Item 3. LEGAL PROCEEDINGS
Due to the nature of its business, McDermott International is, from time to time, involved in litigation. It is management's opinion that none of this litigation will have a material adverse effect on the consolidated financial position of McDermott International.
For a discussion of McDermott International's potential liability for non-employee products liability asbestos claims see Item 1F and Note 1 to the consolidated financial statements.
- 17 -
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.
- 18 - PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
International's Common Stock is traded on the New York Stock Exchange. High and low stock prices and dividends declared for the years ended March 31, 1994 and 1993 follow:
As of March 31, 1994, the approximate number of record holders of Common Stock was 7,005.
- 19 - Item 6.
Item 6. SELECTED FINANCIAL DATA
- 20 - In fiscal year 1994, Net Income (Loss) includes a cumulative effect of an accounting change of $100,750,000 due to the adoption of Emerging Issues Task Force Issue No. 93-5 which resulted in a provision for estimated future costs resulting from possible gaps in insurance coverage with respect to non-employee products liability asbestos claims. Inherent in the estimate of such future costs are assumptions which may vary significantly as claims are filed and settled, and accordingly, the ultimate loss may differ materially from the amount provided. In fiscal year 1993, Net Income (Loss) includes a cumulative effect of an accounting change of $249,351,000 due to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 106. See Note 1 to the consolidated financial statements regarding the above and the adoption of SFAS No. 109 in fiscal year 1993, Note 2 regarding the acquisition of Northern Ocean Services Limited and Delta Catalytic Corporation, and Note 13 regarding discontinued operations.
In fiscal years 1993 and 1992, Income (Loss) from Continuing Operations before Extraordinary Items and Cumulative Effect of Accounting Changes includes after tax gains from the sale of McDermott International's interests in its two commercial nuclear joint ventures of $15,667,000 and $35,436,000, respectively (see Note 3 to the consolidated financial statements).
- 21 - Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
FISCAL YEAR 1994 VS FISCAL YEAR 1993
Power Generation Systems and Equipment's revenues increased $90,730,000 to $1,614,206,000. This was primarily due to higher revenues from fabrication and erection of fossil fuel steam and environmental control systems, replacement nuclear steam generators, repair and alteration of existing fossil fuel steam systems, and nuclear fuel assemblies and reactor components for the U. S. Government. These increases were partially offset by lower revenues from extended scope of supply and fabrication of industrial boilers, defense and space-related products other than nuclear fuel assemblies and reactor components, and air cooled heat exchangers.
Power Generation Systems and Equipment's segment operating income decreased $6,526,000 to $49,941,000. This was primarily due to lower volume and margins on extended scope of supply and fabrication of industrial boilers as well as defense and space-related products other than nuclear fuel assemblies and reactor components. There were also lower margins on plant enhancements, replacement parts, and repair and alteration of existing fossil fuel steam systems, as well as higher royalty income recorded in the prior year. These decreases were partially offset by higher volume and margins on replacement nuclear steam generators, nuclear fuel assemblies and reactor components for the U. S. Government and higher volume on fabrication and erection of fossil fuel steam and environmental control systems. There were also lower general and administrative expenses, and lower warranty expense primarily due to net favorable warranty reserve adjustments (See Note 15 to the consolidated financial statements).
Power Generation Systems and Equipment's equity in income of investees increased $3,341,000 to $12,032,000 primarily due to improved results in a foreign joint venture and in three domestic joint ventures which own and operate a cogeneration plant and two small power plants, partially offset by unfavorable results in another foreign joint venture.
Backlog for this segment at March 31, 1994 was $2,398,285,000 compared to $2,614,708,000 at March 31, 1993. At March 31, 1994, this segment's backlog with the U.S. Government was $775,909,000 (of which $17,055,000 had not been funded). These amounts reflect the impact of Congressional budget reductions on the advanced solid rocket motor and super conducting super collider projects. Also, additional U. S. Government budget reductions have negatively affected this segment's other government operations. The current competitive economic environment has also negatively affected demand for other industrial related product lines and these markets are expected to remain very competitive.
The current competitive economic environment and uncertainties created by the passage of the Energy Policy Act of 1992 and the Clean Air Act Amendments of 1990 have caused U.S. utilities to defer repairs and refurbishments on existing plants. However, the Clean Air Act has created demand for environmental control equipment and related plant enhancements. Most electric utilities have already purchased equipment to comply with
- 22 - Phase I of the Clean Air Act, and they will purchase equipment to comply with Phase II deadlines in a gradual manner, spread out over the next several years as various deadlines approach. Electric utilities in Asia are active purchasers of large, new baseload generating units, due to the rapid growth of the Pacific Rim economies and to the small existing stock of electrical generating capacity in most developing countries.
Marine Construction Services' revenues decreased $197,156,000 to $1,452,497,000, primarily due to lower volume in worldwide fabrication and engineering operations, foreign marine operations and procured materials. These decreases were partially offset by the acquisition of Delta Catalytic Corporation ("DCC").
Marine Construction Services' segment operating income decreased $23,258,000 to $44,394,000, primarily due to lower volume in worldwide fabrication and engineering operations and lower volume in procured materials. These decreases were partially offset by the acquisition of DCC, higher margins in foreign marine operations, the accelerated depreciation and write-off of certain fabrication facilities and marine construction equipment in the prior year, and reduced operating costs.
Marine Construction Services' equity in income of investees increased $22,461,000 to $107,828,000. This increase was principally due to improved operating results of the HeereMac joint venture. In 1995, this segment anticipates that its joint ventures will perform at significantly lower levels.
Backlog for this segment at March 31, 1994 was $1,054,142,000 (including $233,299,000 from DCC and $57,373,000 from NOS). Excluding DCC and NOS, backlog of $763,470,000 at March 31, 1994 was down from backlog of $1,129,577,000 at March 31, 1993, but remains above the levels experienced during most of the 1980's. Not included in backlog at March 31, 1994 and 1993, was backlog relating to contracts to be performed by unconsolidated foreign joint ventures of approximately $840,000,000 and $900,000,000, respectively. This segment's markets are expected to be at a low level in the U. S. during 1995 while international markets are varied. In all areas, the overcapacity of marine equipment will continue to result in a competitive environment and put pressure on profit margins.
Interest income decreased $1,640,000 to $38,751,000. This decrease was primarily due to lower interest rates on investments in government securities and other long-term investments.
Interest expense decreased $26,365,000 to $63,975,000, primarily due to changes in debt obligations and interest rates prevailing thereon. The decrease reflects the redemption of high coupon debt during April and June 1993, and a reduction in accrued interest on proposed tax deficiencies.
Minority interest expense decreased $2,952,000 to $15,251,000 primarily due to minority shareholder participation in the losses of the McDermott-ETPM East joint venture in the current year and income in the prior year, partially offset by participation in the results of DCC since its acquisition in June 1993 (See Note 2 to the consolidated financial statements).
- 23 - Other-net decreased $14,562,000 to a loss of $4,365,000 from income of $10,197,000. This decrease was primarily due to gains on the sale of interests in two commercial nuclear joint ventures (See Note 3 to the consolidated financial statements), a foreign marine asset casualty gain and gains on the sale of nineteen tugboats, all in the prior period.
Provision for income taxes decreased $15,101,000 to $24,998,000, while income from continuing operations before provision for income taxes, extraordinary items, and cumulative effect of accounting changes increased $7,532,000 to $114,954,000. The decrease in the provision for income taxes is primarily due to a reduction in a provision of taxes due to the settlement of outstanding issues and higher non-taxable earnings.
Net loss decreased $177,938,000 to $10,794,000 reflecting the cumulative effect of the change in accounting for non-employee products liability asbestos claims of $100,750,000 in the current year and the cumulative effect of the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," of $249,351,000 in the prior year, in addition to other items described above.
FISCAL YEAR 1993 VS FISCAL YEAR 1992
Power Generation Systems and Equipment's revenues decreased $70,025,000 to $1,523,476,000. This was primarily due to lower revenues from nuclear fuel assemblies and reactor components for the U. S. Government and plant enhancements. Additionally, the segment's controlling interest in its commercial nuclear fuel joint venture was sold during December 1991, and revenue from this activity is no longer included in this segment's revenues. These decreases were partially offset by higher revenues from fabrication and erection of fossil fuel steam and environmental control systems and extended scope of supply and fabrication of industrial boilers.
Power Generation Systems and Equipment's segment operating income decreased $53,307,000 to $56,467,000. This was primarily due to non-recurring items which benefitted 1992's results. These items included a Department of Energy grant for decommissioning and restoration of an inactive nuclear facility, a favorable adjustment to workers' compensation costs related to prior years, the inclusion of the commercial nuclear fuel joint venture's results through December 1991, and the reduction of a provision to relocate a manufacturing plant. The decrease was also due to lower volume and margins on plant enhancements and lower volume from nuclear fuel assemblies and reactor components for the U. S. Government. This decrease was partially offset by higher volume and margins on fabrication and erection of fossil fuel steam and environmental control systems and higher margins on defense and space-related products other than nuclear fuel assemblies and reactor components.
Marine Construction Services' revenues decreased $286,965,000 to $1,649,653,000 primarily due to the December 1991 deconsolidation of the McDermott-ETPM West joint venture. There was lower volume in domestic fabrication and offshore operations and in fabrication operations in Scotland. There was higher volume on foreign turnkey projects.
Marine Construction Services' segment operating income increased $11,744,000 to $67,652,000 primarily due to improved margins on domestic offshore operations and on foreign turnkey projects, and contract loss provisions in 1992. These were partially offset
- 24 - by the deconsolidation of the McDermott-ETPM West joint venture. There was also lower volume in domestic fabrication and offshore operations and lower margins on domestic fabrication operations.
Equity in income of investees increased $86,816,000 to $94,058,000. This increase was principally due to improved operating results of the HeereMac joint venture and both improved operating results and foreign currency transaction gains in the McDermott-ETPM West joint venture.
Interest income decreased $13,377,000 to $40,391,000. This decrease was principally due to lower interest rates on short-term investments and investments in government securities and other long-term investments.
Interest expense decreased $11,981,000 to $90,340,000, resulting from a reduction in the provision for interest on proposed tax deficiencies, lower interest expense resulting from interest rate swap agreements, and changes in debt obligations and interest rates prevailing thereon.
Minority interest decreased $862,000 to $18,203,000 due to the deconsolidation of the McDermott-ETPM West joint venture and the reacquisition of McDermott Scotland's minority shareholder's interest, both in 1991, mostly offset by minority shareholder participation in the improved results of McDermott-ETPM East.
Other-net decreased $60,172,000 to income of $10,197,000. This decrease was principally due to lower gains on the sale of its interests in two commercial nuclear joint ventures (see Note 3 to the consolidated financial statements), lower marine casualty gains, and gains from the sale of certain marine assets to the HeereMac joint venture in 1992. This was partially offset by a gain of $4,762,000 from the sale of nineteen tugboats in 1993.
Provision for income taxes decreased $3,170,000 to $40,099,000, while income from continuing operations before provision for income taxes, extraordinary items, and cumulative effect of accounting changes decreased $16,384,000 to $107,422,000. The decrease in the provision for income taxes is due primarily to the decrease in income.
Net income (loss) decreased $265,901,000 to a loss of $188,732,000 from income of $77,169,000 reflecting the cumulative effect of the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," of $249,351,000, in addition to other items described above.
Effect of Inflation and Changing Prices
McDermott International's financial statements are prepared in accordance with generally accepted accounting principles, using historical dollar accounting (historical cost). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the dollar, especially during times of significant and continued inflation.
- 25 - The management of McDermott International is cognizant of the effects of inflation and, in order to minimize the negative impact of inflation on its operations, attempts to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimation of such changes, which is reflected in the original fixed price, or through price escalation clauses in its contracts.
Liquidity and Capital Resources
During 1994, McDermott International's cash and cash equivalents decreased $5,713,000 to $133,809,000 and total debt decreased $63,789,000 to $729,610,000. During this period, McDermott International provided cash of $219,524,000 from operating activities; $92,841,000 from the issuance of long-term debt; $16,441,000 from the issuance of common stock; and $140,066,000 from the issuance of Series C convertible preferred stock; and used cash of $56,773,000 for dividends on International's common and preferred stock; $85,894,000 for the acquisitions of Northern Ocean Services Limited ("NOS") and Delta Catalytic Corporation ("DCC") (See Note 2 to the consolidated financial statements); $222,646,000 for repayment of long-term debt and $76,321,000 for additions to property, plant and equipment.
Lower accounts receivable are primarily due to lower volume and the timing of Marine Construction Services' foreign offshore contract billings and collections, and the acceleration of collections of retainage billings on the Naval Reactors program, partially offset by collection delays on a certain foreign Power Generation Systems and Equipment segment contract. Lower accrued liabilities are primarily due to settlement of subcontract costs on a certain foreign offshore contract. Decreases in net contracts in progress and advance billings are primarily due to lower volume.
Pursuant to an agreement with the majority of its principal insurers, McDermott International negotiates and settles products liability asbestos claims from non-employees and bills these amounts to the appropriate insurers. As a result of collection delays inherent in the process, reimbursement is usually delayed for three months or more. McDermott International has outstanding receivables of $29,079,000 at March 31, 1994 from its insurers for reimbursement of these claims. The number of claims, which management believes peaked in fiscal year 1990, has declined moderately. However, the average amount of these claims (historical average of less than $3,000 per claim) has continued to rise. Claims paid in fiscal year 1994 were $112,271,000, including $7,810,000 applicable to insolvent insurers and $3,315,000 relating to the policy year 1979 (see Note 1 to the consolidated financial statements). Settlement of the estimated liability of $135,053,000 at March 31, 1994 for future costs relating to insolvent insurers and policy year 1979 is expected to occur over the next 30 years. McDermott International's estimated future costs relating to policy year 1979 and certain insolvent insurers are derived from its loss history and constitute management's best estimate of such future costs. Inherent in the estimate of such future costs are assumptions which may vary significantly as claims are filed and settled. Accordingly, the amount ultimately paid may differ materially from the amount provided in the consolidated financial statements. The collection delays, and the amount of claims paid that are related to insolvent insurance carriers and the policy year 1979 have not had a material adverse effect on McDermott International's liquidity, and management believes, based on information currently available, that they will not have a material adverse effect on liquidity in the future.
- 26 - McDermott International's expenditures for property, plant and equipment decreased $5,713,000 to $76,321,000 in 1994. While the majority of these expenditures were incurred to maintain and replace existing facilities and equipment, $5,000,000 was expended in connection with the purchase of a fabrication yard in Nueces County, Texas and $8,098,000 was expended on the construction a new combustion and emission test facility at its Alliance, Ohio research center. McDermott International has committed to make capital expenditures of approximately $65,692,000 during fiscal 1995. In addition to maintaining McDermott International's existing facilities, these expenditures include $38,560,000 for a new concept steam generator facility for the Naval Reactor Program in Lynchburg, Virginia, the anticipated purchase of a barge currently leased, and the completion of a new combustion and emission facility in Alliance, Ohio.
During April and May 1993, the Delaware Company issued $87,000,000 of Series B Medium Term Notes at maturities ranging from four to twenty-nine years and interest rates ranging from 6.50% to 8.75%. These notes have an average maturity of approximately twenty years and an average interest rate of approximately 7.95%.
At March 31, 1994 and 1993, The Babcock & Wilcox Company had sold, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable of approximately $170,000,000 under an agreement with a certain U. S. bank. The maximum sales limit available under this agreement was $225,000,000 at March 31, 1994 (See Note 7 to the consolidated financial statements).
At March 31, 1994 and 1993, McDermott International had available to it various uncommitted short-term lines of credit from banks totaling $246,412,000 and $129,734,000, respectively. Borrowings by McDermott International against these lines of credit at March 31, 1994 and 1993 were $37,512,000 and $775,000, respectively. In addition, the Babcock & Wilcox Company had available to it a $128,000,000 unsecured and committed revolving line of credit facility. Loans outstanding under the revolving credit facility may not exceed the banks' commitments thereunder, which commitments are subject to reduction based upon the ratio of the borrower's consolidated net tangible assets to specified indebtedness plus unused commitments. In addition, it is a condition to borrowing under the revolving credit facility that the borrower's consolidated net tangible assets exceed a certain level. There were no borrowings against this facility at March 31, 1994 and 1993. DCC had available from a certain Canadian bank an unsecured and committed revolving credit facility of $14,493,000 which expires on May 31, 1997. No borrowings were outstanding against this facility at March 31, 1994.
McDermott International maintains an investment portfolio of government obligations and other investments which is held for long- term investment purposes. The amortized cost of the long-term portfolio at March 31, 1994 was $715,131,000 (market value of $711,036,000). At March 31, 1994, approximately $157,065,000 amortized cost (market value of $158,200,000) of this portfolio was pledged to secure a letter of credit in connection with a long-term loan and reinsurance agreements.
The Delaware Company is restricted, as a result of covenants in credit agreements, in its ability to transfer funds to International through cash dividends or through unsecured loans or investments. At March 31, 1994, substantially all of the net assets of the Delaware Company were subject to such restrictions. It is not expected that these restrictions will have any significant effect on International's liquidity.
- 27 - During July 1993, International sold 2,875,000 shares of Series C Cumulative Convertible Preferred Stock, and received net proceeds of $140,066,000.
Working capital decreased $117,486,000, to a deficit of $1,422,000 at March 31, 1994 from $116,064,000 at March 31, 1993. During 1995, McDermott International expects to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities and additional borrowings. Leasing agreements for equipment, which are short-term in nature, are not expected to impact McDermott International's liquidity or capital resources.
International's quarterly dividends of $0.25 per share on its Common Stock and the Delaware Company's quarterly dividends of $0.55 per share on the Series A $2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series B $2.60 Cumulative Preferred Stock were at the same rates in 1994 and 1993. At March 31, 1994, International's quarterly dividend rate was $0.71875 per share on its Series C Cumulative Convertible Preferred Stock.
At March 31, 1994 the ratio of long-term debt to total common stock and other stockholders' equity was 1.23 as compared with 1.27 at March 31, 1993.
McDermott International accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". This standard requires, among other things, recognition of future tax benefits, measured by enacted tax rates, attributable to deductible temporary differences between the financial statement and income tax basis of assets and liabilities and to tax net operating loss carryforwards to the extent that realization of such benefits is more likely than not.
McDermott International has provided a valuation allowance ($26,576,000 at March 31, 1994) for deferred tax assets related primarily to net operating loss carryforwards which can not be realized through carrybacks and future reversals of existing taxable temporary differences. Management believes that remaining deferred tax assets ($364,193,000 at March 31, 1994) in all other tax jurisdictions are realizable through carrybacks and future reversals of existing taxable temporary differences and, if necessary, the implementation of tax planning strategies involving sales and sale/leasebacks of appreciated assets. Major uncertainties that affect the ultimate realization of deferred tax assets include the risks of incurring operating losses in the future and the possibility of declines in value of appreciated assets involved in identified tax planning strategies. These factors have been considered in determining the valuation allowance. Management will continue to assess the adequacy of the valuation allowance on a quarterly basis.
New Accounting Standards
McDermott International adopted SFAS No. 106 effective April 1, 1992 for all domestic plans. McDermott International plans to adopt SFAS No. 106 for foreign plans during fiscal year 1996, and the adoption is not expected to have a material effect on the consolidated financial statements of McDermott International. The new standard does not have any impact on the cash requirements of any domestic or foreign postretirement health and welfare plan.
- 28 - In November 1992, the Financial Accounting Standards Board ("FASB") issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits," effective for fiscal years beginning after December 15, 1993. SFAS No. 112 requires accrual accounting, under certain conditions, for the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement. The new standard will have no impact on the cash requirements for any postemployment benefits, and will not have a material effect on the consolidated financial statements of McDermott International.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective for fiscal years beginning after December 15, 1993. SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Based on its current portfolio management practices, McDermott International will report its investments at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. The initial adoption of the new standard will not have a material effect on the consolidated financial statements of McDermott International.
- 29 - Item 8.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPANY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
International has prepared the consolidated financial statements and related financial information included in this report. International has the primary responsibility for the financial statements and other financial information and for ascertaining that the data fairly reflects the financial position and results of operations of McDermott International. The financial statements were prepared in accordance with generally accepted accounting principles, and necessarily reflect informed estimates and judgments by appropriate officers of McDermott International with appropriate consideration given to materiality.
McDermott International believes that it maintains an internal control structure designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with generally accepted accounting principles. The concept of reasonable assurance is based on the recognition that the cost of an internal control structure must not exceed the related benefits. Although internal control procedures are designed to achieve these objectives, it must be recognized that errors or irregularities may nevertheless occur. McDermott International seeks to assure the objectivity and integrity of its accounts by its selection of qualified personnel, by organizational arrangements that provide an appropriate division of responsibility and by the establishment and communication of sound business policies and procedures throughout the organization. McDermott International believes that its internal control structure provides reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected.
McDermott International's accompanying consolidated financial statements have been audited by its independent auditors, who provide McDermott International with expert advice on the application of U. S. generally accepted accounting principles to McDermott International's business and also provide an objective assessment of the degree to which McDermott International meets its responsibility for the fairness of financial reporting. They regularly evaluate the internal control structure and perform such tests and other procedures as they deem necessary to reach and express an opinion on the fairness of the financial statements. The report of the independent auditors appears elsewhere herein.
The Board of Directors pursues its responsibility for McDermott International's consolidated financial statements through its Audit Committee, which is composed solely of directors who are not officers or employees of McDermott International. The Audit Committee meets periodically with the independent auditors and management to review matters relating to the quality of financial reporting and internal control structure and the nature, extent and results of the audit effort. In addition, the Audit Committee is responsible for recommending the engagement of independent auditors for McDermott International to the Board of Directors, who in turn submit the engagement to the stockholders for their approval. The independent auditors have free access to the Audit Committee.
May 10, 1994
- 30 - REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders McDermott International, Inc.
We have audited the accompanying consolidated balance sheet of McDermott International, Inc. as of March 31, 1994 and 1993, and the related consolidated statements of income (loss) and retained earnings (deficit) and cash flows for each of the three years in the period ended March 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McDermott International, Inc. at March 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company has provided for estimated future costs for non- employee products liability asbestos claims. Inherent in the estimate of such future costs are assumptions which may vary significantly as claims are filed and settled. Accordingly, the ultimate loss may differ materially from the amount provided in the consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company changed its methods of accounting for recoveries of products liability claims in 1994 and income taxes and postretirement benefits other than pensions in 1993.
ERNST & YOUNG
New Orleans, Louisiana May 9, 1994
- 31 - McDERMOTT INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEET MARCH 31, 1994 and 1993
ASSETS
See accompanying notes to consolidated financial statements.
- 32 -
LIABILITIES AND STOCKHOLDERS' EQUITY
- 33 - McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT) FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
- 34 - CONTINUED
See accompanying notes to consolidated financial statements.
- 35 - McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
- 36 - CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
See accompanying notes to consolidated financial statements.
- 37 - McDERMOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements are presented in U.S. Dollars in accordance with accounting principles generally accepted in the United States. The consolidated financial statements include the accounts of McDermott International, Inc. and all subsidiaries and controlled joint ventures. Investments in joint venture and other entities in which McDermott International, Inc. has a 20% to 50% interest are accounted for on the equity method. Differences between the cost of equity method investments and the amount of underlying equity in net assets of the investees are amortized systematically to income. All significant intercompany transactions and accounts have been eliminated. Certain amounts previously reported have been reclassified to conform with the presentation at March 31, 1994. The notes to the consolidated financial statements are presented on the basis of continuing operations, unless otherwise stated.
Unless the context otherwise requires, hereinafter "International" will be used to mean McDermott International, Inc., a Panamanian corporation; the "Delaware Company" will be used to mean McDermott Incorporated, a Delaware corporation which is a subsidiary of International, and its consolidated subsidiaries (including Babcock & Wilcox Investment Company and its principal subsidiary, The Babcock & Wilcox Company); and "McDermott International" will be used to mean the consolidated enterprise.
Changes in Accounting Policies
Products Liability - As a result of the consensus reached on Emerging Issues Task Force ("EITF") Issue No. 93-5, a company is no longer permitted to offset, for recognition purposes, reasonably possible recoveries against probable losses which had been McDermott International's practice with respect to estimated future costs for non-employee products liability asbestos claims. During the third quarter of fiscal year 1994, and effective April 1, 1993, McDermott International adopted this provision of EITF Issue No. 93-5 as a change in accounting principle and provided for estimated future costs to the extent that recovery from its insurers is not determined to be probable. McDermott International has an agreement with a majority of its principal insurers concerning the method of allocation of products liability asbestos claim payments to the years of coverage. However, amounts allocable to policy year 1979 are excluded from this agreement, and McDermott International's ability to recover these amounts, and amounts allocable to certain insolvent insurers, is only reasonably possible, thus a provision for these estimated future costs has been recognized. McDermott International's estimated future costs relating to policy year 1979 and certain insolvent insurers are derived from its loss history and constitute management's best estimate of such future costs. As of March 31, 1994, the estimated amount of liabilities arising from all pending and future asbestos claims for non-employees was in excess of $1,100,000,000, of which less than $100,000,000 has been asserted. The estimated amount of future costs allocable to insolvent insurers and the policy year 1979 was $135,053,000. Inherent in the estimate
- 38 - of such future liabilities and costs are expected trends in claim severity and frequency and other factors, including recoverability from insurers, which may vary significantly as claims are filed and settled. Accordingly, the ultimate loss may differ materially from the amount provided in the consolidated financial statements.
The cumulative effect of the accounting change at April 1, 1993 was a charge of $100,750,000 (net of income taxes of $54,250,000), or $1.89 a share, in fiscal year 1994. The adoption of this provision of EITF Issue No. 93-5 resulted in a increase in Income before Cumulative Effect of Accounting Change of $19,947,000, or $0.37 per share, in fiscal year 1994, as costs that would have been recognized under McDermott International's prior practice are included in the cumulative effect of the accounting change. Pro forma amounts reflecting the effect of retroactive application of the accounting change to prior periods are not presented because the amounts are not determinable.
Postretirement Health Care Benefits - During the fourth quarter of 1993 and effective April 1, 1992, McDermott International adopted Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The Statement requires the accrual method of accounting for the costs of providing postretirement health and welfare benefits and expanded postretirement health and welfare plan disclosures. In accordance with the Statement, McDermott International elected immediate recognition of its transition obligation and recorded $249,351,000 (net of income tax benefit of $136,228,000), or $4.79 per share, as the cumulative effect of an accounting change. In fiscal year 1993, other than the cumulative effect of the accounting change, the adoption of SFAS No. 106 resulted in a decrease in Income before Extraordinary Items and Cumulative Effect of Accounting Changes of $4,688,000, or $0.09 per share. Postretirement benefit cost for prior years has not been restated and was recognized by expensing the insurance programs' premiums, the self-insured program's claims paid, and the estimated unpaid liability for claims incurred by plan participants. The aggregate cost, including discontinued operations, was $25,458,000 in fiscal year 1992.
Income Taxes - Effective April 1, 1992, McDermott International adopted SFAS No. 109, "Accounting for Income Taxes". This statement establishes new accounting and reporting standards for the effects of income taxes. It continues the liability approach provided by its predecessor standard, SFAS No. 96, which was adopted by McDermott International in fiscal year 1989, but contains new requirements for asset recognition. It also contains new requirements regarding balance sheet classification and prior business combinations. The cumulative effect of the accounting change reflects the impact of the net reduction in enacted tax rates on temporary differences resulting from adjustments of remaining assets and liabilities acquired in the acquisition of The Babcock & Wilcox Company in 1978 from net of tax to pre-tax amounts. The cumulative effect of the accounting change on prior years at April 1, 1992 was $3,727,000, or $0.07 a share. Other than the cumulative effect, the accounting change had no material effect on fiscal year 1993.
- 39 - Foreign Currency Translation
Assets and liabilities of foreign operations, other than operations in highly inflationary economies, are translated into U.S. Dollars at current exchange rates and income statement items are translated at average exchange rates for the year. Adjustments resulting from the translation of foreign currency financial statements are recorded in a separate component of equity; an analysis of these adjustments follows:
(In thousands)
Balance March 31, 1991 $ (8,869) Translation adjustments for fiscal year 1992 (3,335) - - --------------------------------------------------------------------------------
Balance March 31, 1992 (12,204) Translation adjustments for fiscal year 1993 (21,581) - - --------------------------------------------------------------------------------
Balance March 31, 1993 (33,785) Translation adjustments for fiscal year 1994 (14,116) - - --------------------------------------------------------------------------------
Balance March 31, 1994 $(47,901) ================================================================================
Foreign currency transaction adjustments are reported in income. Included in Other Income (Expense) are transaction losses of $2,260,000, $3,747,000, and $6,744,000 for fiscal years 1994, 1993 and 1992, respectively.
- 40 - Contracts and Revenue Recognition
Contract revenues and related costs are principally recognized on a percentage of completion method for individual contracts or components thereof based upon work performed or a cost to cost method, as applicable to the product or activity involved. Revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, are included in Contracts in Progress. Billings that exceed accumulated contract costs and revenues and costs recognized under percentage of completion are included in Advance Billings on Contracts. Most long-term contracts have provisions for progress payments. Contract price and cost estimates are reviewed periodically as the work progresses and adjustments proportionate to the percentage of completion are reflected in income in the period when such estimates are revised. There are no unbilled revenues which will not be billed. Provisions are made currently for all known or anticipated losses. Claims for extra work or changes in scope of work are included in contract revenues when collection is probable. Included in Accounts Receivable and Contracts in Progress are approximately $56,873,000 and $54,668,000 relating to commercial and U.S. Government contracts claims whose final settlement is subject to future determination through negotiations or other procedures which had not been completed at March 31, 1994 and 1993, respectively. International and certain of its subsidiaries keep books and file tax returns on the completed contract method of accounting.
McDermott International is usually entitled to financial settlements relative to the individual circumstances of deferrals or cancellations of Power Generation Systems and Equipment contracts. McDermott International does not recognize such settlements or claims for additional compensation until final settlement is reached.
- 41 - Included in accounts receivable - trade are amounts representing retainages on contracts as follows:
Of its long-term retainages at March 31, 1994, McDermott International anticipates collection as follows: $18,704,000 in fiscal year 1996, $17,452,000 in fiscal year 1997, $3,214,000 in fiscal year 1998.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined on an average cost basis except for certain materials inventories, for which the last-in first-out (LIFO) method is used. The cost of approximately 21% and 18% of total inventories was determined using the LIFO method at March 31, 1994 and 1993, respectively. Consolidated inventories at March 31, 1994 and 1993 are summarized below:
Warranty Expense
Estimated warranty expense which may be required to satisfy contractual requirements, primarily of the Power Generation Systems and Equipment segment, is accrued relative to revenue recognition on the respective contracts. In addition, specific provisions are made where the costs of warranty are expected to significantly exceed such accruals.
- 42 - Environmental Clean-up Costs
McDermott International accrues for future decommissioning and decontamination of its nuclear facilities that will permit the release of these facilities to unrestricted use at the end of each facility's life, which is a condition of its licenses from the Nuclear Regulatory Commission. Such accruals are based on the estimated cost of those activities over the economic useful life of each facility, which is estimated at 40 years. During fiscal year 1992, the provision was reduced $14,900,000 as a result of a Department of Energy grant for one facility.
Research and Development
The cost of research and development which is not performed on specific contracts is charged to operations as incurred. Such expense was approximately $21,036,000, $19,459,000 and $21,300,000 in fiscal years 1994, 1993 and 1992, respectively. In addition, expenditures on research and development activities of approximately $48,112,000, $42,082,000 and $67,100,000 in fiscal years 1994, 1993 and 1992, respectively, were paid for by customers of McDermott International.
Depreciation, Maintenance and Repairs and Drydocking Expenses
Except for major marine vessels, property, plant and equipment is depreciated on the straight-line method, using estimated economic useful lives of 8 to 40 years for buildings and 2 to 28 years for machinery and equipment.
Major marine vessels are depreciated on the units-of-production method based on the utilization of each vessel. Depreciation expense calculated under the units-of-production method may be less than, equal to, or greater than depreciation expense calculated under the straight-line method in any period. The annual depreciation based on utilization of each vessel will not be less than the greater of 25% of annual straight-line depreciation, or 50% of cumulative straight-line depreciation.
Maintenance, repairs and renewals which do not materially prolong the useful life of an asset are expensed as incurred except for drydocking costs for the marine fleet, which are estimated and accrued over the period of time between drydockings, and such accruals are charged to operations currently.
Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased Businesses
Excess of the cost over fair value of net assets of purchased businesses primarily pertains to The Babcock & Wilcox Company, which is being amortized on a straight-line basis over forty years.
- 43 - Capitalization of Interest Cost
In fiscal years 1994, 1993 and 1992, total interest cost incurred was $65,296,000, $92,111,000 and $104,946,000, respectively, of which $1,321,000, $1,771,000 and $2,625,000, respectively, was capitalized.
Earnings Per Share
Primary earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the year. Fully diluted earnings per share include the dilutive effect of stock options and appreciation rights.
Cash Equivalents
Cash equivalents are highly liquid investments, with maturities of three months or less when purchased, which are not held as part of the long-term investment portfolio.
Investments
Investments in government obligations and other investments (principally debt investments) held as a long-term investment are carried at amortized cost. At March 31, 1994 the market and face values of the government obligations were $393,331,000 and $397,300,000, and other investments were $317,705,000 and $339,016,000, respectively. See Management's Discussion and Analysis of Financial Condition and Results of Operations regarding the future adoption of FASB Statement No. 115, "Accounting for Investments in Debt and Equity Securities".
Forward Exchange Contracts
McDermott International enters into forward exchange contracts primarily as hedges relating to identifiable currency positions. These financial instruments are designed to minimize exposure and reduce risk from exchange rate fluctuations in the regular course of business. Gains and losses on forward exchange contracts which hedge exposures on firm foreign currency commitments are deferred and recognized as adjustments to the bases of those assets. Gains and losses on forward exchange contracts which hedge foreign currency assets or liabilities are recognized in income as incurred. Such amounts effectively offset gains and losses on the foreign currency assets or liabilities that are hedged.
At March 31, 1994, McDermott International had forward exchange contracts to purchase $328,881,000 in foreign currencies (primarily Canadian Dollars and Dutch Guilders), and to sell $281,787,000 in foreign currencies (primarily Canadian Dollars, Japanese Yen, Dutch Guilders, British Pounds, and Saudi Riyals), at varying maturities from fiscal year 1995 through 1998.
- 44 - NOTE 2 - ACQUISITIONS
On February 28, 1994, McDermott International acquired Northern Ocean Services Limited ("NOS") for $57,645,000. NOS owns and operates 2 major marine construction vessels and specialized construction equipment for providing subsea and trenching services to industries worldwide; including oil, gas, marine construction and hydrocarbon processing. The purchase has been reflected in the consolidated balance sheet of McDermott International. Results of NOS's operations from the date of acquisition to March 31, 1994 have been included in McDermott International's consolidated results and are included in the Marine Construction Services' segment. Results for the one month ended March 31, 1994 were not material to the consolidated financial statements of McDermott International.
During June 1993, the Delaware Company acquired a controlling interest in Delta Catalytic Corporation ("DCC") of Calgary, Alberta, Canada for $28,249,000. This was the first step in a two-step transaction which will be completed during fiscal year 1997, when the Delaware Company intends to acquire the balance of DCC. The purchase price for the second step in fiscal year 1997 will be determined based upon DCC's earnings for the period from November 1992 to October 1996. DCC provides engineering, procurement, construction and maintenance services to industries worldwide; including oil, gas, marine construction and hydrocarbon processing. The purchase has been reflected in the consolidated balance sheet of McDermott International. Results of DCC's operations from the date of acquisition to March 31, 1994 have been included in McDermott International's consolidated results and are included in the Marine Construction Services' segment. Revenues, segment operating income and net income were $228,822,000, $7,207,000, and $182,000, respectively, for the ten months ended March 31, 1994.
The following pro forma income statement information for McDermott International is presented as though the acquisitions of NOS and DCC had occurred on April 1, 1992.
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the
- 45 - acquisitions of NOS and DCC been consummated as of the above dates, nor are they necessarily indicative of future operating results.
The acquisitions were accounted for under the purchase method. The excess of cost over fair value of net assets of purchased businesses of DCC and NOS is being amortized over a period of 10 years. The purchase price of DCC has been allocated to the underlying assets and liabilities based on fair values at the date of acquisition, while the purchase price of NOS has been allocated to the underlying assets and liabilities based on estimated fair values at the date of acquisition. Such estimates may be revised at a later date. A summary of the purchase price allocation for DCC and NOS is as follows:
(In thousands) Net Working Capital $ (602) Excess of Cost Over Fair Value of Net Assets of Purchased Businesses 32,832 Net Property, Plant and Equipment 68,003 Other Non-Current Liabilities, Net (14,339) - - ----------------------------------------------------------------------
Total $ 85,894 ======================================================================
NOTE 3 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
During December 1991, McDermott International reduced its participation in the nuclear fuel assembly and commercial nuclear services business by selling a portion of its interests in B&W Fuel Company ("BWFC") and B&W Nuclear Service Company ("BWNSC") to a consortium of U. S. subsidiaries of three French companies and the U. S. subsidiary of Framatome S.A. ("Framatome"), respectively. McDermott International retained a 25% interest in BWFC and BWNSC. Both joint ventures were accounted for on a cost basis after the sale as McDermott International no longer exercised significant influence over these joint ventures. Prior to the sale, BWFC was part of McDermott International's consolidated financial statements and BWNSC was accounted for as an equity investment. Under the terms of the December 1991 sales agreements, Framatome purchased a 25% interest in BWNSC for $45,000,000 and the three French companies, which included Framatome, purchased a 26% interest in BWFC for $13,800,000. In addition, McDermott International was paid $17,000,000 relating to fees earned from, and the termination of, a management services agreement and received $33,820,000 in loan proceeds. On March 30, 1993, McDermott International sold its remaining interests in BWFC and BWNSC to the same parties for $10,150,000 and $32,440,000, respectively, and loans of $33,820,000 were repaid.
Included in the Consolidated Statement of Income (Loss) and Retained Earnings (Deficit) are revenues of $44,639,000 and a loss of $419,000 applicable to BWFC operations, for the fiscal year ended March 31, 1992. Included in Equity in Income of Investees was income applicable to BWNSC of $5,179,000 for the fiscal year ended March 31, 1992. Included in Other-net were gains on the sales of $23,968,000 and $57,397,000 for the fiscal years ended March 31, 1993 and 1992, respectively, and income from management fees and services applicable to these operations of $8,446,000 for the fiscal year ended March 31, 1992.
- 46 - During December 1991, McDermott International and ETPM S.A. negotiated the internal reorganization of the ETPM joint venture. As a result of these negotiations, McDermott International's ownership of McDermott-ETPM East increased from 56.8% to 67.2% and ownership of McDermott-ETPM West decreased from 56.8% to 49.9%. McDermott-ETPM East operates in the Middle East and India; McDermott-ETPM West operates in the North Sea, West Africa and South America. Since December 17, 1991, McDermott International's investment in McDermott-ETPM West, has been accounted for on the equity method.
Included in the Consolidated Statement of Income (Loss) and Retained Earnings (Deficit), during fiscal year 1992, are revenues of $302,766,000 and income of $4,104,000 applicable to McDermott-ETPM West operations, prior to deconsolidation in December 1991. After deconsolidation, a loss of $6,058,000 was included in Equity in Income of Investees in fiscal year 1992.
McDermott International's investments in joint ventures and other entities, which are accounted for on the equity method, were $128,006,000 and $76,996,000 at March 31, 1994 and 1993, respectively. Transactions with entities for which investments are accounted for by the equity method included sales to ($89,123,000, $91,448,000 and $79,061,000 in fiscal years 1994, 1993 and 1992, respectively), including approximately $49,121,000, $47,535,000 and $33,681,000 attributable to leasing activities in fiscal years 1994, 1993 and 1992, respectively, and purchases from ($137,942,000, $76,396,000, and $35,279,000 in fiscal years 1994, 1993 and 1992, respectively) these entities. Included in Accounts receivable-trade at March 31, 1994 and 1993 are $29,883,000 and $45,954,000 of receivables with unconsolidated investees.
In fiscal year 1994, McDermott International recognized revenues of $131,000,000 for work subcontracted to HeereMac. In fiscal year 1992, McDermott International recognized a gain of $5,100,000 on the sale of certain ancillary marine equipment (cost of $14,918,000 and accumulated depreciation of $14,851,000) to HeereMac for $10,267,000. During fiscal year 1992, additional investments of $18,498,000 were made in the HeereMac joint venture. HeereMac subsequently used these funds to settle amounts owed to McDermott International for equipment charters.
At March 31, 1994 and 1993, property, plant and equipment included $409,952,000 and $464,101,000, and accumulated depreciation included $221,503,000 and $247,920,000, respectively, of marine equipment that is leased to unconsolidated investees. Dividends received from unconsolidated investees were $65,214,000, $33,202,000 (including a return of capital of $27,402,000), and $12,346,000, in fiscal years 1994, 1993 and 1992, respectively.
- 47 - Summarized combined balance sheet and income statement information based on the most recent financial information for McDermott International's equity investments in joint ventures and other entities are presented below:
NOTE 4 - INCOME TAXES
Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted. All income has been earned outside of Panama and McDermott International is not subject to income tax in Panama on income earned outside of Panama. Therefore, there is no expected relationship between the provision for, or benefit from, income taxes and income, or loss, before income taxes. The major reason for the variations in such relationships is that income is earned within and subject to the taxation laws of various countries, each of which has a regime of taxation which varies from that of any other country (not only with respect to nominal rate but also with respect to the allowability of deductions, credits and other benefits) and because the proportional extent to which income is earned in, and subject to tax by, any particular country or countries varies from year to year.
- 48 - Deferred income taxes reflect the net tax effects of temporary differences between the financial and tax bases of assets and liabilities. Significant components of deferred tax assets and liabilities as of March 31, 1994 and 1993 were as follows:
- 49 -
Income from continuing operations before provision for income taxes, extraordinary items and cumulative effect of accounting changes was as follows:
The current provision for other than U. S. income taxes in 1994 and 1993 includes a reduction of $22,515,000 and $26,606,000, respectively, for the benefit of net operating loss carryforwards.
- 50 - During fiscal year 1992, a decision was entered in the United States Tax Court concerning the Delaware Company's U.S. income tax liability for the fiscal year ended March 31, 1983 disposing of all significant U.S. federal income tax issues for that year. The IRS has issued notices for fiscal years 1984 through 1988 asserting deficiencies in the amounts of net operating losses and taxes reported. The deficiencies are based on issues substantially similar to those of earlier years. The Delaware Company believes that any income taxes ultimately assessed will not exceed amounts already provided.
Pursuant to a stock purchase and sale agreement (the "Intercompany Agreement"), the Delaware Company has the right to sell to International and International has the right to buy from the Delaware Company, 100,000 units, each unit consisting of one share of International Common Stock and one share of International Series A Participating Preferred Stock, at a price based primarily upon the stockholders' equity of McDermott International at the close of the fiscal year preceding the date at which the right to sell or buy, as the case may be, is exercised, and, to a limited extent, upon the price-to-book value of the Dow Jones Industrial Average. At April 1, 1994, the current unit value was $2,039 and the aggregate current unit value for the Delaware Company's 100,000 units was $203,943,000. The net proceeds to the Delaware Company from the exercise of any rights under the Intercompany Agreement would be subject to U. S. federal, state and other applicable taxes. No tax provisions have been established, since there is no present intention by either party to exercise such rights.
- 51 - NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
- 52 - As defined in the Indenture, the 10.25% Notes due 1995 may be redeemed at the option of the holders upon a change of control of International. The Indenture, and the Indenture for the 9.375% Notes due 2002 and the Series A and B Medium Term Notes, contain certain covenants which restrict the amount of funded indebtedness that the Delaware Company may incur, and place limitations on certain restricted payments, certain transactions between affiliates, the creation of certain liens and the amendment of the Intercompany Agreement.
Pursuant to its right of redemption, on March 31, 1993, the Delaware Company deposited cash into trusts for the purpose of redeeming its 9.625% Sinking Fund Debentures, 10% Subordinated Debentures, and 10.20% Sinking Fund Debentures. These redemptions resulted in an extraordinary loss of $2,429,000 (net of income tax benefit of $1,252,000), in fiscal year 1993. Also on March 31, 1993, pursuant to its redemption option, McDermott International provided for the loss associated with the redemption and subsequent extinguishment of its 12.25% Senior Subordinated Notes due in 1998 resulting in an extraordinary loss of $7,392,000 (net of income tax benefit of $3,808,000). Additionally, during October 1992, the Delaware Company repurchased $10,600,000 aggregate principal amount of its 12.25% Senior Subordinated Notes due 1998 resulting in an extraordinary loss of $610,000 (net of income tax benefit of $314,000).
In management of its net interest costs (expense on debt and income on investments), McDermott International entered into interest rate swap agreements with certain banks which effectively change the fixed interest rates on certain long-term notes payable. Net amounts to be paid or received as a result of these agreements are accrued as adjustments to interest expense over the terms of these contracts. Gains realized as a result of terminating agreements in fiscal year 1993 were deferred and were recognized as reductions of interest expense over the original terms of the agreements. Interest rate swaps resulted in a reduction of interest expense of $5,782,000 and $6,961,000 in fiscal year 1994 and 1993, respectively. At March 31, 1994, McDermott International had an interest rate swap outstanding on the current notional principal of $90,400,000 of its 10.375% note payable due 1998. This interest rate swap effectively changes the fixed rate to a variable rate based on the London Interbank Offered Rate and is expected to effectively reduce interest costs on the note over the remaining term to maturity.
McDermott International's 10.375% Note payable due 1998 is secured by a letter of credit issued by a U. S. bank. The letter of credit was secured by $100,906,000 amortized cost (market value of $100,160,000) of McDermott International's long term portfolio at March 31, 1994. The outstanding principal is repayable in semi-annual payments with the final installment due June 20, 1998. The letter of credit and collateral amounts decline as the loan principal is repaid.
Maturities of long-term debt during the five fiscal years subsequent to March 31, 1994 are as follows: 1995 - $25,032,000; 1996 - $174,571,000; 1997 - $26,216,000; 1998 - $73,467,000; 1999 - $42,462,000.
The Delaware Company is restricted, as a result of covenants in certain credit agreements, in its ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. At March 31, 1994, substantially all of the net assets of the Delaware Company were subject to such restrictions. It is not expected that these restrictions will have any significant effect on International's liquidity.
- 53 - At March 31, 1994 and 1993, McDermott International had available to it various uncommitted short-term lines of credit from banks totaling $246,412,000 and $129,734,000, respectively. Borrowings by McDermott International against these lines of credit at March 31, 1994 and 1993 were $37,512,000 and $775,000, respectively. In addition, the Babcock & Wilcox Company had available to it a $128,000,000 unsecured and committed revolving line of credit facility. Loans outstanding under the revolving credit facility may not exceed the banks' commitments thereunder, which commitments are subject to reduction based upon the ratio of the borrower's consolidated net tangible assets to specified indebtedness plus unused commitments. In addition, it is a condition to borrowing under the revolving credit facility that the borrower's consolidated net tangible assets exceed a certain level. There were no borrowings against this facility at March 31, 1994 and 1993. DCC had available from a certain Canadian bank an unsecured and committed revolving credit facility of $14,493,000 which expires on May 31, 1997. No borrowings were outstanding against this facility at March 31, 1994.
- 54 - NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans - McDermott International provides retirement benefits, primarily through non-contributory pension plans, for substantially all of its regular full-time employees, except certain non-resident alien employees of foreign subsidiaries who are not citizens of a European Community country or who do not earn income in the United States, Canada, or the United Kingdom. Salaried plan benefits are based on final average compensation and years of service, while hourly plan benefits are based on a flat benefit rate and years of service. McDermott International's funding policy is to fund applicable pension plans to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and, generally, to fund other pension plans as recommended by the respective plan actuary and in accordance with applicable law. At January 1, 1994 and 1993, approximately one- half of total plan assets were invested in listed stocks and bonds. The remaining assets were held in foreign equity funds, U. S. Government securities and investments of a short-term nature.
U. S. Pension Plans:
The net periodic pension cost (benefit) for fiscal years 1994, 1993 and 1992 included the following components:
Due to the sale of its welded tubular line of business, the loss from discontinued operations in fiscal year 1992 includes a net after-tax gain of $1,659,000 resulting from the recognition of a curtailment and settlement of a related hourly pension plan.
Due to the sale of interests in its two nuclear joint ventures, income from continuing operations in fiscal year 1992 includes a net after-tax gain of $1,615,000 resulting from the curtailment and settlement of a related salaried pension plan. The remeasurement of net periodic pension cost increased pre-tax income from continuing operations by $2,074,000.
- 55 - The following table sets forth the U. S. plans' funded status and amounts recognized in McDermott International's consolidated financial statements:
The assumptions used in determining the funded status of the U. S. plans were:
- 56 - The changes in the discount rate and the rate of increase in future compensation levels for the U. S. plans increased the projected benefit obligation at March 31, 1994. This net increase includes an increase of $101,960,000 due to the change in discount rate and a decrease of $15,233,000 due to the change in the rate of increase in future compensation levels.
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for Pensions," McDermott International recorded, during 1994 and 1993, an additional minimum liability for certain of its U. S. plans of $8,414,000 and $11,220,000, respectively. These liabilities resulted in recognition of intangible assets of $7,457,000 and $11,144,000 and reductions in stockholders' equity of $931,000 and $74,000, respectively, in fiscal year 1994 and 1993.
The two principal U. S. ERISA pension plans provide that, subject to certain limitations, any excess assets in such plans would be used to increase pension benefits if certain events occurred within a 60 month period following a change in control of International.
Non-U. S. Pension Plans:
The net periodic pension benefit for fiscal years 1994, 1993 and 1992 included the following components:
Due to a reduction in workforce at one of its foreign subsidiaries, income from continuing operations before cumulative effect of accounting change in fiscal year 1994 includes a net after-tax loss of $1,456,000 resulting from the curtailment of a related plan.
- 57 - The following table sets forth the non-U. S. plans' funded status (assets exceed accumulated benefits) and amounts recognized in McDermott International's consolidated financial statements:
The assumptions used in determining the funded status of the non-U. S. plans were:
The changes in the discount rate and the rate of increase in future compensation levels for the non-U. S. plans increased the projected benefit obligation at March 31, 1994. This net increase includes an increase of $40,257,000 due to the change in discount rate and a decrease of $10,767,000 due to the change in the rate of increase in future compensation levels.
- 58 - Multiemployer Plans - One of McDermott International's subsidiaries contributes to various multiemployer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. Amounts charged to pension cost and contributed to the plans were $8,367,000, $4,687,000 and $4,886,000 in fiscal years 1994, 1993 and 1992, respectively.
Postretirement Health Care and Life Insurance Benefits - McDermott International offers postretirement health care and life insurance benefits to substantially all of its retired regular full-time employees, including those associated with discontinued operations, except certain non-resident alien retired employees who are not citizens of a European Community country or who, while employed, did not earn income in the United States, Canada or the United Kingdom. McDermott International shares the cost of providing these benefits with all affected retirees, except for certain life insurance plans. Postretirement health care and life insurance benefits are offered under separate defined benefit postretirement plans to union and non-union employees. The health care plans are contributory and contain cost-sharing provisions such as deductibles and coinsurance; the life insurance plans are contributory and non-contributory. McDermott International does not fund any of its plans.
The following table sets forth the amounts recognized in the consolidated financial statements at March 31:
The accumulated postretirement benefit obligation in the above table includes $408,675,000 and $362,403,000 for McDermott International's health care plans and $43,026,000 and $35,471,000 for McDermott International's life insurance plans at March 31, 1994 and 1993, respectively. The increase in the unrecognized net loss at March 31, 1994 was primarily attributable to the change in the discount rate.
- 59 - Net periodic postretirement benefit cost for fiscal years 1994 and 1993 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 12-1/2% was assumed for 1994 and 13-1/2% for 1993. In both years, the rate was assumed to decrease gradually to 5% in 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of March 31, 1994 by $26,947,000 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for fiscal 1994 by $2,393,000.
Employees of McDermott International who are not U.S. citizens and located in certain foreign countries are covered by various foreign postretirement benefit arrangements. McDermott International has not yet adopted SFAS No. 106 for these foreign plans. The effect of initial adoption will be reported as the cumulative effect of an accounting change and is not expected to have a material effect on the consolidated financial statements of McDermott International.
Postretirement Benefits - See Management's Discussion and Analysis of Financial Condition and Results of Operations regarding future adoption of FASB Statement No. 112, "Employers' Accounting for Postemployment Benefits."
- 60 - NOTE 7 - SALE OF ACCOUNTS RECEIVABLE
In December 1992, The Babcock & Wilcox Company renewed an agreement for an additional period of three years with a certain U.S. bank, whereby it can sell, up to a maximum limit of $225,000,000, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable. Under the terms of the agreement, new receivables are added to the pool as collections reduce previously sold accounts receivable. At March 31, 1994, approximately $170,000,000 of receivables had been sold for cash under this agreement. Included in Other-net income were expenses recorded on the sale of receivables which represent bank fees and discounts of $8,699,000, $7,851,000 and $12,564,000 for the fiscal years ended March 31, 1994, 1993 and 1992, respectively.
NOTE 8 - SUBSIDIARY'S REDEEMABLE PREFERRED STOCKS
At March 31, 1994 and 1993, 13,000,000 shares of Delaware Company Preferred Stock, with a par value of $1 per share, were authorized. Of the authorized shares, 2,818,780 shares of Series A Preferred Stock, and 3,474,652 and 3,724,629 shares of Series B Preferred Stock, respectively, were outstanding (in each case, exclusive of shares owned by the Delaware Company) at March 31, 1994 and 1993. The outstanding shares are entitled to $31.25 per share in liquidation. Preferred dividends of approximately $15,900,000 are classified as minority interest in Other Income (Expense) in each of the fiscal years 1994, 1993 and 1992. Both series of Preferred Stock are entitled to general voting rights of one-half vote for each share. The Board of Directors of the Delaware Company may authorize additional series of Preferred Stock, and may set terms of each new series except that the Delaware Company cannot create any series of stock senior to the existing Series A and Series B Preferred Stock without the consent of the holders of at least 50% of the shares of such Preferred Stock.
Each share of the outstanding Series A Preferred Stock is convertible into one share of Common Stock of International plus $0.10 cash. Series A and Series B Preferred Stock are redeemable at the option of the Delaware Company at $31.25 per share plus accrued dividends. On March 31, 1995 and each subsequent year through March 31, 2008, the Delaware Company is obligated to redeem, at a redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A Preferred Stock. On March 31, 1995, March 31 of the fiscal years 1996 through 2006, and March 31 of the fiscal years 2007 and 2008, the Delaware Company is obligated to redeem 315,877, 252,702 and 189,526 shares of Series B Preferred Stock, respectively. For the five fiscal years subsequent to March 31, 1994, the obligation to redeem the Series A and B Preferred Stock is $19,680,000 for fiscal year 1995 and $17,706,000 for each of the fiscal years 1996 through 1999. The Delaware Company may apply to the mandatory sinking fund obligations any Series A or B Preferred Stock it has reacquired, redeemed or surrendered for conversion which have not been previously credited against the mandatory sinking fund obligations. The Delaware Company applied 313,878 shares of Series A Preferred Stock and 180,700 shares of Series B Preferred Stock that it owned and redeemed 135,177 shares of Series B Preferred Stock to satisfy the March 31, 1994 mandatory sinking fund obligations. During fiscal year 1994, 114,800 shares of Series B Preferred Stock were purchased on the open market. At March 31, 1994, 49,637 shares of Series A Preferred Stock have been converted to date and the Delaware Company owned 1,575,505 shares of Series A Preferred Stock.
- 61 - NOTE 9 - CAPITAL STOCK
Common Stock - Changes in Common and Series C Preferred Stock during the three years ended March 31, 1994 are summarized below:
The Panamanian regulations relating to acquisitions of securities of companies, such as International, registered with the National Securities Commission require, among other matters, that detailed disclosure concerning the offeror, which is subject to review by either the Panamanian National Securities Commission or the Board of Directors of the
- 62 - subject company, be finalized prior to the beneficial acquisition of more than 5 percent of the outstanding shares of any class of stock. Transfers of securities in violation of these regulations are invalid and cannot be registered for transfer.
At March 31, 1994 and 1993, 85,521,703 and 77,823,347 shares of Common Stock, respectively, were reserved for issuance in connection with the conversion and redemption of the Delaware Company's Series A Preferred Stock, the conversion of International's Series C Preferred Stock, the exercise of International Rights, stock options and awards of restricted stock pursuant to the 1992 Officer Stock Program (and its predecessor programs) and the 1992 Director Stock Program, and contributions to the Thrift Plan.
International Preferred Stock - At March 31, 1994 and 1993, 25,000,000 shares of Preferred Stock were authorized. Of the authorized shares, 100,000 shares of Series A Participating Preferred Stock (the "Participating Preferred Stock") and 80,000 and 90,000 shares of Series B Non-Voting Preferred Stock (the "Non-Voting Preferred Stock"), respectively, were issued and owned by the Delaware Company at March 31, 1994 and 1993. The Non-Voting Preferred Stock is currently callable by International at $275 per share and 10,000 shares are to be redeemed each year by International at $250 per share. The annual per share dividend rates for the Participating Preferred Stock and the Non-Voting Preferred Stock are $10 (but no more than ten times the amount of the per share dividend on International Common Shares) and $20, respectively, payable quarterly, and dividends on such shares are cumulative to the extent not paid. In addition, shares of Participating Preferred Stock are entitled to receive additional dividends whenever dividends in excess of $3.00 per International Share are declared (or deemed to have been declared) in any fiscal year. In 1987, the voting rights of the Participating Preferred Stock were eliminated.
Of the authorized shares, International issued 2,875,000 shares of Series C Cumulative Convertible Preferred Stock in July 1993. Net cash proceeds to International were $140,066,000. The Series C shares have a par value of $1.00 per share, and a liquidation preference of $50.00 per share, plus an amount equal to accrued and unpaid dividends. Dividends on Series C shares are cumulative at the annual rate of 5.75% per share on the liquidation preference, equal to $2.875 per annum. International may not redeem Series C shares prior to July 1, 1997. On or after July 1, 1997, the Series C shares are redeemable, in whole or in part, at the option of International, either in cash, shares of International common stock, or a combination thereof. Holders of Series C shares may convert them, in whole or in part, at any time, into International common stock shares at a conversion price of $35.25 per share of common stock (equivalent to a conversion rate of 1.4184 shares of common stock for each share of Series C Preferred Stock), subject to certain adjustments.
The issuance of additional International Preferred Stock in the future and the specific terms thereof, such as the dividend rights, conversion rights, voting rights, redemption prices and similar matters, may be authorized by the Board of Directors of International without stockholder approval, except to the extent such approval may be required by applicable rules of the New York Stock Exchange or applicable law. If additional Preferred Stock is issued, such additional shares will rank senior to International Common Stock as to dividends and upon liquidation.
- 63 -
International Rights - On December 30, 1985, each holder of Common Stock received a dividend distribution of one Right for each outstanding share of Common Stock. The Rights currently trade with the Common Stock and at March 31, 1994 and 1993, International had outstanding Rights to purchase 53,544,467 and 52,311,961 shares (including Rights to purchase 100,000 shares held by the Delaware Company at March 31, 1994 and 1993), respectively, of its Common Stock at a price of $50 per share subject to anti-dilution adjustments. The Rights will become exercisable and will detach from the Common Stock 10 days after a person or a group either becomes the beneficial owner of 20 percent or more of the outstanding Common Stock, or commences or announces an intention to commence a tender or exchange offer for 30 percent or more of the outstanding Common Stock. If thereafter the acquiring person or group engages in certain self-dealing transactions, holders of Rights may purchase at the exercise price that number of shares of Common Stock having a market value equal to twice the exercise price. In the event International merges with or transfers 50 percent or more of its assets or earnings to any person after the Rights become exercisable, holders of Rights may purchase at the exercise price that number of shares of Common Stock of the acquiring entity having a market value equal to twice the exercise price. The Rights are redeemable by International and expire on December 30, 1995.
Stock Plans - The following table summarizes activity for McDermott International's stock option plans:
- 64 - A total of 1,380,090 shares of Common Stock (including 195,230 of approved shares that were not awarded, and rights to shares that have not terminated or expired, under predecessor plans) are available for grants of options under the 1992 Officer Stock Program. Options become exercisable at such time or times as determined at the date of the grant, and expire ten years after the date of grant. Pursuant to the program, eligible employees may be granted rights to purchase shares of Common Stock at par value ($1.00 per share) subject to restrictions on transfer which lapse at such times and circumstances as specified when granted. Substantially all of the shares of Common stock available for award under the 1992 Officer Stock Program may be granted as rights under the program. A total of 789,625 rights have been granted to purchase shares at par value ($1.00 per share) under the 1992 Officer Stock Program (and its predecessor plans) and the 1992 Director Stock Program (described below) at March 31, 1994.
A total of 25,325 shares of Common Stock are available for grants of options, and rights to purchase shares, to non-employee directors under the 1992 Director Stock Program. Options to purchase 900, 300 and 300 shares will be granted on the first, second, and third years, respectively, of a Director's term at not less than 100% of the fair market value on the date of grant. Options become exercisable, in full, six months after the date of the grant, and expire ten years and one day after the date of grant. Rights to purchase 450, 150 and 150 shares are granted on the first, second and third years, respectively, of a Director's term at par value ($1.00 per share) subject to restrictions on transfer, which lapse at the end of such term.
Under the 1992 Senior Management Stock Option plan, senior management employees may be granted options to purchase shares of Common Stock. The total number of shares available for grant is determined by the Board of Directors from time to time. Options to purchase shares are granted at no less that 100% of the fair market value on the date of grant, become exercisable at such time or times as determined when granted, and expire ten years after the date of the grant.
In the event of a change in control of McDermott International, all three programs have provisions that may cause restrictions to lapse and accelerate the exercisability of options outstanding.
Thrift Plan - On November 12, 1991, a maximum of 5,000,000 of the authorized and unissued shares of International's common stock was reserved for possible issuance to be used as the employer match for employee contributions to the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies. Such employer contributions equal 50% of the first 6% of compensation, as defined in the Plan, contributed by participants, and fully vest and are non-forfeitable after five years of service or upon retirement, death, lay-off or approved disability. During fiscal years 1994, 1993 and 1992, 300,391, 347,054 and 115,787 shares, respectively, were issued as employer contributions pursuant to the Plan. At March 31, 1994, 4,236,768 shares remained available for issuance.
- 65 - NOTE 10 - CONTINGENCIES AND COMMITMENTS
Litigation - International and certain of its officers, directors and subsidiaries are defendants in numerous legal proceedings. Management believes that the outcome of these proceedings will not have a material adverse effect upon the consolidated financial position of McDermott International.
Products Liability - See Note 1 regarding products liability.
Operating Leases - Future minimum payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at March 31, 1994 are as follows: 1995 -$25,282,000; 1996 - $20,063,000; 1997 - $17,702,000; 1998 - $16,296,000; 1999 - $13,828,000; and thereafter - $52,519,000. Future minimum lease payments and leased property under capital leases are not material. Total rental expense for fiscal years 1994, 1993 and 1992 was $120,515,000, $131,014,000, and $149,140,000, respectively. These expense figures include contingent rentals and are net of sublease income, both of which are not material.
Other - McDermott International performs significant amounts of work for the U.S. Government under both prime contracts and subcontracts and thus is subject to continuing reviews by governmental agencies.
McDermott International maintains liability and property insurance that it considers normal in the industry. However, certain risks are either not insurable or insurance is available only at rates which McDermott International considers uneconomical.
McDermott International has been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response, Compensation and Liability Act, as amended. Whereas, McDermott International has not been determined to be a major contributor of wastes to these sites, each potentially responsible party or contributor may face assertions of joint and several liability. Based on its relative contribution of wastes to the various sites, of which a final determination has not yet been made, McDermott International's share of the ultimate liability is not expected to have a material adverse effect on its consolidated financial position.
In addition, remediation projects have been or may be undertaken at certain of McDermott International's current and former plant sites, and B&W is currently evaluating a consent order issued by The Department of Environmental Resources of the Commonwealth of Pennsylvania seeking monetary sanctions, and remedial and monitoring relief, relating to B&W's Parks Facilities in Parks Township, Pennsylvania. Any sanctions ultimately assessed, and any costs ultimately incurred on other remediation projects, are not expected to have a material adverse effect on the consolidated financial statements of McDermott International.
Commitments for capital expenditures amounted to approximately $65,849,000 (including $38,560,000 for a new concept steam generator facility for the Naval Reactor Program in Lynchburg, Virginia, the anticipated purchase of a barge currently leased and the completion of a new combustion and emission facility in Alliance, Ohio,) at March 31, 1994, of which approximately $65,692,000 relates to fiscal year 1995.
- 66 - McDermott International is contingently liable under standby letters of credit totaling $428,298,000 (including $72,245,000 issued on behalf of unconsolidated foreign joint ventures) at March 31, 1994, issued in the normal course of business. McDermott International has guaranteed $10,450,000 of loans to and $23,179,000 of standby letters of credit issued by certain unconsolidated foreign joint ventures at March 31, 1994. At March 31, 1994, McDermott International had pledged approximately $56,159,000 amortized cost (market value of $58,040,000) of government obligations to secure payments under and in connection with certain reinsurance agreements.
NOTE 11 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
McDermott International's Power Generation Systems and Equipment customers are principally the electric power generation industry (including government-owned utilities and independent power producers), the U.S. Government (including its contractors), and the pulp and paper and other process industries, such as oil refineries and steel mills. The principal customers of the Marine Construction Services segment are the offshore oil, natural gas and hydrocarbon processing industries and other marine construction companies. These concentrations of customers may impact McDermott International's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic or other conditions. However, McDermott International's management believes that the portfolio of receivables is well diversified and that such diversification minimizes any potential credit risk. Receivables are generally not collateralized.
McDermott International believes that its provision for possible losses on uncollectible accounts receivable is adequate for its credit loss exposure. At March 31, 1994 and 1993, the allowance for possible losses deducted from Accounts receivable-trade on the balance sheet was $7,289,000 and $4,879,000, respectively.
- 67 - NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by McDermott International in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Investment securities: The fair values of investments are estimated based on quoted market prices. For investments for which there are no quoted market prices, fair values are derived from available yield curves for investments of similar quality and terms.
Long and short-term debt: The fair value of McDermott International's debt instruments are based on quoted market prices or where quoted prices are not available, on the present value of cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred stocks of the Delaware Company are based on quoted market prices.
Foreign currency exchange contracts: The fair values of foreign currency forward exchange contracts are estimated by obtaining quotes from brokers. At March 31, 1994 and 1993, McDermott International had forward exchange contracts outstanding to purchase and sell foreign currencies with a net notional value of $47,094,000 and $194,125,000 and a fair value of $35,288,000 and $193,409,000, respectively.
Interest rate swap agreements: The fair values of interest rate swaps are the amounts at which they could be settled and are estimated by obtaining quotes from brokers. At March 31, 1994, McDermott International had an interest rate swap outstanding on current notional principal of $90,400,000 with a fair value of ($1,853,000), which represents the estimated amount McDermott International would have to pay to terminate the agreement.
The estimated fair values of McDermott International's financial instruments at March 31, 1994 and 1993 are as follows:
- 68 - NOTE 13 - DISCONTINUED OPERATIONS
Welded Tubular Line of Business
In fiscal year 1992, McDermott International sold its welded tubular line of business ("Welded") for $30,217,000, consisting of $20,368,000 in cash and receivables of $9,849,000. Revenues applicable to Welded operations were $57,428,000 in fiscal year 1992. Loss from discontinued operations in fiscal year 1992 included income from operations of $182,000 (net of income tax benefit of $114,000) and a loss on disposal of $4,790,000 (net of income tax benefit of $2,936,000), including loss from operations of $1,159,000 during the phase out period.
Seamless Tubular Line of Business
During fiscal year 1991, McDermott International sold its previously discontinued seamless tubular line of business. A gain of $1,240,000 (net of income taxes of $760,000) resulting from price adjustments is included in Loss from discontinued operations in fiscal year 1992.
- 69 - NOTE 14 - SEGMENT REPORTING
McDermott International operates in two industry segments - Power Generation Systems and Equipment, and Marine Construction Services.
Power Generation Systems and Equipments' principal businesses are the supply of fossil-fuel and nuclear steam generating systems and equipment to the electric power generation industry, and nuclear reactor components to the U. S. Navy.
Marine Construction Services supplies worldwide services for the offshore oil, natural gas, and hydrocarbon processing industries, and to other marine construction companies. Principal activities include the design, engineering, fabrication and installation of marine pipelines and offshore structures and subsea production systems for development drilling and production; and onshore construction and maintenance services.
Intersegment sales are accounted for at prices which are generally established by reference to similar transactions with unaffiliated customers. Identifiable assets by industry segment are those assets that are used in McDermott International's operations in each segment. Corporate assets are principally cash and cash equivalents, short-term investments, marketable securities and prepaid pension costs.
In the fiscal years 1994, 1993 and 1992, the U. S. Government accounted for approximately 13%, 13% and 15%, respectively, of McDermott International's total revenues. These revenues are principally included in the Power Generation Systems and Equipment segment.
At March 31, 1994 and 1993 receivables of $1,142,000 and $10,524,000, respectively, were due from minority shareholders, primarily ETPM S.A., participating in McDermott International's majority-owned joint ventures. Sales to ETPM S.A. were $3,358,000, $31,234,000 and $11,216,000, respectively, for the fiscal years ended March 31, 1994, 1993 and 1992. In fiscal years 1994, 1993 and 1992 equipment charters and overhead expenses of $6,330,000, $6,046,000 and $44,578,000, respectively, were charged by ETPM S.A. to the McDermott-ETPM joint venture. Also, during fiscal year 1992, McDermott International acquired HeereMac's minority interest in a subsidiary of International.
The adoption of EITF Issue No. 93-5 in fiscal year 1994 resulted in an increase in the Power Generation Systems and Equipment Segment operating income of $19,947,000. The adoption of SFAS No. 106 in fiscal year 1993 resulted in a net decrease in segment operating income of $6,784,000. This included a decrease of $3,760,000 in the Power Generation Systems and Equipment segment and a decrease of $3,024,000 in the Marine Construction Services segment.
- 70 - Segment Information for the Three Fiscal Years Ended March 31, 1994.
1. Information about McDermott International's Operations in Different Industry Segments.
(1) Segment revenues include intersegment transfers as follows:
(2) See Note 3 regarding the deconsolidation of B&W Fuel Company to a cost method investment and the change in B&W Nuclear Service Company from an equity method to a cost method investment during fiscal year 1992. (3) See Note 3 regarding the deconsolidation of the McDermott-ETPM West joint venture during fiscal year 1992. (4) See Note 2 regarding the acquisition of NOS and DCC during fiscal year 1994.
- 71 -
(1) Includes property, plant and equipment of $79,233,000 of acquired companies in fiscal year 1994, and the purchase of a fabrication yard in Nueces County, Texas financed by a note payable of $16,250,000.
- 72 - 2. Information about McDermott International's Operations in Different Geographic Areas.
(1) Net of inter-geographic area revenues in fiscal year 1994 as follows: United States- $38,666,000, Canada - $12,082,000, Europe and West Africa - $15,868,000, Middle and Far East - $3,160,000 and Other Foreign - $25,770,000. (2) Net of inter-geographic area revenues of $71,027,000 and $129,835,000, respectively, in fiscal years 1993 and 1992.
- 73 - NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial information for the fiscal years ended March 31,1994 and 1993:
Quarterly results for June and September 1993 have been restated to reflect the adoption of EITF Issue No. 93-5 (See Note 1). This restatement decreased income before cumulative effect of accounting change and net income by $467,000 and $101,217,000 (or $0.01 and $1.89 per share), respectively, for the quarter ending June 30, 1993; and increased operating income by $10,367,000, and income before cumulative effect of accounting change and net income by $7,980,000 (or $0.14 per share), for the quarter ending September 30, 1993.
Pre-tax results for the quarter ended June 30, 1993 include a favorable warranty reserve adjustment of $11,000,000. Results for the quarter ended December 31, 1993 include a reduction in the provision for worker's compensation and general liability costs resulting from a change in actuarial estimate of $12,001,000. Results for the quarter ended March 31, 1994 include a provision of $8,807,000, including interest, resulting from an unfavorable ruling on a lawsuit relating to a warranty issue; and a reduction in accrued interest on proposed tax deficiencies of $9,400,000. Included in income before cumulative effect of accounting change and net income for the quarter ended March 31, 1994, is a reduction in the provision for taxes of $10,000,000 due to the settlement of outstanding issues.
- 74 - Continued
Pre-tax results for the quarter ended September 30, 1992 include marine asset casualty gains of $6,782,000. Results for the quarter ended December 31, 1992 include charges for accelerated depreciation and the write-off of certain fabrication facilities and marine construction equipment due to diminished cost-effectiveness and technical obsolescence of $11,708,000 and a reduction in the provision for worker's compensation and general liability costs resulting from a change in actuarial estimate of $17,342,000. Results for the quarter ended March 31, 1993 include the gain on the sale of nineteen tugboats of $4,762,000 and a gain on the sale of the remaining interests in two commercial nuclear joint ventures of $23,968,000.
- 75 - Item 9.
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
- 76 - PART III
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 arrangements or understanding between himself and any other person.
Information required by this item with respect to directors and executive officers is incorporated by reference to the material appearing under the headings "Election of Directors" in the Proxy Statement for the 1994 Annual Meeting of Shareholders.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material appearing under the heading "Cash Compensation of Executive Officers and Certain Relationships and Related Transactions" in the Proxy Statement for the 1994 Annual Meeting of Shareholders.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material appearing under the heading "Election of Directors" in the Proxy Statement for the 1994 Annual Meeting of Shareholders.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the material appearing under the heading "Cash Compensation of Executive Officers and Certain Relationships and Related Transactions" in the Proxy Statement for the 1994 Annual Meeting of Shareholders.
- 77 - PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
- 78 -
- 79 - FORM 8-K REPORTS
Report on Form 8-K, Item 2 was filed on March 14, 1994.
- 80 - EXHIBIT II
McDERMOTT INTERNATIONAL, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS) FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
(In thousands, except shares and per share amounts)
PRIMARY AND FULLY DILUTED
(1) Earnings (loss) per common and common equivalent share assuming full dilution are the same for the fiscal years presented.
- 81 - EXHIBIT 22
McDERMOTT INTERNATIONAL, INC. SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT FISCAL YEAR ENDED MARCH 31, 1994
The subsidiaries omitted from the foregoing list do not, considered in the aggregate, constitute a significant subsidiary.
- 82 - EXHIBIT 24
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 2-83692, No. 33-16680, No. 33-51892, No. 33-51894 and No. 33-63832) of McDermott International, Inc. and the Registration Statement (Form S-3 No. 33-54940) of McDermott Incorporated and in the related Prospectuses of our report dated May 9, 1994 with respect to the consolidated financial statements of McDermott International, Inc. included in this Annual Report (Form 10-K) for the year ended March 31, 1994.
ERNST & YOUNG
New Orleans, Louisiana May 12, 1994
- 83 - SIGNATURES OF THE REGISTRANT
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 10, 1994.
McDERMOTT INTERNATIONAL, INC. (REGISTRANT)
By: /s/ Robert E. Howson
Robert E. Howson Chairman of the Board and Chief Executive Officer
By: /s/ Brock A. Hattox
Brock A. Hattox Senior Vice President and Chief Financial Officer
By: /s/ Daniel R. Gaubert
Daniel R. Gaubert Vice President and Controller
- 84 - SIGNATURES OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on May 10, 1994.
/s/ Thomas D. Barrow /s/ James A. Hunt Thomas D. Barrow James A. Hunt Director Director
/s/ Theodore H. Black __________________________ Theodore H. Black J. Howard Macdonald Director Director
/s/ John F. Bookout /s/ William McCollam, Jr. John F. Bookout William McCollam, Jr. Director Director
/s/ Philip J. Burguieres /s/ John A. Morgan Philip J. Burguieres John A. Morgan Director Director
/s/ James L. Dutt /s/ William T. Seawell James L. Dutt William T. Seawell Director Director
/s/ Brock A. Hattox /s/ John N. Turner Brock A. Hattox John N. Turner Senior Vice President and Director Chief Financial Officer, and Director
/s/ Robert E. Howson Chairman of the Board and Chief Executive Officer, and Director