300 7,684
Deferred career executive stock
plan expense - - - 2,274
- - ------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1994 $ 2,875 53,444,467 $ 53,444 $ 730,987
==================================================================================================================
The Panamanian regulations relating to acquisitions of securities of companies,
such as International, registered with the National Securities Commission
require, among other matters, that detailed disclosure concerning the offeror,
which is subject to review by either the Panamanian National Securities
Commission or the Board of Directors of the
- 62 -
67
subject company, be finalized prior to the beneficial acquisition of more than
5 percent of the outstanding shares of any class of stock. Transfers of
securities in violation of these regulations are invalid and cannot be
registered for transfer.
At March 31, 1994 and 1993, 85,521,703 and 77,823,347 shares of Common Stock,
respectively, were reserved for issuance in connection with the conversion and
redemption of the Delaware Company's Series A Preferred Stock, the conversion
of International's Series C Preferred Stock, the exercise of International
Rights, stock options and awards of restricted stock pursuant to the 1992
Officer Stock Program (and its predecessor programs) and the 1992 Director
Stock Program, and contributions to the Thrift Plan.
International Preferred Stock - At March 31, 1994 and 1993, 25,000,000 shares
of Preferred Stock were authorized. Of the authorized shares, 100,000 shares
of Series A Participating Preferred Stock (the "Participating Preferred Stock")
and 80,000 and 90,000 shares of Series B Non-Voting Preferred Stock (the
"Non-Voting Preferred Stock"), respectively, were issued and owned by the
Delaware Company at March 31, 1994 and 1993. The Non-Voting Preferred Stock is
currently callable by International at $275 per share and 10,000 shares are to
be redeemed each year by International at $250 per share. The annual per share
dividend rates for the Participating Preferred Stock and the Non-Voting
Preferred Stock are $10 (but no more than ten times the amount of the per share
dividend on International Common Shares) and $20, respectively, payable
quarterly, and dividends on such shares are cumulative to the extent not paid.
In addition, shares of Participating Preferred Stock are entitled to receive
additional dividends whenever dividends in excess of $3.00 per International
Share are declared (or deemed to have been declared) in any fiscal year. In
1987, the voting rights of the Participating Preferred Stock were eliminated.
Of the authorized shares, International issued 2,875,000 shares of Series C
Cumulative Convertible Preferred Stock in July 1993. Net cash proceeds to
International were $140,066,000. The Series C shares have a par value of $1.00
per share, and a liquidation preference of $50.00 per share, plus an amount
equal to accrued and unpaid dividends. Dividends on Series C shares are
cumulative at the annual rate of 5.75% per share on the liquidation preference,
equal to $2.875 per annum. International may not redeem Series C shares prior
to July 1, 1997. On or after July 1, 1997, the Series C shares are redeemable,
in whole or in part, at the option of International, either in cash, shares of
International common stock, or a combination thereof. Holders of Series C
shares may convert them, in whole or in part, at any time, into International
common stock shares at a conversion price of $35.25 per share of common stock
(equivalent to a conversion rate of 1.4184 shares of common stock for each
share of Series C Preferred Stock), subject to certain adjustments.
The issuance of additional International Preferred Stock in the future and the
specific terms thereof, such as the dividend rights, conversion rights, voting
rights, redemption prices and similar matters, may be authorized by the Board
of Directors of International without stockholder approval, except to the
extent such approval may be required by applicable rules of the New York Stock
Exchange or applicable law. If additional Preferred Stock is issued, such
additional shares will rank senior to International Common Stock as to
dividends and upon liquidation.
- 63 -
68
International Rights - On December 30, 1985, each holder of Common Stock
received a dividend distribution of one Right for each outstanding share of
Common Stock. The Rights currently trade with the Common Stock and at March
31, 1994 and 1993, International had outstanding Rights to purchase 53,544,467
and 52,311,961 shares (including Rights to purchase 100,000 shares held by the
Delaware Company at March 31, 1994 and 1993), respectively, of its Common Stock
at a price of $50 per share subject to anti-dilution adjustments. The Rights
will become exercisable and will detach from the Common Stock 10 days after a
person or a group either becomes the beneficial owner of 20 percent or more of
the outstanding Common Stock, or commences or announces an intention to
commence a tender or exchange offer for 30 percent or more of the outstanding
Common Stock. If thereafter the acquiring person or group engages in certain
self-dealing transactions, holders of Rights may purchase at the exercise price
that number of shares of Common Stock having a market value equal to twice the
exercise price. In the event International merges with or transfers 50 percent
or more of its assets or earnings to any person after the Rights become
exercisable, holders of Rights may purchase at the exercise price that number
of shares of Common Stock of the acquiring entity having a market value equal
to twice the exercise price. The Rights are redeemable by International and
expire on December 30, 1995.
Stock Plans - The following table summarizes activity for McDermott
International's stock option plans:
1994 1993 1992
---- ---- ----
Options outstanding, April 1, 3,506,710 3,281,965 2,910,197
- - ----------------------------------------------------------------------------------------------------------
Granted 654,040 648,880 638,910
Exercised (783,285) (367,309) (145,357)
Cancelled/forfeited (43,852) (56,826) (121,785)
- - ----------------------------------------------------------------------------------------------------------
Options outstanding, March 31, 3,333,613 3,506,710 3,281,965
==========================================================================================================
Options exercisable at March 31, 2,106,362 2,459,823 2,396,912
==========================================================================================================
Average price:
Outstanding options $ 22.6017 $ 21.5676 $ 20.7369
Exercisable options $ 22.1261 $ 20.8391 $ 19.9904
==========================================================================================================
Shares available at March 31,
that may be granted for options 1,405,415 1,893,044 2,335,883
==========================================================================================================
Charges to income $ 3,576,000 $ 2,383,000 $ 2,681,000
==========================================================================================================
- 64 -
69
A total of 1,380,090 shares of Common Stock (including 195,230 of approved
shares that were not awarded, and rights to shares that have not terminated or
expired, under predecessor plans) are available for grants of options under the
1992 Officer Stock Program. Options become exercisable at such time or times
as determined at the date of the grant, and expire ten years after the date of
grant. Pursuant to the program, eligible employees may be granted rights to
purchase shares of Common Stock at par value ($1.00 per share) subject to
restrictions on transfer which lapse at such times and circumstances as
specified when granted. Substantially all of the shares of Common stock
available for award under the 1992 Officer Stock Program may be granted as
rights under the program. A total of 789,625 rights have been granted to
purchase shares at par value ($1.00 per share) under the 1992 Officer Stock
Program (and its predecessor plans) and the 1992 Director Stock Program
(described below) at March 31, 1994.
A total of 25,325 shares of Common Stock are available for grants of options,
and rights to purchase shares, to non-employee directors under the 1992
Director Stock Program. Options to purchase 900, 300 and 300 shares will be
granted on the first, second, and third years, respectively, of a Director's
term at not less than 100% of the fair market value on the date of grant.
Options become exercisable, in full, six months after the date of the grant,
and expire ten years and one day after the date of grant. Rights to purchase
450, 150 and 150 shares are granted on the first, second and third years,
respectively, of a Director's term at par value ($1.00 per share) subject to
restrictions on transfer, which lapse at the end of such term.
Under the 1992 Senior Management Stock Option plan, senior management employees
may be granted options to purchase shares of Common Stock. The total number of
shares available for grant is determined by the Board of Directors from time to
time. Options to purchase shares are granted at no less that 100% of the fair
market value on the date of grant, become exercisable at such time or times as
determined when granted, and expire ten years after the date of the grant.
In the event of a change in control of McDermott International, all three
programs have provisions that may cause restrictions to lapse and accelerate
the exercisability of options outstanding.
Thrift Plan - On November 12, 1991, a maximum of 5,000,000 of the authorized
and unissued shares of International's common stock was reserved for possible
issuance to be used as the employer match for employee contributions to the
Thrift Plan for Employees of McDermott Incorporated and Participating
Subsidiary and Affiliated Companies. Such employer contributions equal 50% of
the first 6% of compensation, as defined in the Plan, contributed by
participants, and fully vest and are non-forfeitable after five years of
service or upon retirement, death, lay-off or approved disability. During
fiscal years 1994, 1993 and 1992, 300,391, 347,054 and 115,787 shares,
respectively, were issued as employer contributions pursuant to the Plan. At
March 31, 1994, 4,236,768 shares remained available for issuance.
- 65 -
70
NOTE 10 - CONTINGENCIES AND COMMITMENTS
Litigation - International and certain of its officers, directors and
subsidiaries are defendants in numerous legal proceedings. Management believes
that the outcome of these proceedings will not have a material adverse effect
upon the consolidated financial position of McDermott International.
Products Liability - See Note 1 regarding products liability.
Operating Leases - Future minimum payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year at
March 31, 1994 are as follows: 1995 -$25,282,000; 1996 - $20,063,000; 1997 -
$17,702,000; 1998 - $16,296,000; 1999 - $13,828,000; and thereafter -
$52,519,000. Future minimum lease payments and leased property under capital
leases are not material. Total rental expense for fiscal years 1994, 1993 and
1992 was $120,515,000, $131,014,000, and $149,140,000, respectively. These
expense figures include contingent rentals and are net of sublease income, both
of which are not material.
Other - McDermott International performs significant amounts of work for the
U.S. Government under both prime contracts and subcontracts and thus is subject
to continuing reviews by governmental agencies.
McDermott International maintains liability and property insurance that it
considers normal in the industry. However, certain risks are either not
insurable or insurance is available only at rates which McDermott International
considers uneconomical.
McDermott International has been identified as a potentially responsible party
at various cleanup sites under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended. Whereas, McDermott International
has not been determined to be a major contributor of wastes to these sites,
each potentially responsible party or contributor may face assertions of joint
and several liability. Based on its relative contribution of wastes to the
various sites, of which a final determination has not yet been made, McDermott
International's share of the ultimate liability is not expected to have a
material adverse effect on its consolidated financial position.
In addition, remediation projects have been or may be undertaken at certain of
McDermott International's current and former plant sites, and B&W is currently
evaluating a consent order issued by The Department of Environmental Resources
of the Commonwealth of Pennsylvania seeking monetary sanctions, and remedial
and monitoring relief, relating to B&W's Parks Facilities in Parks Township,
Pennsylvania. Any sanctions ultimately assessed, and any costs ultimately
incurred on other remediation projects, are not expected to have a material
adverse effect on the consolidated financial statements of McDermott
International.
Commitments for capital expenditures amounted to approximately $65,849,000
(including $38,560,000 for a new concept steam generator facility for the Naval
Reactor Program in Lynchburg, Virginia, the anticipated purchase of a barge
currently leased and the completion of a new combustion and emission facility
in Alliance, Ohio,) at March 31, 1994, of which approximately $65,692,000
relates to fiscal year 1995.
- 66 -
71
McDermott International is contingently liable under standby letters of credit
totaling $428,298,000 (including $72,245,000 issued on behalf of unconsolidated
foreign joint ventures) at March 31, 1994, issued in the normal course of
business. McDermott International has guaranteed $10,450,000 of loans to and
$23,179,000 of standby letters of credit issued by certain unconsolidated
foreign joint ventures at March 31, 1994. At March 31, 1994, McDermott
International had pledged approximately $56,159,000 amortized cost (market
value of $58,040,000) of government obligations to secure payments under and in
connection with certain reinsurance agreements.
NOTE 11 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
McDermott International's Power Generation Systems and Equipment customers are
principally the electric power generation industry (including government-owned
utilities and independent power producers), the U.S. Government (including its
contractors), and the pulp and paper and other process industries, such as oil
refineries and steel mills. The principal customers of the Marine Construction
Services segment are the offshore oil, natural gas and hydrocarbon processing
industries and other marine construction companies. These concentrations of
customers may impact McDermott International's overall exposure to credit risk,
either positively or negatively, in that the customers may be similarly
affected by changes in economic or other conditions. However, McDermott
International's management believes that the portfolio of receivables is well
diversified and that such diversification minimizes any potential credit risk.
Receivables are generally not collateralized.
McDermott International believes that its provision for possible losses on
uncollectible accounts receivable is adequate for its credit loss exposure. At
March 31, 1994 and 1993, the allowance for possible losses deducted from
Accounts receivable-trade on the balance sheet was $7,289,000 and $4,879,000,
respectively.
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72
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by McDermott International in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
Investment securities: The fair values of investments are estimated based on
quoted market prices. For investments for which there are no quoted market
prices, fair values are derived from available yield curves for investments of
similar quality and terms.
Long and short-term debt: The fair value of McDermott International's debt
instruments are based on quoted market prices or where quoted prices are not
available, on the present value of cash flows discounted at estimated borrowing
rates for similar debt instruments or on estimated prices based on current
yields for debt issues of similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred
stocks of the Delaware Company are based on quoted market prices.
Foreign currency exchange contracts: The fair values of foreign currency
forward exchange contracts are estimated by obtaining quotes from brokers. At
March 31, 1994 and 1993, McDermott International had forward exchange contracts
outstanding to purchase and sell foreign currencies with a net notional value
of $47,094,000 and $194,125,000 and a fair value of $35,288,000 and
$193,409,000, respectively.
Interest rate swap agreements: The fair values of interest rate swaps are the
amounts at which they could be settled and are estimated by obtaining quotes
from brokers. At March 31, 1994, McDermott International had an interest rate
swap outstanding on current notional principal of $90,400,000 with a fair value
of ($1,853,000), which represents the estimated amount McDermott International
would have to pay to terminate the agreement.
The estimated fair values of McDermott International's financial instruments at
March 31, 1994 and 1993 are as follows:
March 31, 1994 March 31, 1993
-------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
Balance Sheet Instruments
- - -------------------------
Cash and cash equivalents $ 133,809 $ 133,809 $ 139,522 $ 139,522
Investment securities 716,121 712,026 666,660 673,241
Debt excluding capital leases 726,090 772,661 790,486 860,255
Subsidiary's redeemable
preferred stocks 196,672 193,064 204,482 206,042
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NOTE 13 - DISCONTINUED OPERATIONS
Welded Tubular Line of Business
In fiscal year 1992, McDermott International sold its welded tubular line of
business ("Welded") for $30,217,000, consisting of $20,368,000 in cash and
receivables of $9,849,000. Revenues applicable to Welded operations were
$57,428,000 in fiscal year 1992. Loss from discontinued operations in fiscal
year 1992 included income from operations of $182,000 (net of income tax
benefit of $114,000) and a loss on disposal of $4,790,000 (net of income tax
benefit of $2,936,000), including loss from operations of $1,159,000 during the
phase out period.
Seamless Tubular Line of Business
During fiscal year 1991, McDermott International sold its previously
discontinued seamless tubular line of business. A gain of $1,240,000 (net of
income taxes of $760,000) resulting from price adjustments is included in Loss
from discontinued operations in fiscal year 1992.
- 69 -
74
NOTE 14 - SEGMENT REPORTING
McDermott International operates in two industry segments - Power Generation
Systems and Equipment, and Marine Construction Services.
Power Generation Systems and Equipments' principal businesses are the supply
of fossil-fuel and nuclear steam generating systems and equipment to the
electric power generation industry, and nuclear reactor components to the U. S.
Navy.
Marine Construction Services supplies worldwide services for the offshore oil,
natural gas, and hydrocarbon processing industries, and to other marine
construction companies. Principal activities include the design, engineering,
fabrication and installation of marine pipelines and offshore structures and
subsea production systems for development drilling and production; and onshore
construction and maintenance services.
Intersegment sales are accounted for at prices which are generally established
by reference to similar transactions with unaffiliated customers. Identifiable
assets by industry segment are those assets that are used in McDermott
International's operations in each segment. Corporate assets are principally
cash and cash equivalents, short-term investments, marketable securities and
prepaid pension costs.
In the fiscal years 1994, 1993 and 1992, the U. S. Government accounted for
approximately 13%, 13% and 15%, respectively, of McDermott International's
total revenues. These revenues are principally included in the Power
Generation Systems and Equipment segment.
At March 31, 1994 and 1993 receivables of $1,142,000 and $10,524,000,
respectively, were due from minority shareholders, primarily ETPM S.A.,
participating in McDermott International's majority-owned joint ventures.
Sales to ETPM S.A. were $3,358,000, $31,234,000 and $11,216,000, respectively,
for the fiscal years ended March 31, 1994, 1993 and 1992. In fiscal years
1994, 1993 and 1992 equipment charters and overhead expenses of $6,330,000,
$6,046,000 and $44,578,000, respectively, were charged by ETPM S.A. to the
McDermott-ETPM joint venture. Also, during fiscal year 1992, McDermott
International acquired HeereMac's minority interest in a subsidiary of
International.
The adoption of EITF Issue No. 93-5 in fiscal year 1994 resulted in an increase
in the Power Generation Systems and Equipment Segment operating income of
$19,947,000. The adoption of SFAS No. 106 in fiscal year 1993 resulted in a
net decrease in segment operating income of $6,784,000. This included a
decrease of $3,760,000 in the Power Generation Systems and Equipment segment
and a decrease of $3,024,000 in the Marine Construction Services segment.
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Segment Information for the Three Fiscal Years Ended March 31, 1994.
1. Information about McDermott International's Operations in Different
Industry Segments.
REVENUES (1) 1994 1993 1992
- - --------- ---- ---- ----
Power Generation Systems and Equipment(2) $ 1,614,206 $ 1,523,476 $ 1,593,501
Marine Construction Services(3)(4) 1,452,497 1,649,653 1,936,618
Intersegment Transfer Eliminations (6,791) (574) (5,637)
- - --------------------------------------------------------------------------------------------------------------
Total Revenues $ 3,059,912 $ 3,172,555 $ 3,524,482
==============================================================================================================
OPERATING INCOME
- - -----------------
Segment Operating Income:
Power Generation Systems and Equipment(2) $ 49,941 $ 56,467 $ 109,774
Marine Construction Services(3)(4) 44,394 67,652 55,908
- - --------------------------------------------------------------------------------------------------------------
Total Segment Operating Income 94,335 124,119 165,682
- - --------------------------------------------------------------------------------------------------------------
Equity in Income of Investees:
Power Generation Systems and Equipment(2) 12,032 8,691 13,864
Marine Construction Services(3) 107,828 85,367 (6,622)
- - --------------------------------------------------------------------------------------------------------------
Total Equity in Income of Investees 119,860 94,058 7,242
- - --------------------------------------------------------------------------------------------------------------
General Corporate Expenses (54,401) (52,800) (51,869)
- - --------------------------------------------------------------------------------------------------------------
Total Operating Income $ 159,794 $ 165,377 $ 121,055
==============================================================================================================
(1) Segment revenues include intersegment transfers as follows:
Power Generation Systems
and Equipment $ 6,365 $ 414 $ 4,790
Marine Construction Services 426 160 847
--------------------------------------------------------------------------------------------
Total $ 6,791 $ 574 $ 5,637
============================================================================================
(2) See Note 3 regarding the deconsolidation of B&W Fuel Company to a cost
method investment and the change in B&W Nuclear Service
Company from an equity method to a cost method investment during fiscal
year 1992.
(3) See Note 3 regarding the deconsolidation of the McDermott-ETPM West joint
venture during fiscal year 1992.
(4) See Note 2 regarding the acquisition of NOS and DCC during fiscal year 1994.
- 71 -
76
1994 1993 1992
---- ---- ----
(In thousands)
CAPITAL EXPENDITURES
- - --------------------
Power Generation Systems and Equipment $ 47,898 $ 45,102 $ 52,582
Marine Construction Services(1) 123,055 36,038 22,345
Corporate 851 2,757 834
Discontinued Operations - - 560
- - --------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 171,804 $ 83,897 $ 76,321
==============================================================================================================
DEPRECIATION AND AMORTIZATION
- - -----------------------------
Power Generation Systems and Equipment $ 36,567 $ 36,798 $ 32,034
Marine Construction Services 59,454 82,336 90,798
Corporate 3,372 2,374 2,980
Discontinued Operations - - 3,248
- - --------------------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 99,393 $ 121,508 $ 129,060
==============================================================================================================
IDENTIFIABLE ASSETS
- - -------------------
Power Generation Systems and Equipment $ 1,201,156 $ 1,146,702 $ 1,179,921
Marine Construction Services 1,107,956 1,053,473 1,066,732
Corporate 899,836 892,788 879,542
- - --------------------------------------------------------------------------------------------------------------
Total Identifiable Assets $ 3,208,948 $ 3,092,963 $ 3,126,195
==============================================================================================================
(1) Includes property, plant and equipment of $79,233,000 of acquired companies
in fiscal year 1994, and the purchase of a fabrication yard in Nueces
County, Texas financed by a note payable of $16,250,000.
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77
2. Information about McDermott International's Operations in Different
Geographic Areas.
1994 1993 1992
---- ---- ----
(In thousands)
Revenues(1) - United States(2) $ 1,614,533 $ 1,657,084 $ 1,957,139
- Canada 583,169 227,066 178,395
- Europe and
West Africa 153,709 532,989 721,334
- Middle and Far
East 708,501 752,316 644,067
- Other Foreign - 3,100 23,547
- - -------------------------------------------------------------------------------------------------------------
Total $ 3,059,912 $ 3,172,555 $ 3,524,482
=============================================================================================================
Segment Operating
Income (Loss) by
Geographic Area - United States $ 12,947 $ 53,256 $ 127,669
- Canada 35,497 9,395 5,356
- Europe and
West Africa 5,126 17,759 47,735
- Middle and Far
East 43,666 45,219 (13,176)
- Other Foreign (2,901) (1,510) (1,902)
- - -------------------------------------------------------------------------------------------------------------
Total $ 94,335 $ 124,119 $ 165,682
=============================================================================================================
Identifiable
Assets - United States $ 1,301,904 $ 1,286,433 $ 1,264,795
- Canada 265,342 144,785 143,257
- Europe and
West Africa 324,084 265,020 383,089
- Middle and Far
East 262,386 353,972 289,567
- Other Foreign 155,396 149,965 165,945
- Corporate 899,836 892,788 879,542
- - -------------------------------------------------------------------------------------------------------------
Total $ 3,208,948 $ 3,092,963 $ 3,126,195
=============================================================================================================
(1) Net of inter-geographic area revenues in fiscal year 1994 as follows:
United States- $38,666,000, Canada - $12,082,000, Europe and West Africa
- $15,868,000, Middle and Far East - $3,160,000 and Other Foreign -
$25,770,000.
(2) Net of inter-geographic area revenues of $71,027,000 and $129,835,000,
respectively, in fiscal years 1993 and 1992.
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78
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31,1994 and 1993:
1994
----
Q U A R T E R E N D E D
------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1993 1993 1993 1994
-------- --------- -------- ---------
(In thousands, except for per share amounts)
Revenues $ 703,418 $ 777,459 $ 798,886 $ 780,149
Operating income 59,472 61,502 33,217 5,603
Income before cumulative effect
of accounting change 25,209 37,588 15,377 11,782
Net income (loss) (75,541) 37,588 15,377 11,782
Primary and Fully Diluted
Earnings (Loss) per Share:
Income before cumulative
effect of accounting change 0.47 0.66 0.25 0.18
Net income (loss) (1.42) 0.66 0.25 0.18
Quarterly results for June and September 1993 have been restated to reflect the
adoption of EITF Issue No. 93-5 (See Note 1). This restatement decreased income
before cumulative effect of accounting change and net income by $467,000 and
$101,217,000 (or $0.01 and $1.89 per share), respectively, for the quarter
ending June 30, 1993; and increased operating income by $10,367,000, and income
before cumulative effect of accounting change and net income by $7,980,000 (or
$0.14 per share), for the quarter ending September 30, 1993.
Pre-tax results for the quarter ended June 30, 1993 include a favorable
warranty reserve adjustment of $11,000,000. Results for the quarter ended
December 31, 1993 include a reduction in the provision for worker's
compensation and general liability costs resulting from a change in actuarial
estimate of $12,001,000. Results for the quarter ended March 31, 1994 include
a provision of $8,807,000, including interest, resulting from an unfavorable
ruling on a lawsuit relating to a warranty issue; and a reduction in accrued
interest on proposed tax deficiencies of $9,400,000. Included in income before
cumulative effect of accounting change and net income for the quarter ended
March 31, 1994, is a reduction in the provision for taxes of $10,000,000 due to
the settlement of outstanding issues.
- 74 -
79
Continued
1993
----
Q U A R T E R E N D E D
------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1992 1992 1992 1993
-------- --------- -------- ---------
(In thousands, except for per share amounts)
Revenues $ 826,563 $ 734,610 $ 848,720 $ 762,662
Operating income 26,744 40,048 57,184 41,401
Income before extraordinary items and
cumulative effect of accounting
changes 2,740 18,553 19,426 26,604
Net income (loss) (242,884) 18,553 18,816 16,783
Primary and Fully Diluted
Earnings (Loss) per Share:
Income before extraordinary items
and cumulative effect of accounting
changes 0.05 0.36 0.37 0.51
Net income (loss) (4.69) 0.36 0.36 0.32
Pre-tax results for the quarter ended September 30, 1992 include marine asset
casualty gains of $6,782,000. Results for the quarter ended December 31, 1992
include charges for accelerated depreciation and the write-off of certain
fabrication facilities and marine construction equipment due to diminished
cost-effectiveness and technical obsolescence of $11,708,000 and a reduction in
the provision for worker's compensation and general liability costs resulting
from a change in actuarial estimate of $17,342,000. Results for the quarter
ended March 31, 1993 include the gain on the sale of nineteen tugboats of
$4,762,000 and a gain on the sale of the remaining interests in two commercial
nuclear joint ventures of $23,968,000.
- 75 -
80
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
- 76 -
81
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no family relationships between any of the executive officers,
directors or persons nominated to be such, and no executive officer was elected
to his position pursuant to any arrangements or understanding between himself
and any other person.
Information required by this item with respect to directors and executive
officers is incorporated by reference to the material appearing under the
headings "Election of Directors" in the Proxy Statement for the 1994 Annual
Meeting of Shareholders.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Cash Compensation of Executive Officers and
Certain Relationships and Related Transactions" in the Proxy Statement for the
1994 Annual Meeting of Shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material
appearing under the heading "Election of Directors" in the Proxy Statement for
the 1994 Annual Meeting of Shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the material
appearing under the heading "Cash Compensation of Executive Officers and
Certain Relationships and Related Transactions" in the Proxy Statement for the
1994 Annual Meeting of Shareholders.
- 77 -
82
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 31
Consolidated Balance Sheet
March 31, 1994 and 1993 32
Consolidated Statement of Income (Loss) and Retained Earnings (Deficit)
For The Three Fiscal Years Ended March 31, 1994 34
Consolidated Statement of Cash Flows
For the Three Fiscal Years Ended March 31, 1994 36
Notes to Consolidated Financial Statements
For the Three Fiscal Years Ended March 31, 1994 38
CONSOLIDATED FINANCIAL SCHEDULES
All required schedules will be filed by amendment to this Form 10-K on
Form 10-K/A.
EXHIBIT INDEX
3 Articles of Incorporation and By-Laws (Item 3(a) is incorporated
by reference to Exhibit 3 to McDermott International's annual report
on Form 10-K, as amended, for the fiscal year ended March 31, 1983
and Item 3(b) is incorporated by reference to Exhibit 3 to McDermott
International's annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1991).
(a) McDermott International's Restated Articles of Incorporation
(b) McDermott International's By-Laws
4(a) Rights Agreement (incorporated by reference to Exhibit 1 to the
McDermott International's registration statement on Form 8-A, dated
December 27, 1985).
4(b) Indentures with respect to certain of McDermott International's
long-term debt are not filed as exhibits hereto inasmuch as the
securities authorized under any such Indenture do not exceed 10%
of McDermott International's total assets. McDermott International
agrees to furnish a copy of each such Indenture to the Securities
and Exchange Commission upon request.
- 78 -
83
PAGE
10 Material Contracts to Exhibit II to McDermott International's
current report on Form 8-K filed December 10, 1991; (Exhibits 10(b)
through 10(d) are incorporated by reference to Exhibit 10 to
McDermott International's annual report on Form 10-K, as amended,
for the fiscal year ended March 31, 1983; Exhibit 10(e) is
incorporated by reference to Exhibit 10 to McDermott International's
annual report on Form 10-K, as amended, for the fiscal year ended
March 31, 1990; Exhibit 10(f) is incorporated by reference to
Exhibit 10 to McDermott International's annual report on Form 10-K,
as amended, for the fiscal year ended March 31, 1987; Exhibit 10(g)
is incorporated by reference to Exhibit 10 to McDermott
International's annual report on Form 10-K, as amended, for the
fiscal year ended, March 31, 1988; and Exhibit 10(h) is incorporated
by reference to Exhibit 11 to McDermott International's current
report on Form 8-K filed December 10, 1991; and Exhibits (j) and (k)
are incorporated by reference to McDermott International's annual
report on Form 10-K, as amended, for the fiscal year ended March 31,
1992.)
(a) Supplemental Executive Retirement Plan, as amended, will be
filed with Form 10-K/A.
(b) 1983 Long-Term Performance Incentive Compensation Program
(c) Restoration of Retirement Income Plan for Certain Participants
in the Retirement Plan for Employees of McDermott Incorporated
(d) Intercompany Agreement
(e) Trust for Supplemental Executive Retirement Plan
(f) Variable Supplemental Compensation Plan
(g) 1987 Long-Term Performance Incentive Compensation Program
(h) Retirement Plan for Non-Management Directors of
McDermott International, Inc.
(i) 1992 Senior Management Stock Option Plan will be filed with
Form 10-K/A.
(j) 1992 Officer Stock Incentive Plan
(k) 1992 Director Stock Plan
11 Statement Re Computation of Per Share Earnings (Loss) 81
22 Significant Subsidiaries of the Registrant 82
24 Consent of Independent Auditors 83
- 79 -
84
FORM 8-K REPORTS
Report on Form 8-K, Item 2 was filed on March 14, 1994.
- 80 -
85
EXHIBIT II
McDERMOTT INTERNATIONAL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
(In thousands, except shares and per share amounts)
PRIMARY AND FULLY DILUTED
1994 1993 1992
---- ---- ----
Income from continuing operations before
extraordinary items and cumulative
effect of accounting changes $ 89,956 $ 67,323 $ 80,537
Less dividend requirements of preferred stock, Series C (6,084) - -
- - ----------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable
to common stock 83,872 67,323 80,537
Loss from discontinued operations - - (3,368)
Extraordinary items - (10,431) -
Cumulative effect of accounting changes (100,750) (245,624) -
- - ----------------------------------------------------------------------------------------------------------------------
Net income (loss) for primary computation $ (16,878) $ (188,732) $ 77,169
======================================================================================================================
Weighted average number of common
shares outstanding during the year 52,945,193 51,665,331 46,010,431
Common stock equivalents of stock
options and stock appreciation
rights based on "treasury stock"
method 522,740 339,017 91,766
- - ----------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding during the year 53,467,933 52,004,348 46,102,197
======================================================================================================================
Earnings (loss) per common and
common equivalent share: (1)
Continuing operations $ 1.57 $ 1.29 $ 1.75
Discontinued operations - - (0.08)
Extraordinary items - (0.20) -
Accounting changes (1.89) (4.72) -
Net income (loss) $ (0.32) $ (3.63) $ 1.67
(1) Earnings (loss) per common and common equivalent share assuming full
dilution are the same for the fiscal years presented.
- 81 -
86
EXHIBIT 22
McDERMOTT INTERNATIONAL, INC.
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
FISCAL YEAR ENDED MARCH 31, 1994
PERCENTAGE
ORGANIZED OF VOTING
UNDER THE SHARES
NAME OF COMPANY LAWS OF OWNED
Creole Insurance Company, Ltd. Bermuda 100
McDermott International Investments Co., Inc. Panama 100
Hydro Marine Services, Inc. Panama 100
Varsy International Netherlands Antilles 100
McDermott (Holland) B.V. Netherlands 100
McDermott Incorporated Delaware 92
Babcock & Wilcox Investment Company Delaware 100
The Babcock & Wilcox Company Delaware 100
Babcock & Wilcox Industries, Ltd. Canada 100
The subsidiaries omitted from the foregoing list do not, considered in the
aggregate, constitute a significant subsidiary.
- 82 -
87
EXHIBIT 24
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 2-83692, No. 33-16680, No. 33-51892, No. 33-51894 and No.
33-63832) of McDermott International, Inc. and the Registration Statement (Form
S-3 No. 33-54940) of McDermott Incorporated and in the related Prospectuses of
our report dated May 9, 1994 with respect to the consolidated financial
statements of McDermott International, Inc. included in this Annual Report
(Form 10-K) for the year ended March 31, 1994.
ERNST & YOUNG
New Orleans, Louisiana
May 12, 1994
- 83 -
88
SIGNATURES OF THE REGISTRANT
Pursuant to the requirements of Sections 13 or 15(d) 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 on May 10, 1994.
McDERMOTT INTERNATIONAL, INC.
(REGISTRANT)
By: /s/ Robert E. Howson
Robert E. Howson
Chairman of the Board and Chief
Executive Officer
By: /s/ Brock A. Hattox
Brock A. Hattox
Senior Vice President and Chief
Financial Officer
By: /s/ Daniel R. Gaubert
Daniel R. Gaubert
Vice President and Controller
- 84 -
89
SIGNATURES OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on May 10, 1994.
/s/ Thomas D. Barrow /s/ James A. Hunt
Thomas D. Barrow James A. Hunt
Director Director
/s/ Theodore H. Black __________________________
Theodore H. Black J. Howard Macdonald
Director Director
/s/ John F. Bookout /s/ William McCollam, Jr.
John F. Bookout William McCollam, Jr.
Director Director
/s/ Philip J. Burguieres /s/ John A. Morgan
Philip J. Burguieres John A. Morgan
Director Director
/s/ James L. Dutt /s/ William T. Seawell
James L. Dutt William T. Seawell
Director Director
/s/ Brock A. Hattox /s/ John N. Turner
Brock A. Hattox John N. Turner
Senior Vice President and Director
Chief Financial Officer,
and Director
/s/ Robert E. Howson
Chairman of the Board and
Chief Executive Officer,
and Director