Item 3. LEGAL PROCEEDINGS
Due to the nature of its business, McDermott International is, from time to time, involved in litigation. It is management's opinion that none of this litigation will have a material adverse effect on the consolidated financial position of McDermott International.
For a discussion of McDermott International's potential liability for non-employee products liability asbestos claims see Item 1F and Note 1 to the consolidated financial statements.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.
PART I I
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
International's Common Stock is traded on the New York Stock Exchange. High and low stock prices and dividends declared for the fiscal years ended March 31, 1995 and 1994 follow:
FISCAL YEAR 1994 ----------------
FISCAL YEAR 1995 ----------------
As of March 31, 1995, the approximate number of record holders of Common Stock was 6,673.
Item 6.
Item 6. SELECTED FINANCIAL DATA
See Note 1 to the consolidated financial statements regarding the adoption of Statement of Financial Accounting Standards ("SFAS") No. 112 in fiscal year 1995, Emerging Issues Task Force Issue No. 93-5 in fiscal year 1994 and SFAS No. 106 and SFAS No. 109 in fiscal year 1993. See Note 2 regarding the acquisition of OPI in fiscal year 1995 and the acquisitions of Northern Ocean Services Limited and DCC in fiscal year 1994. See Note 10 regarding the uncertainty as to the ultimate loss relating to products liability asbestos claims.
In fiscal year 1995, Income before Cumulative Effect of Accounting Change included after tax charges of $30,218,000 for provisions for the decontamination, decommissioning and closing of certain nuclear manufacturing facilities and the closing of a manufacturing facility, and $8,832,000 for the reduction of estimated products liability asbestos claims recoveries from insurers. Also, in fiscal year 1995, after tax income included $16,631,000 for a reduction in accrued interest expense due to the settlement of outstanding tax issues. In fiscal year 1993 and 1992, Income from Continuing Operations before Extraordinary Items and Cumulative Effect of Accounting Changes included after tax gains from the sale of McDermott International's interest in its two commercial nuclear joint ventures of $15,667,000 and $35,436,000, respectively.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
A significant portion of McDermott International's revenues and operating results are derived from its foreign operations. As a result, McDermott International's operations and financial results could be significantly affected by international factors, such as changes in foreign currency exchange rates. McDermott International's policy is to minimize its exposure to changes in foreign currency exchange rates by attempting to match foreign currency contract receipts with like foreign currency disbursements during contract negotiations. To the extent that it is unable to match the foreign currency receipts and disbursements related to its contracts, it enters into forward exchange contracts to hedge foreign currency transactions on a continuing basis for periods consistent with its committed exposures. This practice minimizes the impact of foreign exchange rate movements on McDermott International's operating results.
FISCAL YEAR 1995 VS FISCAL YEAR 1994
Power Generation Systems and Equipment's revenues increased $49,029,000 to $1,663,235,000. This was primarily due to higher revenues from fabrication and erection of fossil fuel steam and environmental control systems, nuclear fuel assemblies and reactor components for the U. S. Government, replacement nuclear steam generators, repair and alteration of existing fossil fuel steam systems, and operations and maintenance contracts for small power plants. These increases were partially offset by lower revenues from defense and space-related products (other than nuclear fuel assemblies and reactor components), extended scope of supply and fabrication of industrial boilers, and replacement parts.
Power Generation Systems and Equipment's segment operating income decreased $29,131,000 to $20,810,000 due to provisions for the decontamination, decommissioning and closing of certain nuclear manufacturing facilities and the closing of a manufacturing facility ($46,489,000) and a favorable warranty reserve recorded in the prior year ($11,000,000). Operating income increased due to lower operating expenses (including favorable workers compensation adjustments) and administrative expenses (including cost reduction initiatives); higher volume and margins on operations and maintenance contracts; and improved margins on plant enhancement projects. These increases were partially offset by lower volume and margins on extended scope of supply and fabrication of industrial boilers, lower volume on replacement parts, and lower margins on nuclear fuel assemblies and reactor components for the U. S. Government.
Power Generation Systems and Equipment's equity in income of investees decreased $3,668,000 to $8,364,000 primarily due to a provision for loss on discontinuing a domestic joint venture and lower operating results in a foreign joint venture.
Backlog for this segment at March 31, 1995 was $2,058,215,000 compared to $2,398,285,000 at March 31, 1994. At March 31, 1995 this segment's backlog with the U.S. Government was $631,578,000 (of which $21,607,000 had not been funded). U.S
Government budget reductions have negatively affected this segment's government operations, and backlog at March 31, 1995 and 1994 reflects the impact of Congressional budget reductions on the advanced solid rocket motor and super conducting super collider projects in prior years. The current competitive economic environment has also negatively affected demand for other industrial- related product lines and these markets are expected to remain very competitive.
As discussed (see Item 1F - Insurance), provisions for these estimated future costs for non-employee products liability asbestos claims have been recognized for financial reporting purposes during fiscal years 1995 and 1994 (see Note 1 to the consolidated financial statements and the discussion of Other-net expense and Liquidity below). Inherent in the estimate of these liabilities and recoveries are expected trends in claim severity and frequency and other factors, including recoverability from insurers, which may vary significantly as claims are filed and settled.
The current competitive economic environment for the electric power industry in the United States has intensified, as the Federal Energy Regulatory Commission has begun to implement the provisions of the Energy Policy Act of 1992, which deregulated the electric power generation industry by allowing independent power producers and other companies access to its transmission and distribution systems, and the Clean Air Act amendments of 1990 have caused U. S. utilities to defer ordering large new baseload power plants and to defer repairs and refurbishments on existing plants. Most electric utilities have already purchased equipment to comply with Phase I of the Clean Air Act, and many will defer purchases of new equipment to comply with Phase II deadlines until after the turn of the century. Electric utilities in Asia are active purchasers of large, new baseload generating units, due to the rapid growth of the Pacific Rim economies and to the small existing stock of electrical generating capacity in most developing countries.
Marine Construction Services' revenues decreased $61,578,000 to $1,390,919,000, primarily due to lower volume in worldwide marine and domestic fabrication operations. These decreases were partially offset by the inclusion of revenues as a result of the acquisitions of Offshore Pipelines, Inc. ("OPI") ($44,439,000) on January 31, 1995 and Northern Ocean Services ("NOS") ($59,644,000 for the full fiscal year) in February 1994 (See Note 2 to the Consolidated Financial Statements), and higher volume in foreign fabrication and procured materials.
Marine Construction Services' segment operating income increased slightly to $44,619,000 (including $4,993,000 from OPI) from $44,394,000 primarily due to improved margins in foreign marine operations, inclusion of the operating results of NOS for the full fiscal year; and higher volume of procured materials, domestic engineering operations, and foreign fabrication. These increases were mostly offset by higher operating expenses, lower operating results from DCC's operations, lower margins from shipyard operations, and start-up costs associated with new shipbuilding activities.
Marine Construction Services' equity in income of investees decreased $82,340,000 to $25,488,000 primarily due to lower operating volume and margins of the McDermott ETPM-West, Inc. and HeereMac joint ventures.
Backlog for this segment at March 31, 1995 and 1994 was $1,510,117,000 (including $46,396,000 from the acquisition of OPI) and $1,054,142,000, respectively. Not included in backlog at March 31, 1995 and 1994 was backlog relating to contracts to be performed by unconsolidated joint ventures of approximately $1,014,000,000 and $840,000,000, respectively.
The activity of McDermott International depends mainly on the capital expenditures of oil and gas companies which in turn are influenced by world oil and gas prices. World oil and gas prices are expected to remain weak in the near term resulting in a negative impact on new business awards. In addition, the continued overcapacity of marine equipment worldwide has resulted in a competitive environment and put pressure on operating profit margins worldwide. In fiscal year 1995, McDermott International's unconsolidated affiliates performed at significantly lower levels as several large contracts were completed in fiscal year 1994 and are expected to remain at low levels in fiscal 1996 and 1997.
Interest income increased $13,989,000 to $52,740,000 primarily due to recognition of interest on a receivable from an equity investee, settlement of claims for interest relating to foreign tax refunds and contract claims, and higher interest rates on investments in government obligations and other investments.
Interest expense decreased $6,860,000 to $57,115,000, primarily due to a reduction of accrued interest on proposed tax deficiencies, partially offset by changes in debt obligations and interest rates prevailing thereon.
Minority interest expense decreased $3,084,000 to $12,167,000 primarily due to minority shareholder participation in increased losses of DCC and JRM's losses for the two months ended March 31, 1995. These decreases in expense were partially offset by an increase due to minority shareholder participation in the improved results of the McDermott-ETPM East joint venture.
Other-net expense increased $28,926,000 to $33,291,000 primarily due to a loss related to the reduction of estimated products liability asbestos claim recoveries from insurers, a provision for the settlement of a lawsuit and losses on the sales of investment securities in the current period.
The provision for income taxes decreased $45,041,000 from a provision of $24,998,000 to a benefit of $20,043,000, while income before income taxes and cumulative effect of accounting changes decreased $124,121,000. The reduction in income taxes is primarily due to a decrease in income from operations along with a reduction in a provision for taxes due to a settlement of outstanding issues and higher non-taxable earnings. In addition, McDermott International operates in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits, and even tax basis (for example, revenues versus income). These variances, along with variances in the mix of income within jurisdictions, are responsible for shifts in the effective tax rate. As a result of these factors, the benefit from income taxes was 219% of pretax loss in fiscal year 1995 compared to a provision for income taxes of 22% of pretax income in fiscal year 1994.
Net lncome increased $19,905,000 from a loss of $10,794,000 to income of $9,111,000 reflecting the cumulative effect of the adoption of SFAS No. 112, "Employers' Accounting for Postemployment Benefits" of $1,765,000 in the current year and the cumulative effect of accounting change for non-employee products liability asbestos claims of $100,750,000 in the prior year, in addition to other items described above.
FISCAL YEAR 1994 VS FISCAL YEAR 1993
Power Generation Systems and Equipment's revenues increased $90,730,000 to $1,614,206,000. This was primarily due to higher revenues from fabrication and erection of fossil fuel steam and environmental control systems, replacement nuclear steam generators, repair and alteration of existing fossil fuel steam systems, and nuclear fuel assemblies and reactor components for the U. S. Government. These increases were partially offset by lower revenues from extended scope of supply and fabrication of industrial boilers, defense and space-related products other than nuclear fuel assemblies and reactor components, and air cooled heat exchangers.
Power Generation Systems and Equipment's segment operating income decreased $6,526,000 to $49,941,000. This was primarily due to lower volume and margins on extended scope of supply and fabrication of industrial boilers as well as defense and space-related products other than nuclear fuel assemblies and reactor components. There were also lower margins on plant enhancements, replacement parts, and repair and alteration of existing fossil fuel steam systems, as well as higher royalty income recorded in the prior year. These decreases were partially offset by higher volume and margins on replacement nuclear steam generators, nuclear fuel assemblies and reactor components for the U. S. Government and higher volume on fabrication and erection of fossil fuel steam and environmental control systems. There were also lower general and administrative expenses, and lower warranty expense primarily due to net favorable warranty reserve adjustments.
Power Generation Systems and Equipment's equity in income of investees increased $3,341,000 to $12,032,000 primarily due to improved results in a foreign joint venture and in three domestic joint ventures which own and operate a cogeneration plant and two small power plants, partially offset by unfavorable results in another foreign joint venture.
Marine Construction Services' revenues decreased $197,156,000 to $1,452,497,000, primarily due to lower volume in worldwide fabrication and engineering operations, foreign marine operations and procured materials. These decreases were partially offset by the acquisition of DCC.
Marine Construction Services' segment operating income decreased $23,258,000 to $44,394,000, primarily due to lower volume in worldwide fabrication and engineering operations and lower volume in procured materials. These decreases were partially offset by the acquisition of DCC, higher margins in foreign marine operations, the accelerated depreciation and write-off of certain fabrication facilities and marine construction equipment in the prior year, and reduced operating costs.
Marine Construction Services' equity in income of investees increased $22,461,000 to $107,828,000. This increase was principally due to improved operating results of the HeereMac joint venture.
Interest income decreased $1,640,000 to $38,751,000. This decrease was primarily due to lower interest rates on investments in government securities and other long-term investments.
Interest expense decreased $26,365,000 to $63,975,000, primarily due to changes in debt obligations and interest rates prevailing thereon. The decrease reflects the redemption of high coupon debt during April and June 1993, and a reduction in accrued interest on proposed tax deficiencies.
Minority interest expense decreased $2,952,000 to $15,251,000 primarily due to minority shareholder participation in the losses of the McDermott-ETPM East joint venture in the current year and income in the prior year, partially offset by participation in the results of DCC since its acquisition in June 1993.
Other-net decreased $14,562,000 to a loss of $4,365,000 from income of $10,197,000. This decrease was primarily due to gains on the sale of interests in two commercial nuclear joint ventures a foreign marine asset casualty gain and gains on the sale of nineteen tugboats, all in the prior period.
Provision for income taxes decreased $15,101,000 to $24,998,000, while income from continuing operations before provision for income taxes, extraordinary items, and cumulative effect of accounting changes increased $7,532,000 to $114,954,000. The decrease in the provision for income taxes is primarily due to a reduction in a provision for taxes of $10,000,000 due to a settlement of outstanding issues and higher non-taxable earnings. In addition, McDermott International operates in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits, and even tax basis (for example, revenues versus income). These variances, along with variances in the mix of income within jurisdictions, are responsible for shifts in the effective tax rate. During this period, these factors reduced the effective tax rate to 22% from 37%.
Net loss decreased $177,938,000 to $10,794,000 reflecting the cumulative effect of the change in accounting for non-employee products liability asbestos claims of $100,750,000 in the current year and the cumulative effect of the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," of $249,351,000 in the prior year, in addition to other items described above.
Effect of Inflation and Changing Prices
McDermott International's financial statements are prepared in accordance with generally accepted accounting principles, using historical dollar accounting (historical cost). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the dollar, especially during times of significant and continued inflation.
The management of McDermott International is cognizant of the effects of inflation and, in order to minimize the negative impact of inflation on its operations, attempts to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimation of such changes, which is reflected in an original price, or through price escalation clauses in its contracts.
Liquidity and Capital Resources
During fiscal year 1995, McDermott International's cash and cash equivalents decreased $47,900,000 to $85,909,000 and total debt increased $257,077,000 (including $120,200,000 assumed in the acquisition of OPI) to $986,687,000. During this period, McDermott International used cash of $97,890,000 for additions to property, plant and equipment; $61,827,000 for dividends on International's common and preferred stocks; $35,553,000 for repayment of long-term debt; $12,559,000 in operating activities; and $17,185,000 for the repurchase of a subsidiary's preferred stock to satisfy current and future sinking fund requirements.
Decreases in accounts payable reflect settlement of charter obligations to the HeereMac joint venture and amounts owned to ETPM S.A. Higher payables due to increased volume at B&W's Canadian operations and activity on the Britoil contract for the Atlantic Frontier Programme Development of Foinaven Phase One Facility ("Foinaven") were offset by lower volume elsewhere. Increases in Net contracts in progress and advance billings were primarily due to the timing of billings on the Canadian and Foinaven contracts. Lower income taxes reflects payments made in Canada and changes in the domestic tax provision due to higher losses in the U.S., and accrued liabilities includes a reduction of accrued interest expense of $26,300,000 resulting from the settlement of outstanding tax issues with the IRS.
Pursuant to an agreement with the majority of its principal insurers, McDermott International negotiates and settles products liability asbestos claims from non-employees and bills these amounts to the appropriate insurers. As a result of collection delays inherent in the process, reimbursement is usually delayed for three months or more. The number of claims had declined moderately since fiscal year 1990, but have increased during the second half of fiscal year 1995. Management believes, based on information currently available, that the recent increase represents an acceleration in the timing of the receipt of these claims, but does not represent an increase in its total estimated liability. The average amount of these claims (historical average of approximately $4,800 per claim over the last three years) has continued to rise. Claims paid in fiscal year 1995 were $126,151,000, of which $111,163,000 has been recovered or is due from insurers. At March 31, 1995, Accounts receivable-other included receivables of $34,925,000 that are due from insurers for reimbursement of settled claims. During fiscal year 1995, McDermott International received notice that provisional liquidators have been appointed to a London-based products liability asbestos insurer and certain of its subsidiaries and as a result, a loss of $14,478,000 related to the reduction of estimated products liability asbestos claim recoveries was recognized. Estimated liabilities for pending and future non-employee products liability asbestos claims are derived from McDermott International's claims history and constitute management's best estimate of such future costs. Estimated insurance recoveries are based upon analysis of insurers providing coverage of the estimated liabilities. Inherent in the estimate of such liabilities and recoveries are expected trends in claim severity and frequency and other factors, including recoverability from insurers, which may vary significantly as claims are filed and
settled. Accordingly, the ultimate loss may differ materially from amounts provided in the consolidated financial statements. Settlement of the liability is expected to occur over approximately the next 25 years. The collection delays, and the amount of claims paid for which insurance recovery is not probable have not had a material adverse effect on McDermott International's liquidity, and management believes, based on information currently available, that they will not have a material adverse effect on liquidity in the future.
McDermott International's expenditures for property, plant and equipment increased $21,569,000 to $97,890,000 in fiscal year 1995. While the majority of these expenditures were incurred to maintain and replace existing facilities and equipment, $15,010,000 was expended for the purchase of a barge which was formerly leased by a subsidiary of International. McDermott International has committed to make capital expenditures of approximately $40,301,000 (including $9,457,000 for a new pipelay system on marine equipment and $14,286,000 for the conversion of a barge to a floating production unit) during fiscal 1996. The barge conversion is financed by a $16,700,000 note, payable in 30 monthly installments beginning with the completion of the conversion. Interest is at Libor plus 2%. There were no borrowings against this facility at March 31, 1995.
At March 31, 1995 and 1994, The Babcock & Wilcox Company had sold, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable of approximately $175,000,000 and $170,000,000, respectively, under an agreement with a U. S. bank. The maximum sales limit available under the agreement, which expires on December 31, 1997 is $225,000,000. (See Note 7 to the consolidated financial statements).
At March 31, 1995 and 1994, International and its subsidiaries, had available to them various uncommitted short-term lines of credit from banks totaling $373,867,000 and $246,412,000, respectively. Borrowings against these lines of credit at March 31, 1995 and 1994 were $63,025,000 and $37,512,000, respectively. In addition, the Babcock & Wilcox Company had available to it a $128,000,000 unsecured and committed revolving line of credit facility. Loans outstanding under the revolving credit facility may not exceed the banks' commitments thereunder. In addition, it is a condition to borrowing under the revolving credit facility that the borrower's consolidated net tangible assets exceed a certain level. There were no borrowings against this facility at March 31, 1995 and 1994. DCC had available from a certain Canadian bank an unsecured and committed revolving credit facility of $14,184,000 which expires on May 31, 1997. Borrowings outstanding against this facility at March 31, 1995 were $7,420,000. There were no borrowings outstanding against this facility at March 31, 1994. In addition, JRM had available two secured and committed revolving credit facilities totaling $53,500,000 of which $24,500,000 was outstanding at March 31, 1995. Loans outstanding under these facilities were repaid and the facility terminated on May 10, 1995.
In consideration for the contribution of substantially all of McDermott International's marine construction services business, JRM issued 3,200,000 shares of Series A $2.25 Cumulative Convertible Preferred Stock, $231,000,000 9% Senior Subordinated Notes due 2001 and a $39,750,000 Floating Rate Note at 7.69% at the Merger Date (7.4375% at March 31, 1995) to International. The Floating Rate Note is due January 31, 1997 or earlier upon demand. JRM expects to pay this note during fiscal year 1996. In addition, a
subsidiary of JRM assumed all of OPI's $70,000,000 12-7/8% Guaranteed Senior Notes due 2002. The Notes due 2002 are redeemable at the option of a subsidiary of JRM after June 1997. On June 7, 1995, JRM entered into an agreement with a group of banks to provide a $150,000,000 three year unsecured and committed line of credit to support the operating requirements of its domestic and international operations. JRM is restricted, as a result of covenants in these agreements, in its ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. As approximately $40,000,000 of its net assets were not subject to these restrictions, they are not expected to impact JRM's ability to make preferred dividend payments.
The Delaware Company is restricted, as a result of covenants in credit agreements, in its ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. Substantially all of the net assets of the Delaware Company is subject to such restrictions. It is not expected that these restrictions will have any significant effect on International's liquidity.
McDermott International maintains an investment portfolio of government obligations and other investments which is classified as available for sale under SFAS No. 115 (See Note 12 to the consolidated financial statements). The fair value of short-term investments and the long-term portfolio at March 31, 1995 was $715,093,000 (amortized cost $723,946,000). The net unrealized loss on the current and long-term investment portfolio, net of income tax effect, was $8,050,000 at March 31, 1995. At March 31, 1995, approximately $146,142,000 fair value (amortized cost of $148,422,000) of these obligations were pledged to secure a letter of credit in connection with a long-term loan and certain reinsurance agreements. In addition, McDermott International had obligations of $135,691,000 under short-term repurchase agreements which were secured by government obligations with a fair value of $134,673,000 at March 31, 1995.
Working capital decreased $106,442,000 to a deficit of $40,790,000 at March 31, 1995 from $65,652,000 at March 31, 1994. During 1996, McDermott International expects to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, its short-term investment portfolio, and additional borrowings. On June 1, 1995, McDermott International repaid its 10.25% Notes of $150,000,000 from its short-term investment portfolio and additional borrowings from revolving lines of credit. Leasing agreements for equipment, which are short-term in nature, are not expected to impact McDermott International's liquidity or capital resources.
International's quarterly dividends are $0.25 per share on its Common Stock and $0.71875 per share on its Series C Cumulative Convertible Preferred Stock. The Delaware Company's quarterly dividends are $0.55 per share on the Series A $2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series B $2.60 Cumulative Preferred Stock. International's and the Delaware Company's quarterly dividends were at the same rates in 1995 and 1994. JRM's quarterly dividends on its Series A and Series B Preferred Stock are $0.5625 per share. At March 31, 1995, JRM paid dividends for a partial quarterly period of $900,000 on its Series A Preferred Stock and on April 17, 1995 paid $217,000 on its Series B Preferred Stock.
At March 31, 1995 the ratio of long-term debt to total stockholders' equity was 0.81 as compared with 1.23 at March 31, 1994.
McDermott International accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". This standard requires, among other things, recognition of future tax benefits, measured by enacted tax rates, attributable to deductible temporary differences between the financial statement and income tax basis of assets and liabilities and to tax net operating loss and foreign tax credit carryforwards to the extent that realization of such benefits is more likely than not.
McDermott International has provided a valuation allowance ($34,943,000 at March 31, 1995) for deferred tax assets which can not be realized through carrybacks and future reversals of existing taxable temporary differences. Management believes that remaining deferred tax assets ($675,282,000 at March 31, 1995) in all other tax jurisdictions are realizable through carrybacks and future reversals of existing taxable temporary differences and, if necessary, the implementation of tax planning strategies involving sales and sale/leasebacks of appreciated assets. A major uncertainty that affects the ultimate realization of deferred tax assets is the possibility of declines in value of appreciated assets involved in identified tax planning strategies. This factor has been considered in determining the valuation allowance. Management will continue to assess the adequacy of the valuation allowance on a quarterly basis.
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 24, 1995
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders McDermott International, Inc.
We have audited the accompanying consolidated balance sheet of McDermott International, Inc. as of March 31, 1995 and 1994, and the related consolidated statements of income (loss), stockholders' equity and cash flows for each of the three years in the period ended March 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McDermott International, Inc. at March 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company has provided for estimated future costs for non-employee products liability asbestos claims. Inherent in the estimate of such future costs are assumptions which may vary significantly as claims are filed and settled. Accordingly, the ultimate loss may differ materially from amounts provided in the consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company changed its methods of accounting for postemployment benefits and investment securities in 1995, recoveries of products liability claims in 1994 and income taxes and postretirement benefits other than pensions in 1993.
ERNST & YOUNG LLP
New Orleans, Louisiana May 24, 1995
McDERMOTT INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEET MARCH 31, 1995 and 1994
ASSETS
See accompanying notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF INCOME (LOSS) FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
CONTINUED
See accompanying notes to consolidated financial statements.
McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995 (In thousands, except for share amounts)
See accompanying notes to the consolidated financial statements.
McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
See accompanying notes to consolidated financial statements.
McDERMOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements are presented in U.S. Dollars in accordance with accounting principles generally accepted in the United States. The consolidated financial statements include the accounts of McDermott International, Inc. and all subsidiaries and controlled joint ventures. Investments in joint venture and other entities in which McDermott International, Inc. has a 20% to 50% interest are accounted for on the equity method. Differences between the cost of equity method investments and the amount of underlying equity in net assets of the investees are amortized systematically to income. All significant intercompany transactions and accounts have been eliminated. Certain amounts previously reported have been reclassified to conform with the presentation at March 31, 1995.
Unless the context otherwise requires, hereinafter "International" will be used to mean McDermott International, Inc., a Panamanian corporation; "JRM" will be used to mean J. Ray McDermott, S.A., a Panamanian corporation, which is a majority owned subsidiary of International, and its consolidated subsidiaries; and the "Delaware Company" will be used to mean McDermott Incorporated, a Delaware corporation which is a subsidiary of International, and its consolidated subsidiaries (including Babcock & Wilcox Investment Company and its principal subsidiary, The Babcock & Wilcox Company); and "McDermott International" will be used to mean the consolidated enterprise.
Changes in Accounting Policies
Products Liability - As a result of the consensus reached on Emerging Issues Task Force ("EITF") Issue No. 93-5, a company is no longer permitted to offset, for recognition purposes, reasonable possible recoveries against probable losses which until fiscal year 1994 had been McDermott International's practice with respect to estimated future costs for non-employee products liability asbestos claims. During the third quarter of fiscal year 1994, and effective April 1, 1993, McDermott International adopted this provision of EITF Issue No. 93-5 as a change in accounting principle and provided for estimated future costs to the extent that recovery from its insurers was not determined to be probable. The cumulative effect of the accounting change at April 1, 1993 was a charge of $100,750,000 (net of income taxes of $54,250,000), or $1.89 per share. The adoption of this provision of EITF Issue No. 93-5 resulted in an increase in pre-tax Income before Cumulative Effect of Accounting Change of $19,947,000 ($12,168,000 net of tax, or $0.23 per share) in fiscal year 1994, as costs in fiscal year 1994 that would have been recognized under McDermott International's prior practice were included in the cumulative effect of the accounting change. Prior to the adoption of EITF Issue No. 93-5, McDermott International had not made calculations in similar detail to those required to adopt EITF 93-5 and determined at the time of adoption of EITF Issue No. 93-5 that it was not practical to do so retroactively. Events giving rise to the liability for non- employee products liability asbestos claims occurred prior to 1987 and McDermott International had concluded in all
earlier periods, based upon information then currently available, that it was adequately insured against future non-employee products liability claims. Therefore, because the amounts were not available and because of the inherent complexities in making reliable determinations at an earlier point in time consistent with the methods used in the April 1, 1993 determination, pro forma amounts reflecting the retroactive application of the accounting change for fiscal year 1993 are not presented.
During the first quarter of fiscal year 1995, McDermott International adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 39, which required McDermott International to present separately in the balance sheet its estimated liabilities for pending and future non-employee products liability asbestos claims and related estimated insurance recoveries. Accordingly, the accompanying consolidated balance sheet at March 31, 1994 and the consolidated statement of cash flows for the years ended March 31, 1994 and 1993 have been restated to conform to the March 31, 1995 presentation. The adoption of FASB Interpretation No. 39 did not have any effect on earnings.
Postemployment Benefits - Effective April 1, 1994, McDermott International adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits," in accounting for disability benefits and other types of benefits paid to employees, their beneficiaries and covered dependents after active employment, but before retirement. The cumulative effect as of April 1, 1994 of this change in accounting was to reduce net income by $1,765,000 (net of income taxes of $287,000) or $0.03 per share. Other than the cumulative effect, the accounting change had no material effect on the results of fiscal year 1995. Prior to April 1, 1994, McDermott International recognized the cost of providing most of these benefits on a cash basis. Under this new principle of accounting, the cost of these benefits is accrued when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid. In accordance with the Statement, prior period financial statements have not been restated to reflect this change in accounting principle.
Postretirement Health Care Benefits - Effective April 1, 1992, McDermott International adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". In accordance with the Statement, McDermott International elected immediate recognition of its transition obligation and recorded $249,351,000 (net of income tax benefit of $136,228,000), or $4.79 per share, as the cumulative effect of an accounting change. In fiscal year 1993, other than the cumulative effect of the accounting change, the adoption of SFAS No. 106 resulted in a decrease in Income before Extraordinary Items and Cumulative Effect of Accounting Changes of $4,688,000, or $0.09 per share.
Investments - Effective April 1, 1994, McDermott International adopted the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" for investments held as of or acquired after April 1, 1994. The adoption of SFAS No. 115 resulted in a decrease in the opening balance of stockholders' equity of $4,095,000 to reflect the net unrealized holding losses on McDermott International's investment securities which were previously carried at amortized cost. In accordance with the Statement, prior period financial statements have not been restated to reflect this change in accounting principle.
At March 31, 1995 McDermott International's investments, primarily government obligations and other debt securities, are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. Management determines the appropriate classifications of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Investment securities available for current operations are classified in the balance sheet as current assets while securities held for long-term investment purposes are classified as non- current assets. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses are included in other income. The cost of securities sold is based on the specific identification method. Interest on securities is included in interest income.
Income Taxes - Income taxes have been provided using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes", which was adopted effective April 1, 1992. The cumulative effect of the accounting change on prior years at April 1, 1992 was a benefit of $3,727,000, or $0.07 a share. Other than the cumulative effect, the accounting change had no material effect on fiscal year 1993.
Foreign Currency Translation
Assets and liabilities of foreign operations, other than operations in highly inflationary economies, are translated into U.S. Dollars at current exchange rates and income statement items are translated at average exchange rates for the year. Adjustments resulting from the translation of foreign currency financial statements are recorded in a separate component of equity. Foreign currency transaction adjustments are reported in income. Included in Other Income (Expense) are transaction losses of $1,057,000, $2,260,000, and $3,747,000 for fiscal years 1995, 1994 and 1993, respectively.
Contracts and Revenue Recognition
Contract revenues and related costs are principally recognized on a percentage of completion method for individual contracts or components thereof based upon work performed or a cost to cost method, as applicable to the product or activity involved. Revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, are included in Contracts in Progress. Billings that exceed accumulated contract costs and revenues and costs recognized under percentage of completion are included in Advance Billings on Contracts. Most long-term contracts have provisions for progress payments. Contract price and cost estimates are reviewed periodically as the work progresses and adjustments proportionate to the percentage of completion are reflected in income in the period when such estimates are revised. There are no unbilled revenues which will not be billed. Provisions are made currently for all known or anticipated losses. Claims for extra work or changes in scope of work are included in contract revenues when collection is probable. Included in Accounts Receivable and Contracts in Progress are approximately $50,831,000 and $56,873,000 relating to commercial and U.S. Government contracts claims whose final settlement is
subject to future determination through negotiations or other procedures which had not been completed at March 31, 1995 and 1994, respectively.
McDermott International is usually entitled to financial settlements relative to the individual circumstances of deferrals or cancellations of Power Generation Systems and Equipment contracts. McDermott International does not recognize such settlements or claims for additional compensation until final settlement is reached.
Included in accounts receivable - trade are amounts representing retainages on contracts as follows:
Of its long-term retainages at March 31, 1995, McDermott International anticipates collection as follows: $23,790,000 in fiscal year 1997, $15,768,000 in fiscal year 1998, $284,000 in fiscal year 1999 and $1,513,000 in fiscal year 2000.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined on an average cost basis except for certain materials inventories, for which the last-in first-out (LIFO) method is used. The cost of approximately 20% and 21% of total inventories was determined using the LIFO method at March 31, 1995 and 1994, respectively. Consolidated inventories at March 31, 1995 and 1994 are summarized below:
Warranty Expense
Estimated warranty expense which may be required to satisfy contractual requirements, primarily of the Power Generation Systems and Equipment segment, is accrued relative to revenue recognition on the respective contracts. In addition, specific provisions are made where the costs of warranty are expected to significantly exceed such accruals.
Environmental Clean-up Costs
McDermott International accrues for future decommissioning and decontamination of its nuclear facilities that will permit the release of these facilities to unrestricted use at the end of each facility's life, which is a condition of its licenses from the Nuclear Regulatory Commission. Such accruals are based on the estimated cost of those activities over the economic useful life of each facility, which is estimated at 40 years.
Research and Development
The cost of research and development which is not performed on specific contracts is charged to operations as incurred. Such expense was approximately $19,905,000, $21,036,000 and $19,459,000 in fiscal years 1995, 1994 and 1993, respectively. In addition, expenditures on research and development activities of approximately $44,240,000, $48,112,000 and $42,082,000 in fiscal years 1995, 1994 and 1993, respectively, were paid for by customers of McDermott International.
Depreciation, Maintenance and Repairs and Drydocking Expenses
Except for major marine vessels, property, plant and equipment is depreciated on the straight-line method, using estimated economic useful lives of 8 to 40 years for buildings and 2 to 28 years for machinery and equipment.
Major marine vessels are depreciated on the units-of-production method based on the utilization of each vessel. Depreciation expense calculated under the units-of-production method may be less than, equal to, or greater than depreciation expense calculated under the straight-line method in any period. The annual depreciation based on utilization of each vessel will not be less than the greater of 25% of annual straight-line depreciation, or 50% of cumulative straight-line depreciation.
Maintenance, repairs and renewals which do not materially prolong the useful life of an asset are expensed as incurred except for drydocking costs for the marine fleet, which are estimated and accrued over the period of time between drydockings, and such accruals are charged to operations currently.
Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased Businesses
Excess of the cost over fair value of net assets of purchased businesses pertains to the acquisition of The Babcock & Wilcox Company, which is being amortized on a straight-line basis over forty years and the acquisitions of Offshore Pipelines, Inc., Delta Catalytic Corporation and Northern Ocean Services Limited (See Note 2) which are being amortized on a straight-line basis over ten years. Management periodically reviews goodwill to assess recoverability, and impairments would be recognized in operating results if a permanent diminution in value were to occur.
Capitalization of Interest Cost
In fiscal years 1995, 1994 and 1993, total interest cost incurred was $59,715,000, $65,296,000 and $92,111,000, respectively, of which $2,600,000, $1,321,000 and $1,771,000, respectively, was capitalized.
Earnings Per Share
Primary earnings per share are based on the weighted average number of common and dilutive common equivalent shares outstanding during the year. For fiscal years 1995, 1994 and 1993, fully dilutive earnings per share, which includes the effects of stock options and appreciation rights, is considered to be the same as primary since the effect of these common stock equivalents would be antidilutive.
Cash Equivalents
Cash equivalents are highly liquid investments, with maturities of three months or less when purchased, which are not held as part of the investment portfolio.
Derivative Financial Instruments
Derivatives, primarily forward exchange contracts, are utilized by McDermott International to minimize exposure and reduce risk from foreign exchange fluctuations in the regular course of business. Gains and losses related to qualifying hedges of firm commitments are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transactions occur. Gains and losses on forward exchange contracts which hedge foreign currency assets or liabilities are recognized in income as incurred. Such amounts effectively offset gains and losses on the foreign currency assets or liabilities that are hedged.
NOTE 2 - ACQUISITIONS
On January 31, 1995, McDermott International contributed substantially all of its marine construction services business to JRM and JRM acquired Offshore Pipelines, Inc. ("OPI"), a full-range provider of offshore marine construction and other related services on a worldwide basis to the oil and gas industry, pursuant to an Agreement and Plan of Merger dated as of June 2, 1994 as amended ( the "Merger Agreement"). Pursuant to the Merger Agreement, JRM issued 13,867,946 shares of Common Stock, 897,818 options to acquire shares of Common Stock and 458,632 shares of Series B $2.25 Cumulative Convertible Exchangeable Preferred Stock (liquidation preference $11,465,800) valued at $347,599,000 in exchange for all of the outstanding common stock, stock options and preferred stock of OPI. As a result of the acquisition of OPI, McDermott International's ownership interest in the common stock of JRM was reduced to approximately 64%. The acquisition was accounted for by the purchase method and, accordingly, the purchase price ($369,868,000, including direct costs of acquisition and non-compete agreements) has been allocated to the underlying assets and liabilities based upon preliminary fair values at the date of acquisition. The excess of cost over fair value of net assets acquired is being amortized over 10 years. The operating results have been included in the Consolidated Statement of Income (Loss) from the acquisition date. The preliminary purchase price allocation is subject to change when additional information concerning asset and liability valuations is obtained. Therefore, the final allocation may differ from the preliminary allocation summarized as follows:
At March 31, 1995, JRM's Series B $2.25 Cumulative Convertible Exchangeable Preferred Stock was convertible into 1,005,772 shares of JRM common stock and JRM had options outstanding under its stock option plans to purchase 1,078,242 shares of JRM stock at an average price of $9.46 per share (834,712 shares exercisable at an average price of $5.62 per share). In addition, at March 31, 1995, JRM had outstanding 3,200,000 shares of its voting Series A $2.25 Cumulative Convertible Preferred Stock (liquidation preference $160,000,000), all of which is owned by McDermott International.
The following unaudited pro forma results of operations assume the acquisition of OPI had occurred as of the beginning of the periods presented.
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisition of OPI been completed as of April 1, 1993, nor is it necessarily indicative of future operating results. The pro forma information does not reflect estimates of cost savings that may be realized.
On February 28, 1994, McDermott International acquired Northern Ocean Services Limited ("NOS") for $57,645,000. NOS owns and operates 2 major marine construction vessels and specialized construction equipment for providing subsea and trenching services to industries worldwide; including oil, gas, marine construction and hydrocarbon processing. In addition, during June 1993, the Delaware Company acquired a controlling interest in Delta Catalytic Corporation ("DCC") of Calgary, Alberta, Canada for $28,249,000. The Delaware Company has reached an agreement to purchase the remaining portion of DCC in fiscal year 1996. DCC provides engineering, procurement, construction and maintenance services to industries worldwide; including oil, gas, marine construction and hydrocarbon processing.
The acquisitions of NOS and DCC were accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the underlying assets and liabilities based on fair values as of the dates of acquisition. The excess of cost over fair value of net assets acquired is being amortized over a period of 10 years. The operating results have been included in the Consolidated Statement of Income (Loss) from the acquisition dates. A summary of the purchase price allocation for DCC and NOS follows:
The following unaudited pro forma results of operations assume the acquisitions of NOS and DCC had occurred as of the beginning of the periods presented.
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions of NOS and DCC been completed as of April 1, 1992 nor is it necessarily indicative of future operating results.
NOTE 3 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
Investments in joint ventures and other entities, which are accounted for on the equity method, were $163,029,000 and $128,006,000 at March 31, 1995 and 1994, respectively. Transactions with entities for which investments are accounted for by the equity method included sales to ($152,517,000, $89,123,000 and $91,448,000 in fiscal years 1995, 1994 and 1993, respectively, including approximately $54,657,000, $49,121,000 and $47,535,000, respectively, attributable to leasing activities) and purchases from ($12,582,000, $137,942,000, and $76,396,000 in fiscal years 1995, 1994 and 1993, respectively) these entities. Included in non- current Other Assets at March 31, 1995 and 1994 are $12,996,000 and $1,395,000, respectively of accounts and note receivable from unconsolidated investees. Included in Accounts payable at March 31, 1995 and 1994 are $7,168,000 and $18,180,000, respectively, of payables to unconsolidated investees.
In fiscal year 1995, JRM contributed various marine construction barges (including the DB100 semi-submersible derrick barge) with a cost of $102,602,000 and accumulated depreciation of $76,763,000 and sold the DB51 derrick barge to the HeereMac joint venture for $9,101,000. In fiscal year 1994, McDermott International recognized revenues of $131,000,000 on work subcontracted to HeereMac.
At March 31, 1995 and 1994, property, plant and equipment included $402,479,000 and $409,952,000, and accumulated depreciation included $230,674,000 and $221,503,000, respectively, of marine equipment that is leased to unconsolidated investees. Dividends received from unconsolidated investees were $76,481,000, $65,214,000 and $33,202,000 (including a return of capital of $27,402,000) in fiscal years 1995, 1994 and 1993, respectively. Undistributed earnings in unconsolidated affiliates were $44,503,000 and $76,843,000, respectively, at March 31, 1995 and 1994.
On March 30, 1993, McDermott International sold its remaining interests in its B&W Fuel Company and B&W Nuclear Service Company for $10,150,000 and $32,440,000, respectively. Included in Other-net were gains on the sales of $23,968,000 in fiscal year 1993.
Summarized combined balance sheet and income statement information based on the most recent financial information for equity investments in joint ventures and other entities (25% to 50% owned) are presented below:
NOTE 4 - INCOME TAXES
Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted. All income has been earned outside of Panama and McDermott International is not subject to income tax in Panama on income earned outside of Panama. Therefore, there is no expected relationship between the provision for, or benefit from, income taxes and income, or loss, before income taxes. The major reason for the variations in such relationships is that income is earned within and subject to the taxation laws of various countries, each of which has a regime of taxation which varies from that of any other country (not only with respect to nominal rate but also with respect to the allowability of deductions, credits and other benefits) and because the proportional extent to which income is earned in, and subject to tax by, any particular country or countries varies from year to year. International and certain of its subsidiaries keep books and file tax returns on the completed contract method of accounting.
Deferred income taxes reflect the net tax effects of temporary differences between the financial and tax bases of assets and liabilities. Significant components of deferred tax assets and liabilities as of March 31, 1995 and 1994 were as follows:
Income (loss) before provision for (benefit from) income taxes, extraordinary items and cumulative effect of accounting changes was as follows:
The provision for (benefit from) income taxes consists of:
The current provision for other than U. S. income taxes in 1995, 1994 and 1993 includes a reduction of $1,323,000, $22,515,000 and $28,113,000, respectively, for the benefit of net operating loss carryforwards.
During fiscal year 1995, a settlement was reached with the Internal Revenue Service ("IRS") concerning the Delaware Company's U. S. income tax liability for the fiscal years ended March 31, 1983 through March 31, 1986 disposing of all U.S. federal income tax issues for those years. A settlement was also reached for the fiscal years ended March 31, 1987 and March 31, 1988 disposing of all U.S. federal income tax issues for those years and is pending approval by the Joint Committee of Taxation. These settlements resulted in a reduction in accrued interest expense of $26,300,000. The IRS has issued notices for fiscal years March 31, 1989 and March 31, 1990 asserting deficiencies in the amount of taxes reported. The deficiencies are based on issues substantially similar to those of earlier years. The Delaware Company believes that any income taxes ultimately assessed will not exceed amounts already provided.
Pursuant to a stock purchase and sale agreement (the "Intercompany Agreement"), the Delaware Company has the right to sell to International and International has the right to buy from the Delaware Company, 100,000 units, each unit consisting of one share of International Common Stock and one share of International Series A Participating Preferred Stock, at a price based primarily upon the stockholders' equity of McDermott International at the close of the fiscal year preceding the date at which the right to sell or buy, as the case may be, is exercised, and, to a limited extent, upon the price-to-book value of the Dow Jones Industrial Average. At April 1, 1995, the current unit value was $2,649 and the aggregate current unit value for the Delaware Company's 100,000 units was $264,880,000. The net proceeds to the Delaware Company from the exercise of any rights under the Intercompany Agreement would be subject to U. S. federal, state and other applicable taxes. No tax provisions have been established, since there is no present intention by either party to exercise such rights.
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
Notes payable and current maturities of long-term debt consist of:
The Indenture for the 9.375% Notes due 2002 and the Series A and B Medium Term Notes, contain certain covenants which restrict the amount of funded indebtedness that the Delaware Company may incur, and place limitations on certain restricted payments, certain transactions between affiliates, the creation of certain liens and the amendment of the Intercompany Agreement.
In connection with the OPI acquisition, a subsidiary of JRM assumed OPI's $70,000,000 12-7/8% Guaranteed Senior Notes ("12.875% Notes"). The 12.875% Notes are subject to mandatory sinking fund requirements beginning on July 15, 2000 calculated to retire 50% of the original principal amount prior to maturity in 2002. The 12.875% Notes are redeemable, for cash, at the option of the issuer, at any time on or after July 15, 1997, in whole or in part, at a price of 106.4% of the principal amount, and thereafter at prices declining annually to 100% of the principal amount on or after July 15, 2000.
McDermott International's 10.375% Note payable due 1998 is secured by a letter of credit issued by a U. S. bank. The letter of credit was secured by $83,363,000 market value of McDermott International's long-term portfolio at March 31, 1995. The outstanding principal is repayable in semi-annual payments with the final installment due June 20, 1998. The letter of credit and collateral amounts decline as the loan principal is repaid.
Maturities of long-term debt during the five fiscal years subsequent to March 31, 1995 are as follows: 1996 - $176,950,000; 1997 - $25,913,000; 1998 - $74,483,000; 1999 - $50,643,000; 2000 - $546,000.
The Delaware Company and JRM are restricted, as a result of covenants in certain credit agreements, in their ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. At March 31, 1995, substantially all of the net assets of the Delaware Company and JRM were subject to such restrictions.
Pursuant to its right of redemption, on March 31, 1993, the Delaware Company deposited cash into trusts for the purpose of redeeming its 9.625% Sinking Fund Debentures, 10% Subordinated Debentures, and 10.20% Sinking Fund Debentures. These redemptions resulted in an extraordinary loss of $2,429,000 (net of income tax benefit of $1,252,000), in fiscal year 1993. Also on March 31, 1993, pursuant to its redemption option, McDermott International provided for the loss associated with the redemption and extinguishment of its 12.25% Senior Subordinated Notes due in 1998 resulting in an extraordinary loss of $7,392,000 (net of income tax benefit of $3,808,000). Additionally, during October 1992, the Delaware Company repurchased $10,600,000 aggregate principal amount of its 12.25% Senior Subordinated Notes due 1998 resulting in an extraordinary loss of $610,000 (net of income tax benefit of $314,000).
At March 31, 1995 and 1994, International and its subsidiaries, had available to them various uncommitted short-term lines of credit from banks totaling $373,867,000 and $246,412,000, respectively. Borrowings against these lines of credit at March 31, 1995 and 1994 were $63,025,000 and $37,512,000, respectively. In addition, the Babcock & Wilcox Company had available to it a $128,000,000 unsecured and committed revolving line of credit facility. Loans outstanding under the revolving credit facility may not exceed the banks' commitments thereunder. In addition, it is a condition to borrowing under the revolving credit facility that the borrower's consolidated net tangible assets exceed a certain level. There were no borrowings against this facility at March 31, 1995 and 1994. DCC had available from a certain Canadian bank an unsecured and committed revolving credit facility of $14,184,000 which expires on May 31, 1997. Borrowings outstanding against this facility at March 31, 1995 were $7,420,000. There were no borrowings outstanding against this facility at March 31, 1994. In addition, JRM had available two secured and committed revolving credit facilities totaling $53,500,000 of which $24,500,000 was outstanding at March 31, 1995. Loans outstanding under these facilities were repaid and the facility terminated on May 10, 1995.
McDermott International's obligations under short-term repurchase agreements at March 31, 1995 were secured by government obligations with a fair value of $134,673,000.
NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans - McDermott International provides retirement benefits, primarily through non-contributory pension plans, for substantially all of its regular full-time employees, except certain non-resident alien employees of foreign subsidiaries who are not citizens of a European Community country or who do not earn income in the United States, Canada, or the United Kingdom. Salaried plan benefits are based on final average compensation and years of service, while hourly plan benefits are based on a flat benefit rate and years of service. McDermott International's funding policy is to fund applicable pension plans to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and, generally, to fund other pension plans as recommended by the respective plan actuary and in accordance with applicable law. At January 1, 1995 and 1994, approximately one- half of total plan assets were invested in listed stocks and bonds. The remaining assets were held in foreign equity funds, U. S. Government securities and investments of a short-term nature.
U. S. Pension Plans:
The net periodic pension benefit for fiscal years 1995, 1994 and 1993 included the following components:
Due to the sale of a domestic entity, loss from operations before cumulative effect of accounting change in fiscal year 1995, includes a net after-tax gain of $732,000 resulting from the recognition of a curtailment of a related plan.
The following table sets forth the U. S. plans' funded status and amounts recognized in the consolidated financial statements:
The assumptions used in determining the funded status of the U. S. plans were:
The changes in the discount rate and the rate of increase in future compensation levels for the U. S. plans decreased the projected benefit obligation at March 31, 1995. This net decrease includes a decrease of $76,961,000 due to the change in discount rate and an increase of $12,458,000 due to the change in the rate of increase in future compensation levels.
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for Pensions," McDermott International recorded, during 1995 and 1994, an additional minimum liability for certain of its U. S. plans of $10,322,000 and $8,414,000, respectively. These liabilities resulted in recognition of intangible assets of $9,910,000 and $7,457,000 and reductions in stockholders' equity of $391,000 and $931,000, respectively, in fiscal years 1995 and 1994.
The two principal U. S. ERISA pension plans provide that, subject to certain limitations, any excess assets in such plans would be used to increase pension benefits if certain events occurred within a 60 month period following a change in control of International.
Non-U. S. Pension Plans:
The net periodic pension benefit for fiscal years 1995, 1994 and 1993 included the following components:
Due to a reduction in workforce at one foreign subsidiary, income before cumulative effect of accounting change in fiscal year 1994 includes a net after-tax loss of $1,456,000 resulting from the recognition of a curtailment of a related plan.
The following table sets forth the non-U. S. plans' funded status (assets exceed accumulated benefits) and amounts recognized in the 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 decreased the projected benefit obligation at March 31, 1995. This net decrease includes a decrease of $9,825,000 due to the change in discount rate and a decrease of $3,094,000 due to the change in the rate of increase in future compensation levels.
Multiemployer Plans - One of McDermott International's subsidiaries contributes to various multiemployer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. Amounts charged to pension cost and contributed to the plans were $9,838,000, $8,367,000 and $4,687,000 in fiscal years 1995, 1994 and 1993, respectively.
Postretirement Health Care and Life Insurance Benefits - McDermott International offers postretirement health care and life insurance benefits to substantially all of its retired regular full-time employees, including those associated with discontinued operations, except certain non-resident alien retired employees who are not citizens of a European Community country or who, while employed, did not earn income in the United States, Canada or the United Kingdom. McDermott International shares the cost of providing these benefits with all affected retirees, except for certain life insurance plans. Postretirement health care and life insurance benefits are offered under separate defined benefit postretirement plans to union and non-union employees. The health care plans are contributory and contain cost-sharing provisions such as deductibles and coinsurance; the life insurance plans are contributory and non-contributory. McDermott International does not fund any of its plans.
The following table sets forth the amounts recognized in the consolidated financial statements at March 31:
The accumulated postretirement benefit obligation in the above table includes $358,543,000 and $408,675,000 for McDermott International's health care plans and $41,158,000 and $43,026,000 for McDermott International's life insurance plans at March 31, 1995 and 1994, respectively. The changes in the accumulated postretirement benefit obligation and the unrecognized net gain (loss) at March 31, 1995 were primarily attributable to the increase in the discount rate.
Net periodic postretirement benefit cost for fiscal years 1995, 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 11-1/2% was assumed for 1995, 12-1/2% for 1994 and 13-1/2% in 1993. For 1996, a rate of 10-3/4% is assumed. In all years, the rate was assumed to decrease gradually to 5% in 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of March 31, 1995 by $20,896,000 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for fiscal year 1995 by $2,638,000.
NOTE 7 - SALE OF ACCOUNTS RECEIVABLE
The Babcock & Wilcox Company has an agreement with a U.S. bank, whereby it can sell, up to a maximum limit of $225,000,000, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable. Under the terms of the agreement, new receivables are added to the pool as collections reduce previously sold accounts receivable. At March 31, 1995, approximately $175,000,000 of receivables had been sold for cash under this agreement. At March 31, 1994, approximately $170,000,000 had been sold. Receivables sold under this agreement are presented as a reduction of accounts receivable on the accompanying balance sheets. Included in Other-net income were expenses recorded on the sale of receivables which represent bank fees and discounts of $9,709,000, $8,699,000 and $7,851,000 for fiscal years 1995, 1994 and 1993, respectively. Discounts are based on the bank's cost of issuing commercial paper and bank fees are a fixed amount based on the maximum limit which may be sold.
NOTE 8 - SUBSIDIARY'S REDEEMABLE PREFERRED STOCKS
At March 31, 1995 and 1994, 13,000,000 shares of Delaware Company Preferred Stock, with a par value of $1 per share, were authorized. Of the authorized shares, 2,818,780 shares of Series A Preferred Stock, and 2,917,236 and 3,474,652 shares of Series B Preferred Stock were outstanding (in each case, exclusive of shares owned by the Delaware Company) at March 31, 1995 and 1994, respectively. The outstanding shares are entitled to $31.25 per share in liquidation. Preferred dividends of $14,142,000, $15,719,000 and $15,885,000 are classified as minority interest in Other Income (Expense) in fiscal years 1995, 1994 and 1993, respectively. Both series of Preferred Stock are entitled to general voting rights of one-half vote for each share. The Board of Directors of the Delaware Company may authorize additional series of Preferred Stock, and may set terms of each new series except that the Delaware Company cannot create any series of stock senior to the existing Series A and Series B Preferred Stock without the consent of the holders of at least 50% of the shares of such Preferred Stock.
Each share of the outstanding Series A Preferred Stock is convertible into one share of International's Common Stock plus $0.10 cash. Series A and Series B Preferred Stock are redeemable at the option of the Delaware Company at $31.25 per share plus accrued dividends. On March 31, 1996 and each subsequent year through March 31, 2008, the Delaware Company is obligated to redeem, at a redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A Preferred Stock. On March 31 of fiscal years 1996 through 2006, and March 31 of fiscal years 2007 and 2008, the Delaware Company is obligated to redeem 252,702 and 189,526 shares, respectively, of Series B Preferred Stock. For the five fiscal years subsequent to March 31, 1995, the obligation to redeem the Series A and B Preferred Stock is $17,706,000 for each of the fiscal years 1996 through 2000. The Delaware Company may apply to the mandatory sinking fund obligations any Series A or B Preferred Stock reacquired, redeemed or surrendered for conversion which have not been previously credited against the mandatory sinking fund obligations. The Delaware Company applied 313,878 shares of Series A Preferred Stock and 315,877 shares of Series B Preferred Stock that it owned to satisfy the March 31, 1995 mandatory sinking fund obligations. During fiscal years 1995 and 1994, 557,416 and 114,800 shares, respectively, of Series B Preferred Stock were purchased on the open market. At March 31, 1995, 49,637 shares of Series A Preferred Stock have been converted to date and the Delaware Company owned 1,261,627 and 241,539 shares of Series A and Series B Preferred Stock, respectively.
NOTE 9 - CAPITAL STOCK
The Panamanian regulations relating to acquisitions of securities of companies, such as International, registered with the National Securities Commission require, among other matters, that detailed disclosure concerning the offeror, which is subject to review by either the Panamanian National Securities Commission or the Board of Directors of the subject company, be finalized prior to the beneficial acquisition of more than 5 percent of the outstanding shares of any class of stock. Transfers of securities in violation of these regulations are invalid and cannot be registered for transfer.
At March 31, 1995 and 1994, 86,389,216 and 85,521,703 shares of Common Stock, respectively, were reserved for issuance in connection with the conversion and redemption
of the Delaware Company's Series A Preferred Stock, the conversion of International's Series C Preferred Stock, the exercise of International Rights, the 1992 Officer Stock Program (and its predecessor programs), the 1992 Director Stock Program, the 1992 Senior Management Stock Program and contributions to the Thrift Plan.
International Preferred Stock - At March 31, 1995 and 1994, 25,000,000 shares of Preferred Stock were authorized. Of the authorized shares, 100,000 shares of Series A Participating Preferred Stock (the "Participating Preferred Stock") and 70,000 and 80,000 shares of Series B Non-Voting Preferred Stock (the "Non-Voting Preferred Stock") were issued and owned by the Delaware Company at March 31, 1995 and 1994, respectively. The Non-Voting Preferred Stock is currently callable by International at $275 per share and 10,000 shares are to be redeemed each year by International at $250 per share. The annual per share dividend rates for the Participating Preferred Stock and the Non-Voting Preferred Stock are $10 (but no more than ten times the amount of the per share dividend on International Common Stock) and $20, respectively, payable quarterly, and dividends on such shares are cumulative to the extent not paid. In addition, shares of Participating Preferred Stock are entitled to receive additional dividends whenever dividends in excess of $3.00 per share on International Common Stock are declared (or deemed to have been declared) in any fiscal year. In 1987, the voting rights of the Participating Preferred Stock were eliminated.
Of the authorized shares, International issued 2,875,000 shares of Series C Cumulative Convertible Preferred Stock in July 1993. Net cash proceeds to International were $140,066,000. The Series C shares have a par value of $1.00 per share, and a liquidation preference of $50.00 per share, plus an amount equal to accrued and unpaid dividends. Dividends on Series C shares are cumulative at the annual rate of 5.75% per share on the liquidation preference, equal to $2.875 per annum. International may not redeem Series C shares prior to July 1, 1997. On or after July 1, 1997, the Series C shares are redeemable, in whole or in part, at the option of International, either in cash, shares of International Common Stock, or a combination thereof. Holders of Series C shares may convert them, in whole or in part, at any time, into International Common Stock at a conversion price of $35.25 per share of Common Stock (equivalent to a conversion rate of 1.4184 shares of Common Stock for each share of Series C Preferred Stock), subject to adjustment.
The issuance of additional International Preferred Stock in the future and the specific terms thereof, such as the dividend rights, conversion rights, voting rights, redemption prices and similar matters, may be authorized by the Board of Directors of International without stockholder approval, except to the extent such approval may be required by applicable rules of the New York Stock Exchange or applicable law. If additional Preferred Stock is issued, such additional shares will rank senior to International Common Stock as to dividends and upon liquidation.
International Rights - On December 30, 1985, each holder of Common Stock received a dividend distribution of one Right for each outstanding share of Common Stock. The Rights currently trade with the Common Stock and at March 31, 1995 and 1994, International had outstanding Rights to purchase 54,059,597 and 53,544,467 shares (including Rights to purchase 100,000 shares held by the Delaware Company at March 31,
1995 and 1994), respectively, of its Common Stock at a price of $50 per share subject to anti-dilution adjustments. The Rights will become exercisable and will detach from the Common Stock 10 days after a person or a group either becomes the beneficial owner of 20 percent or more of the outstanding Common Stock, or commences or announces an intention to commence a tender or exchange offer for 30 percent or more of the outstanding Common Stock. If thereafter the acquiring person or group engages in certain self-dealing transactions, holders of Rights may purchase at the exercise price that number of shares of Common Stock having a market value equal to twice the exercise price. In the event International merges with or transfers 50 percent or more of its assets or earnings to any person after the Rights become exercisable, holders of Rights may purchase at the exercise price that number of shares of Common Stock of the acquiring entity having a market value equal to twice the exercise price. The Rights are redeemable by International and expire on December 30, 1995.
International's Stock Plans - The following table summarizes activity for International's stock option plans:
A total of 749,191 shares of Common Stock (including 230,811 of approved shares that were not awarded, and rights to shares that have not terminated or expired, under predecessor plans) are available for grants of options under the 1992 Officer Stock Program. Options become exercisable at such time or times as determined at the date of the grant, and expire ten years after the date of grant. Pursuant to the program, eligible employees may be granted rights to purchase shares of Common Stock at par value
($1.00 per share) subject to restrictions on transfer which lapse at such times and circumstances as specified when granted. Substantially all of the shares of Common Stock available for award under the 1992 Officer Stock Program may be granted as rights under the program. A total of 847,525 rights have been granted to purchase shares at par value ($1.00 per share) under the 1992 Officer Stock Program (and its predecessor plans) and the 1992 Director Stock Program (described below) at March 31, 1995.
A total of 18,575 shares of Common Stock are available for grants of options, and rights to purchase shares, to non-employee directors under the 1992 Director Stock Program. Options to purchase 900, 300 and 300 shares will be granted on the first, second, and third years, respectively, of a Director's term at not less than 100% of the fair market value on the date of grant. Options become exercisable, in full, six months after the date of the grant, and expire ten years and one day after the date of grant. Rights to purchase 450, 150 and 150 shares are granted on the first, second and third years, respectively, of a Director's term at par value ($1.00 per share) subject to restrictions on transfer, which lapse at the end of such term.
Under the 1992 Senior Management Stock Option plan, senior management employees may be granted options to purchase shares of Common Stock. The total number of shares available for grant is determined by the Board of Directors from time to time. Options to purchase shares are granted at no less that 100% of the fair market value on the date of grant, become exercisable at such time or times as determined when granted, and expire ten years after the date of the grant.
In the event of a change in control of McDermott International, all three programs have provisions that may cause restrictions to lapse and accelerate the exercisability of options outstanding.
Thrift Plan - On November 12, 1991, a maximum of 5,000,000 of the authorized and unissued shares of International's Common Stock was reserved for possible issuance to be used as the employer match for employee contributions to the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies. Such employer contributions equal 50% of the first 6% of compensation, as defined in the Plan, contributed by participants, and fully vest and are non-forfeitable after five years of service or upon retirement, death, lay-off or approved disability. During fiscal years 1995, 1994 and 1993, 312,883, 300,391 and 347,054 shares, respectively, were issued as employer contributions pursuant to the Plan. At March 31, 1995, 3,923,885 shares remained available for issuance.
NOTE 10 - CONTINGENCIES AND COMMITMENTS
Litigation - International and certain of its officers, directors and subsidiaries are defendants in numerous legal proceedings. Management believes that the outcome of these proceedings will not have a material adverse effect upon the consolidated financial position of McDermott International.
Products Liability - At March 31, 1995 and 1994, the estimated liability for pending and future non-employee products liability asbestos claims was $995,948,000 (of which less than $165,000,000 had been asserted) and $1,122,099,000 and estimated insurance recoveries were $861,407,000 and $987,046,000, respectively. During fiscal year 1995, McDermott International received notice that provisional liquidators had been appointed to a London-based products liability asbestos insurer and, as a result, a loss of $14,478,000 related to the reduction of estimated insurance recoveries was recognized. Estimated liabilities for pending and future non-employee products liability asbestos claims are derived from McDermott International's claims history and constitute management's best estimate of such future costs. Estimated insurance recoveries are based upon analysis of insurers providing coverage of the estimated liabilities. Inherent in the estimate of such liabilities and recoveries are expected trends in claim severity and frequency and other factors, including recoverability from insurers, which may vary significantly as claims are filed and settled. Accordingly, the ultimate loss may differ materially from amounts provided in the consolidated financial statements.
Environmental Matters - During the March 1995 quarter, a decision was made to close certain of its nuclear manufacturing facilities, and a provision of $41,724,000 for the decontamination, decommissioning and the closing of these facilities was recognized immediately. Previously, decontamination and decommissioning costs were being accrued over the facilities' remaining expected life. Decontamination will proceed as permitted by the existing NRC license, while funding support will be sought and a decommissioning plan will be submitted for review and approval as required by the NRC. B&W expects to have reached agreement with the NRC in fiscal 1997 on the plan that will provide for the completion of facilities dismantlement and soil restoration by the end of fiscal year 2001. B&W expects to request approval from the NRC to release the site for unrestricted use at that time.
At March 31, 1995 and 1994, McDermott International had total environmental reserves of $51,721,000 (including the provision discussed above) and $13,513,000 respectively, of which $8,770,000 and $661,000 were included in current liabilities.
McDermott International has been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response, Compensation and Liability Act, as amended. McDermott International has not been determined to be a major contributor of wastes to these sites. However, each potentially responsible party or contributor may face assertions of joint and several liability. Generally, however, a final allocation of costs is made based on its relative contribution of wastes to each site. Based on its relative contribution of waste to each site, McDermott International's share of the ultimate liability for the various sites is not expected to have a material effect on its consolidated financial position.
The Department of Environmental Resources of the Commonwealth of Pennsylvania, ("PADER"), by letter dated March 19, 1994, advised B&W that it will seek monetary sanctions, and remedial and monitoring relief, related to B&W's Parks Facilities in Parks Township, Armstrong County, Pennsylvania. The relief sought relates to potential groundwater contamination related to the previous operations of the facilities. B&W is currently negotiating with PADER and expects to reach a settlement without having to resort to litigation. Any sanctions ultimately assessed are not expected to have a material effect on the consolidated financial statements of McDermott International.
Operating Leases - Future minimum payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at March 31, 1995 are as follows: 1996 -$16,510,000; 1997 - $12,233,000; 1998 - $10,122,000; 1999 - $9,629,000; 2000 - $9,156,000; and thereafter - $44,347,000. Total rental expense for fiscal years 1995, 1994 and 1993 was $109,655,000, $120,515,000, and $131,014,000, respectively. These expense figures include contingent rentals and are net of sublease income, both of which are not material.
Other - McDermott International performs significant amounts of work for the U.S. Government under both prime contracts and subcontracts and thus is subject to continuing reviews by governmental agencies.
McDermott International maintains liability and property insurance that it considers normal in the industry. However, certain risks are either not insurable or insurance is available only at rates which McDermott International considers uneconomical.
Commitments for capital expenditures amounted to approximately $40,301,000 at March 31, 1995, all of which relates to fiscal year 1996.
McDermott International is contingently liable under standby letters of credit totaling $374,414,000 (including $47,864,000 issued on behalf of unconsolidated foreign joint ventures) at March 31, 1995, issued in the normal course of business. McDermott International has guaranteed $29,705,000 of loans to and $26,559,000 of standby letters of credit issued by unconsolidated foreign joint ventures at March 31, 1995. At March 31, 1995, McDermott International had pledged approximately $62,778,000 fair value of government obligations and corporate bonds to secure payments under and in connection with certain reinsurance agreements.
Related Party - In connection with the acquisition of OPI, two directors and two officers of JRM have entered into noncompetition agreements. As consideration, the directors and officers received a total of $10,117,000 (including 50,000 shares of JRM's common stock valued at $1,117,000) during fiscal year 1995. In addition, one director will receive additional payments of $1,500,000 per year over the next five years.
A subsidiary of JRM has entered into an office sublease with an affiliate of two of JRM's directors. Under the sublease, which expires no later than March 1997, the affiliate is required to make monthly rental payments of approximately $18,000 to the subsidiary.
Under another agreement, the affiliate will manage and operate the subsidiary's offshore producing oil an gas property for a monthly fee of $48,000 and reimbursement of certain costs. In addition, a subsidiary of JRM sold an offshore jacket and deck to the affiliate for $1,100,000 during fiscal year 1995 and has a contract to refurbish and install the jacket and deck for approximately $1,300,000.
A subsidiary of JRM entered into agreements with an affiliate of another director of JRM pursuant to which, the subsidiary acquired interests in certain offshore oil and gas property. During fiscal year 1995, the subsidiary paid $3,000,000 to the affiliate under the agreements in connection with the acquisition of its interests and the development of such property. In addition, a subsidiary of JRM owns 140,000 shares of this affiliate and 20,000 units in a limited partnership which is also an affiliate of this director.
JRM maintains employment agreements with certain officers and employees which contain change in control provisions that would entitle each to receive two times his three-year average annual salary plus continuation of certain benefits if there is a change in control of JRM (as defined) and a termination of his employment within two years after a change in control. These agreements also provide medical and health insurance benefits for a two year period following the termination of employment.
NOTE 11 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
McDermott International's Power Generation Systems and Equipment customers are principally the electric power generation industry (including government-owned utilities and independent power producers), the U.S. Government (including its contractors), and the pulp and paper and other process industries, such as oil refineries and steel mills. The principal customers of the Marine Construction Services segment are the offshore oil, natural gas and hydrocarbon processing industries and other marine construction companies. These concentrations of customers may impact McDermott International's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic or other conditions. However, McDermott International's management believes that the portfolio of receivables is well diversified and that such diversification minimizes any potential credit risk. Receivables are generally not collateralized.
McDermott International believes that its provision for possible losses on uncollectible accounts receivable is adequate for its credit loss exposure. At March 31, 1995 and 1994, the allowance for possible losses deducted from Accounts receivable-trade on the balance sheet was $8,526,000 and $7,289,000, respectively.
NOTE 12 - INVESTMENTS
The following is a summary of available-for-sale securities at March 31, 1995:
The amortized cost and estimated fair value amounts above include $10,909,000 in other debt securities which are reported as cash equivalents in the balance sheet.
Proceeds, gross realized gains and losses on sales of available-for-sale securities were approximately $251,565,000, $88,000 and $2,666,000, respectively, for fiscal year 1995. The amortized cost and estimated fair value of available-for-sale debt and equity securities at March 31, 1995, by contractual maturity, are shown below:
NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS
McDermott International operates internationally giving rise to exposure to market risks from changes in foreign exchange rates. Derivative financial instruments, primarily forward exchange contracts, are utilized to reduce those risks. McDermott International does not hold or issue financial instruments for trading purposes.
Forward exchange contracts are entered into primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies. At March 31, 1995, McDermott International had forward exchange contracts to purchase $251,562,000 in foreign currencies (primarily Canadian Dollars, Japanese Yen, and Pound Sterling), and to sell $199,735,000 in foreign currencies (primarily Canadian Dollars, Dutch Guilders, Japanese Yen, Malaysian Ringgit, and Pound Sterling), at varying maturities from fiscal year 1996 through 2000. At March 31, 1994, McDermott International had forward exchange contracts to purchase $328,881,000 in foreign currencies (primarily Canadian Dollars and Dutch Guilders), and to sell $281,787,000 in foreign currencies (primarily Canadian Dollars, Japanese Yen, Dutch Guilders, British Pounds, and Saudi Riyals), at varying maturities from fiscal year 1995 through 1998.
Deferred realized and unrealized gains and losses from hedging firm purchase and sale commitments are included on a net basis in the balance sheet as a component of either contracts in progress or advance billings on contracts or as a component of either other current assets or accrued liabilities. They are recognized in income as part of the purchase or sale transaction when it is recognized, or as other gains or losses when a hedged transaction is no longer expected to occur. At March 31, 1995, McDermott International had deferred gains of $2,231,000 and deferred losses of $10,865,000 related to forward exchange contracts which will principally be recognized in accordance with the percentage of completion method of accounting.
In management of its net interest costs (expense on debt and income on investments), McDermott International entered into interest rate swap agreements with certain banks which effectively change the fixed interest rates on certain long-term notes payable. Net amounts to be paid or received as a result of these agreements are accrued as adjustments to interest expense over the terms of these contracts. Gains realized as a result of terminating agreements in fiscal year 1993 were deferred and were recognized as reductions of interest expense over the original terms of the agreements. Interest rate swaps resulted in an increase in interest expense of $1,202,000 in fiscal year 1995 and a reduction of interest expense of $5,782,000 and $6,961,000 in fiscal years 1994 and 1993, respectively. At March 31, 1995 and 1994 McDermott International had an interest rate swap outstanding on the current notional principal of $73,800,000 and $90,400,000, respectively, of its 10.375% note payable due 1998.
McDermott International is exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments, but it does not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in such contracts.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by McDermott International in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Investment securities: The fair values of investments are estimated based on quoted market prices. For investments for which there are no quoted market prices, fair values are derived from available yield curves for investments of similar quality and terms.
Long and short-term debt: The fair values of debt instruments are based on quoted market prices or where quoted prices are not available, on the present value of cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred stocks of the Delaware Company are based on quoted market prices.
Foreign currency exchange contracts: The fair values of foreign currency forward exchange contracts are estimated by obtaining quotes from brokers. At March 31, 1995 and 1994, McDermott International had net forward exchange contracts outstanding to purchase foreign currencies with a notional value of $51,827,000 and $47,094,000 and a fair value of $41,237,000 and $35,288,000, respectively.
Interest rate swap agreements: The fair values of interest rate swaps are the amounts at which they could be settled and are estimated by obtaining quotes from brokers. At March 31, 1995 and 1994, McDermott International had an interest rate swap outstanding on current notional principal of $73,800,000 with a fair value of ($2,541,000) and $90,400,000 with a fair value of ($1,853,000), respectively, which represents the estimated amount, McDermott International would have to pay to terminate the agreement.
The estimated fair values of McDermott International's financial instruments are as follows:
NOTE 15 - SEGMENT REPORTING
McDermott International operates in two industry segments - Power Generation Systems and Equipment and Marine Construction Services.
Power Generation Systems and Equipments' principal businesses are the supply of fossil-fuel and nuclear steam generating systems and equipment to the electric power generation industry, and nuclear reactor components to the U. S. Navy.
Marine Construction Services supplies worldwide services for the offshore oil, natural gas and hydrocarbon processing industries, and to other marine construction companies, primarily through JRM. Principal activities include the design, engineering, fabrication and installation of marine pipelines and offshore structures and subsea production systems for development drilling and production, and onshore construction and maintenance services.
Intersegment sales are accounted for at prices which are generally established by reference to similar transactions with unaffiliated customers. Identifiable assets by industry segment are those assets that are used in McDermott International's operations in each segment. Corporate assets are principally cash and cash equivalents, short-term investments, marketable securities and prepaid pension costs.
In the fiscal years 1995, 1994 and 1993, the U. S. Government accounted for approximately 12%, 13% and 13%, respectively, of McDermott International's total revenues. These revenues are principally included in the Power Generation Systems and Equipment segment.
At March 31, 1995, 1994 and 1993 receivables of $6,230,000, $1,142,000, and $10,524,000, respectively, were due from minority shareholders, primarily ETPM S.A., participating in McDermott International's majority-owned joint ventures. Sales to ETPM S.A. were $1,801,000, $3,358,000 and $31,234,000, respectively, for the fiscal years ended March 31, 1995, 1994 and 1993. In fiscal years 1995, 1994 and 1993 equipment charters and overhead expenses of $4,938,000, $6,330,000 and $6,046,000, respectively, were charged by ETPM S.A. to the McDermott-ETPM joint venture.
The provisions for the closing of certain facilities in fiscal year 1995 resulted in a decrease in the Power Generation Systems and Equipment segment operating income of $46,489,000. The adoption of EITF Issue No. 93-5 in fiscal year 1994 resulted in an increase in the Power Generation Systems and Equipment segment operating income of $19,947,000. The adoption of SFAS No. 106 in fiscal year 1993 resulted in a net decrease in segment operating income of $6,784,000. This included a decrease of $3,760,000 in the Power Generation Systems and Equipment segment and a decrease of $3,024,000 in the Marine Construction Services segment.
Segment Information for the Three Fiscal Years Ended March 31, 1995.
1. Information about McDermott International's Operations in Different Industry Segments.
(1) Segment revenues include intersegment transfers as follows:
(2) See Note 2 regarding the acquisition of OPI during fiscal year 1995 and the acquisitions of NOS and DCC during fiscal year 1994.
(1) Includes property, plant and equipment of $173,134,000 and $79,233,000 of acquired companies in fiscal years 1995 and 1994, respectively, and the purchase of a fabrication yard financed by a note payable of $16,250,000 in fiscal year 1994.
2 . Information about McDermott International's Operations in Different Geographic Areas.
(1) Net of inter-geographic area revenues in fiscal years 1995 and 1994 as follows: United States- $69,432,000 and $38,666,000, Canada - $11,538,000 and $12,082,000, Europe and West Africa - $13,200,000 and $15,868,000, Far East - $18,414,000 and $474,000, Middle East - $37,303,000 and $2,686,000 and Other Foreign - $26,259,000 and $25,770,000, respectively.
(2) Net of inter-geographic area revenues of $71,027,000 in fiscal year 1993.
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial information for the fiscal years ended March 31,1995 and 1994:
Pre-tax results for the quarter ended June 30, 1994 include a reduction in accrued interest expense of $5,700,000 due to settlement of an outstanding tax issue with the IRS. Results for the quarter ended September 30, 1994 include a loss related to the reduction of estimated products liability asbestos claim recoveries from insurers of $14,478,000 and a reduction in accrued interest expense of $5,600,000 due to the settlement of outstanding tax issues. Results for the quarter ended December 31, 1994 include a reduction in accrued interest expense of $5,000,000 due to the settlement of outstanding tax issues and favorable worker's compensation cost adjustments of $14,886,000. Results for the quarter ended March 31, 1995 include provisions of $46,489,000 for the decontamination, decommissioning, and closing of a nuclear facility and for the closing of a manufacturing facility, and a reduction in accrued interest expense and taxes of $10,000,000 and $5,200,000, respectively, due to the settlement of outstanding tax issues.
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.
Item 9.
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART I I I
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no family relationships between any of the executive officers, directors or persons nominated to be such, and no executive officer was elected to his position pursuant to any arrangements or understanding between himself and any other person.
Information required by this item with respect to directors and executive officers is incorporated by reference to the material appearing under the headings "Election of Directors" in the Proxy Statement for International's 1995 Annual Meeting of Stockholders.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material appearing under the heading "Compensation of Executive Officers" and "Certain Transactions" in the Proxy Statement for International's 1995 Annual Meeting of Stockholders.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material appearing under the headings "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in International's Proxy Statement for the 1995 Annual Meeting of Stockholders.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the material appearing under the heading "Compensation of Executive Officers" and "Certain Transactions" in International's Proxy Statement for the 1995 Annual Meeting of Stockholders.
PART I V
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or incorporated by reference:
1. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheet March 31, 1995 and 1994
Consolidated Statement of Income (Loss) For The Three Fiscal Years Ended March 31, 1995
Consolidated Statement of Stockholders' Equity For The Three Fiscal Years Ended March 31, 1995
Consolidated Statement of Cash Flows For the Three Fiscal Years Ended March 31, 1995
Notes to Consolidated Financial Statements For the Three Fiscal Years Ended March 31, 1995
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All required schedules will be filed by amendment to this Form 10-K on Form 10-K/A.
3. EXHIBITS
(a) CURRENT REPORTS ON FORM 8-K
A Current Report on Form 8-K, Item 2, was filed by McDermott International, Inc. on February 15, 1995.
A Current Report on Form 8-K/A, Item 7, was filed by McDermott International, Inc. on March 31, 1995.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
McDERMOTT INTERNATIONAL, INC.
s/ Robert E. Howson ------------------------------ June 16, 1995 By: Robert E. Howson Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated.
June 16, 1995