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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - 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, 1995
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 $1,444,216,074 as of April 26, 1995.
The number of shares outstanding of the Company's Common Stock at April 26,
1995 was 54,063,698.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 1995 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 3
General 3
Foreign Operations 4
Raw Materials 4
Customers and Competition 4
Backlog 5
Factors Affecting Demand 6
C. Marine Construction Services 7
General 7
Foreign Operations 12
Raw Materials 13
Customers and Competition 13
Backlog 13
Factors Affecting Demand 14
D. Patents and Licenses 14
E. Research and Development Activities 14
F. Insurance 15
G. Employees 16
H. Environmental Regulations and Matters 16
Item 3. LEGAL PROCEEDINGS 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
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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 20
Item 6. SELECTED FINANCIAL DATA 21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS 23
General 23
Fiscal Year 1995 vs Fiscal Year 1994 23
Fiscal Year 1994 vs Fiscal Year 1993 26
Effects of Inflation and Changing Prices 27
Liquidity and Capital Resources 28
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Company Report on Consolidated Financial Statements 32
Report of Independent Auditors 33
Consolidated Balance Sheet - March 31, 1995 and 1994 34
Consolidated Statement of Income (Loss) for the Three
Fiscal Years ended March 31, 1995 36
Consolidated Statement of Stockholders' Equity for the
Three Fiscal Years Ended March 31, 1995 38
Consolidated Statement of Cash Flows for the Three
Fiscal Years ended March 31, 1995 40
Notes to Consolidated Financial Statements 42
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 80
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 81
Item 11. EXECUTIVE COMPENSATION 81
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 81
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 81
II
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INDEX - FORM 10-K
PART IV
PAGE
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 82
Signatures 86
III
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P A R T 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 J. Ray McDermott, S.A. ("JRM") and
McDermott Incorporated. International's Common Stock, JRM's Common Stock and
Series B $2.25 Cumulative Convertible Exchangeable Preferred 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; "JRM" will be used
to mean J. Ray McDermott, S.A., a Panamanian corporation, which is a majority
owned subsidiary of International, and its consolidated subsidiaries; 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:
- - 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
- - Marine Construction Services, which supplies worldwide services for the
offshore oil, natural gas and hydrocarbon processing industries, and to
other marine construction companies, primarily through JRM. 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 of McDermott
International for the three fiscal years ended March 31, 1995. See Note 15 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,
1995 1994 1993
---------------- ---------------- -----------------
Power Generation Systems
and Equipment $1,663.2 54% $1,614.2 53% $1,523.5 48%
Marine Construction Services(1) 1,390.9 46% 1,452.5 47% 1,649.7 52%
Intersegment Transfer
Eliminations (10.4) - (6.8) - (0.6) -
- ----------------------------------------------------------------------------------------------------
Total Revenues $3,043.7 100% $3,059.9 100% $3,172.6 100%
====================================================================================================
OPERATING INCOME
(Dollars in Millions)
FOR FISCAL YEARS ENDED MARCH 31,
1995 1994 1993
---------------- ---------------- -----------------
Segment Operating Income:
Power Generation Systems
and Equipment $ 20.8 32% $ 49.9 53% $ 56.5 46%
Marine Construction Services(1) 44.6 68% 44.4 47% 67.6 54%
- ----------------------------------------------------------------------------------------------------
Total Segment Operating Income 65.4 100% 94.3 100% 124.1 100%
- ----------------------------------------------------------------------------------------------------
Equity in Income of Investees:
Power Generation Systems
and Equipment 8.4 25% 12.1 10% 8.7 9%
Marine Construction Services 25.5 75% 107.8 90% 85.4 91%
- ----------------------------------------------------------------------------------------------------
Total Equity in Income
of Investees 33.9 100% 119.9 100% 94.1 100%
- ----------------------------------------------------------------------------------------------------
General Corporate Expenses (58.6) - (54.4) - (52.8) -
- ----------------------------------------------------------------------------------------------------
Total Operating Income $ 40.7 - $ 159.8 - $ 165.4 -
====================================================================================================
(1) See Note 2 to the consolidated financial statements regarding the
acquisition of Offshore Pipelines, Inc. during fiscal year 1995 and
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 boilers, complete fossil fuel steam generating systems
and related equipment and facilities, and environmental control systems for
electric power generation and for industrial processes. 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 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
air- cooled and condensing heat exchangers for the process and power
industries.
This segment is actively involved in the market for providing power through
cogeneration, refuse-fueled power plants 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 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 10%, 9% and 8% of McDermott International's total revenues
for fiscal years 1995, 1994 and 1993, 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. U. S. Government budget reductions, including the
cancellation of the advanced solid rocket motor and super conducting super
collider projects in prior years, 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, primarily 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 contracts during fiscal years 1993 and 1995 valued at
approximately $430,000,000 to supply replacement recirculating steam generators
to four domestic utilities through fiscal year 1999. 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
Indianapolis, Indiana; West Point, Mississippi; Barberton and Lancaster, Ohio;
Beasley and Paris, Texas; Lynchburg, Virginia; and Cambridge, Ontario, Canada.
Less than majority- owned (equity investees) foreign plants are located in
China, Indonesia, India and Egypt. All these plants are well maintained, have
suitable equipment and are of adequate size.
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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)
1995 $ 521,657 17% $ 36,354 56%
1994 372,727 12% 30,362 32%
1993 246,181 8% 11,107 9%
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, India and
Egypt.
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.
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; and
other industries and institutions. The electric power generation industry
accounted for approximately 30%, 26% and 18% of McDermott International's total
revenues for fiscal years 1995, 1994 and 1993, respectively. U. S. Government
business with
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this segment, excluding government-owned utilities, accounted for approximately
12%, 13% and 12% 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 systems, equipment and services, 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. In May 1995, B&W
was awarded new orders for aircraft carrier components and prototypical steam
generation equipment for the newest submarine design. 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, 1995 and 1994 for the Power Generation Systems and
Equipment segment was $2,058,215,000 and $2,398,285,000, or approximately 58%
and 69%, respectively, of McDermott International's backlog. Of the March 31,
1995 backlog, it is expected that approximately $1,012,915,000 will be
recognized in revenues in fiscal year 1996, $528,242,000 in fiscal year 1997
and $517,058,000 thereafter, of which approximately 71% will be recognized in
fiscal years 1998 through 2000. At March 31, 1995 this segment's backlog with
the U. S. Government was $631,578,000 (of which $21,607,000 had not yet been
funded), or approximately 18% of McDermott International's total backlog.
During fiscal year 1995, B&W was awarded a $155,000,000 contract from China
National Machinery Import & Export Corporation to supply two 600-megawatt
coal-fired boilers and auxiliary equipment for the Yangzhou Power Plant Project
in Yangzhou City, The People's Republic of China. In addition, in fiscal year
1995, B&W was also awarded a $150,000,000 contract from Israel Electric Company
to supply two 550-megawatt coal-fired boilers for the Rutenburg Station at
Ashkelon, Israel. Also during fiscal year 1995, B&W was awarded a $150,000,000
contract from Commonwealth Edison Company of Chicago, Illinois to design,
manufacture and supply eight nuclear steam generators. In addition, during
fiscal year 1995, B&W obtained a letter of award amounting to $100,000,000 for
the engineering, procurement and construction of a power station in Pakistan's
Punjab province. The plant will consist of one 480- megawatt oil-fired steam
generator and a steam turbine generator.
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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
Electric utilities in Asia and the Middle East are active purchasers of large,
new baseload generating units, due to the rapid growth of their economies and
to the small existing stock of electrical generating capacity in most
developing countries. These newly-emerging economies need power and steam
generating systems, equipment and services to build their industrial base.
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 for the electric power industry in
the United States has intensified, as the Federal Energy Regulatory Commission
has begun to implement the provisions 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 ordering large new baseload power plants and to defer repairs and
refurbishments on existing plants. Most electric utilities have already
purchased equipment to comply with Phase I of the Clean Air Act, and many will
defer purchases of new equipment to comply with Phase II deadlines until after
the turn of the century.
Steam generation equipment is purchased most frequently by firms in the
energy-intensive industries, including pulp and paper, oil refining, chemicals
and primary metals. 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 for
additional steam generation capacity. These factors and the current economic
environment have affected demand for industrial- related product lines and
these markets are expected to remain very competitive.
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
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reactor components comprised a substantial portion of this segment's backlog
with the U. S. Government at March 31, 1995 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, in prior years, 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, B&W manages and operates
a government-owned facility at the Department of Energy's Idaho National
Engineering Laboratory and beginning July 1, 1995, will participate in the
management and operation of the Rocky Flats Environmental Technology Site near
Denver, Colorado with six other companies.
C. MARINE CONSTRUCTION SERVICES
GENERAL
On January 31, 1995, McDermott International contributed substantially all of
its marine construction services business to JRM, a new company incorporated
under the laws of the Republic of Panama in 1994. Also, on January 31, 1995,
JRM acquired Offshore Pipelines, Inc. (the "Merger"), pursuant to an Agreement
and Plan of Merger dated as of June 2, 1994, as amended (the "Merger
Agreement"). Prior to the Merger with Offshore Pipelines, Inc. ("OPI"), JRM
was a wholly owned subsidiary of McDermott International; as a result of the
Merger, JRM is a majority owned subsidiary of McDermott International. The
business activities of this segment are conducted primarily through JRM.
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; the provision
of subsea and trenching services; the removal of offshore fixed platforms
(principally in the Gulf of Mexico); 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, JRM participates in joint ventures with other
marine contractors. JRM 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. During March 1995, JRM contributed the DB100 semi-submersible
derrick barge and sold the DB51 to the joint venture.
JRM'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. JRM 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 JRM. JRM 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.
On March 31, 1995, JRM and ETPM S.A. signed a preliminary agreement to
restructure this joint venture. The preliminary agreement calls for the
expansion of the joint venture into the Far East, the Mediterranean Sea, and
all of Africa and for ETPM S.A. to take a minority interest in a new JRM subsea
company. Final agreements are expected in the summer of 1995, subject to any
necessary government approvals or authorizations.
JRM also participates in a joint venture with Hyundai Heavy Industries Co. Ltd.
The joint venture was formed for the purpose of jointly pursuing marine
construction projects in India, the Middle East, Southeast Asia and the Far
East. The joint venture, formed in September 1992, has a limited life of ten
years. JRM charters one derrick barge to the joint venture for the life of the
joint venture.
JRM has also established joint ventures in which it has a 49% interest in
Malaysia with Renong Berhad, a Malaysian industrial conglomerate and in Mexico
with CCC Fabricaciones y Construcciones, S.A. de C.V., a marine construction
company. It also has a 70% interest a joint venture established in Angola with
Sociedade Nacional de Combustiveis de Angola, the Angolan state owned oil
company.
McDermott International also owns a 49% interest in another Mexican joint
venture, Construcciones Maritimas Mexicanas, 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. The property in Scotland
is operated by Brown and Root McDermott Fabricators Limited, an equally owned
joint venture company formed by JRM and Halliburton Company's Brown and Root
Energy
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Services business unit in February 1995. Halliburton's yard at Nigg in
Scotland is also operated by this joint venture. This segment 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
Onne, Nigeria Year 2014
Warri, Nigeria Year 2065
McDermott International expects to renew the lease at Ras-al-Khaimah, U.A.E.,
which is negotiated on an annual basis.
JRM 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. These barges,
which range in length from 180 feet to 677 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.
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The following table describes the major marine construction vessels owned and
utilized in the conduct of McDermott International's marine construction
business and their location as of March 31, 1995.
Maximum Maximum
Derrick Pipe
Vessel Vessel Type Lift Diameter
------ ----------- ----- --------
(tons) (inches)
United States
DB 16 Derrick 860 -
DB 23 Derrick 750 -
DB 28 Derrick/Pipelay 860 40
DB 050 Derrick 4,000 -
DB II Derrick 600 -
BB 356 Pipe Bury - -
JB 3 Pipe Bury - -
OPI 263 Pipe Bury - -
LB 280 Pipelay - 16
LB Pipeliner 5 Pipelay - 48
Oceanic 93 Shearleg 5,000 -
OPI 2500 Shearleg 1,600 -
Ocean Builder(1) Derrick 2,000 -
Europe and West Africa
DB 21 Derrick/Pipelay 1,000 40
DLB 1 Derrick/Pipelay 250 24
LB Pipeliner 6 Pipelay - 16
MV Norlift Pipelay - 10
MV Northern Explorer Pipe Bury - -
LB 200 Semi Submersible Pipelay - 60
DB 101 Semi Submersible Crane 3,500 -
DB 102 Semi Submersible Crane 13,200 -
Middle East
DB 14 Derrick/Pipelay 700 40
DB 27 Derrick/Pipelay 2,400 60
BB 316 Pipe Bury - -
JB 4 Pipe Bury - -
Far East
DB 15 Derrick/Pipelay 860 40
DB 17 Derrick/Pipelay 860 60
DB 26 Derrick/Pipelay 900 60
DLB KP1 Derrick/Pipelay 860 60
LB 29 Pipelay - 60
LB 30 Pipelay - 60
OHI 5000(2) Derrick 5,510 -
- ---------------
(1) In February 1994, this vessel was sold by OPI in a sale-leaseback
transaction. JRM is chartering and operating the vessel and has an option
to purchase the vessel at the end of the five-year charter term.
(2) Damaged in typhoon, insurance claim submitted.
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The following table describes the major marine construction vessels owned by
McDermott International's joint venture companies and utilized in the conduct
of their marine construction business and their location as of March 31, 1995.
Maximum Maximum
Derrick Pipe
Vessel Vessel Type Lift Diameter
------ ----------- ---- --------
(tons) (inches)
Europe and West Africa
DB 051 Derrick 3,000 -
DB 100 Semi Submersible Derrick 2,000 -
Middle and Far East
Teknik Pada Derrick/Pipelay 1,100 60
Teknik Perdana Derrick/Pipelay 925 60
Other Foreign
Huasteco Derrick/Pipelay 2,000 48
Mixteco Derrick/Pipelay 800 48
Olmeca II Pipelay - 48
McDermott International 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.
During June 1993, the Delaware Company acquired a controlling interest in Delta
Catalytic Corporation ("DCC") in the first step of a two step transaction. The
Delaware Company and DCC of Calgary, Alberta, have reached an agreement which
accelerates from fiscal year 1997 to June 1995, the Delaware Company's purchase
of the remaining portion of DCC. DCC provides engineering, procurement,
construction and maintenance services to industries worldwide; including oil,
gas, marine construction and hydrocarbon processing.
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. In fiscal year 1995, a Production Sharing
Contract ("PSC") was entered into by these parties and a new company, Sakhalin
Energy Investment Company, Ltd., was formed to represent the consortium's
interest in the Piltun Astohskoye and Lunskoye fields development. The
consortium is awaiting approval by the Russian Government of this PSC.
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
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agreed to a declaration promulgated by the State Oil Company of the Azerbaijan
Republic ("SOCAR") providing for the joint development of the Guneshli, Chirag
and Azeri fields by all the companies. In September 1994, a Production
Sharing Agreement ("PSA") was signed by the oil companies, SOCAR, and the
Azerbaijan President and ratified by the Azeri government in November 1994, and
Azerbaijan International Operating Company was formed by the oil companies to
serve as the operator for the development. Delta Nimir Khazar Limited and
LUKoil Joint Stock Company have also become participants in the PSA.
In May 1994, McDermott International and SOCAR 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. Both joint ventures are currently negotiating work in the Caspian
Sea region. The joint ventures are currently negotiating with the Azerbaijan
International Operating Company for work in the Chirag fields.
During fiscal year 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. These two joint ventures have not
yet begun operations.
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, follow:
REVENUES SEGMENT OPERATING INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in thousands)
1995 $ 1,021,986 34% $ 67,812 104%
1994 1,076,610 35% 51,026 54%
1993 1,269,290 40% 59,756 48%
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, McDermott-ETPM West, Offshore
Hyundai International, Ltd., CCC Fabricaciones
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y Construcciones, S.A. de C.V. and its Malaysian joint venture. Equity income
recognized from the Heeremac and McDermott-ETPM West joint ventures contributed
substantially to this segment's results during fiscal years 1994 and 1993. In
fiscal year 1995, the contribution from these joint ventures was significantly
less compared to the prior two fiscal years due to lower volume and margins.
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, McDermott-ETPM and its various other joint ventures
in each of the separate marine construction phases in various parts of the
world.
BACKLOG
As of March 31, 1995 and 1994, the Marine Construction Services' backlog
amounted to $1,510,117,000 and $1,054,142,000, or approximately 42% and 31%,
respectively, of McDermott International's total backlog. Backlog at March 31,
1995 was up from the level of backlog at March 1994, due principally to a
contract award from Britoil for the Atlantic Frontier Programme Development of
Foinaven Phase One facility. Of the March 31, 1995 backlog, it is expected
that approximately $980,384,000 will be recognized in revenues in fiscal year
1996, $400,314,000 in fiscal year 1997 and $129,419,000 thereafter.
Not included in Marine Construction Services' backlog at March 31, 1995 and
1994 was backlog relating to contracts to be performed by unconsolidated
foreign joint ventures of approximately $1,014,000,000 and $840,000,000,
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.
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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.
Oil company exploration and production budgets in calendar year 1995 are
moderately higher than 1994 expenditures. Both domestic and international
areas are expected to increase, although domestic will rise at a slower rate.
World oil prices in calendar year 1994 were below those in 1993. This has had a
negative impact on near term marine construction activities. World oil prices
in calendar year 1995 are expected to be somewhat higher than those in 1994.
The composite spot price for natural gas in the United States was substantially
lower in calendar year 1994 than in 1993 and had continued to decline through
May 1995.
This segment's markets are expected to be at a low level in the U. S. during
fiscal year 1996 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,
1995, 1994 and 1993, approximately $64,145,000, $69,148,000 and $61,541,000,
respectively, was spent by McDermott International on research and development
activities, of which approximately $44,240,000, $48,112,000 and $42,082,000,
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. McDermott International's new
multi-million dollar clean environment development facility in Alliance, Ohio
was completed during fiscal year 1995. The facility was constructed in
response to present and future emission pollution standards in the U. S. and
worldwide. Approximately 311 employees were engaged full time in research and
development activities at March 31, 1995.
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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.
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
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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.
For financial reporting purposes, a provision has been recognized to the extent
that recovery of these amounts from McDermott International's insurers has not
been determined to be probable. Estimated liabilities for pending and future
non- employee products liability asbestos claims are derived from McDermott
International's claims history and constitute management's best estimate of
such future costs. Estimated insurance recoveries are based upon analysis of
insurers providing coverage of the estimated liabilities. Inherent in the
estimate of such liabilities and recoveries are expected trends in claim
severity and frequency and other factors, including recoverability from
insurers, which may vary significantly as claims are filed and settled.
Accordingly, the ultimate loss may differ materially from 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, 1995, McDermott International employed, under its direct
supervision approximately 25,200 persons compared with 25,900 at March 31,
1994. Approximately 4,600 employees were members of labor unions at March 31,
1995 as compared with approximately 5,000 at March 31, 1994. The majority of
B&W's manufacturing facilities operate under union contracts which customarily
are renewed every two to three years. During the next twelve months, six
contracts covering approximately 2,100 of B&W's hourly workers will expire.
B&W expects to renew these contracts successfully, without incident. 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 $1,318,000 in fiscal year
1995, and it expects to spend another $4,830,000 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
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taxes of approximately $10,002,000 in fiscal year 1995 (excluding a provision
for the decontamination and decommissioning relating to the closing of certain
of its nuclear manufacturing facilities described below).
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 contribution 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
effect on McDermott International's consolidated financial position.
Remediation projects have been or may be undertaken at certain of McDermott
International's current and former plant sites, and, during fiscal year 1995,
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.
During the March 1995 quarter, a decision was made to close certain of its
nuclear manufacturing facilities, and a provision of $41,724,000 for the
decontamination, decommissioning and the closing of these facilities was
recognized immediately. Previously, decontamination and decommissioning costs
were being accrued over the facilities' remaining expected life.
Decontamination will proceed as permitted by the existing NRC license, while
funding support will be sought and a decommissioning plan will be submitted for
review and approval as required by the NRC. B&W expects to have reached
agreement with the NRC in fiscal 1997 on the plan that will provide for the
completion of facilities dismantlement and soil restoration by the end of
fiscal year 2001. B&W expects to request approval from the NRC to release the
site for unrestricted use at that time.
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 negotiating with PADER and
expects to reach a settlement without having to resort to litigation. Any
sanctions ultimately assessed are not expected to have a material 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.
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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 provided financial assurance of approximately $11,000,000
during fiscal year 1995 by issuing letters of credit 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 effect upon the consolidated financial position of McDermott
International.
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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.
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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P A R T I I
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 fiscal years ended March
31, 1995 and 1994 follow:
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
FISCAL YEAR 1995
----------------
SALES PRICE CASH
----------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ------------- ---- --- --------
June 30, 1994 25 - 7/8 19 - 3/8 $0.25
September 30, 1994 27 - 1/4 24 - 1/4 $0.25
December 31, 1994 26 - 1/8 23 - 1/2 $0.25
March 31, 1995 29 - 1/8 23 - 3/4 $0.25
As of March 31, 1995, the approximate number of record holders of Common Stock
was 6,673.
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Item 6. SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDED MARCH 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands except for per share amounts)
Revenues $3,043,680 $3,059,912 $3,172,555 $3,524,482 $3,069,849
Income (Loss) from
Continuing Operations
before Extraordinary
Items and Cumulative
Effect of Accounting
Changes $ 10,876 $ 89,956 $ 67,323 $ 80,537 $ (87,697)
Net Income (Loss) $ 9,111 $ (10,794) $ (188,732) $ 77,169 $ (69,525)
Primary and Fully
Diluted Earnings
(Loss) Per
Common Share:
Income (Loss) from
Continuing Operations
before Extraordinary
Items and Cumulative
Effect of Accounting
Changes $ 0.05 $ 1.57 $ 1.29 $ 1.75 $ (2.00)
Net Income (Loss) $ 0.02 $ (0.32) $ (3.63) $ 1.67 $ (1.58)
Total Assets $4,751,670 $4,223,569 $3,092,963 $3,126,195 $3,341,138
Long-Term Debt $ 579,101 $ 667,066 $ 583,211 $ 765,053 $ 639,645
Subsidiary's
Redeemable
Preferred Stocks 179,251 196,672 204,482 204,482 204,482
------- ------- ------- ------- -------
Total $ 758,352 $ 863,738 $ 787,693 $ 969,535 $ 844,127
Cash Dividends Per
Common Share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
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See Note 1 to the consolidated financial statements regarding the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 112 in fiscal year
1995, Emerging Issues Task Force Issue No. 93-5 in fiscal year 1994 and SFAS
No. 106 and SFAS No. 109 in fiscal year 1993. See Note 2 regarding the
acquisition of OPI in fiscal year 1995 and the acquisitions of Northern Ocean
Services Limited and DCC in fiscal year 1994. See Note 10 regarding the
uncertainty as to the ultimate loss relating to products liability asbestos
claims.
In fiscal year 1995, Income before Cumulative Effect of Accounting Change
included after tax charges of $30,218,000 for provisions for the
decontamination, decommissioning and closing of certain nuclear manufacturing
facilities and the closing of a manufacturing facility, and $8,832,000 for the
reduction of estimated products liability asbestos claims recoveries from
insurers. Also, in fiscal year 1995, after tax income included $16,631,000 for
a reduction in accrued interest expense due to the settlement of outstanding
tax issues. In fiscal year 1993 and 1992, Income from Continuing Operations
before Extraordinary Items and Cumulative Effect of Accounting Changes included
after tax gains from the sale of McDermott International's interest in its two
commercial nuclear joint ventures of $15,667,000 and $35,436,000, respectively.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
A significant portion of McDermott International's revenues and operating
results are derived from its foreign operations. As a result, McDermott
International's operations and financial results could be significantly
affected by international factors, such as changes in foreign currency exchange
rates. McDermott International's policy is to minimize its exposure to changes
in foreign currency exchange rates by attempting to match foreign currency
contract receipts with like foreign currency disbursements during contract
negotiations. To the extent that it is unable to match the foreign currency
receipts and disbursements related to its contracts, it enters into forward
exchange contracts to hedge foreign currency transactions on a continuing basis
for periods consistent with its committed exposures. This practice minimizes
the impact of foreign exchange rate movements on McDermott International's
operating results.
FISCAL YEAR 1995 VS FISCAL YEAR 1994
Power Generation Systems and Equipment's revenues increased $49,029,000 to
$1,663,235,000. This was primarily due to higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems, nuclear fuel
assemblies and reactor components for the U. S. Government, replacement nuclear
steam generators, repair and alteration of existing fossil fuel steam systems,
and operations and maintenance contracts for small power plants. These
increases were partially offset by lower revenues from defense and
space-related products (other than nuclear fuel assemblies and reactor
components), extended scope of supply and fabrication of industrial boilers,
and replacement parts.
Power Generation Systems and Equipment's segment operating income decreased
$29,131,000 to $20,810,000 due to provisions for the decontamination,
decommissioning and closing of certain nuclear manufacturing facilities and the
closing of a manufacturing facility ($46,489,000) and a favorable warranty
reserve recorded in the prior year ($11,000,000). Operating income increased
due to lower operating expenses (including favorable workers compensation
adjustments) and administrative expenses (including cost reduction
initiatives); higher volume and margins on operations and maintenance
contracts; and improved margins on plant enhancement projects. These increases
were partially offset by lower volume and margins on extended scope of supply
and fabrication of industrial boilers, lower volume on replacement parts, and
lower margins on nuclear fuel assemblies and reactor components for the U. S.
Government.
Power Generation Systems and Equipment's equity in income of investees
decreased $3,668,000 to $8,364,000 primarily due to a provision for loss on
discontinuing a domestic joint venture and lower operating results in a foreign
joint venture.
Backlog for this segment at March 31, 1995 was $2,058,215,000 compared to
$2,398,285,000 at March 31, 1994. At March 31, 1995 this segment's backlog
with the U.S. Government was $631,578,000 (of which $21,607,000 had not been
funded). U.S
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Government budget reductions have negatively affected this segment's government
operations, and backlog at March 31, 1995 and 1994 reflects the impact of
Congressional budget reductions on the advanced solid rocket motor and super
conducting super collider projects in prior years. 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.
As discussed (see Item 1F - Insurance), provisions for these estimated future
costs for non-employee products liability asbestos claims have been recognized
for financial reporting purposes during fiscal years 1995 and 1994 (see Note 1
to the consolidated financial statements and the discussion of Other-net
expense and Liquidity below). Inherent in the estimate of these liabilities
and recoveries are expected trends in claim severity and frequency and other
factors, including recoverability from insurers, which may vary significantly
as claims are filed and settled.
The current competitive economic environment for the electric power industry in
the United States has intensified, as the Federal Energy Regulatory Commission
has begun to implement the provisions 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 ordering large new baseload power plants and to defer repairs and
refurbishments on existing plants. Most electric utilities have already
purchased equipment to comply with Phase I of the Clean Air Act, and many will
defer purchases of new equipment to comply with Phase II deadlines until after
the turn of the century. 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 $61,578,000 to $1,390,919,000,
primarily due to lower volume in worldwide marine and domestic fabrication
operations. These decreases were partially offset by the inclusion of revenues
as a result of the acquisitions of Offshore Pipelines, Inc. ("OPI")
($44,439,000) on January 31, 1995 and Northern Ocean Services ("NOS")
($59,644,000 for the full fiscal year) in February 1994 (See Note 2 to the
Consolidated Financial Statements), and higher volume in foreign fabrication
and procured materials.
Marine Construction Services' segment operating income increased slightly to
$44,619,000 (including $4,993,000 from OPI) from $44,394,000 primarily due to
improved margins in foreign marine operations, inclusion of the operating
results of NOS for the full fiscal year; and higher volume of procured
materials, domestic engineering operations, and foreign fabrication. These
increases were mostly offset by higher operating expenses, lower operating
results from DCC's operations, lower margins from shipyard operations, and
start-up costs associated with new shipbuilding activities.
Marine Construction Services' equity in income of investees decreased
$82,340,000 to $25,488,000 primarily due to lower operating volume and margins
of the McDermott ETPM-West, Inc. and HeereMac joint ventures.
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Backlog for this segment at March 31, 1995 and 1994 was $1,510,117,000
(including $46,396,000 from the acquisition of OPI) and $1,054,142,000,
respectively. Not included in backlog at March 31, 1995 and 1994 was backlog
relating to contracts to be performed by unconsolidated joint ventures of
approximately $1,014,000,000 and $840,000,000, respectively.
The activity of McDermott International depends mainly on the capital
expenditures of oil and gas companies which in turn are influenced by world oil
and gas prices. World oil and gas prices are expected to remain weak in the
near term resulting in a negative impact on new business awards. In addition,
the continued overcapacity of marine equipment worldwide has resulted in a
competitive environment and put pressure on operating profit margins worldwide.
In fiscal year 1995, McDermott International's unconsolidated affiliates
performed at significantly lower levels as several large contracts were
completed in fiscal year 1994 and are expected to remain at low levels in
fiscal 1996 and 1997.
Interest income increased $13,989,000 to $52,740,000 primarily due to
recognition of interest on a receivable from an equity investee, settlement of
claims for interest relating to foreign tax refunds and contract claims, and
higher interest rates on investments in government obligations and other
investments.
Interest expense decreased $6,860,000 to $57,115,000, primarily due to a
reduction of accrued interest on proposed tax deficiencies, partially offset by
changes in debt obligations and interest rates prevailing thereon.
Minority interest expense decreased $3,084,000 to $12,167,000 primarily due to
minority shareholder participation in increased losses of DCC and JRM's losses
for the two months ended March 31, 1995. These decreases in expense were
partially offset by an increase due to minority shareholder participation in
the improved results of the McDermott-ETPM East joint venture.
Other-net expense increased $28,926,000 to $33,291,000 primarily due to a loss
related to the reduction of estimated products liability asbestos claim
recoveries from insurers, a provision for the settlement of a lawsuit and
losses on the sales of investment securities in the current period.
The provision for income taxes decreased $45,041,000 from a provision of
$24,998,000 to a benefit of $20,043,000, while income before income taxes and
cumulative effect of accounting changes decreased $124,121,000. The reduction
in income taxes is primarily due to a decrease in income from operations along
with a reduction in a provision for taxes due to a settlement of outstanding
issues and higher non-taxable earnings. In addition, McDermott International
operates in many different tax jurisdictions. Within these jurisdictions, tax
provisions vary because of nominal rates, allowability of deductions, credits
and other benefits, and even tax basis (for example, revenues versus income).
These variances, along with variances in the mix of income within
jurisdictions, are responsible for shifts in the effective tax rate. As a
result of these factors, the benefit from income taxes was 219% of pretax loss
in fiscal year 1995 compared to a provision for income taxes of 22% of pretax
income in fiscal year 1994.
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30
Net lncome increased $19,905,000 from a loss of $10,794,000 to income of
$9,111,000 reflecting the cumulative effect of the adoption of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits" of $1,765,000 in the
current year and the cumulative effect of accounting change for non-employee
products liability asbestos claims of $100,750,000 in the prior year, in
addition to other items described above.
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.
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.
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 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.
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31
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.
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.
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 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 for taxes of $10,000,000 due to a settlement of
outstanding issues and higher non-taxable earnings. In addition, McDermott
International operates in many different tax jurisdictions. Within these
jurisdictions, tax provisions vary because of nominal rates, allowability of
deductions, credits and other benefits, and even tax basis (for example,
revenues versus income). These variances, along with variances in the mix of
income within jurisdictions, are responsible for shifts in the effective tax
rate. During this period, these factors reduced the effective tax rate to 22%
from 37%.
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.
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.
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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 an original price, or through price escalation
clauses in its contracts.
Liquidity and Capital Resources
During fiscal year 1995, McDermott International's cash and cash equivalents
decreased $47,900,000 to $85,909,000 and total debt increased $257,077,000
(including $120,200,000 assumed in the acquisition of OPI) to $986,687,000.
During this period, McDermott International used cash of $97,890,000 for
additions to property, plant and equipment; $61,827,000 for dividends on
International's common and preferred stocks; $35,553,000 for repayment of
long-term debt; $12,559,000 in operating activities; and $17,185,000 for the
repurchase of a subsidiary's preferred stock to satisfy current and future
sinking fund requirements.
Decreases in accounts payable reflect settlement of charter obligations to the
HeereMac joint venture and amounts owned to ETPM S.A. Higher payables due to
increased volume at B&W's Canadian operations and activity on the Britoil
contract for the Atlantic Frontier Programme Development of Foinaven Phase One
Facility ("Foinaven") were offset by lower volume elsewhere. Increases in Net
contracts in progress and advance billings were primarily due to the timing of
billings on the Canadian and Foinaven contracts. Lower income taxes reflects
payments made in Canada and changes in the domestic tax provision due to higher
losses in the U.S., and accrued liabilities includes a reduction of accrued
interest expense of $26,300,000 resulting from the settlement of outstanding
tax issues with the IRS.
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. The number of claims had declined moderately since
fiscal year 1990, but have increased during the second half of fiscal year
1995. Management believes, based on information currently available, that the
recent increase represents an acceleration in the timing of the receipt of
these claims, but does not represent an increase in its total estimated
liability. The average amount of these claims (historical average of
approximately $4,800 per claim over the last three years) has continued to
rise. Claims paid in fiscal year 1995 were $126,151,000, of which $111,163,000
has been recovered or is due from insurers. At March 31, 1995, Accounts
receivable-other included receivables of $34,925,000 that are due from insurers
for reimbursement of settled claims. During fiscal year 1995, McDermott
International received notice that provisional liquidators have been appointed
to a London-based products liability asbestos insurer and certain of its
subsidiaries and as a result, a loss of $14,478,000 related to the reduction of
estimated products liability asbestos claim recoveries was recognized.
Estimated liabilities for pending and future non-employee products liability
asbestos claims are derived from McDermott International's claims history and
constitute management's best estimate of such future costs. Estimated
insurance recoveries are based upon analysis of insurers providing coverage of
the estimated liabilities. Inherent in the estimate of such liabilities and
recoveries are expected trends in claim severity and frequency and other
factors, including recoverability from insurers, which may vary significantly
as claims are filed and
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33
settled. Accordingly, the ultimate loss may differ materially from amounts
provided in the consolidated financial statements. Settlement of the
liability is expected to occur over approximately the next 25 years. The
collection delays, and the amount of claims paid for which insurance recovery
is not probable have not had a material adverse effect on McDermott
International's liquidity, and management believes, based on information
currently available, that they will not have a material adverse effect on
liquidity in the future.
McDermott International's expenditures for property, plant and equipment
increased $21,569,000 to $97,890,000 in fiscal year 1995. While the majority
of these expenditures were incurred to maintain and replace existing facilities
and equipment, $15,010,000 was expended for the purchase of a barge which was
formerly leased by a subsidiary of International. McDermott International has
committed to make capital expenditures of approximately $40,301,000 (including
$9,457,000 for a new pipelay system on marine equipment and $14,286,000 for the
conversion of a barge to a floating production unit) during fiscal 1996. The
barge conversion is financed by a $16,700,000 note, payable in 30 monthly
installments beginning with the completion of the conversion. Interest is at
Libor plus 2%. There were no borrowings against this facility at March 31,
1995.
At March 31, 1995 and 1994, The Babcock & Wilcox Company had sold, with limited
recourse, an undivided interest in a designated pool of qualified accounts
receivable of approximately $175,000,000 and $170,000,000, respectively, under
an agreement with a U. S. bank. The maximum sales limit available under the
agreement, which expires on December 31, 1997 is $225,000,000. (See Note 7 to
the consolidated financial statements).
At March 31, 1995 and 1994, International and its subsidiaries, had available
to them various uncommitted short-term lines of credit from banks totaling
$373,867,000 and $246,412,000, respectively. Borrowings against these lines of
credit at March 31, 1995 and 1994 were $63,025,000 and $37,512,000,
respectively. In addition, the Babcock & Wilcox Company had available to it a
$128,000,000 unsecured and committed revolving line of credit facility. Loans
outstanding under the revolving credit facility may not exceed the banks'
commitments thereunder. In addition, it is a condition to borrowing under the
revolving credit facility that the borrower's consolidated net tangible assets
exceed a certain level. There were no borrowings against this facility at
March 31, 1995 and 1994. DCC had available from a certain Canadian bank an
unsecured and committed revolving credit facility of $14,184,000 which expires
on May 31, 1997. Borrowings outstanding against this facility at March 31, 1995
were $7,420,000. There were no borrowings outstanding against this facility at
March 31, 1994. In addition, JRM had available two secured and committed
revolving credit facilities totaling $53,500,000 of which $24,500,000 was
outstanding at March 31, 1995. Loans outstanding under these facilities were
repaid and the facility terminated on May 10, 1995.
In consideration for the contribution of substantially all of McDermott
International's marine construction services business, JRM issued 3,200,000
shares of Series A $2.25 Cumulative Convertible Preferred Stock, $231,000,000
9% Senior Subordinated Notes due 2001 and a $39,750,000 Floating Rate Note at
7.69% at the Merger Date (7.4375% at March 31, 1995) to International. The
Floating Rate Note is due January 31, 1997 or earlier upon demand. JRM expects
to pay this note during fiscal year 1996. In addition, a
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subsidiary of JRM assumed all of OPI's $70,000,000 12-7/8% Guaranteed Senior
Notes due 2002. The Notes due 2002 are redeemable at the option of a
subsidiary of JRM after June 1997. On June 7, 1995, JRM entered into an
agreement with a group of banks to provide a $150,000,000 three year unsecured
and committed line of credit to support the operating requirements of its
domestic and international operations. JRM is restricted, as a result of
covenants in these agreements, in its ability to transfer funds to
International and its subsidiaries through cash dividends or through unsecured
loans or investments. As approximately $40,000,000 of its net assets were not
subject to these restrictions, they are not expected to impact JRM's ability to
make preferred dividend payments.
The Delaware Company is restricted, as a result of covenants in credit
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
Substantially all of the net assets of the Delaware Company is subject to such
restrictions. It is not expected that these restrictions will have any
significant effect on International's liquidity.
McDermott International maintains an investment portfolio of government
obligations and other investments which is classified as available for sale
under SFAS No. 115 (See Note 12 to the consolidated financial statements). The
fair value of short-term investments and the long-term portfolio at March 31,
1995 was $715,093,000 (amortized cost $723,946,000). The net unrealized loss
on the current and long-term investment portfolio, net of income tax effect,
was $8,050,000 at March 31, 1995. At March 31, 1995, approximately
$146,142,000 fair value (amortized cost of $148,422,000) of these obligations
were pledged to secure a letter of credit in connection with a long-term loan
and certain reinsurance agreements. In addition, McDermott International had
obligations of $135,691,000 under short-term repurchase agreements which were
secured by government obligations with a fair value of $134,673,000 at March
31, 1995.
Working capital decreased $106,442,000 to a deficit of $40,790,000 at March 31,
1995 from $65,652,000 at March 31, 1994. During 1996, McDermott International
expects to obtain funds to meet capital expenditure, working capital and debt
maturity requirements from operating activities, its short-term investment
portfolio, and additional borrowings. On June 1, 1995, McDermott International
repaid its 10.25% Notes of $150,000,000 from its short-term investment
portfolio and additional borrowings from revolving lines of credit. 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 are $0.25 per share on its Common Stock and
$0.71875 per share on its Series C Cumulative Convertible Preferred Stock. The
Delaware Company's quarterly dividends are $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. International's and the Delaware
Company's quarterly dividends were at the same rates in 1995 and 1994. JRM's
quarterly dividends on its Series A and Series B Preferred Stock are $0.5625
per share. At March 31, 1995, JRM paid dividends for a partial quarterly
period of $900,000 on its Series A Preferred Stock and on April 17, 1995 paid
$217,000 on its Series B Preferred Stock.
At March 31, 1995 the ratio of long-term debt to total stockholders' equity was
0.81 as compared with 1.23 at March 31, 1994.
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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 and foreign tax credit carryforwards
to the extent that realization of such benefits is more likely than not.
McDermott International has provided a valuation allowance ($34,943,000 at
March 31, 1995) for deferred tax assets which can not be realized through
carrybacks and future reversals of existing taxable temporary differences.
Management believes that remaining deferred tax assets ($675,282,000 at March
31, 1995) 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. A major uncertainty that affects the
ultimate realization of deferred tax assets is the possibility of declines in
value of appreciated assets involved in identified tax planning strategies.
This factor has been considered in determining the valuation allowance.
Management will continue to assess the adequacy of the valuation allowance on a
quarterly basis.
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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 24, 1995
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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, 1995 and 1994, and the related consolidated
statements of income (loss), stockholders' equity and cash flows for each of
the three years in the period ended March 31, 1995. 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, 1995 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1995, 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 amounts provided in the consolidated
financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for postemployment benefits and investment
securities in 1995, recoveries of products liability claims in 1994 and income
taxes and postretirement benefits other than pensions in 1993.
ERNST & YOUNG LLP
New Orleans, Louisiana
May 24, 1995
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McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1995 and 1994
ASSETS
1995 1994
---- ----
(In thousands)
Current Assets:
Cash and cash equivalents $ 85,909 $ 133,809
Short-term investments 132,691 990
Accounts receivable - trade 475,861 347,894
Accounts and note receivable - unconsolidated affiliates 75,709 29,883
Accounts receivable - other 104,155 133,913
Insurance recoverable - current 111,188 110,200
Contracts in progress 279,016 237,722
Inventories 64,044 66,469
Deferred income taxes 76,863 100,167
Other current assets 45,131 12,899
- -------------------------------------------------------------------------------------------------------------
Total Current Assets 1,450,567 1,173,946
- -------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land 37,528 32,683
Buildings 257,228 247,388
Machinery and equipment 1,886,268 1,833,169
Property under construction 55,994 45,175
- -------------------------------------------------------------------------------------------------------------
2,237,018 2,158,415
Less accumulated depreciation 1,337,341 1,378,046
- -------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 899,677 780,369
- -------------------------------------------------------------------------------------------------------------
Investments:
Government obligations 383,023 395,556
Other investments 199,379 319,575
- -------------------------------------------------------------------------------------------------------------
Total Investments 582,402 715,131
- -------------------------------------------------------------------------------------------------------------
Insurance Recoverable 750,219 876,846
- -------------------------------------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets of
Purchased Businesses Less Accumulated Amortization
of $96,405,000 at March 31, 1995
and $84,170,000 at March 31, 1994 381,491 158,726
- -------------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 277,814 246,854
- -------------------------------------------------------------------------------------------------------------
Other Assets 409,500 271,697
- -------------------------------------------------------------------------------------------------------------
TOTAL $4,751,670 $4,223,569
=============================================================================================================
See accompanying notes to consolidated financial statements.
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LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
---- ----
(In thousands)
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 407,586 $ 62,544
Accounts payable 286,219 245,819
Environmental and products liabilities - current 133,280 122,361
Accrued employee benefits 104,883 106,907
Accrued liabilities - other 326,688 296,628
Advance billings on contracts 180,018 181,572
U.S. and foreign income taxes 52,683 92,463
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,491,357 1,108,294
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt 579,101 667,066
- -------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 393,744 380,309
- -------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 913,939 1,013,251
- -------------------------------------------------------------------------------------------------------------
Other Liabilities 310,989 300,003
- -------------------------------------------------------------------------------------------------------------
Contingencies
- -------------------------------------------------------------------------------------------------------------
Minority Interest:
Subsidiary's redeemable preferred stocks 179,251 196,672
Other minority interest 172,710 15,716
- -------------------------------------------------------------------------------------------------------------
Total Minority Interest 351,961 212,388
- -------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, authorized 25,000,000 shares;
outstanding 2,875,000 Series C $2.875 cumulative
convertible, par value $1.00 per share,
(liquidation preference $143,750,000) 2,875 2,875
Common stock, par value $1.00 per share,
authorized 150,000,000 shares; outstanding
53,959,597 at March 31, 1995 and
53,444,467 at March 31, 1994 53,960 53,444
Capital in excess of par value 936,134 730,987
Deficit (249,061) (196,216)
Minimum pension liability (391) (931)
Net unrealized loss on investments (8,050) -
Currency translation adjustments (24,888) (47,901)
- -------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 710,579 542,258
- -------------------------------------------------------------------------------------------------------------
TOTAL $4,751,670 $4,223,569
=============================================================================================================
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McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
1995 1994 1993
---- ---- ----
(In thousands)
Revenues $3,043,680 $3,059,912 $3,172,555
- ------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 2,645,232 2,657,712 2,742,260
Depreciation and amortization 115,558 99,393 121,508
Selling, general and
administrative expenses 276,076 262,873 237,468
- ------------------------------------------------------------------------------------------------------------------
3,036,866 3,019,978 3,101,236
- ------------------------------------------------------------------------------------------------------------------
6,814 39,934 71,319
Equity in Income of Investees 33,852 119,860 94,058
- ------------------------------------------------------------------------------------------------------------------
Operating Income 40,666 159,794 165,377
- ------------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 52,740 38,751 40,391
Interest expense (57,115) (63,975) (90,340)
Minority interest (12,167) (15,251) (18,203)
Other-net (33,291) (4,365) 10,197
- ------------------------------------------------------------------------------------------------------------------
(49,833) (44,840) (57,955)
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) before Provision for (Benefit from)
Income Taxes, Extraordinary Items and
Cumulative Effect of Accounting Changes (9,167) 114,954 107,422
Provision for (Benefit from) Income Taxes (20,043) 24,998 40,099
- ------------------------------------------------------------------------------------------------------------------
Income before Extraordinary Items and
Cumulative Effect of Accounting Changes 10,876 89,956 67,323
Extraordinary Items - - (10,431)
Cumulative Effect of Accounting Changes (1,765) (100,750) (245,624)
- ------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 9,111 $ (10,794) $ (188,732)
==================================================================================================================
Net Income (Loss) Applicable to
Common Stock (after Preferred
Stock Dividends) $ 845 $ (16,878) $ (188,732)
==================================================================================================================
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CONTINUED
1995 1994 1993
---- ---- ----
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Primary and Fully Diluted:
Income before extraordinary
items and cumulative
effect of accounting
changes $ 0.05 $ 1.57 $ 1.29
Extraordinary items - - (0.20)
Accounting changes (0.03) (1.89) (4.72)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.02 $ (0.32) $ (3.63)
============================================================================================================
CASH DIVIDENDS:
Per common share $ 1.00 $ 1.00 $ 1.00
Per preferred share $ 2.88 $ 2.12 $ -
- -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
37
42
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
(In thousands, except for share amounts)
Preferred Stock
Series C Common Stock
----------------------------- ------------------------
Par Par
Shares Value Shares Value
------ ----- ------ -----
Balance March 31, 1992 - $ - 51,355,353 $ 51,355
- -------------------------------------------------------------------------------------------------------------------
Net loss - - - -
Minimum pension liability - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Exercise of stock options - - 367,309 368
Restricted stock purchases - net - - 142,245 142
Contributions to thrift plan - - 347,054 347
Deferred career executive
stock plan expense - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance March 31, 1993 - - 52,211,961 52,212
- -------------------------------------------------------------------------------------------------------------------
Net loss - - - -
Minimum pension liability - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
Preferred shares issued 2,875,000 2,875 - -
Exercise of stock options - - 783,285 783
Restricted stock purchases - net - - 148,830 149
Contributions to thrift plan - - 300,391 300
Deferred career executive
stock plan expense - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance March 31, 1994 2,875,000 2,875 53,444,467 53,444
- -------------------------------------------------------------------------------------------------------------------
Adoption of SFAS 115 - - - -
Net income - - - -
Minimum pension liability - - - -
Loss on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
Acquisition of OPI by JRM - - - -
Exercise of JRM's stock options - - - -
Exercise of stock options - - 147,217 148
Tax benefit on exercise of
stock options - - - -
Restricted stock purchases - net - - 55,030 55
Redemption of preferred shares - - - -
Contributions to thrift plan - - 312,883 313
Deferred career executive
stock plan expense - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance March 31, 1995 2,875,000 $ 2,875 53,959,597 $ 53,960
===================================================================================================================
See accompanying notes to the consolidated financial statements.
38
43
Capital Retained Minimum Unrealized Currency Total
in Excess Earnings Pension Loss on Translation Stockholders'
of Par Value (Deficit) Liability Investments Adjustment Equity
------------ --------- --------- ----------- ---------- ------
$551,790 $114,204 $(1,264) $ - $(12,204) $ 703,881
- -----------------------------------------------------------------------------------------------------------------------
- (188,732) - - - (188,732)
- - 1,190 - - 1,190
- - - - (21,581) (21,581)
- (51,736) - - - (51,736)
7,524 - - - - 7,892
- - - - - 142
7,642 - - - - 7,989
1,373 - - - - 1,373
- -----------------------------------------------------------------------------------------------------------------------
568,329 (126,264) (74) - (33,785) 460,418
- -----------------------------------------------------------------------------------------------------------------------
- (10,794) - - - (10,794)
- - (857) - - (857)
- - - - (14,116) (14,116)
- (53,074) - - - (53,074)
- (6,084) - - - (6,084)
137,191 - - - - 140,066
15,509 - - - - 16,292
- - - - - 149
7,684 - - - - 7,984
2,274 - - - - 2,274
- -----------------------------------------------------------------------------------------------------------------------
730,987 (196,216) (931) - (47,901) 542,258
- -----------------------------------------------------------------------------------------------------------------------
- - - (4,095) - (4,095)
- 9,111 - - - 9,111
- - 540 - - 540
- - - (3,955) - (3,955)
- - - - 15,597 15,597
- (53,690) - - - (53,690)
- (8,266) - - - (8,266)
189,793 - - - 7,416 197,209
(151) - - - - (151)
2,991 - - - - 3,139
2,642 - - - - 2,642
- - - - - 55
239 - - - - 239
7,400 - - - - 7,713
2,233 - - - - 2,233
- -----------------------------------------------------------------------------------------------------------------------
$936,134 $(249,061) $ (391) $(8,050) $(24,888) $ 710,579
=======================================================================================================================
39
44
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1995 1994 1993
---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 9,111 $(10,794) $(188,732)
- ----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 115,558 99,393 121,508
Equity in income of investees
less dividends 42,629 (54,646) (88,258)
Gain on sale and disposal of assets (1,874) (4,369) (34,459)
Provision for (benefit from) deferred taxes (3,896) 3,875 10,466
Extraordinary items - - 10,431
Cumulative effect of accounting changes 1,765 100,750 245,624
Other 1,954 9,724 3,614
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable 1,688 134,517 25,151
Accounts payable (34,637) (34,944) 25,876
Inventories 5,000 1,768 18,858
Net contracts in progress and advance
billings (37,891) 54,768 42,746
Income taxes (38,277) (37,118) (50,256)
Accrued liabilities (32,243) (92,349) (23,099)
Other, net (20,609) 60,813 23,528
Proceeds from insurance for products liabilities claims 105,314 103,994 106,252
Payments of products liabilities claims (126,151) (112,271) (94,304)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (12,559) 223,111 154,946
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Offshore Pipelines Inc. 10,828 - -
Acquisitions of Delta Catalytic Corporation
and Northern Ocean Services Limited - (85,894) -
Purchases of property, plant and
equipment (97,890) (76,321) (82,034)
Purchases of short-term investments,
government obligations and
other investments (520,007) (794,234) (521,745)
Sales and maturities of short-term investments,
government obligations and
other investments 512,786 746,514 538,555
Proceeds from sale and disposal of assets 22,430 6,539 74,635
Investments in equity investees (26,156) (1,108) (3,201)
Other - (4,287) 2,096
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (98,009) (208,791) 8,306
- ----------------------------------------------------------------------------------------------------------------
40
45
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1995 1994 1993
---- ---- ----
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $(35,553) $(222,646) $(119,684)
Issuance of long-term debt 3,482 92,841 89,000
Increase (decrease) in short-term
borrowing 167,987 16,639 (9,781)
Issuance of common stock 3,194 16,441 8,034
Issuance of preferred stock - 140,066 -
Dividends paid (61,827) (56,773) (51,528)
Repurchase of subsidiary's preferred stock (17,185) (3,587) -
Other 1,747 (950) (2,287)
- --------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 61,845 (17,969) (86,246)
- --------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES
ON CASH 823 (2,064) (9,069)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (47,900) (5,713) 67,937
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 133,809 139,522 71,585
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 85,909 $ 133,809 $ 139,522
==============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 76,519 $ 72,159 $ 143,739
Income taxes (net of refunds) $ 10,664 $ 18,726 $ 79,797
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
41
46
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
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, 1995.
Unless the context otherwise requires, hereinafter "International" will be used
to mean McDermott International, Inc., a Panamanian corporation; "JRM" will be
used to mean J. Ray McDermott, S.A., a Panamanian corporation, which is a
majority owned subsidiary of International, and its consolidated subsidiaries;
and 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, reasonable possible recoveries against probable
losses which until fiscal year 1994 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 was not determined to be
probable. 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 per
share. The adoption of this provision of EITF Issue No. 93-5 resulted in an
increase in pre-tax Income before Cumulative Effect of Accounting Change of
$19,947,000 ($12,168,000 net of tax, or $0.23 per share) in fiscal year 1994,
as costs in fiscal year 1994 that would have been recognized under McDermott
International's prior practice were included in the cumulative effect of the
accounting change. Prior to the adoption of EITF Issue No. 93-5, McDermott
International had not made calculations in similar detail to those required to
adopt EITF 93-5 and determined at the time of adoption of EITF Issue No. 93-5
that it was not practical to do so retroactively. Events giving rise to the
liability for non- employee products liability asbestos claims occurred prior
to 1987 and McDermott International had concluded in all
42
47
earlier periods, based upon information then currently available, that it was
adequately insured against future non-employee products liability claims.
Therefore, because the amounts were not available and because of the inherent
complexities in making reliable determinations at an earlier point in time
consistent with the methods used in the April 1, 1993 determination, pro forma
amounts reflecting the retroactive application of the accounting change for
fiscal year 1993 are not presented.
During the first quarter of fiscal year 1995, McDermott International adopted
the provisions of Financial Accounting Standards Board ("FASB") Interpretation
No. 39, which required McDermott International to present separately in the
balance sheet its estimated liabilities for pending and future non-employee
products liability asbestos claims and related estimated insurance recoveries.
Accordingly, the accompanying consolidated balance sheet at March 31, 1994 and
the consolidated statement of cash flows for the years ended March 31, 1994
and 1993 have been restated to conform to the March 31, 1995 presentation. The
adoption of FASB Interpretation No. 39 did not have any effect on earnings.
Postemployment Benefits - Effective April 1, 1994, McDermott International
adopted Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits," in accounting for
disability benefits and other types of benefits paid to employees, their
beneficiaries and covered dependents after active employment, but before
retirement. The cumulative effect as of April 1, 1994 of this change in
accounting was to reduce net income by $1,765,000 (net of income taxes of
$287,000) or $0.03 per share. Other than the cumulative effect, the accounting
change had no material effect on the results of fiscal year 1995. Prior to
April 1, 1994, McDermott International recognized the cost of providing most of
these benefits on a cash basis. Under this new principle of accounting, the
cost of these benefits is accrued when it becomes probable that such benefits
will be paid and when sufficient information exists to make reasonable
estimates of the amounts to be paid. In accordance with the Statement, prior
period financial statements have not been restated to reflect this change in
accounting principle.
Postretirement Health Care Benefits - Effective April 1, 1992, McDermott
International adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". 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.
Investments - Effective April 1, 1994, McDermott International adopted the
provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" for investments held as of or acquired after April 1, 1994.
The adoption of SFAS No. 115 resulted in a decrease in the opening balance of
stockholders' equity of $4,095,000 to reflect the net unrealized holding losses
on McDermott International's investment securities which were previously
carried at amortized cost. In accordance with the Statement, prior period
financial statements have not been restated to reflect this change in
accounting principle.
43
48
At March 31, 1995 McDermott International's investments, primarily government
obligations and other debt securities, are classified as available-for-sale
and are carried at fair value, with the unrealized gains and losses, net of
tax, reported in a separate component of shareholders' equity. Management
determines the appropriate classifications of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date.
Investment securities available for current operations are classified in the
balance sheet as current assets while securities held for long-term investment
purposes are classified as non- current assets. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization is included in interest income. Realized gains
and losses are included in other income. The cost of securities sold is based
on the specific identification method. Interest on securities is included in
interest income.
Income Taxes - Income taxes have been provided using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes", which was adopted
effective April 1, 1992. The cumulative effect of the accounting change on
prior years at April 1, 1992 was a benefit of $3,727,000, or $0.07 a share.
Other than the cumulative effect, the accounting change had no material effect
on fiscal year 1993.
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. Foreign
currency transaction adjustments are reported in income. Included in Other
Income (Expense) are transaction losses of $1,057,000, $2,260,000, and
$3,747,000 for fiscal years 1995, 1994 and 1993, respectively.
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 $50,831,000 and $56,873,000
relating to commercial and U.S. Government contracts claims whose final
settlement is
44
49
subject to future determination through negotiations or other procedures which
had not been completed at March 31, 1995 and 1994, respectively.
1995 1994
---- ----
(In thousands)
Included in Contracts in Progress are:
Costs incurred less costs of revenue recognized $ 32,070 $ 99,456
Revenues recognized less billings to customers 246,946 138,266
- --------------------------------------------------------------------------------------------------------
Contracts in Progress $279,016 $237,722
========================================================================================================
Included in Advance Billings on Contracts are:
Billings to customers less revenues recognized $212,197 $190,501
Costs incurred less costs of revenue recognized (32,179) (8,929)
- --------------------------------------------------------------------------------------------------------
Advance Billings on Contracts $180,018 $181,572
========================================================================================================
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.
Included in accounts receivable - trade are amounts representing retainages on
contracts as follows:
1995 1994
---- ----
(In thousands)
Retainages $ 72,257 $ 75,322
========================================================================================================
Retainages expected to be collected after one year $ 41,355 $ 39,370
========================================================================================================
Of its long-term retainages at March 31, 1995, McDermott International
anticipates collection as follows: $23,790,000 in fiscal year 1997,
$15,768,000 in fiscal year 1998, $284,000 in fiscal year 1999 and $1,513,000 in
fiscal year 2000.
45
50
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 20% and 21%
of total inventories was determined using the LIFO method at March 31, 1995 and
1994, respectively. Consolidated inventories at March 31, 1995 and 1994 are
summarized below:
1995 1994
---- ----
(In thousands)
Raw Materials and Supplies $ 38,570 $40,281
Work in Progress 15,341 17,566
Finished Goods 10,133 8,622
- ---------------------------------------------------------------------------------------
$ 64,044 $66,469
=======================================================================================
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.
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.
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
$19,905,000, $21,036,000 and $19,459,000 in fiscal years 1995, 1994 and 1993,
respectively. In addition, expenditures on research and development activities
of approximately $44,240,000, $48,112,000 and $42,082,000 in fiscal years 1995,
1994 and 1993, respectively, were paid for by customers of McDermott
International.
46
51
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
pertains to the acquisition of The Babcock & Wilcox Company, which is being
amortized on a straight-line basis over forty years and the acquisitions of
Offshore Pipelines, Inc., Delta Catalytic Corporation and Northern Ocean
Services Limited (See Note 2) which are being amortized on a straight-line
basis over ten years. Management periodically reviews goodwill to assess
recoverability, and impairments would be recognized in operating results if a
permanent diminution in value were to occur.
Capitalization of Interest Cost
In fiscal years 1995, 1994 and 1993, total interest cost incurred was
$59,715,000, $65,296,000 and $92,111,000, respectively, of which $2,600,000,
$1,321,000 and $1,771,000, respectively, was capitalized.
Earnings Per Share
Primary earnings per share are based on the weighted average number of common
and dilutive common equivalent shares outstanding during the year. For fiscal
years 1995, 1994 and 1993, fully dilutive earnings per share, which includes
the effects of stock options and appreciation rights, is considered to be the
same as primary since the effect of these common stock equivalents would be
antidilutive.
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 investment portfolio.
47
52
Derivative Financial Instruments
Derivatives, primarily forward exchange contracts, are utilized by McDermott
International to minimize exposure and reduce risk from foreign exchange
fluctuations in the regular course of business. Gains and losses related to
qualifying hedges of firm commitments are deferred and are recognized in income
or as adjustments of carrying amounts when the hedged transactions occur.
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.
NOTE 2 - ACQUISITIONS
On January 31, 1995, McDermott International contributed substantially all of
its marine construction services business to JRM and JRM acquired Offshore
Pipelines, Inc. ("OPI"), a full-range provider of offshore marine construction
and other related services on a worldwide basis to the oil and gas industry,
pursuant to an Agreement and Plan of Merger dated as of June 2, 1994 as amended
( the "Merger Agreement"). Pursuant to the Merger Agreement, JRM issued
13,867,946 shares of Common Stock, 897,818 options to acquire shares of Common
Stock and 458,632 shares of Series B $2.25 Cumulative Convertible Exchangeable
Preferred Stock (liquidation preference $11,465,800) valued at $347,599,000 in
exchange for all of the outstanding common stock, stock options and preferred
stock of OPI. As a result of the acquisition of OPI, McDermott International's
ownership interest in the common stock of JRM was reduced to approximately 64%.
The acquisition was accounted for by the purchase method and, accordingly, the
purchase price ($369,868,000, including direct costs of acquisition and
non-compete agreements) has been allocated to the underlying assets and
liabilities based upon preliminary fair values at the date of acquisition. The
excess of cost over fair value of net assets acquired is being amortized over
10 years. The operating results have been included in the Consolidated
Statement of Income (Loss) from the acquisition date. The preliminary purchase
price allocation is subject to change when additional information concerning
asset and liability valuations is obtained. Therefore, the final allocation
may differ from the preliminary allocation summarized as follows:
(In thousands)
Cash and Cash Equivalents $ 10,828
Other Net Working Capital 18,875
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses 235,000
Net Property, Plant and Equipment 173,134
Other Assets, Net 17,965
Long-Term Debt (107,085)
Minority Interest (151,508)
Capital in Excess of Par (197,209)
48
53
At March 31, 1995, JRM's Series B $2.25 Cumulative Convertible Exchangeable
Preferred Stock was convertible into 1,005,772 shares of JRM common stock and
JRM had options outstanding under its stock option plans to purchase 1,078,242
shares of JRM stock at an average price of $9.46 per share (834,712 shares
exercisable at an average price of $5.62 per share). In addition, at March 31,
1995, JRM had outstanding 3,200,000 shares of its voting Series A $2.25
Cumulative Convertible Preferred Stock (liquidation preference $160,000,000),
all of which is owned by McDermott International.
The following unaudited pro forma results of operations assume the acquisition
of OPI had occurred as of the beginning of the periods presented.
FISCAL YEAR ENDED
3/31/95 3/31/94
------- -------
(Unaudited)
(In thousands, except for per share amounts)
Revenues $ 3,360,450 $ 3,397,804
Income (Loss) before Cumulative
Effect of Accounting Changes $ (18,186) $ 44,785
Net Loss $ (19,951) $ (55,965)
Earnings (Loss) Per Common and Common
Equivalent Share (Primary and Fully Diluted):
Income (loss) before cumulative
effect of accounting changes $ (0.39)
$ 0.84
Net Loss $ (0.52) $ (1.16)
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 acquisition of OPI been completed as of April 1, 1993, nor is
it necessarily indicative of future operating results. The pro forma
information does not reflect estimates of cost savings that may be realized.
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. In addition, during June 1993,
the Delaware Company acquired a controlling interest in Delta Catalytic
Corporation ("DCC") of Calgary, Alberta, Canada for $28,249,000. The Delaware
Company has reached an agreement to purchase the remaining portion of DCC in
fiscal year 1996. DCC provides engineering, procurement, construction and
maintenance services to industries worldwide; including oil, gas, marine
construction and hydrocarbon processing.
49
54
The acquisitions of NOS and DCC were accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
underlying assets and liabilities based on fair values as of the dates of
acquisition. The excess of cost over fair value of net assets acquired is
being amortized over a period of 10 years. The operating results have been
included in the Consolidated Statement of Income (Loss) from the acquisition
dates. A summary of the purchase price allocation for DCC and NOS 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
==============================================================================================
The following unaudited pro forma results of operations assume the acquisitions
of NOS and DCC had occurred as of the beginning of the periods presented.
FISCAL YEAR ENDED
3/31/94 3/31/93
------- -------
(Unaudited)
(In thousands, except for per share amounts)
Revenues $ 3,164,468 $ 3,709,911
Income before Extraordinary Items and
Cumulative Effect of Accounting Changes $ 94,704 $ 64,428
Net Loss $ (6,046) $ (191,627)
Earnings (Loss) Per Common and Common
Equivalent Share: (Primary and Fully Diluted)
Income before extraordinary items and
cumulative effect of accounting changes $ 1.66
$ 1.24
Net 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 acquisitions of NOS and DCC been completed as of April 1, 1992
nor is it necessarily indicative of future operating results.
50
55
NOTE 3 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
Investments in joint ventures and other entities, which are accounted for on
the equity method, were $163,029,000 and $128,006,000 at March 31, 1995 and
1994, respectively. Transactions with entities for which investments are
accounted for by the equity method included sales to ($152,517,000, $89,123,000
and $91,448,000 in fiscal years 1995, 1994 and 1993, respectively, including
approximately $54,657,000, $49,121,000 and $47,535,000, respectively,
attributable to leasing activities) and purchases from ($12,582,000,
$137,942,000, and $76,396,000 in fiscal years 1995, 1994 and 1993,
respectively) these entities. Included in non- current Other Assets at March
31, 1995 and 1994 are $12,996,000 and $1,395,000, respectively of accounts and
note receivable from unconsolidated investees. Included in Accounts payable at
March 31, 1995 and 1994 are $7,168,000 and $18,180,000, respectively, of
payables to unconsolidated investees.
In fiscal year 1995, JRM contributed various marine construction barges
(including the DB100 semi-submersible derrick barge) with a cost of
$102,602,000 and accumulated depreciation of $76,763,000 and sold the DB51
derrick barge to the HeereMac joint venture for $9,101,000. In fiscal year
1994, McDermott International recognized revenues of $131,000,000 on work
subcontracted to HeereMac.
At March 31, 1995 and 1994, property, plant and equipment included $402,479,000
and $409,952,000, and accumulated depreciation included $230,674,000 and
$221,503,000, respectively, of marine equipment that is leased to
unconsolidated investees. Dividends received from unconsolidated investees
were $76,481,000, $65,214,000 and $33,202,000 (including a return of capital of
$27,402,000) in fiscal years 1995, 1994 and 1993, respectively. Undistributed
earnings in unconsolidated affiliates were $44,503,000 and $76,843,000,
respectively, at March 31, 1995 and 1994.
On March 30, 1993, McDermott International sold its remaining interests in its
B&W Fuel Company and B&W Nuclear Service Company for $10,150,000 and
$32,440,000, respectively. Included in Other-net were gains on the sales of
$23,968,000 in fiscal year 1993.
51
56
Summarized combined balance sheet and income statement information based on the
most recent financial information for equity investments in joint ventures and
other entities (25% to 50% owned) are presented below:
1995 1994
---- ----
(In thousands)
Current Assets $ 602,761 $608,053
Non-Current Assets 608,500 359,678
-----------------------------------------------------------------------------------
Total Assets $1,211,261 $967,731
===================================================================================
Current Liabilities $ 510,098 $461,306
Non-Current Liabilities 361,623 244,640
Owners' Equity 339,540 261,785
-----------------------------------------------------------------------------------
Total Liabilities and
Owners' Equity $1,211,261 $967,731
===================================================================================
1995 1994 1993
---- ---- ----
(In thousands)
Revenues $1,038,686 $1,160,363 $1,299,364
Gross Profit $ 239,424 $ 361,699 $ 393,241
Income before Provision for
Income Taxes $ 87,717 $ 232,366 $ 203,592
Provision for Income Taxes 9,509 13,539 4,754
---------------------------------------------------------------------------------------
Net Income $ 78,208 $ 218,827 $ 198,838
=======================================================================================
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.
International and certain of its subsidiaries keep books and file tax returns
on the completed contract method of accounting.
52
57
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, 1995 and 1994
were as follows:
1995 1994
---- ----
(In thousands)
Deferred tax assets:
Accrued warranty expense $ 12,796 $ 11,745
Accrued vacation pay 8,574 9,726
Accrued liabilities for self-insurance
(including postretirement health
care benefits) 170,326 186,146
Accrued liabilities for executive and
employee incentive compensation 17,773 14,621
Accrued pension liability 6,788 7,260
Accrued interest on proposed tax
deficiencies 4,071 11,874
Long-term contracts 3,837 35,461
Investments in joint ventures and affiliated
companies 12,496 7,111
Net operating loss carryforwards 17,323 19,773
Foreign tax credits 15,662 -
Environmental and products liabilities 410,588 442,241
Other 29,991 29,759
------------------------------------------------------------------------------------------------
Total deferred tax assets 710,225 775,717
------------------------------------------------------------------------------------------------
Valuation allowance for deferred tax assets (34,943) (26,576)
------------------------------------------------------------------------------------------------
Net deferred tax assets 675,282 749,141
------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment 54,194 92,671
Long-term contracts 15,842 13,047
Prepaid pension costs 96,680 94,274
Investments in joint ventures and affiliated
companies 27,346 28,056
Insurance recoverable 336,429 384,948
Other 7,819 1,818
------------------------------------------------------------------------------------------------
Total deferred tax liabilities 538,310 614,814
------------------------------------------------------------------------------------------------
Net deferred tax assets $136,972 $134,327
================================================================================================
53
58
Income (loss) before provision for (benefit from) income taxes, extraordinary
items and cumulative effect of accounting changes was as follows:
1995 1994 1993
---- ---- ----
(In thousands)
U. S. $(124,271) $(53,574) $(40,505)
Other than U. S. 115,104 168,528 147,927
- --------------------------------------------------------------------------------------------
$ (9,167) $114,954 $107,422
============================================================================================
The provision for (benefit from) income taxes consists of:
1995 1994 1993
---- ---- ----
(In thousands)
Current:
U. S. - Federal $ (35,891) $(15,029) $ (9,823)
U.S. - State and local (4,405) 1,804 630
Other than U. S. 24,149 34,348 38,826
- --------------------------------------------------------------------------------------------
Total current (16,147) 21,123 29,633
- --------------------------------------------------------------------------------------------
Deferred:
U. S. - Federal (826) (1,798) 4,909
U. S. - State and local 2,778 (4,392) 1,115
Other than U. S. (5,848) 10,065 4,442
- --------------------------------------------------------------------------------------------
Total deferred (3,896) 3,875 10,466
- --------------------------------------------------------------------------------------------
Provision for (Benefit from)
Income Taxes $ (20,043) $ 24,998 $ 40,099
============================================================================================
The current provision for other than U. S. income taxes in 1995, 1994 and 1993
includes a reduction of $1,323,000, $22,515,000 and $28,113,000, respectively,
for the benefit of net operating loss carryforwards.
During fiscal year 1995, a settlement was reached with the Internal Revenue
Service ("IRS") concerning the Delaware Company's U. S. income tax liability
for the fiscal years ended March 31, 1983 through March 31, 1986 disposing of
all U.S. federal income tax issues for those years. A settlement was also
reached for the fiscal years ended March 31, 1987 and March 31, 1988 disposing
of all U.S. federal income tax issues for those years and is pending approval
by the Joint Committee of Taxation. These settlements resulted in a reduction
in accrued interest expense of $26,300,000. The IRS has issued notices for
fiscal years March 31, 1989 and March 31, 1990 asserting deficiencies in the
amount of 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.
54
59
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, 1995, the current unit
value was $2,649 and the aggregate current unit value for the Delaware
Company's 100,000 units was $264,880,000. 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.
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of: 1995 1994
---- ----
(In thousands)
Unsecured Debt:
Series A Medium Term Notes (maturities ranging
from 2 to 8 years; interest at various rates ranging
from 7.92% to 9.00%) $ 75,000 $ 75,000
Series B Medium Term Notes (maturities ranging
from 3 to 28 years; interest at various rates ranging
from 6.50% to 8.75%)
101,000 101,000
9.375% Notes due 2002 ($225,000,000 face value) 224,482 224,428
10.25% Notes due June 1, 1995 150,000 150,000
12.875% Guaranteed Senior Notes due 2002
($70,000,000 face value) 74,933 -
Other notes payable through 2009 (interest at
various rates ranging to 6.80%) 31,669 26,306
Secured Debt:
10.375% Note payable due 1998 73,800 90,400
Other notes payable through 2012 and
capitalized lease obligations 25,167 24,964
- ------------------------------------------------------------------------------------------------------
756,051 692,098
Less: Amounts due within one year 176,950 25,032
- ------------------------------------------------------------------------------------------------------
$579,101 $667,066
======================================================================================================
55
60
Notes payable and current maturities of long-term debt consist of:
1995 1994
---- ----
(In thousands)
Short-term lines of credit:
Unsecured $ 70,445 $ 37,512
Secured 24,500 -
Repurchase agreements 135,691 -
Current maturities of long-term debt 176,950 25,032
- -----------------------------------------------------------------------------------------------------
Total $ 407,586 $ 62,544
=====================================================================================================
Weighted average interest rate
on short-term borrowings 7.19% 4.70%
=====================================================================================================
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.
In connection with the OPI acquisition, a subsidiary of JRM assumed OPI's
$70,000,000 12-7/8% Guaranteed Senior Notes ("12.875% Notes"). The 12.875%
Notes are subject to mandatory sinking fund requirements beginning on July 15,
2000 calculated to retire 50% of the original principal amount prior to
maturity in 2002. The 12.875% Notes are redeemable, for cash, at the option of
the issuer, at any time on or after July 15, 1997, in whole or in part, at a
price of 106.4% of the principal amount, and thereafter at prices declining
annually to 100% of the principal amount on or after July 15, 2000.
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
$83,363,000 market value of McDermott International's long-term portfolio at
March 31, 1995. 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, 1995 are as follows: 1996 - $176,950,000; 1997 - $25,913,000; 1998 -
$74,483,000; 1999 - $50,643,000; 2000 - $546,000.
The Delaware Company and JRM are restricted, as a result of covenants in
certain credit agreements, in their ability to transfer funds to International
and its subsidiaries through cash dividends or through unsecured loans or
investments. At March 31, 1995, substantially all of the net assets of the
Delaware Company and JRM were subject to such restrictions.
56
61
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 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).
At March 31, 1995 and 1994, International and its subsidiaries, had available
to them various uncommitted short-term lines of credit from banks totaling
$373,867,000 and $246,412,000, respectively. Borrowings against these lines of
credit at March 31, 1995 and 1994 were $63,025,000 and $37,512,000,
respectively. In addition, the Babcock & Wilcox Company had available to it a
$128,000,000 unsecured and committed revolving line of credit facility. Loans
outstanding under the revolving credit facility may not exceed the banks'
commitments thereunder. In addition, it is a condition to borrowing under the
revolving credit facility that the borrower's consolidated net tangible assets
exceed a certain level. There were no borrowings against this facility at
March 31, 1995 and 1994. DCC had available from a certain Canadian bank an
unsecured and committed revolving credit facility of $14,184,000 which expires
on May 31, 1997. Borrowings outstanding against this facility at March 31, 1995
were $7,420,000. There were no borrowings outstanding against this facility at
March 31, 1994. In addition, JRM had available two secured and committed
revolving credit facilities totaling $53,500,000 of which $24,500,000 was
outstanding at March 31, 1995. Loans outstanding under these facilities were
repaid and the facility terminated on May 10, 1995.
McDermott International's obligations under short-term repurchase agreements at
March 31, 1995 were secured by government obligations with a fair value of
$134,673,000.
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62
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, 1995 and 1994, 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 benefit for fiscal years 1995, 1994 and 1993 included
the following components:
1995 1994 1993
---- ---- ----
(In thousands)
Service cost - benefits earned
during the period $ 22,917 $ 21,035 $ 20,443
Interest cost on projected
benefit obligation 62,690 62,827 57,259
Actual return on plan assets 16,701 (166,978) (59,897)
Net amortization and deferral (114,343) 81,509 (27,687)
- --------------------------------------------------------------------------------------------------------------
Net periodic pension benefit $ (12,035) $ (1,607) $ (9,882)
==============================================================================================================
Due to the sale of a domestic entity, loss from operations before cumulative
effect of accounting change in fiscal year 1995, includes a net after-tax gain
of $732,000 resulting from the recognition of a curtailment of a related plan.
58
63
The following table sets forth the U. S. plans' funded status and amounts
recognized in the consolidated financial statements:
Plans for Which Plans for Which
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
----------------------------- -------------------------
1995 1994 1995 1994
---- ---- ---- ----
(In thousands)
Actuarial present value of
benefit obligations:
Vested benefit
obligation $534,093 $532,205 $134,801 $129,862
==========================================================================================================
Accumulated benefit
obligation $584,938 $596,595 $163,374 $160,974
==========================================================================================================
Projected benefit
obligation $654,066 $690,970 $165,799 $165,075
Plan assets at fair value 912,329 964,646 117,606 119,493
- ----------------------------------------------------------------------------------------------------------
Projected benefit obliga-
tion (in excess of) or
less than plan assets 258,263 273,676 (48,193) (45,582)
Unrecognized net (gain) loss 40,295 (1,464) (5,497) (3,989)
Unrecognized prior service cost (25,796) (14,462) 19,695 18,356
Unrecognized transition asset (38,669) (45,157) (1,892) (2,091)
Adjustment required to
recognize minimum
liability - - (10,322) (8,414)
- ----------------------------------------------------------------------------------------------------------
Prepaid pension cost
(pension liability) $234,093 $212,593 $(46,209) $(41,720)
==========================================================================================================
The assumptions used in determining the funded status of the U. S. plans were:
1995 1994 1993
---- ---- ----
Actuarial assumptions:
Discount rate 8.25% 7.5% 8.5%
- ---------------------------------------------------------------------------------------------------
Rate of increase in future
compensation levels 5.0% 4.5% 5.0%
- ---------------------------------------------------------------------------------------------------
Expected long-term rate of
return on assets 8.5% 8.5% 8.5%
- ---------------------------------------------------------------------------------------------------
59
64
The changes in the discount rate and the rate of increase in future
compensation levels for the U. S. plans decreased the projected benefit
obligation at March 31, 1995. This net decrease includes a decrease of
$76,961,000 due to the change in discount rate and an increase of $12,458,000
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 1995 and 1994, an
additional minimum liability for certain of its U. S. plans of $10,322,000 and
$8,414,000, respectively. These liabilities resulted in recognition of
intangible assets of $9,910,000 and $7,457,000 and reductions in stockholders'
equity of $391,000 and $931,000, respectively, in fiscal years 1995 and 1994.
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 1995, 1994 and 1993 included
the following components:
1995 1994 1993
---- ---- ----
(In thousands)
Service cost - benefits earned
during the period $ 4,832 $ 3,816 $ 6,442
Interest cost on projected
benefit obligation 11,103 10,027 10,710
Actual return on plan assets (5,702) (32,477) (28,480)
Net amortization and deferral (16,174) 12,297 10,090
- --------------------------------------------------------------------------------------------------------------
Net periodic pension benefit $ (5,941) $ (6,337) $ (1,238)
==============================================================================================================
Due to a reduction in workforce at one foreign subsidiary, income before
cumulative effect of accounting change in fiscal year 1994 includes a net
after-tax loss of $1,456,000 resulting from the recognition of a curtailment of
a related plan.
60
65
The following table sets forth the non-U. S. plans' funded status (assets
exceed accumulated benefits) and amounts recognized in the consolidated
financial statements:
1995 1994
---- ----
(In thousands)
Actuarial present value of
benefit obligations:
Vested benefit obligation $117,738 $117,612
=========================================================================================================
Accumulated benefit obligation $119,973 $126,387
=========================================================================================================
Projected benefit obligation $136,155 $146,850
Plan assets at fair value 205,840 203,797
- ---------------------------------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 69,685 56,947
Unrecognized net (gain) loss (4,633) 1,765
Unrecognized prior service cost 4,375 4,138
Unrecognized transition asset (26,449) (28,891)
- ---------------------------------------------------------------------------------------------------------
Net prepaid pension cost $ 42,978 $ 33,959
=========================================================================================================
The assumptions used in determining the funded status of the non-U. S. plans
were:
1995 1994 1993
---- ---- ----
Actuarial assumptions:
Discount rate 8.0-8.25% 7.5-8.0% 8.5-9.5%
- ----------------------------------------------------------------------------------------------------------
Rate of increase in future
compensation levels 5.0% 4.5-6.0% 5.0-7.5%
- ----------------------------------------------------------------------------------------------------------
Expected long-term rate of
return on plan assets 8.5-9.0% 8.0-9.0% 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 decreased the projected benefit
obligation at March 31, 1995. This net decrease includes a decrease of
$9,825,000 due to the change in discount rate and a decrease of $3,094,000 due
to the change in the rate of increase in future compensation levels.
61
66
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 $9,838,000, $8,367,000 and
$4,687,000 in fiscal years 1995, 1994 and 1993, 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:
1995 1994
---- ----
(In thousands)
Accumulated Postretirement Benefit Obligation:
Retirees $318,276 $359,624
Fully eligible active participants 16,226 20,038
Other active plan participants 65,199 72,039
- ---------------------------------------------------------------------------------------------------
399,701 451,701
Unrecognized net gain (loss) 22,142 (43,294)
- ---------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $421,843 $408,407
===================================================================================================
Weighted-average discount rate 8.25% 7.5%
===================================================================================================
The accumulated postretirement benefit obligation in the above table includes
$358,543,000 and $408,675,000 for McDermott International's health care plans
and $41,158,000 and $43,026,000 for McDermott International's life insurance
plans at March 31, 1995 and 1994, respectively. The changes in the accumulated
postretirement benefit obligation and the unrecognized net gain (loss) at March
31, 1995 were primarily attributable to the increase in the discount rate.
62
67
Net periodic postretirement benefit cost for fiscal years 1995, 1994 and 1993
included the following components:
1995 1994 1993
---- ---- ----
(In thousands)
Service cost $ 4,686 $ 3,570 $ 3,292
Interest cost 32,494 32,507 32,000
Net amortization and deferral 3,004 19 -
- ----------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $40,184 $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 11-1/2% was assumed for
1995, 12-1/2% for 1994 and 13-1/2% in 1993. For 1996, a rate of 10-3/4% is
assumed. In all 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, 1995 by $20,896,000 and the aggregate of the service cost and
interest cost components of net periodic postretirement benefit cost for fiscal
year 1995 by $2,638,000.
NOTE 7 - SALE OF ACCOUNTS RECEIVABLE
The Babcock & Wilcox Company has an agreement with a 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, 1995,
approximately $175,000,000 of receivables had been sold for cash under this
agreement. At March 31, 1994, approximately $170,000,000 had been sold.
Receivables sold under this agreement are presented as a reduction of accounts
receivable on the accompanying balance sheets. Included in Other-net income
were expenses recorded on the sale of receivables which represent bank fees and
discounts of $9,709,000, $8,699,000 and $7,851,000 for fiscal years 1995, 1994
and 1993, respectively. Discounts are based on the bank's cost of issuing
commercial paper and bank fees are a fixed amount based on the maximum limit
which may be sold.
63
68
NOTE 8 - SUBSIDIARY'S REDEEMABLE PREFERRED STOCKS
At March 31, 1995 and 1994, 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 2,917,236 and
3,474,652 shares of Series B Preferred Stock were outstanding (in each case,
exclusive of shares owned by the Delaware Company) at March 31, 1995 and 1994,
respectively. The outstanding shares are entitled to $31.25 per share in
liquidation. Preferred dividends of $14,142,000, $15,719,000 and $15,885,000
are classified as minority interest in Other Income (Expense) in fiscal years
1995, 1994 and 1993, respectively. 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 International's Common Stock 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, 1996 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 of fiscal years 1996 through 2006, and March 31
of fiscal years 2007 and 2008, the Delaware Company is obligated to redeem
252,702 and 189,526 shares, respectively, of Series B Preferred Stock. For the
five fiscal years subsequent to March 31, 1995, the obligation to redeem the
Series A and B Preferred Stock is $17,706,000 for each of the fiscal years 1996
through 2000. The Delaware Company may apply to the mandatory sinking fund
obligations any Series A or B Preferred Stock 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 315,877 shares of Series B Preferred
Stock that it owned to satisfy the March 31, 1995 mandatory sinking fund
obligations. During fiscal years 1995 and 1994, 557,416 and 114,800 shares,
respectively, of Series B Preferred Stock were purchased on the open market.
At March 31, 1995, 49,637 shares of Series A Preferred Stock have been
converted to date and the Delaware Company owned 1,261,627 and 241,539 shares
of Series A and Series B Preferred Stock, respectively.
NOTE 9 - CAPITAL STOCK
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 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, 1995 and 1994, 86,389,216 and 85,521,703 shares of Common Stock,
respectively, were reserved for issuance in connection with the conversion and
redemption
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of the Delaware Company's Series A Preferred Stock, the conversion of
International's Series C Preferred Stock, the exercise of International Rights,
the 1992 Officer Stock Program (and its predecessor programs), the 1992
Director Stock Program, the 1992 Senior Management Stock Program and
contributions to the Thrift Plan.
International Preferred Stock - At March 31, 1995 and 1994, 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 70,000 and 80,000 shares of Series B Non-Voting Preferred Stock (the
"Non-Voting Preferred Stock") were issued and owned by the Delaware Company at
March 31, 1995 and 1994, respectively. 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 Stock) 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 share on
International Common Stock 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 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 adjustment.
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.
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, 1995 and 1994, International had outstanding Rights to purchase 54,059,597
and 53,544,467 shares (including Rights to purchase 100,000 shares held by the
Delaware Company at March 31,
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1995 and 1994), 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.
International's Stock Plans - The following table summarizes activity for
International's stock option plans:
1995 1994 1993
---- ---- ----
Options outstanding, April 1, 3,333,613 3,506,710 3,281,965
- ----------------------------------------------------------------------------------------------------
Granted 813,730 654,040 648,880
Exercised (147,217) (783,285) (367,309)
Cancelled/forfeited (65,930) (43,852) (56,826)
- ----------------------------------------------------------------------------------------------------
Options outstanding, March 31, 3,934,196 3,333,613 3,506,710
====================================================================================================
Options exercisable at March 31, 2,653,541 2,106,362 2,459,823
====================================================================================================
Average price:
Outstanding options $ 23.2349 $ 22.6017 $ 21.5676
Exercisable options $ 22.2608 $ 22.1261 $ 20.8391
====================================================================================================
Shares available at March 31,
that may be granted for options 1,375,018 1,405,415 1,893,044
====================================================================================================
Charges to income $4,155,000 $3,576,000 $2,383,000
====================================================================================================
A total of 749,191 shares of Common Stock (including 230,811 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
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($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 847,525 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, 1995.
A total of 18,575 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 1995, 1994 and 1993, 312,883, 300,391 and 347,054 shares,
respectively, were issued as employer contributions pursuant to the Plan. At
March 31, 1995, 3,923,885 shares remained available for issuance.
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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 - At March 31, 1995 and 1994, the estimated liability for
pending and future non-employee products liability asbestos claims was
$995,948,000 (of which less than $165,000,000 had been asserted) and
$1,122,099,000 and estimated insurance recoveries were $861,407,000 and
$987,046,000, respectively. During fiscal year 1995, McDermott International
received notice that provisional liquidators had been appointed to a
London-based products liability asbestos insurer and, as a result, a loss of
$14,478,000 related to the reduction of estimated insurance recoveries was
recognized. Estimated liabilities for pending and future non-employee products
liability asbestos claims are derived from McDermott International's claims
history and constitute management's best estimate of such future costs.
Estimated insurance recoveries are based upon analysis of insurers providing
coverage of the estimated liabilities. Inherent in the estimate of such
liabilities and recoveries are expected trends in claim severity and frequency
and other factors, including recoverability from insurers, which may vary
significantly as claims are filed and settled. Accordingly, the ultimate loss
may differ materially from amounts provided in the consolidated financial
statements.
Environmental Matters - During the March 1995 quarter, a decision was made to
close certain of its nuclear manufacturing facilities, and a provision of
$41,724,000 for the decontamination, decommissioning and the closing of these
facilities was recognized immediately. Previously, decontamination and
decommissioning costs were being accrued over the facilities' remaining expected
life. Decontamination will proceed as permitted by the existing NRC license,
while funding support will be sought and a decommissioning plan will be
submitted for review and approval as required by the NRC. B&W expects to have
reached agreement with the NRC in fiscal 1997 on the plan that will provide for
the completion of facilities dismantlement and soil restoration by the end of
fiscal year 2001. B&W expects to request approval from the NRC to release the
site for unrestricted use at that time.
At March 31, 1995 and 1994, McDermott International had total environmental
reserves of $51,721,000 (including the provision discussed above) and
$13,513,000 respectively, of which $8,770,000 and $661,000 were included in
current liabilities.
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 its relative contribution 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
effect on its consolidated financial position.
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 negotiating with PADER and
expects to reach a settlement without having to resort to litigation. Any
sanctions ultimately assessed are not expected to have a material effect on the
consolidated financial statements of McDermott International.
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, 1995 are as follows: 1996 -$16,510,000; 1997 - $12,233,000; 1998 -
$10,122,000; 1999 - $9,629,000; 2000 - $9,156,000; and thereafter -
$44,347,000. Total rental expense for fiscal years 1995, 1994 and 1993 was
$109,655,000, $120,515,000, and $131,014,000, respectively. These expense
figures include contingent rentals and are net of sublease income, both of
which are not material.
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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.
Commitments for capital expenditures amounted to approximately $40,301,000 at
March 31, 1995, all of which relates to fiscal year 1996.
McDermott International is contingently liable under standby letters of credit
totaling $374,414,000 (including $47,864,000 issued on behalf of unconsolidated
foreign joint ventures) at March 31, 1995, issued in the normal course of
business. McDermott International has guaranteed $29,705,000 of loans to and
$26,559,000 of standby letters of credit issued by unconsolidated foreign joint
ventures at March 31, 1995. At March 31, 1995, McDermott International had
pledged approximately $62,778,000 fair value of government obligations and
corporate bonds to secure payments under and in connection with certain
reinsurance agreements.
Related Party - In connection with the acquisition of OPI, two directors and
two officers of JRM have entered into noncompetition agreements. As
consideration, the directors and officers received a total of $10,117,000
(including 50,000 shares of JRM's common stock valued at $1,117,000) during
fiscal year 1995. In addition, one director will receive additional payments
of $1,500,000 per year over the next five years.
A subsidiary of JRM has entered into an office sublease with an affiliate of
two of JRM's directors. Under the sublease, which expires no later than March
1997, the affiliate is required to make monthly rental payments of
approximately $18,000 to the subsidiary.
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Under another agreement, the affiliate will manage and operate the subsidiary's
offshore producing oil an gas property for a monthly fee of $48,000 and
reimbursement of certain costs. In addition, a subsidiary of JRM sold an
offshore jacket and deck to the affiliate for $1,100,000 during fiscal year
1995 and has a contract to refurbish and install the jacket and deck for
approximately $1,300,000.
A subsidiary of JRM entered into agreements with an affiliate of another
director of JRM pursuant to which, the subsidiary acquired interests in certain
offshore oil and gas property. During fiscal year 1995, the subsidiary paid
$3,000,000 to the affiliate under the agreements in connection with the
acquisition of its interests and the development of such property. In
addition, a subsidiary of JRM owns 140,000 shares of this affiliate and 20,000
units in a limited partnership which is also an affiliate of this director.
JRM maintains employment agreements with certain officers and employees which
contain change in control provisions that would entitle each to receive two
times his three-year average annual salary plus continuation of certain
benefits if there is a change in control of JRM (as defined) and a termination
of his employment within two years after a change in control. These agreements
also provide medical and health insurance benefits for a two year period
following the termination of employment.
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, 1995 and 1994, the allowance for possible losses deducted from
Accounts receivable-trade on the balance sheet was $8,526,000 and $7,289,000,
respectively.
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NOTE 12 - INVESTMENTS
The following is a summary of available-for-sale securities at March 31, 1995:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
U. S. Treasury securities
and obligations of U. S.
government agencies $388,150 $1,085 $6,212 $383,023
Corporate notes and bonds 280,474 432 3,305 277,601
Other debt securities 64,222 21 297 63,946
- -------------------------------------------------------------------------------------------------------------
Total debt securities 732,846 1,538 9,814 724,570
- -------------------------------------------------------------------------------------------------------------
Equity securities 2,009 - 577 1,432
- -------------------------------------------------------------------------------------------------------------
Total $734,855 $1,538 $10,391 $726,002
=============================================================================================================
The amortized cost and estimated fair value amounts above include $10,909,000
in other debt securities which are reported as cash equivalents in the balance
sheet.
Proceeds, gross realized gains and losses on sales of available-for-sale
securities were approximately $251,565,000, $88,000 and $2,666,000,
respectively, for fiscal year 1995. The amortized cost and estimated fair
value of available-for-sale debt and equity securities at March 31, 1995, by
contractual maturity, are shown below:
Estimated
Fair
Cost Value
---- -----
(In thousands)
Due in one year or less $196,036 $194,797
Due after one through three years 470,122 464,116
Due after three years 66,688 65,657
- -----------------------------------------------------------------------------------------------------------
732,846 724,570
Equity securities 2,009 1,432
- -----------------------------------------------------------------------------------------------------------
Total $734,855 $726,002
===========================================================================================================
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NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS
McDermott International operates internationally giving rise to exposure to
market risks from changes in foreign exchange rates. Derivative financial
instruments, primarily forward exchange contracts, are utilized to reduce those
risks. McDermott International does not hold or issue financial instruments
for trading purposes.
Forward exchange contracts are entered into primarily as hedges of certain firm
purchase and sale commitments denominated in foreign currencies. At March 31,
1995, McDermott International had forward exchange contracts to purchase
$251,562,000 in foreign currencies (primarily Canadian Dollars, Japanese Yen,
and Pound Sterling), and to sell $199,735,000 in foreign currencies (primarily
Canadian Dollars, Dutch Guilders, Japanese Yen, Malaysian Ringgit, and Pound
Sterling), at varying maturities from fiscal year 1996 through 2000. 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.
Deferred realized and unrealized gains and losses from hedging firm purchase
and sale commitments are included on a net basis in the balance sheet as a
component of either contracts in progress or advance billings on contracts or
as a component of either other current assets or accrued liabilities. They are
recognized in income as part of the purchase or sale transaction when it is
recognized, or as other gains or losses when a hedged transaction is no longer
expected to occur. At March 31, 1995, McDermott International had deferred
gains of $2,231,000 and deferred losses of $10,865,000 related to forward
exchange contracts which will principally be recognized in accordance with the
percentage of completion method of accounting.
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 an increase in interest expense of $1,202,000 in fiscal year
1995 and a reduction of interest expense of $5,782,000 and $6,961,000 in fiscal
years 1994 and 1993, respectively. At March 31, 1995 and 1994 McDermott
International had an interest rate swap outstanding on the current notional
principal of $73,800,000 and $90,400,000, respectively, of its 10.375% note
payable due 1998.
McDermott International is exposed to credit-related losses in the event of
nonperformance by counterparties to derivative financial instruments, but it
does not anticipate nonperformance by any of these counterparties. The amount
of such exposure is generally the unrealized gains in such contracts.
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NOTE 14 - 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 values of 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, 1995 and 1994, McDermott International had net forward exchange
contracts outstanding to purchase foreign currencies with a notional value of
$51,827,000 and $47,094,000 and a fair value of $41,237,000 and $35,288,000,
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, 1995 and 1994, McDermott International had an
interest rate swap outstanding on current notional principal of $73,800,000
with a fair value of ($2,541,000) and $90,400,000 with a fair value of
($1,853,000), respectively, 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
are as follows:
March 31, 1995 March 31, 1994
-------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
Balance Sheet Instruments
Cash and cash equivalents $ 85,909 $ 85,909 $133,809 $133,809
Investment securities 715,093 715,093 716,121 712,026
Debt excluding capital leases 966,397 988,343 726,090 772,661
Subsidiary's redeemable
preferred stocks 179,251 174,108 196,672 193,064
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NOTE 15 - 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, primarily through JRM. 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 1995, 1994 and 1993, the U. S. Government accounted for
approximately 12%, 13% and 13%, respectively, of McDermott International's
total revenues. These revenues are principally included in the Power
Generation Systems and Equipment segment.
At March 31, 1995, 1994 and 1993 receivables of $6,230,000, $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 $1,801,000, $3,358,000 and $31,234,000, respectively,
for the fiscal years ended March 31, 1995, 1994 and 1993. In fiscal years
1995, 1994 and 1993 equipment charters and overhead expenses of $4,938,000,
$6,330,000 and $6,046,000, respectively, were charged by ETPM S.A. to the
McDermott-ETPM joint venture.
The provisions for the closing of certain facilities in fiscal year 1995
resulted in a decrease in the Power Generation Systems and Equipment segment
operating income of $46,489,000. 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, 1995.
1. Information about McDermott International's Operations in Different
Industry Segments.
REVENUES (1) 1995 1994 1993
- --------- ---- ---- ----
Power Generation Systems and Equipment $1,663,235 $1,614,206 $1,523,476
Marine Construction Services(2) 1,390,919 1,452,497 1,649,653
Intersegment Transfer Eliminations (10,474) (6,791) (574)
- -------------------------------------------------------------------------------------------------------------
Total Revenues $3,043,680 $3,059,912 $3,172,555
=============================================================================================================
OPERATING INCOME
- -----------------
Segment Operating Income:
Power Generation Systems and Equipment $ 20,810 $ 49,941 $ 56,467
Marine Construction Services(2) 44,619 44,394 67,652
- -------------------------------------------------------------------------------------------------------------
Total Segment Operating Income 65,429 94,335 124,119
- -------------------------------------------------------------------------------------------------------------
Equity in Income of Investees:
Power Generation Systems and Equipment 8,364 12,032 8,691
Marine Construction Services 25,488 107,828 85,367
- -------------------------------------------------------------------------------------------------------------
Total Equity in Income of Investees 33,852 119,860 94,058
- -------------------------------------------------------------------------------------------------------------
General Corporate Expenses (58,615) (54,401) (52,800)
- -------------------------------------------------------------------------------------------------------------
Total Operating Income $ 40,666 $ 159,794 $ 165,377
=============================================================================================================
(1) Segment revenues include intersegment transfers as follows:
Power Generation Systems
and Equipment $ 9,669 $ 6,365 $ 414
Marine Construction Services 805 426 160
-------------------------------------------------------------------------------------------------------
Total $ 10,474 $ 6,791 $ 574
=======================================================================================================
(2) See Note 2 regarding the acquisition of OPI during fiscal year 1995 and the
acquisitions of NOS and DCC during fiscal year 1994.
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1995 1994 1993
---- ---- ----
(In thousands)
CAPITAL EXPENDITURES
- --------------------
Power Generation Systems and Equipment $ 45,306 $ 47,898 $ 45,102
Marine Construction Services(1) 224,251 123,055 36,038
Corporate 1,467 851 2,757
- -------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 271,024 $ 171,804 $ 83,897
=============================================================================================================
DEPRECIATION AND AMORTIZATION
- -----------------------------
Power Generation Systems and Equipment $ 34,828 $ 36,567 $ 36,798
Marine Construction Services 76,563 59,454 82,336
Corporate 4,167 3,372 2,374
- -------------------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 115,558 $ 99,393 $ 121,508
=============================================================================================================
IDENTIFIABLE ASSETS
- -------------------
Power Generation Systems and Equipment $2,099,223 $2,188,202 $1,146,702
Marine Construction Services 1,716,912 1,107,956 1,053,473
Corporate 935,535 927,411 892,788
- -------------------------------------------------------------------------------------------------------------
Total Identifiable Assets $4,751,670 $4,223,569 $3,092,963
=============================================================================================================
(1) Includes property, plant and equipment of $173,134,000 and $79,233,000 of
acquired companies in fiscal years 1995 and 1994, respectively, and the
purchase of a fabrication yard financed by a note payable of $16,250,000 in
fiscal year 1994.
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2 . Information about McDermott International's Operations in Different
Geographic Areas.
1995 1994 1993
---- ---- ----
(In thousands)
Revenues(1) - United States(2) $1,500,037 $1,614,533 $1,657,084
- Canada 739,663 583,169 227,066
- Europe and
West Africa 348,486 153,709 532,989
- Far East 326,523 545,545 473,424
- Middle East 128,860 162,956 281,976
- Other Foreign 111 - 16
- ------------------------------------------------------------------------------------------------------------
Total $3,043,680 $3,059,912 $3,172,555
============================================================================================================
Segment Operating
Income (Loss) by
Geographic Area - United States $ (38,737) $ 12,947 $ 53,256
- Canada 28,465 35,497 9,395
- Europe and
West Africa 29,744 6,809 21,273
- Far East 39,114 37,960 29,996
- Middle East 10,958 4,036 11,689
- Other Foreign (4,115) (2,914) (1,490)
- ------------------------------------------------------------------------------------------------------------
Total $ 65,429 $ 94,335 $ 124,119
============================================================================================================
Identifiable
Assets - United States $2,267,800 $2,288,950 $1,286,433
- Canada 348,200 265,342 144,785
- Europe and
West Africa 736,442 455,511 408,149
- Far East 208,655 156,088 237,081
- Middle East 209,221 108,596 117,389
- Other Foreign 45,817 21,671 6,338
- Corporate 935,535 927,411 892,788
- ------------------------------------------------------------------------------------------------------------
Total $4,751,670 $4,223,569 $3,092,963
============================================================================================================
(1) Net of inter-geographic area revenues in fiscal years 1995 and 1994 as
follows: United States- $69,432,000 and $38,666,000, Canada - $11,538,000
and $12,082,000, Europe and West Africa - $13,200,000 and $15,868,000,
Far East - $18,414,000 and $474,000, Middle East - $37,303,000 and
$2,686,000 and Other Foreign - $26,259,000 and $25,770,000, respectively.
(2) Net of inter-geographic area revenues of $71,027,000 in fiscal year 1993.
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NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31,1995 and 1994:
1995
----
Q U A R T E R E N D E D
------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1995
-------- --------- -------- ---------
(In thousands, except for per share amounts)
Revenues $759,808 $724,065 $715,525 $844,282
Operating income (loss) 15,831 19,769 53,568 (48,502)
Income (loss) before cumulative effect
of accounting change 3,118 (3,262) 29,814 (18,794)
Net income (loss) 1,353 (3,262) 29,814 (18,794)
Primary and Fully Diluted
Earnings (Loss) per Share:
Income (loss) before cumulative
effect of accounting change
0.02 (0.10) 0.51 (0.39)
Net income (loss) (0.01) (0.10) 0.51 (0.39)
Pre-tax results for the quarter ended June 30, 1994 include a reduction in
accrued interest expense of $5,700,000 due to settlement of an outstanding tax
issue with the IRS. Results for the quarter ended September 30, 1994 include a
loss related to the reduction of estimated products liability asbestos claim
recoveries from insurers of $14,478,000 and a reduction in accrued interest
expense of $5,600,000 due to the settlement of outstanding tax issues. Results
for the quarter ended December 31, 1994 include a reduction in accrued interest
expense of $5,000,000 due to the settlement of outstanding tax issues and
favorable worker's compensation cost adjustments of $14,886,000. Results for
the quarter ended March 31, 1995 include provisions of $46,489,000 for the
decontamination, decommissioning, and closing of a nuclear facility and for the
closing of a manufacturing facility, and a reduction in accrued interest
expense and taxes of $10,000,000 and $5,200,000, respectively, due to the
settlement of outstanding tax issues.
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83
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
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.
79
84
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
80
85
P A R T I I I
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 International's
1995 Annual Meeting of Stockholders.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Compensation of Executive Officers" and "Certain
Transactions" in the Proxy Statement for International's 1995 Annual Meeting of
Stockholders.
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 headings "Security Ownership of Directors and Executive
Officers" and "Security Ownership of Certain Beneficial Owners" in
International's Proxy Statement for the 1995 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the material
appearing under the heading "Compensation of Executive Officers" and "Certain
Transactions" in International's Proxy Statement for the 1995 Annual Meeting of
Stockholders.
81
86
P A R T I V
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheet
March 31, 1995 and 1994
Consolidated Statement of Income (Loss)
For The Three Fiscal Years Ended March 31, 1995
Consolidated Statement of Stockholders' Equity
For The Three Fiscal Years Ended March 31, 1995
Consolidated Statement of Cash Flows
For the Three Fiscal Years Ended March 31, 1995
Notes to Consolidated Financial Statements
For the Three Fiscal Years Ended March 31, 1995
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All required schedules will be filed by amendment to this Form
10-K on Form 10-K/A.
3. EXHIBITS
Exhibit
Number Description
------ -----------
3.1 McDermott International, Inc.'s Restated Articles of Incorporation (incorporated by reference to
Exhibit 3 to McDermott International, Inc.'s annual report on Form 10-K as amended, for the
fiscal year ended March 31, 1983)
3.2 McDermott International, Inc.'s By-Laws (incorporated by reference to Exhibit 3 to McDermott
International, Inc.'s annual report on Form 10-K, as amended, for the fiscal year ended March
31, 1991).
82
87
4.1 Rights Agreement (incorporated by reference to Exhibit 1 to McDermott International Inc.'s
registration statement on Form 8-A, dated December 27, 1985).
10.1 McDermott International, Inc.'s Supplemental Executive Retirement Plan, as amended (incorporated
by reference to Exhibit 10 of McDermott International Inc.'s 10-K/A for fiscal year end March
31, 1994 filed with the Commission on June 27, 1994).
10.2 McDermott International, Inc.'s 1983 Long-Term Performance Incentive Compensation Program
(incorporated by reference to Exhibit 10 to McDermott International, Inc.'s annual report on
Form 10-K, as amended, for the fiscal year ended March 31, 1983).
10.3 Intercompany Agreement (incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983).
10.4 Trust for Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form 10-K, as amended, for the fiscal year
ended March 31, 1990).
10.5 McDermott International, Inc.'s 1994 Variable Supplemental Compensation Plan (incorporated by
reference to Exhibit A to McDermott International, Inc.'s Proxy Statement for its Annual Meeting
of Stockholders held on August 9, 1994 as filed with the Commission).
10.6 McDermott International, Inc.'s 1987 Long-Term Performance Incentive Compensation Program
(incorporated by reference to Exhibit 10 to McDermott International, Inc.'s annual report of
Form 10-K, as amended, for the fiscal year ended March 31, 1988).
10.7 Retirement Plan for Non-Management Directors of McDermott International, Inc. (incorporated by
reference to Exhibit 11 to McDermott International, Inc.'s current report on Form 8-K filed with
the Commission December 10, 1991).
10.8 McDermott International, Inc.'s 1992 Senior Management Stock Option Plan (incorporated by
reference to Exhibit 10 of McDermott International, Inc.'s 10-K/A for fiscal year ended March
31, 1994 filed with the Commission on June 27, 1994).
83
88
10.9 McDermott International, Inc.'s 1992 Officer Stock Incentive Program (incorporated by reference
to McDermott International, Inc.'s annual report on Form 10-K, as amended for the fiscal year
ended March 31, 1992).
10.10 McDermott International, Inc.'s 1992 Director Stock Program (incorporated by reference to
McDermott International, Inc.'s annual report on Form 10-K, as amended, for the fiscal year
ended March 31, 1992).
11 Statement Re Computation of Per Share Earnings (Loss)
22 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
84
89
(a) CURRENT REPORTS ON FORM 8-K
A Current Report on Form 8-K, Item 2, was filed by
McDermott International, Inc. on February 15, 1995.
A Current Report on Form 8-K/A, Item 7, was filed by
McDermott International, Inc. on March 31, 1995.
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90
SIGNATURES
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.
McDERMOTT INTERNATIONAL, INC.
s/ Robert E. Howson
------------------------------
June 16, 1995 By: Robert E. Howson
Chairman of the Board and
Chief Executive Officer
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 and on the date indicated.
Signature Title
--------- -----
s/ Robert E. Howson Chairman of the Board, Chief Executive
- --------------------------- Officer and Director (Principal Executive
Robert E. Howson Officer)
s/ Brock A. Hattox Executive Vice President, Chief Financial
- --------------------------- Officer and Director (Principal Financial
Brock A. Hattox Officer)
s/ Daniel R. Gaubert Vice President, Finance and Controller
- --------------------------- (Principal Accounting Officer)
Daniel R. Gaubert
s/ Thomas D. Barrow Director
- ---------------------------
Thomas D. Barrow
86
91
Signature Title
--------- -----
s/ Theodore H. Black Director
- ---------------------------
Theodore H. Black
s/ John F. Bookout Director
- ---------------------------
John F. Bookout
s/ Phillip J. Burguieres Director
- ---------------------------
Phillip J. Burguieres
s/ James L. Dutt Director
- ---------------------------
James L. Dutt
s/ James A. Hunt Director
- ---------------------------
James A. Hunt
s/ J. Howard Macdonald Director
- ---------------------------
J. Howard Macdonald
s/ William McCollam, Jr. Director
- ---------------------------
William McCollam, Jr.
s/ John A. Morgan Director
- ---------------------------
John A. Morgan
s/ John N. Turner Director
- ---------------------------
John N. Turner
June 16, 1995
87
92
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Pages
------ ----------- ------------
3.1 McDermott International, Inc.'s Restated Articles of Incorporation (incorporated
by reference to Exhibit 3 to McDermott International, Inc.'s annual report on
Form 10-K as amended, for the fiscal year ended March 31, 1983)
3.2 McDermott International, Inc.'s By-Laws (incorporated by reference to Exhibit 3
to McDermott International, Inc.'s annual report on Form 10-K, as amended, for
the fiscal year ended March 31, 1991).
4.1 Rights Agreement (incorporated by reference to Exhibit 1 to McDermott International
Inc.'s registration statement on Form 8-A, dated December 27, 1985).
10.1 McDermott International, Inc.'s Supplemental Executive Retirement Plan, as amended
(incorporated by reference to Exhibit 10 of McDermott International Inc.'s 10-K/A
for fiscal year end March 31, 1994 filed with the Commission on June 27, 1994).
10.2 McDermott International, Inc.'s 1983 Long-Term Performance Incentive Compensation
Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s
annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983).
10.3 Intercompany Agreement (incorporated by reference to Exhibit 10 to McDermott
International, Inc.'s annual report on Form 10-K, as amended, for the fiscal year
ended March 31, 1983).
10.4 Trust for Supplemental Executive Retirement Plan (incorporated by reference to
Exhibit 10 to McDermott International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1990).
10.5 McDermott International, Inc.'s 1994 Variable Supplemental Compensation Plan
(incorporated by reference to Exhibit A to McDermott International, Inc.'s Proxy
Statement for its Annual Meeting of Stockholders held on August 9, 1994 as filed
with the Commission).
10.6 McDermott International, Inc.'s 1987 Long-Term Performance Incentive Compensation
Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s
annual report of Form 10-K, as amended, for the fiscal year ended March 31, 1988).
10.7 Retirement Plan for Non-Management Directors of McDermott International, Inc.
(incorporated by reference to Exhibit 11 to McDermott International, Inc.'s
current report on Form 8-K filed with the Commission December 10, 1991).
10.8 McDermott International, Inc.'s 1992 Senior Management Stock Option Plan
(incorporated by reference to Exhibit 10 of McDermott International, Inc.'s
10-K/A for fiscal year ended March 31, 1994 filed with the Commission on
June 27, 1994).
10.9 McDermott International, Inc.'s 1992 Officer Stock Incentive Program
(incorporated by reference to McDermott International, Inc.'s annual
report on Form 10-K, as amended for the fiscal year ended March 31, 1992).
10.10 McDermott International, Inc.'s 1992 Director Stock Program (incorporated
by reference to McDermott International, Inc.'s annual report on Form 10-K,
as amended, for the fiscal year ended March 31, 1992).
11 Statement Re Computation of Per Share Earnings (Loss)
22 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule