Item 3. LEGAL PROCEEDINGS
Due to the nature of its business, the Delaware Company 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 the Delaware Company.
For a discussion of the Delaware Company's potential liability for non-employee products liability asbestos claims, see Item 1F and Note 1 and 11 to the consolidated financial statements.
Item 4.
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.
PART I I
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
As a result of the plan of reorganization announced by the Delaware Company on October 28, 1982 and completed on March 15, 1983, all of the Delaware Company's outstanding Common Stock is owned by International and, consequently, there is no market for the Delaware Company's Common Stock. For restrictions on the Delaware Company's present or future ability to pay dividends, see Item 7 Liquidity and Capital Resources and Note 7 to the consolidated financial statements.
Item 6.
Item 6. SELECTED FINANCIAL DATA
See Note 3 to the consolidated financial statements regarding acquisitions in fiscal years 1996 and 1994. See Note 2 regarding the sale of a portion of the marine construction services business to International in fiscal year 1995. See Note 1 regarding the adoption of Statement of Financial Accounting Standards ("SFAS") No. 112 in fiscal year 1995 and Emerging Issues Task Force Issue No. 93-5 in fiscal year 1994. Fiscal year 1993 includes the cumulative effect of the adoption of SFAS No. 106 and SFAS No. 109. See Note 11 regarding the uncertainty as to the ultimate loss relating to products liability asbestos claims.
In fiscal year 1996, Net Loss included an after tax equity income gain of $20,047,000 resulting from the sale of two power purchase contracts and an after tax charge of $7,840,000 due to the write-off of an insurance receivable due to an unfavorable arbitration ruling related to the recovery of cost incurred for corrective action in certain utility and industrial installations. In fiscal year 1995, Loss 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 years 1993 and 1992, Income (Loss) from Continuing Operations before Extraordinary Items and Cumulative Effect of Accounting Changes included after tax gains from the sale of the Delaware Company's interest in its two commercial nuclear joint ventures of $15,667,000 and $35,436,000, respectively.
All of the Common Stock of the Delaware Company is owned by International and, therefore, no per share data is shown above.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
A significant portion of the Delaware Company's revenues and operating results are derived from its foreign operations, which are primarily located in Canada. As a result, the Delaware Company's operations and financial results are affected by international factors, such as changes in foreign currency exchange rates. The Delaware Company's policy attempts to minimize its exposure to changes in foreign currency exchange rates by attempting to match foreign currency contract receipts with like foreign currency disbursements. To the extent that it is unable to match the foreign currency receipts and disbursements related to its contracts, its practice of entering into forward exchange contracts to hedge foreign currency transactions reduces the impact of foreign exchange rate movements on operating results.
In general, both of the Delaware Company's business segments are capital intensive businesses that rely on large contracts for a substantial amount of their revenues.
The performance of the Power Generation Systems and Equipment segment is largely a function of capital spending in the electric power generation industry and U.S. Government spending, especially for nuclear fuel assemblies and reactor components for the U.S. Navy. This segment's recent business activities have been characterized by significant demand for large, new baseload generating units for electric utilities in Asia and the Middle East and relatively weaker markets in the United States and Europe.
The performance of the Marine Construction Services segment is a function of the level of oil and gas development activity. As a result, this segment's revenues and profitability reflect some variability associated with the timing of the completion of significant development projects and commencement of others as to which it has contracts. In addition, the demand for new ship construction and inland barges is impacted by charter rates that ship and barge owners and operators can earn and by the age and condition of the existing fleet. Based on its ongoing dialogue with existing customers with respect to possible future contracts, the Delaware Company expects some improvement in certain of its significant markets including the Gulf of Mexico. However, the Delaware Company cannot at this time predict the timing or extent of any improvement in the industry or the future level of demand for services of this segment.
The foregoing statements regarding the Delaware Company's markets and the other statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, among others, the uncertainties relating to the development of electric generating units and offshore development decisions to be made by oil and gas exploration and development companies.
During fiscal year 1996 and 1995, the Delaware Company's Canadian operations contributed 44% and 34% to total revenues and $18,655,000 and $25,431,000 to operating income, respectively, reflecting increased activity at its Cambridge, Ontario location, principally due to the supply of replacement recirculating steam generators to domestic utilities and work for two government owned utilities located in the Far East.
FISCAL YEAR 1996 VS FISCAL YEAR 1995
Power Generation Systems and Equipment's revenues increased $45,257,000 to $1,708,274,000. This was primarily due to higher revenues from engineering, procurement and construction of cogeneration plants, from defense and space-related products (other than nuclear fuel assemblies and reactor components), replacement nuclear steam generators for domestic customers manufactured at B&W's Cambridge, Ontario location and fabrication of industrial boilers. These increases were partially offset by lower revenues from repair and alteration of existing fossil fuel steam systems, fabrication and erection of fossil fuel steam and environmental control systems and nuclear fuel assemblies and reactor components for the U.S. Government.
Power Generation Systems and Equipment's segment operating income decreased $466,000 to $17,176,000 due to the write-off of an insurance claim of $12,600,000 due to an unfavorable arbitration ruling related to the recovery of cost incurred for corrective action in certain utility and industrial installations. There were also lower margins from engineering, procurement and construction of cogeneration plants. In addition, there were lower volume and margins from repair and alteration of existing fossil fuel steam systems, plant enhancement projects and from operations and maintenance contracts. These decreases were offset by provisions of $46,489,000 for the decontamination, decommissioning and closing of certain nuclear manufacturing facilities and the closing of a manufacturing facility in the prior year. In addition, there were higher volume and margins from replacement nuclear steam generators, improved margins from fabrication of fossil fuel steam and environmental control systems (including a license buyout agreement of $8,574,000) and higher volume from defense and space-related products (other than nuclear fuel assemblies and reactor components).
Power Generation Systems and Equipment's equity in income of investees increased $25,891,000 to $31,747,000. This represents the results of approximately 10 active joint ventures, but is primarily due to a nonrecurring equity income gain of $30,612,000 resulting from the sale of power purchase contracts back to a local utility.
Backlog for this segment at March 31, 1996 was $2,276,973,000 compared to $2,130,754,000 at March 31, 1995. At March 31, 1996, this segment's backlog with the U. S. Government was $816,783,000 (of which $57,988,000 had not yet been funded) and includes orders for nuclear fuel assemblies and reactor components for the U.S. Navy. These orders are expected to continue to comprise a substantial portion of backlog with the U.S. Government as B&W is the sole source provider of these nuclear fuel assemblies due to reload requirements.
This segment's foreign markets for industrial and utility boilers remain strong as 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 companies.
Domestic utility markets remain weak as competition within 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. The modest growth in demand and the changes associated with this transition from a regulated to a competitive industry have caused electric utilities to defer ordering large, new baseload power plants in the United States and 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. In addition, the Clean Air Act amendments of 1990 required many customer industries to implement systems to limit or remove emissions. These mandated expenditures have caused some customers to defer repairs and refurbishments on existing plants. However, the U.S. market for replacement nuclear steam generators is expected to continue to make significant contributions to operating income in the foreseeable future, although at lower levels than in recent years.
As discussed (see Item 1F - Insurance), provisions for estimated future costs for non-employee products liability asbestos claims have been recognized for financial reporting purposes (see Notes 1 and 11 to the consolidated financial statements and the discussion of 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.
Marine Construction Services' revenues decreased $230,367,000 to $329,583,000 primarily due to inclusion in the prior year of revenues related to the marine construction services business sold to International on January 31, 1995 and lower volume from shipyard operations. These decreases were partially offset by higher revenues from engineering activities in the U.S.
Marine Construction Services' segment operating loss decreased $7,688,000 to $26,931,000 primarily due to income in the prior period related to the marine construction business sold to International on January 31, 1995. These decreases were partially offset by higher margins from domestic shipyard operations.
Marine Construction Services' equity in income of investees increased $56,000 to $4,534,000 primarily due to improved operating results of a domestic fabrication joint venture. Last year's results included income from its CMM joint venture whose results are now included in J. Ray McDermott, S.A.
Backlog for this segment at March 31, 1996 was $187,288,000 as compared to $333,912,000 at March 31, 1995. Not included in backlog at March 31, 1996 and 1995 was backlog relating to contracts performed by unconsolidated joint ventures of $24,000,000 and $36,000,000, respectively.
The activity of the Marine Construction Services' segment (including its significant investees) depends mainly on the capital expenditures of oil and gas companies 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 political and economic conditions. Demand for new ship construction and inland barges is
impacted by charter rates that ship and barge owners can earn and by the age and condition of the existing fleet.
Oil company capital exploration and production budgets in calendar year 1996 are higher than 1995 expenditures. While oil prices remain flat, natural gas prices have increased significantly as compared to calendar year 1995. Expenditures are expected to increase. Demand for offshore drilling rigs has increased and this, historically, has been a leading indicator for an increase in the need for marine construction services. This segment's markets are expected to begin to emerge from the competitive environment that has put pressure on margins in prior periods.
Interest income decreased $888,000 to $11,798,000 primarily due to decreased investments in government obligations and other investments.
Interest expense increased $11,574,000 to $52,910,000, primarily due to a reduction of accrued interest of $26,300,000 on proposed tax deficiencies that was recorded in the prior year, partially offset by changes in debt obligations and interest rates prevailing thereon.
Other-net increased $37,939,000 to income of $4,935,000 from expense of $33,004,000. This increase was primarily due to a loss related to the reduction of estimated products liability asbestos claim recoveries of $14,478,000 from insurers and a provision for the settlement of a lawsuit, both in the prior period, and gains in the current year of $6,425,000 on the disposal of assets.
The benefit from income taxes decreased $24,120,000 to $5,269,000 while loss before the benefit from income taxes and cumulative effect of accounting changes decreased $70,857,000 to $32,412,000. The decrease in the benefit from income taxes is due primarily to the decrease in loss from operations.
Net loss decreased $47,249,000 to $27,143,000 reflecting the cumulative effect of the adoption of SFAS No. 112 of $512,000 in the prior year in addition to the other items described above.
FISCAL YEAR 1995 VS FISCAL YEAR 1994
Power Generation Systems and Equipment's revenues increased $49,063,000 to $1,663,017,000. 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 $31,972,000 to $17,642,000 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 adjustment 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 $2,779,000 to $5,856,000. This represents the results of approximately 12 active joint ventures each of which is relatively small. The decrease was primarily due to a provision for loss on discontinuing a domestic joint venture.
Marine Construction Services' revenues decreased $72,292,000 to $559,950,000 primarily due to lower volume in domestic engineering, fabrication and marine operations, and shipyard operations. These decreases were partially offset by the inclusion of revenues of MECL, which was acquired in June 1993, for the full fiscal year. (See Note 2 to the consolidated financial statements concerning the sale of a portion of the marine construction services business to International on January 31, 1995.)
Marine Construction Services' segment operating income (loss) decreased $40,287,000 to a loss of $34,619,000 from income of $5,668,000 primarily due to unfavorable operating results from MECL's operations, higher operating expenses, lower margins from shipyard operations, and start-up costs associated with new shipbuilding activities. These decreases were partially offset by higher margins in domestic engineering.
Marine Construction Services' equity in income of investees increased $4,033,000 to $4,478,000 primarily due to improved operating results of its Mexican joint venture.
Interest income increased $7,144,000 to $12,686,000 primarily due to higher interest rates on investments in government obligations and other investments.
Interest expense decreased $12,534,000 to $41,336,000, primarily due to a reduction of accrued interest on proposed tax deficiencies, partially offset by changes in debt obligations and interest rates prevailing thereon.
Other-net expense increased $23,938,000 to $33,004,000 primarily due to a loss related to the reduction of estimated products liability asbestos claim recoveries from insurers, a litigation provision for the settlement of a lawsuit and foreign currency transaction losses in the current period.
Provision for (benefit from) income taxes decreased $30,304,000 to a benefit of $29,389,000 from a provision of $915,000 while loss before the benefit from income taxes and cumulative effect of accounting changes increased $77,868,000 to $103,269,000. The increase in the benefit from income taxes is due primarily to the increase in loss from operations.
Net loss decreased $52,674,000 to $74,392,000 reflecting the cumulative effect of the adoption of SFAS No. 112 of $512,000 in the current year and the cumulative effect of the change in accounting for non-employee products liability asbestos claims of $100,750,000 in the prior year, in addition to the other items described above.
Effect of Inflation and Changing Prices
The Delaware Company'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.
The management of the Delaware Company 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 1996, the Delaware Company's cash and cash equivalents increased $1,872,000 to $22,886,000 and total debt decreased $120,997,000 to $598,871,000. This included the Delaware Company's repayment of its 10.25% Notes of $150,000,000 on June 1, 1995. During the same period, the Delaware Company used cash of $200,565,000 in operating activities; $150,165,000 for repayment of long-term debt; $39,111,000 for additions to property, plant and equipment; $37,967,000 for repayment of short-term borrowings; $13,663,000 for cash dividends on the Delaware Company's preferred stocks; $13,083,000 for acquisitions; and $5,743,000 for the repurchase of preferred stock to satisfy current and future sinking fund requirements. Also during this period, the Delaware Company received cash of $363,845,000 from the liquidation of its investment portfolio; $65,363,000 from short-term borrowing from McDermott International, Inc.; and $29,465,000 from the sale of assets.
The increase in receivables reflects the reduction in the amount of receivables sold to a U.S. bank and a federal income tax refund receivable. Lower payables are primarily due to settlements of amounts owed to McDermott International, Inc. Increases in net contracts in progress and advance billings were primarily due to the timing of billings on B&W's Canadian contracts.
Pursuant to an agreement with a majority of its principal insurers, the Delaware Company negotiates and settles products liability asbestos claims from non-employees and bills these amounts to the appropriate insurers. As a result of collection delays inherent in this process, reimbursement is usually delayed for three months or more. The number of claims had increased during the second half of fiscal year 1995 and the first nine months of fiscal year 1996, but have decreased during the March quarter. Management believes, based on information currently available, that the recent increase represented 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 $5,500 per claim over the last three years) has continued to rise. Claims paid during the fiscal year ended March 31, 1996 were $151,961,000, of which $135,778,000 has been recovered or is due from insurers. At March 31, 1996, receivables of $63,223,000 were due from insurers for reimbursement of settled claims, including $21,050,000 due from certain insurers which have refused to reimburse B&W for amount paid by B&W to settle claims under applicable policies. B&W has filed a lawsuit against these insurers seeking reimbursement of these claims and expects to prevail in this litigation which may continue beyond fiscal year 1997 unless a
settlement is reached. B&W will require that any settlement reimburse B&W for all amounts billed to date and future payments up to full policy limits. Estimated liabilities for pending and future non-employee products liability asbestos claims are derived from the Delaware Company'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. Settlement of the liability is expected to occur over approximately the next 25 years. The collection delays (including the lawsuit mentioned above), and the amount of claims paid for which insurance recovery is not probable have not had a material adverse effect upon the Delaware Company's liquidity, and management believes, based on information currently available, that they will not have a material adverse effect on liquidity in the future.
The Delaware Company's expenditures for property, plant and equipment decreased $32,682,000 to $39,111,000 in fiscal year 1996. Fiscal year 1995 included $20,908,000 of capital expenditures relating to the portion of the marine construction services business sold to International. The majority of expenditures incurred in fiscal year 1996 were to maintain and replace existing facilities and equipment. The Delaware Company has committed to make capital expenditures of approximately $8,069,000 during fiscal year 1997.
At March 31, 1996 and 1995, The Babcock & Wilcox Company had sold, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable of approximately $107,000,000 and $175,000,000, respectively, under an agreement with a U.S. Bank. During fiscal year 1996, the maximum sales limit available under the agreement was reduced from $225,000,000 to $140,000,000 and was amended to provide for an annual renewal of the program.
At March 31, 1996 and 1995, the Delaware Company had available to it various uncommitted short-term lines of credit from banks totalling $285,859,000 and $247,903,000, respectively. Borrowings against these lines of credit at March 31, 1996 and 1995 were $58,314,000 and $33,220,000, respectively. In addition, The Babcock & Wilcox Company had available to it an unsecured and committed revolving credit facility which was amended during fiscal year 1996 to increase the commitment to $150,000,000 and to extend the agreement to March 31, 1999. It is a condition to borrowing under this revolving credit facility that the borrower's tangible net worth, debt to capitalization, and interest coverage as defined in the agreement meet or exceed certain covenant requirements. There were borrowings of $50,000,000 against this facility at March 31, 1996 and none at March 31, 1995.
The Delaware Company is restricted, as a result of covenants in certain 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. At March 31, 1996, the most restrictive of these covenants with respect to the payment of dividends by the Delaware Company would prohibit the payment of dividends other than current dividends on existing preferred stock.
Effective February 1, 1989, the Delaware Company and a subsidiary of International, McDermott International Investments Co., Inc. ("MIICO"), entered into a reverse repurchase
agreement whereby either party acting as a "buyer" would purchase for cash certain U. S. Government obligations owned by the other party acting as a "seller", and, at the date of purchase, the "seller" would agree to repurchase the same securities at a set price (including accrued interest) at a future specified date. There were no transactions under this agreement during fiscal year 1996.
The Delaware Company and MIICO are parties to an agreement pursuant to which the Delaware Company may borrow up to $150,000,000 from MIICO at interest rates computed at the applicable federal rate determined by the IRS. At March 31, 1996, the Delaware Company had borrowed $65,363,000 against this agreement, all of which was repaid in April 1996 with funds from borrowings under shor-term lines of credit. There were no borrowings against this agreement at March 31, 1995.
Working capital increased to $92,086,000 at March 31, 1996 from a deficit of $21,580,000 at March 31, 1995. During 1997, the Delaware Company expects to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, additional borrowings and capital contributions from International (if required). Leasing agreements for equipment, which are short-term in nature, are not expected to impact the Delaware Company's liquidity nor capital resources.
The Delaware Company's quarterly dividends of $0.55 per share on the Series A $2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series B $2.60 Cumulative Preferred Stock were the same in 1996 and 1995.
The Delaware Company has provided a valuation allowance ($14,673,000 at March 31, 1996) for deferred tax assets which cannot be realized through carrybacks and future reversals of existing taxable temporary differences. Management believes that remaining deferred tax assets at March 31, 1996 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 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.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective for fiscal years beginning after December 15, 1995. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 also applies to similar assets that are held for disposal, except for the assets of a discontinued operation. The Delaware Company has not yet finalized its review of the impact of this statement, but it is not expected to have a material impact on the consolidated financial statements.
Item 8.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders McDermott Incorporated
We have audited the accompanying consolidated balance sheet of McDermott Incorporated as of March 31, 1996 and 1995, and the related consolidated statements of loss, stockholder's equity and cash flows for each of the three years in the period ended March 31, 1996. 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 Incorporated at March 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles.
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 and recoveries of products liability claims in 1994.
ERNST & YOUNG LLP
New Orleans, Louisiana May 15, 1996
MCDERMOTT INCORPORATED CONSOLIDATED BALANCE SHEET MARCH 31, 1996 AND 1995 ASSETS
See accompanying notes to consolidated financial statements.
McDERMOTT INCORPORATED CONSOLIDATED STATEMENT OF LOSS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996
See accompanying notes to consolidated financial statements. Significant related party transactions are disclosed in Note 6.
MCDERMOTT INCORPORATED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996 (In thousands)
(1) There were 3,600 common shares outstanding at March 31, 1996, 1995, and 1994 consisting of 3,000 voting shares entitled to 12,000 votes per share and 600 non-voting shares.
See accompanying notes to the consolidated financial statements.
McDERMOTT INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Continued
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
See accompanying notes to consolidated financial statements.
MCDERMOTT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of McDermott Incorporated and all subsidiaries. Investments in joint venture and other entities in which McDermott Incorporated 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, 1996.
Unless the context otherwise requires, hereinafter, the "Delaware Company" will be used to mean McDermott Incorporated and its consolidated subsidiaries (including Babcock & Wilcox Investment Company and its principal subsidiary, The Babcock & Wilcox Company), and "International" will be used to mean McDermott International, Inc., a Panamanian corporation. International is the parent company of the Delaware Company.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Changes in Accounting Policies
Products Liabilities - As a result of the consensus reached on Emerging Issues Task Force ("EITF") Issue No. 93-5, a company is no longer permitted to offset, for recognition purposes, reasonably possible recoveries against probable losses which until fiscal year 1994 had been the Delaware Company's practice with respect to estimated future costs for non-employee products liability asbestos claims. Effective April 1, 1993, the Delaware Company 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). The adoption of this provision of EITF Issue No. 93-5 resulted in a decrease in pretax Loss before Cumulative Effect of Accounting Change of $19,947,000 ($12,168,000, net of tax) in fiscal year 1994, as costs in fiscal year 1994 that would have been recognized under the Delaware Company's prior practice were included in the cumulative effect of the accounting change.
Postemployment Benefits - Effective April 1, 1994, the Delaware Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits," in accounting for disability benefits and other types of benefits paid to employees, their beneficiaries and covered dependents after active employment, but
before retirement. The cumulative effect as of April 1, 1994 of this change in accounting was to increase net loss by $512,000 (net of income taxes of $287,000). Other than the cumulative effect, the accounting change had no material effect on the results of fiscal year 1995. Prior to April 1, 1994, the Delaware Company recognized the cost of providing most of these benefits on a cash basis.
Investments - Effective April 1, 1994, the Delaware Company adopted 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 stockholder's equity of $1,480,000 to reflect the net unrealized holding losses on the Delaware Company's investment securities which were previously carried at amortized cost.
At March 31, 1996 and 1995, the Delaware Company'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 shareholder's 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."
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 gains (losses) of $(750,000), $(384,000), and $1,695,000 for fiscal years 1996, 1995 and 1994, 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. There are no unbilled revenues which will not be billed. 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. Provisions are made currently for all known or anticipated losses. Variations from estimated contract performance could result in a material adjustment to operating results for any fiscal quarter or year. 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 $46,627,000 and $46,717,000 relating to commercial and U. S. Government contracts claims whose final settlement is subject to future determination through negotiations or other procedures which had not been completed at March 31, 1996 and 1995, respectively.
The Delaware Company is usually entitled to financial settlements relative to the individual circumstances of deferrals or cancellations of Power Generation Systems and Equipment contracts. The Delaware Company 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:
Of its long-term retainages at March 31, 1996, the Delaware Company anticipates collection of $13,541,000 in fiscal year 1998 and $4,012,000 in fiscal year 1999.
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 15% and 18% of total inventories was determined using the LIFO method at March 31, 1996 and 1995, respectively. Consolidated inventories at March 31, 1996 and 1995 are summarized below:
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
The Delaware Company 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 $21,491,000, $19,455,000 and $19,583,000 in fiscal years 1996, 1995 and 1994, respectively. In addition, expenditures on research and development activities of approximately $45,106,000, $44,240,000 and $48,112,000 in fiscal years 1996, 1995 and 1994, respectively, were paid for by customers of the Delaware Company.
Depreciation, Maintenance and Repairs
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. Maintenance, repairs and renewals which do not materially prolong the useful life of an asset are expensed as incurred.
Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased Businesses
Excess of the cost over fair value of net assets of purchased businesses primarily pertains to the acquisition of The Babcock & Wilcox Company, which is being amortized on a straight-line
basis over 40 years and the acquisition of McDermott Engineers and Constructors (Canada) Ltd. which is being amortized on a straight-line basis over 10 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 1996, 1995 and 1994, total interest cost incurred was $53,511,000, $43,919,000 and $55,187,000, respectively, of which $601,000, $2,583,000 and $1,317,000, respectively, was capitalized.
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.
Derivative Financial Instruments
Derivatives, primarily forward exchange contracts, are utilized 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.
Accounting for Long-Lived Assets
The Delaware Company is currently reviewing SFAS No. 121, "Accounting for Impairment of Long-Lived Assets to Be Disposed Of," effective for fiscal years beginning after December 15, 1995. SFAS No. 121 established financial accounting and reporting standards for long-lived assets and certain identifiable intangibles. The Delaware Company has not yet finalized its review of the impact of this statement, but it is not expected to have a material impact on the consolidated financial statements.
NOTE 2 - SALE OF MARINE CONSTRUCTION SERVICES BUSINESSES
In connection with the merger of Offshore Pipelines, Inc. into J. Ray McDermott, S.A., ("JRM") a subsidiary of International, on January 31, 1995, the Delaware Company sold a portion of its marine construction services business having a net book value of $187,622,000 (which included property, plant and equipment of $190,780,000) to International and received marketable securities having an aggregate fair value of $230,173,000. The excess of the sales price over the net book value of net assets sold to International of $29,015,000 (net of tax of $13,536,000) was included in Capital in Excess of Par Value.
Revenues and operating income, respectively, of the portion of the marine construction services business sold were $243,959,000 and $7,324,000 in fiscal year 1995 and $295,125,000 and $22,752,000 in fiscal year 1994.
NOTE 3 - ACQUISITIONS
During the three years ended March 31, 1996, the Delaware Company made the acquisitions described below which were accounted for by the purchase method. Operating results have been included in the Consolidated Statement of Loss from the acquisition dates. Pro forma results of operations have not been presented because the effects of these acquisitions were not significant.
During fiscal year 1996, the Delaware Company acquired the assets of Joy Environmental Technologies, which specialized in technologies used by electric utilities and other industrial companies to comply with clean air regulations. The purchase price was $13,083,000 of which approximately $6,457,000 was assigned to excess of cost over fair value of net assets acquired and is being amortized over a period of twenty years.
During June 1993, the Delaware Company acquired a controlling interest in McDermott Engineers and Constructors (Canada) Ltd. ("MECL"), formerly Delta Catalytic Corporation, for $28,249,000. Of the purchase price, $17,170,000 was assigned to excess of cost over fair value of net assets acquired and is being amortized over a period of 10 years. International acquired the minority ownership interest in MECL in fiscal year 1996. Included in Other-net is minority interest income of $7,277,000 relating to International's share of MECL's net loss.
NOTE 4 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
Investments in entities which are accounted for on the equity method were $40,958,000 and $35,524,000 at March 31, 1996 and 1995, respectively. Transactions with entities for which investments are accounted for on the equity method included sales to ($37,487,000, $5,693,000 and $5,443,000 in fiscal years 1996, 1995 and 1994, respectively) and purchases from ($378,000, $195,000 and $3,510,000 in fiscal years 1996, 1995 and 1994, respectively) these entities. Included in Accounts payable at March 31, 1996 and 1995 are $9,192,000 and $3,180,000, respectively of payables to unconsolidated affiliates. Dividends received from unconsolidated investees were $39,734,000, $9,681,000 and $5,749,000 in fiscal years 1996, 1995 and 1994, respectively. Undistributed earnings in unconsolidated affiliates were $13,523,000 and $11,339,000, respectively, at March 31, 1996 and 1995.
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:
NOTE 5 - INCOME TAXES
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, 1996 and 1995 were as follows:
Loss before provision for (benefit from) income taxes and cumulative effect of accounting changes was as follows:
The provision for (benefit from) income taxes consists of:
The effective income tax rate is reconciled to the statutory federal income tax rate as follows:
Undistributed earnings of consolidated foreign subsidiaries amounted to approximately $61,800,000 at March 31, 1996. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state and local income taxes has been provided. Upon distribution of those earnings, the Delaware Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign jurisdictions. The unrecognized deferred income tax liability is estimated to be approximately $24,100,000. Withholding taxes of $5,800,000 would be payable upon remittance of all previously unremitted earnings at March 31, 1996.
During fiscal year 1995, settlements were 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, 1988 disposing of all U.S. Federal income tax issues for those
years. These settlements resulted in a reduction in accrued interest expense of $26,300,000 during fiscal year 1995. The IRS has issued notices for fiscal years ended 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.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Delaware Company has material transactions with International and its other subsidiaries occurring in the normal course of operations. Transactions which are included in the Delaware Company's revenues include the sales of engineering and design services and fabrication services ($40,718,000, $13,257,000, and $7,415,000 in fiscal years 1996, 1995 and 1994 respectively) and the leasing of equipment ($4,215,000, and $16,107,000, in fiscal years 1995 and 1994, respectively). Other transactions include the allocation of general and administrative and other costs to International ($11,900,000, $7,309,000 and $8,491,000 in fiscal years 1996, 1995 and 1994, respectively), placing certain insurance coverage (at prices determined on an annual basis of $15,213,000, $28,024,000, and $24,582,000 in fiscal years 1996, 1995 and 1994, respectively) through commercial insurance carriers which in turn substantially reinsure such exposure to a wholly-owned subsidiary of International, and the management of certain of the investments of the Delaware Company and its pension plans by a wholly-owned subsidiary of International for which the Delaware Company paid fees of $2,901,000, $2,949,000 and $2,528,000 in fiscal years 1996, 1995 and 1994, respectively.
Effective February 1, 1989, the Delaware Company and a subsidiary of International, McDermott International Investments Co., Inc., ("MIICO"), entered into a reverse repurchase agreement whereby either party acting as a "buyer" would purchase for cash certain U. S. Government obligations owned by the other party acting as a "seller", and, at the date of purchase, the "seller" would agree to repurchase the same securities at a set price (including accrued interest) at a future specified date. At March 31, 1996 and 1995, there were no obligations outstanding under the agreement. Interest income recognized from these reverse repurchase agreements was $560,000 for fiscal year 1994.
The Delaware Company and MIICO are parties to an agreement pursuant to which the Delaware Company may borrow up to $150,000,000. At March 31, 1996, the Delaware Company had borrowed $65,363,000 against this agreement, all of which was repaid in April 1996. There were no borrowings against this agreement at March 31, 1995.
Under a reorganization during the fiscal year ended March 31, 1983, International became the parent of the McDermott group of companies, which includes the Delaware Company which prior to the reorganization was the parent company. The Delaware Company's investment in International represents its right to the undistributed earnings of International existing at the time of the reorganization less subsequent distributions by International to the Delaware Company. In order to preserve the Delaware Company's right to the undistributed earnings and provide for the distribution of such earnings to the Delaware Company should either the Delaware Company or International elect not to keep these earnings invested with International, the Delaware Company retained its ownership of 100,000 shares of International Common Stock, received 100,000 shares of International Series A Participating Preferred Stock and 100,000 shares of International Series B Non-Voting Preferred Stock, and entered
into a stock purchase and sale agreement with International (the "Intercompany Agreement"). Both Series A and Series B Preferred Stocks have certain rights in the event of liquidation of International. Series B Preferred Stock is currently callable by International at $275 per share and 10,000 shares are to be redeemed by International each year at $250 per share. Such redemption began in November 1992. The Series A and Series B Preferred Stocks are entitled to annual per share dividends of $10 (but no more than ten times the amount of per share dividends paid by International on its Common Stock) and $20, respectively, and such dividends are cumulative to the extent not paid. Shares of Series A Preferred Stock are also entitled to additional dividends whenever dividends in excess of $3 per International Common Share are declared in any fiscal year. Dividends and proceeds from redemption of Series B Preferred Stock received from International have been accounted for as a reduction of the Delaware Company's investment in International.
Pursuant to 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 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. If a unit is sold to International upon the Delaware Company's exercise of its right to sell under the Intercompany Agreement, the purchase price of such unit will be 90% of the then current value of the unit (the "current unit value"). If a unit is sold to International pursuant to an exercise by International of its right to purchase under the Intercompany Agreement, the purchase price of such unit will be 110% of the current unit value. At April 1, 1996, the current unit value was $2,529 and the aggregate current unit value for the Delaware Company's 100,000 units was $252,886,000. Both parties intend to preserve the Delaware Company's right to the undistributed earnings by not exercising any rights under the Intercompany Agreement that would result in a loss to the Delaware Company. 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.
The Delaware Company maintains the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the "Thrift Plan"), which is a defined contribution plan that includes a cash or deferred arrangement. Monthly employer contributions are equal to 50% of the first 6% of compensation (as defined in the plan) contributed by participants, and may be made, at the discretion of the Delaware Company, in cash or in common stock of International. When monthly employer contributions are made in stock, the Delaware Company pays cash to International and shares of common stock are issued to the Thrift Plan from the authorized but unissued share capital of International. The number of such shares is determined based on the closing price on the last business day of the month as reported on the New York Stock Exchange Composite Tape with fractional shares paid in cash. During fiscal years 1996, 1995 and 1994, respectively, 300,951, 312,883 and 300,391 shares were purchased by the Delaware Company for $6,347,000, $7,713,000 and $7,984,000.
Certain officers and employees of the Delaware Company participate in certain benefit plans which involve the issuance of International Common Stock.
NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE
Notes payable and current maturities of long-term debt consist of:
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.
Maturities of long-term debt during the five fiscal years subsequent to March 31, 1996 are as follows: 1997 - $1,312,000; 1998 - $46,132,000; 1999 - $27,189,000; 2000 - $30,665,000; 2001 - $25,000.
The Delaware Company is restricted, as a result of covenants in certain credit agreements, in its ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. At March 31, 1996, substantially all of the net assets of the Delaware Company were subject to such restrictions. At March 31, 1996, the most restrictive of these covenants with respect to the payment of dividends by the Delaware Company would prohibit the payment of dividends other than the current dividends on existing preferred stock.
At March 31, 1996 and 1995, the Delaware Company had available to it various uncommitted short-term lines of credit from banks totalling $285,859,000 and $247,903,000, respectively. Borrowings against these lines of credit at March 31, 1996 and 1995 were $58,314,000 and $33,220,000, respectively. In addition, The Babcock & Wilcox Company had available to it an unsecured and committed revolving line of credit facility, which was amended during fiscal year 1996 to increase the commitment to $150,000,000 and to extend the agreement to March 31, 1999. It is a condition to borrowing under this revolving credit facility that the borrower's tangible net worth, debt to capitalization, and interest coverage as defined in the agreement meet or exceed certain covenant requirements. There were borrowings of $50,000,000 against this facility at March 31, 1996 and none at March 31, 1995.
NOTE 8 - PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans - The Delaware Company 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. The Delaware Company'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, 1996 and 1995, 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 1996, 1995 and 1994 included the following components:
Due to the sale of a domestic entity, loss 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.
The following table sets forth the U.S. plans' funded status and amounts recognized in the consolidated financial statements:
The assumptions used in determining the funded status of the U.S. plans were:
Effective April 1, 1995, the Delaware Company transferred to JRM an accrued pension liability of approximately $4,585,000 relating to certain former employees who are now covered under JRM's plan and transferred to JRM's plan assets, which were equal to the projected benefit obligation, of approximately $40,456,000.
The projected benefit obligation increase at March 31, 1996 was primarily due to the change in the discount rate for the U.S. plans ($107,600,000) and changes to actuarial assumptions relative to mortality and retirement.
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for Pensions," the Delaware Company recorded, during 1996 and 1995, an additional minimum liability for certain of its U.S. pension plans of $4,917,000 and $9,596,000, respectively. These liabilities resulted in recognition of intangible assets of $3,744,000 and $9,536,000 and reductions in stockholders' equity of $763,000 and $39,000 in fiscal years 1996 and 1995, respectively.
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 cost for fiscal years 1996, 1995, and 1994 included the following components:
The following table sets forth the plans' funded status (assets exceed accumulated benefits) and amounts recognized in the Delaware Company's consolidated financial statements:
The assumptions used in determining the funded status of the non-U.S. plans were:
The changes in the discount rate for the non-U.S. plans increased the projected benefit obligation at March 31, 1996 by $1,008,000.
Multiemployer Plans - One of the Delaware Company'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 $4,441,000, $9,838,000, and $8,367,000 in fiscal years 1996, 1995 and 1994, respectively.
Postretirement Health Care and Life Insurance Benefits - The Delaware Company 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. The Delaware Company 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. The Delaware Company does not fund any of its plans.
The following table sets forth the amounts recognized in the consolidated financial statements at March 31:
The accumulated postretirement benefit obligation in the above table includes $373,027,000 and $340,899,000 for the Delaware Company's health care plans and $41,815,000 and $39,101,000 for the Delaware Company's life insurance plans at March 31, 1996 and 1995, respectively. The changes in the accumulated postretirement benefit obligation and the unrecognized net gain (loss) at March 31, 1996 were primarily attributable to the decrease in the discount rate.
Net periodic postretirement benefit cost for fiscal years 1996, 1995 and 1994 included the following components:
For measurement purposes, a weighted-average annual assumed rate of increase in the per capita cost of covered health care claims of 10-3/4% was assumed for 1996, 11-1/2% for 1995 and 12-1/2% for 1994. For 1997, a rate of 9-3/4% was 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, 1996
by $24,343,000 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit costs for fiscal year 1996 by $2,065,000.
NOTE 9 - SALE OF ACCOUNTS RECEIVABLE
The Babcock & Wilcox Company has an agreement with a U. S. bank, whereby it can sell 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. The maximum sales limit under the agreement was reduced during fiscal year 1996 from $225,000,000 to $140,000,000. At March 31, 1996 and 1995 approximately $107,000,000 and $175,000,000, respectively, of receivables had been sold for cash under this agreement. 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 $8,518,000, $9,709,000 and $8,699,000 in fiscal years 1996, 1995 and 1994, 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.
NOTE 10 - REDEEMABLE PREFERRED STOCKS
At March 31, 1996 and 1995, 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 2,726,860 and 2,917,236 shares of Series B Preferred Stock, respectively, were outstanding (in each case, exclusive of shares owned by the Delaware Company) at March 31, 1996 and 1995. The outstanding shares are entitled to $31.25 per share in liquidation. Both series of Preferred Stock are entitled to general voting rights of one-half vote for each share. The Board of Directors of the Delaware Company may authorize additional series of Preferred Stock, and may set terms of each new series except that the Delaware Company cannot create any series of stock senior to the existing Series A and Series B Preferred Stock without the consent of the holders of at least 50% of the shares of such Preferred Stock.
Each share of the outstanding Series A Preferred Stock is convertible into one share of Common Stock of International plus $0.10 cash. Series A and Series B Preferred Stock are redeemable at the option of the Delaware Company at $31.25 per share, plus accrued dividends. On March 31, 1997 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 1997 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, 1996, the obligation to redeem the Series A and B Preferred Stock is $17,706,000 for each of the fiscal years 1997 through 2001. 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 252,702 shares of Series B Preferred Stock that it owned to satisfy the March 31, 1996 mandatory sinking fund obligations. During fiscal year 1996 and 1995, 190,376 and 557,416 shares, respectively, of Series B
Preferred Stock were purchased in the open market. At March 31, 1996, 49,637 shares of Series A Preferred Stock have been converted to date and the Delaware Company owned 947,749 and 179,213 shares of Series A and Series B Preferred Stock, respectively.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Litigation - The Delaware Company 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 the Delaware Company.
Products Liabilities - At March 31, 1996 and 1995, the estimated liability for pending and future non-employee products liability asbestos claims was $843,986,000 (of which approximately $208,000,000 had been asserted) and $995,948,000 and estimated insurance recoveries were $723,243,000 and $861,407,000, respectively. Certain B&W insurers have refused to reimburse B&W for amounts paid to settle claims under applicable policies. At March 31, 1996, receivables outstanding from these insurers were $21,050,000. B&W has filed a lawsuit against these insurers seeking reimbursement of these claims and expects to prevail in this litigation which may continue beyond fiscal year 1997 unless a settlement is reached. B&W will require that any settlement reimburse B&W for all amounts billed to date and for all future payments up to full policy limits. During fiscal year 1995, the Delaware Company 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 the Delaware Company'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, changes in estimates could result in a material adjustment to operating results for any fiscal quarter or year and the ultimate loss may differ materially from amounts provided in the consolidated financial statements.
Environmental Matters - During fiscal year 1995, a decision was made to close certain nuclear manufacturing facilities and a provision of $41,724,000 for the decontamination, decommissioning and the closing of these facilities was recognized. Previously, decontamination and decommissioning costs were being accrued over these 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 year 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, 1996 and 1995, the Delaware Company had total environmental reserves of $37,578,000 and $51,271,000 (including the provision discussed above), respectively, of which $9,824,000 and $8,780,000 were included in current liabilities.
The Delaware Company has been identified as a potentially responsible party at various clean up sites under the Comprehensive Environmental Response, Compensation and Liability Act, as amended. The Delaware Company 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, the Delaware Company'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 the Delaware Company.
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, 1996 are as follows: 1997 - $8,369,000; 1998 - $7,887,000; 1999 - $7,785,000; 2000 - $7,718,000; 2001 -$7,025,000; and thereafter - $14,604,000. Total rental expense for fiscal years 1996, 1995 and 1994 was $21,937,000, $52,684,000 and $64,515,000, respectively. These expense figures include contingent rentals and are net of sublease income, both of which are not material.
Other - The Delaware Company 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.
The Delaware Company 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 the Delaware Company considers uneconomical.
Commitments for capital expenditures amounted to approximately $8,069,000 at March 31, 1996, all of which relates to fiscal year 1997.
The Delaware Company is contingently liable under standby letters of credit totaling $256,471,000 at March 31, 1996, issued in the normal course of business.
NOTE 12 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The Delaware Company'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 large oil and gas companies and the U. S. and other governments. These concentrations of customers may impact the Delaware
Company'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, the Delaware Company'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.
The Delaware Company believes that its provision for possible losses on uncollectible accounts receivable is adequate for its credit loss exposure. At March 31, 1996 and 1995, the allowance for possible losses deducted from Accounts receivable-trade on the balance sheet was $13,234,000 and $7,425,000, respectively.
NOTE 13 - INVESTMENTS
At March 31, 1996, all of the Delaware Companies available-for-sale securities were debt securities with a cost of $439,000 that approximated estimated fair value.
The following is a summary of available-for-sale securities at March 31, 1995:
Proceeds, gross realized gains and gross realized losses on sales of available for sale securities were approximately $146,254,000, $3,651,000 and $275,000, respectively for fiscal year 1996 and proceeds and gross realized losses were $20,283,000 and $320,000, respectively for fiscal year 1995. At March 31, 1996, all of the Delaware Company's available-for-sale debt securities were due in one year or less.
NOTE 14 - DERIVATIVE FINANCIAL INSTRUMENTS
The Delaware Company 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. The Delaware Company 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, 1996, the Delaware Company had forward exchange contracts to purchase $172,599,000 in foreign currencies (primarily Canadian Dollars), and to sell $70,636,000 in foreign currencies (primarily Canadian
Dollars), at varying maturities from fiscal year 1997 through 2000. At March 31, 1995, the Delaware Company had forward exchange contracts to purchase $234,233,000 in foreign currencies (primarily Canadian Dollars and Japanese Yen), and to sell $135,138,000 in foreign currencies (primarily Canadian Dollars and Japanese Yen), at varying maturities from fiscal year 1996 through 2000.
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. 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, 1996 and 1995, the Delaware Company had deferred gains of $4,183,000 and $1,694,000, respectively, and deferred losses of $1,059,000 and $9,294,000, respectively, related to forward exchange contracts which will be recognized in accordance with the percentage of completion method of accounting.
The Delaware Company 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.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Delaware Company 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 value of investments are estimated based on quoted market prices. For investments for which there are no quoted market prices, fair values are derived from available yield curves for investments of similar quality and terms.
Long and short-term debt: The fair value of debt instruments are based on quoted market prices or, where quoted prices are not available, 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 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, 1996 and 1995, the Delaware Company had net forward exchange contracts outstanding to purchase foreign currencies with notional values of $101,963,000 and $99,095,000 and fair values of $104,471,000 and $89,613,000, respectively.
The estimated fair values of the Delaware Company's financial instruments are as follows:
NOTE 16 - SEGMENT REPORTING
The Delaware Company operates in two industry segments - Power Generation Systems and Equipment, and Marine Construction Services.
Power Generation Systems and Equipment's principal businesses are the supply of fossil-fuel and nuclear steam generating equipment to the electric power generation industry, and nuclear reactor components to the U.S. Navy.
Marine Construction Services supplies design, engineering, and project and construction management services to offshore oil and gas exploration and production and hydrocarbon processing industries, and to other marine construction companies. This segment also provides maintenance and construction services for a variety of marine vessels and the fabrication of structures and equipment for offshore drilling and production operations.
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 the Delaware Company's operations in each segment. Corporate assets are principally cash and cash equivalents, short-term investments, marketable securities and prepaid pension costs.
In fiscal years 1996, 1995 and 1994, the U. S. Government accounted for approximately 19%, 16%, and 17%, respectively, of the Delaware Company's total revenues. These revenues are principally included in the Power Generation Systems and Equipment segment.
A gain resulting from the sale of two power purchase contracts resulted in an increase in the Power Generation Systems and Equipment segment's equity in income of investees of $30,612,000. In fiscal year 1996, the write-off of an insurance claim due to an unfavorable arbitration ruling resulted in a decrease in the Power Generation Systems and Equipment segment operating income of $12,600,000. 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.
Segment Information For the Three Fiscal Years Ended March 31, 1996.
1. Information about the Delaware Company's Operations in Different Industry Segments.
(2) See Note 2 regarding the sale of a portion of the marine construction service business during fiscal year 1995.
(3) Fiscal years 1995 and 1994 have been restated to reflect the allocation of certain expenses to the business segments which were previously included in General Corporate Expenses. This restatement reduced Segment Operating Income and General Corporate Expenses by $10,009,000 and $10,690,000 in fiscal years 1995 and 1994, respectively, from amounts previously reported.
(1) Fiscal year 1994 includes property, plant and equipment of $14,887,000 of MECL (See Note 3) and the purchase of a fabrication yard financed by a note payable of $16,250,000.
2. Information about the Delaware Company's Operations in Different Geographic Areas.
(1) Net of inter-geographic area revenues in fiscal years 1996, 1995 and 1994 as follows: United States - $38,908,000, $61,797,000 and $20,702,000; Canada - $16,485,000, $2,288,000 and $8,167,000; and Other Foreign - $79,000, $151,000 and $281,000, respectively.
(2) Fiscal years 1995 and 1994 have been restated to reflect the allocation of certain expenses to the geographic areas which were previously included in General Corporate Expenses.
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial information for the fiscal years ended March 31, 1996 and 1995:
Pretax results for the quarter ended June 30, 1995 include an equity income gain of $30,612,000 resulting from the sale of two power purchase contracts. Results for the quarter ended December 31, 1995 include a favorable worker's compensation cost adjustment of $5,746,000. Results for the quarter ended March 31, 1996 include the write-off of an insurance claim of $12,600,000 due to an unfavorable arbitration ruling related to the recovery of cost incurred for corrective action in certain utility and industrial installations.
Pretax results for the quarter ended June 30, 1994 include a reduction in accrued interest expense of $5,700,000 due to settlement 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 claims recoveries from insurance carriers of $14,478,000 and a reduction in accrued interest expense of $5,600,000 due to 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 settlement of outstanding tax issues and favorable worker's compensation cost adjustments of $6,067,000. Results for the quarter ended March 31, 1995 include provisions of $46,489,000 for the closing of certain facilities and a reduction in accrued interest expense of $10,000,000 due to settlement of outstanding tax issues.
Item 9.
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART I I I
Item 10.
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 arrangement or understanding between himself and any other person.
Information required by this item is incorporated by reference to the material appearing under the heading "Election of Directors" in the Information Statement for action to be taken by the Delaware Company without a meeting of stockholders on August 6, 1996.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material appearing under the heading "Stock Compensation of Executive Officers" and "Certain Transactions" in the Information Statement for action to be taken by the Delaware Company without a meeting of stockholders on August 6, 1996.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material appearing under the heading "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Information Statement for action to be taken by the Delaware Company without a meeting of stockholders on August 6, 1996.
Item 13.
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 the Information Statement for action to be taken by the Delaware Company without a meeting of stockholders on August 6, 1996.
PART I V
Item 14.
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, 1996 and 1995
Consolidated Statement of Loss For the Three Fiscal Years Ended March 31, 1996
Consolidated Statement of Stockholder's Equity For the Three Fiscal Years Ended March 31, 1996
Consolidated Statement of Cash Flows For the Three Fiscal Years Ended March 31, 1996
Notes to Consolidated Financial Statements For the Three Fiscal Years Ended March 31, 1996
2. CONSOLIDATED FINANCIAL SCHEDULES
All required schedules will be filed by amendment to this Form 10-K on Form 10-K/A.
3. EXHIBIT INDEX
Exhibit Number Description ------ -----------
3 Articles of Incorporation and By-Laws (Item 3(a) is incorporated by reference to Exhibit 3 to the Delaware Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983; Item 3(b) is incorporated by reference to Exhibit 3 to the Company's annual report on Form 10-K for the fiscal year ended March 31, 1981).
(a) The Delaware Company's Restated Articles of Incorporation
(b) The Delaware Company's By-Laws
4 Indentures with respect to certain of the Delaware Company's long-term debt are not filed as exhibits hereto inasmuch as the securities authorized under any such Indenture do not exceed 10% of the Delaware Company's total assets. The Delaware Company agrees to furnish a copy of each such Indenture to the Securities and Exchange Commission upon request.
10 Material Contracts (Exhibit 10(b) is incorporated by reference to Exhibit 10 to the Delaware Company's annual report on Form 10-K for the fiscal year ended March 31, 1981; Exhibit 10(c) is incorporated by reference to Exhibit 10 to the Delaware Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983; and Exhibit 10(d) is incorporated by reference to Exhibit 10 to the Delaware Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1987; Exhibit 10(e) is incorporated by reference to Exhibit 10 to the Delaware Company's annual report on Form 10-K for the fiscal year ended March 31, 1990).
(a) Supplemental Executive Retirement Plan
(b) Restoration of Retirement Income Plan for Certain Participants in the Retirement Plan for Employees of McDermott Incorporated
(c) Intercompany Agreement
(d) Trust for Supplemental Executive Retirement Plan
(e) Variable Supplemental Compensation Plan
22 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
FORM 8-K REPORTS
There were no reports on Form 8-K filed during the three months ended March 31,
SIGNATURES OF THE REGISTRANT
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
McDERMOTT INCORPORATED
June 4, 1996 By: s/Robert E. Howson ------------------------------ 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 and on the date indicated.
June 4, 1996
INDEX TO EXHIBITS
Exhibit Number Description - ------ -----------
3 Articles of Incorporation and By-Laws (Item 3(a) is incorporated by reference to Exhibit 3 to the Delaware Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983; Item 3(b) is incorporated by reference to Exhibit 3 to the Company's annual report on Form 10-K for the fiscal year ended March 31, 1981).
(a) The Delaware Company's Restated Articles of Incorporation
(b) The Delaware Company's By-Laws
4 Indentures with respect to certain of the Delaware Company's long-term debt are not filed as exhibits hereto inasmuch as the securities authorized under any such Indenture do not exceed 10% of the Delaware Company's total assets. The Delaware Company agrees to furnish a copy of each such Indenture to the Securities and Exchange Commission upon request.
10 Material Contracts (Exhibit 10(b) is incorporated by reference to Exhibit 10 to the Delaware Company's annual report on Form 10-K for the fiscal year ended March 31, 1981; Exhibit 10(c) is incorporated by reference to Exhibit 10 to the Delaware Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983; and Exhibit 10(d) is incorporated by reference to Exhibit 10 to the Delaware Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1987; Exhibit 10(e) is incorporated by reference to Exhibit 10 to the Delaware Company's annual report on Form 10-K for the fiscal year ended March 31, 1990).
(a) Supplemental Executive Retirement Plan
(b) Restoration of Retirement Income Plan for Certain Participants in the Retirement Plan for Employees of McDermott Incorporated
(c) Intercompany Agreement
(d) Trust for Supplemental Executive Retirement Plan
(e) Variable Supplemental Compensation Plan
21 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule