-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OwSVekCAy0LxJZTAtTxsoZQ0FnPybmyM79lvSPIkU7qfsVwLVUOFNpEoRH7IJt4l LdM54bCI3diYPovdGkGtVA== 0000899243-96-001419.txt : 19961113 0000899243-96-001419.hdr.sgml : 19961113 ACCESSION NUMBER: 0000899243-96-001419 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDERMOTT INTERNATIONAL INC CENTRAL INDEX KEY: 0000708819 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 720593134 STATE OF INCORPORATION: R1 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20599 FILM NUMBER: 96657822 BUSINESS ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70112 BUSINESS PHONE: 5045875400 MAIL ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70161 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 For the transition period from ______________to______________ Commission File No. 1-8430 McDERMOTT INTERNATIONAL, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) REPUBLIC OF PANAMA 72-0593134 - -------------------------------------------------------------------------------- (State or other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation of Organization) 1450 Poydras Street, New Orleans, Louisiana 70112-6050 - ------------------------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number, Including Area Code (504) 587-5400 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of Common Stock, par value $1 per share, outstanding as of October 25, 1996 was 54,841,403. M c D E R M O T T I N T E R N A T I O N A L , I N C. I N D E X - F O R M 1 0 - Q ---------------------------------
PAGE ---- PART I - FINANCIAL INFORMATION - ------------------------------ Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet September 30, 1996 and March 31, 1996 4 Condensed Consolidated Statement of Income (Loss) Three and Six Months Ended September 30, 1996 and 1995 6 Condensed Consolidated Statement of Cash Flows Six Months Ended September 30, 1996 and 1995 7 Notes to Condensed Consolidated Financial Statements 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION - --------------------------- Item 4 - Submission of Matters to a Vote of Security Holders 26 Item 6 - Exhibits and Reports on Form 8-K 27 SIGNATURES 28 Exhibit 11 - Calculation of Earnings (Loss) Per Common and Common Equivalent Share 30 Exhibit 27 - Financial Data Schedule 31
2 PART I McDERMOTT INTERNATIONAL, INC. FINANCIAL INFORMATION --------------------- Item 1. Condensed Consolidated Financial Statements 3 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1996
ASSETS 9/30/96 3/31/96 -------- -------- (Unaudited) (In thousands) Current Assets: Cash and cash equivalents $ 255,927 $ 238,663 Accounts receivable - trade 513,230 457,049 Accounts receivable - unconsolidated affiliates 38,816 57,691 Accounts receivable - other 172,527 162,335 Insurance recoverable - current 199,489 116,280 Contracts in progress 493,555 457,265 Inventories 74,078 77,592 Deferred income taxes 78,446 93,104 Other current assets 48,414 64,559 - -------------------------------------------------------------------------- Total Current Assets 1,874,482 1,724,538 - -------------------------------------------------------------------------- Property, Plant and Equipment, at Cost: 1,883,573 1,890,103 Less accumulated depreciation 1,205,691 1,199,416 - -------------------------------------------------------------------------- Net Property, Plant and Equipment 677,882 690,687 - -------------------------------------------------------------------------- Investments: Government obligations 283,942 132,674 Other investments 145,887 109,352 - -------------------------------------------------------------------------- Total Investments 429,829 242,026 - -------------------------------------------------------------------------- Insurance Recoverable 451,114 606,963 - -------------------------------------------------------------------------- Excess of Cost Over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization of $142,571,000 at September 30, 1996 and $126,882,000 at March 31, 1996 447,503 460,058 - -------------------------------------------------------------------------- Prepaid Pension Costs 293,125 283,656 - -------------------------------------------------------------------------- Other Assets 387,245 379,323 - -------------------------------------------------------------------------- TOTAL $ 4,561,180 $4,387,251 ==========================================================================
See accompanying notes to condensed consolidated financial statements. 4 LIABILITIES AND STOCKHOLDERS' EQUITY
9/30/96 3/31/96 -------- -------- (Unaudited) (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 471,619 $ 234,258 Accounts payable 264,247 264,930 Environmental and products liabilities - current 261,192 161,062 Accrued employee benefits 99,988 98,159 Advance billings on contracts 205,851 187,378 Other current liabilities 368,393 446,765 ------------------------------------------------------------------------- Total Current Liabilities 1,671,290 1,392,552 - -------------------------------------------------------------------------- Long-Term Debt 694,001 576,256 - -------------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation 403,174 401,321 - -------------------------------------------------------------------------- Environmental and Products Liabilities 538,864 721,740 - -------------------------------------------------------------------------- Other Liabilities 272,314 268,975 - -------------------------------------------------------------------------- Contingencies - -------------------------------------------------------------------------- Minority Interest: Subsidiary's preferred stocks 173,301 173,301 Other minority interest 171,079 168,586 - -------------------------------------------------------------------------- Total Minority Interest 344,380 341,887 - -------------------------------------------------------------------------- Stockholders' Equity: Preferred stock, authorized 25,000,000 shares; outstanding 2,875,000 Series C $2.875 cumulative convertible, par value $1.00 per share, (liquidation preference $143,750,000) 2,875 2,875 Common stock, par value $1.00 per share, authorized 150,000,000 shares; outstanding 54,741,403 at September 30, 1996 and 54,435,823 at March 31, 1996 54,741 54,436 Capital in excess of par value 956,227 949,022 Deficit (342,693) (290,968) Minimum pension liability (1,428) (1,428) Net unrealized loss on investments (2,418) (1,875) Currency translation adjustments (30,147) (27,542) - -------------------------------------------------------------------------- Total Stockholders' Equity 637,157 684,520 - -------------------------------------------------------------------------- TOTAL $ 4,561,180 $4,387,251 ==========================================================================
5 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS) SEPTEMBER 30, 1996
THREE SIX MONTHS ENDED MONTHS ENDED 9/30/96 9/30/95 9/30/96 9/30/95 --------- --------- ---------- ---------- (Unaudited) (In thousands) Revenues $ 806,898 $ 813,307 $1,681,030 $1,630,567 - ---------------------------------------------------------------------------------------------- Costs and Expenses: Cost of operations (excluding depreciation and amortization) 723,083 686,460 1,492,351 1,397,108 Depreciation and amortization 38,259 36,660 72,114 70,772 Selling, general and administrative expenses 60,898 68,168 123,981 135,019 --------------------------------------------------------------------------------------------- 822,240 791,288 1,688,446 1,602,899 - ---------------------------------------------------------------------------------------------- Operating Income (Loss) before Equity in Income (Loss) of Investees (15,342) 22,019 (7,416) 27,668 Equity in Income (Loss) of Investees 23,864 (15) 28,308 33,164 - ---------------------------------------------------------------------------------------------- Operating Income 8,522 22,004 20,892 60,832 - ---------------------------------------------------------------------------------------------- Other Income (Expense): Interest income 9,522 8,431 19,851 19,690 Interest expense (23,758) (21,376) (43,486) (42,914) Minority interest (5,383) (5,516) (14,840) (9,146) Other-net 4,124 1,437 2,552 (1,773) - ---------------------------------------------------------------------------------------------- (15,495) (17,024) (35,923) (34,143) - ---------------------------------------------------------------------------------------------- Income (Loss) before Provision for (Benefit from) Income Taxes (6,973) 4,980 (15,031) 26,689 Provision for (Benefit from) Income Taxes 5,457 (4,074) 5,223 8,803 - ---------------------------------------------------------------------------------------------- Net Income (Loss) $ (12,430) $ 9,054 $ (20,254) $ 17,886 ============================================================================================== Net Income (Loss) Applicable to Common Stock (after Preferred Stock Dividends) $ (14,497) $ 6,987 $ (24,387) $ 13,753 ============================================================================================== Net Income (Loss) per Common and Common Equivalent Share (Primary and Fully Diluted) $ (0.27) $ 0.13 $ (0.45) $ 0.25 ============================================================================================== Weighted Average Number of Common and Common Equivalent Shares Outstanding 54,694,402 54,359,639 54,603,746 54,386,373 ============================================================================================== Cash Dividends: Per common share $ 0.25 $ 0.25 $ 0.50 $ 0.50 Per preferred share $ 0.72 $ 0.72 $ 1.44 $ 1.44 ==============================================================================================
See accompanying notes to condensed consolidated financial statements. 6 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS SEPTEMBER 30, 1996 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED 9/30/96 9/30/95 ------- ------- (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ (20,254) $ 17,886 - ------------------------------------------------------------------------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 72,114 70,772 Equity in income of investees, less dividends (21,703) 15,431 Provision for (benefit from) deferred taxes 7,576 (1,719) Other (10,266) (4,899) Changes in assets and liabilities: Accounts receivable (45,829) (103,538) Net contracts in progress and advance billings (18,651) (89,911) Accounts payable (2,279) (6,089) Accrued and other current liabilities (50,012) (57,990) Other, net 43,643 (28,110) Proceeds from insurance for products liabilities claims 55,395 49,305 Payments of products liabilities claims (79,859) (74,112) - ------------------------------------------------------------------------- NET CASH USED IN OPERATING ACTIVITIES (70,125) (212,974) - ------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition - (6,527) Proceeds from sale and disposal of assets 20,141 17,908 Purchases of property, plant and equipment (59,158) (38,666) Investment in asset held for lease - (9,802) Purchases of investments (255,970) (304,920) Sales and maturities of investments 68,486 652,904 Investments in equity investees (10,267) (4,609) - ------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (236,768) 306,288 - -------------------------------------------------------------------------
7 CONTINUED INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED 9/30/96 9/30/95 -------- -------- (Unaudited) (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt $ (15,238) $(163,047) Issuance of long-term debt 244,375 13,240 Increase in short-term borrowing 127,236 108,304 Dividends paid (31,394) (31,142) Other (887) 979 - -------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 324,092 (71,666) - -------------------------------------------------------------------------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH 65 (3) - -------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 17,264 21,645 - -------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 238,663 85,909 - -------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 255,927 $ 107,554 ========================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 39,058 $ 47,175 Income taxes (net of refunds) $ 15,084 $ 29,934 ==========================================================================
See accompanying notes to condensed consolidated financial statements. 8 McDERMOTT INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE 1 - BASIS OF PRESENTATION McDermott International, Inc. is the parent company of the McDermott group of companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott Incorporated. Unless the context otherwise requires, hereinafter, "International" will be used to mean the consolidated enterprise. The accompanying unaudited condensed consolidated financial statements are presented in U. S. Dollars, and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments are of a normal, recurring nature except for an asset impairment loss ($4,742,000, net of tax of $2,553,000, or $0.09 per share) included in the three and six months ended September 30, 1996; a favorable insurance adjustment ($12,000,000 or $0.22 per share) in the three and six months ended September 30, 1995; a gain resulting from the sale of two power purchase contracts ($20,047,000, net of tax of $10,565,000, or $0.37 per share) included in the six months ended September 30, 1995. Certain amounts previously reported have been reclassified to conform with the presentation at September 30, 1996. Operating results for the three and six months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending March 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in International's, annual report on Form 10-K for the year ended March 31, 1996. 9 NOTE 2 - PRODUCTS LIABILITY At September 30, 1996, the estimated liability for pending and future non- employee products liability asbestos claims was $764,127,000 (of which approximately $220,000,000 had been asserted) and estimated insurance recoveries were $650,603,000. Estimated liabilities for pending and future non- employee products liability asbestos claims are derived from 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, changes in estimates could result in a material adjustment to operating results for any fiscal quarter or year and the ultimate loss may differ materially from amounts provided in the consolidated financial statements. NOTE 3 - INVENTORIES Consolidated inventories at September 30, 1996 and March 31, 1996 are summarized below:
September 30, March 31, 1996 1996 ------------- ---------- (Unaudited) (In thousands) Raw Materials and Supplies $ 48,830 $ 47,457 Work in Progress 18,432 17,305 Finished Goods 6,816 12,830 - -------------------------------------------------------------------------- $ 74,078 $ 77,592 ==========================================================================
10 NOTE 4 - SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATES The combined financial results of two of JRM's joint ventures, HeereMac and McDermott-ETPM West, Inc., which are accounted for using the equity method, are summarized below. These ventures were significant (as defined by applicable Securities and Exchange Commission regulations) in fiscal year 1996.
THREE SIX MONTHS ENDED MONTHS ENDED 9/30/96 9/30/95 9/30/96 9/30/95 ------- ------- -------- ------- (Unaudited) (In thousands) Revenues $ 214,404 $126,104 $ 385,757 $ 318,023 - ---------------------------------------------------------------------------------------------- Operating Income (Loss) $ 42,141 $ (1,274) $ 64,860 $ 4,338 - ---------------------------------------------------------------------------------------------- Income (Loss) before Income Taxes $ 45,542 $ (200) $ 46,255 $ 10,011 Provision for (Benefit from) Income Taxes 2,439 (1,355) 4,413 318 - ---------------------------------------------------------------------------------------------- Net Income $ 43,103 $ 1,155 $ 41,842 $ 9,693 ============================================================================================== Equity in Net Income $ 20,561 $ 891 $ 19,356 $ 4,873 ==============================================================================================
11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL McDermott International, Inc. is the parent company of the McDermott group of companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott Incorporated. Unless the context otherwise requires, hereinafter "International" will be used to mean the consolidated enterprise. A significant portion of International's revenues and operating results are derived from its foreign operations. As a result, International's operations and financial results are affected by international factors, such as changes in foreign currency exchange rates. International attempts to minimize its exposure to changes in foreign currency exchange rates by attempting to match foreign currency contract receipts with like foreign currency disbursements. To the extent that International 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, which reduce the impact of foreign exchange rate movements on operating results. Management's discussion of revenues and operating income is presented on a business unit basis as follows: the JRM business unit (includes the results of operations of the marine construction services business); the B&W Operations business unit (includes the operations of the Babcock & Wilcox Power Generation and Government Groups); and the Industrial Operations business unit (includes Engineering and Construction operations, barge construction, ship repair and other industrial operations). Other business unit revenues include combining adjustments and eliminations resulting from inter-business unit contracts. Other business unit income (loss) includes certain adjustments which are not allocated to the business units, including retiree benefit and legal costs as well as the impact of combining adjustments on margins of inter-business unit contracts. Business unit revenue and income (loss) for the three and six months ended September 30, 1995 have been restated to reflect the reclassification of certain operations to B&W Operations from the Industrial Operations business unit; the allocation of certain expenses to the B&W Operations and the Industrial Operations business units from Other; the allocation of certain expenses from Business Unit Income (Loss) to Corporate General & Administrative Expense; and to include gains and losses on asset sales and disposals to conform with the presentation at September 30, 1996. 12
THREE SIX MONTHS ENDED MONTHS ENDED 9/30/96 9/30/95 9/30/96 9/30/95 -------- -------- ---------- ---------- (Unaudited) (In thousands) REVENUES J. Ray McDermott, S.A. $ 368,708 $ 359,503 $ 758,305 $ 671,662 B&W Operations 350,429 333,652 696,058 711,648 Industrial Operations 117,132 128,780 269,579 265,411 Other (including Transfer Eliminations) (29,371) (8,628) (42,912) (18,154) - ---------------------------------------------------------------------------------------------- TOTAL REVENUES $ 806,898 $ 813,307 $1,681,030 $1,630,567 ============================================================================================== OPERATING INCOME Business Unit Income (Loss): J. Ray McDermott, S.A. $ 7,852 $ 25,608 $ 29,500 $ 41,552 B&W Operations 11,220 (1,898) 13,084 1,528 Industrial Operations (10,346) (4,559) (15,444) (9,198) Other (12,645) 11,558 (13,654) 10,483 - ---------------------------------------------------------------------------------------------- TOTAL BUSINESS UNIT INCOME (LOSS) (3,919) 30,709 13,486 44,365 - ---------------------------------------------------------------------------------------------- Equity in Income (Loss) of Investees: J. Ray McDermott, S.A. 22,853 (1,903) 24,151 (2,801) B&W Operations 1,145 1,758 4,273 35,841 Industrial Operations (134) 130 (116) 124 - ---------------------------------------------------------------------------------------------- TOTAL EQUITY IN INCOME (LOSS) OF INVESTEES 23,864 (15) 28,308 33,164 - ---------------------------------------------------------------------------------------------- Corporate General & Administrative Expense (11,423) (8,690) (20,902) (16,697) - ---------------------------------------------------------------------------------------------- TOTAL OPERATING INCOME $ 8,522 $ 22,004 $ 20,892 $ 60,832 ==============================================================================================
13 RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 VS. THREE MONTHS ENDED SEPTEMBER 30, 1995 JRM's revenues increased $9,205,000 to $368,708,000, primarily due to higher volume in North America, partially offset by lower activities in the North Sea and lower leasing activities due to the sale of the DB101 and DB102 to the HeereMac joint venture. B&W Operations' revenues increased $16,777,000 to $350,429,000, primarily due to higher revenues from the Power Generation Group's repair and alteration of existing fossil fuel steam systems, plant enhancement projects, and replacement nuclear steam generators for domestic customers manufactured at B&W's Cambridge, Ontario location. In addition, the Government Group's commercial nuclear environmental services had higher revenues. These increases were partially offset by lower volume from fabrication and erection of fossil fuel steam and environmental control systems and Canadian nuclear services. Industrial Operations' revenues decreased $11,648,000 to $117,132,000, primarily due to lower revenues from engineering and construction activities from this business unit's Canadian and domestic operations. These decreases were partially offset by higher barge construction activities in this business unit's domestic operations and ship repair activities in its Mexican operations. JRM's business unit income decreased $17,756,000 to $7,852,000, primarily due to lower volume and margins on the Foinaven project, the completion of profitable Offshore Pipelines, Inc. contracts in West Africa last year, lower leasing activities due to the sale of the DB101 and DB102, and lower margins in the Middle East. These decreases were partially offset by higher volume in North America and improved margins in the Far East. B&W Operations' business unit income increased $13,118,000 from a loss of $1,898,000 to income of $11,220,000, primarily due to the Power Generation Group's higher volume and margins on industrial boilers and replacement nuclear steam generators and improved margins on repair and alteration of existing fossil fuel steam systems. These increases were partially offset by lower volume and margins on fabrication and erection of fossil fuel steam and environmental control systems. In addition, there were higher volume and margins from the Government Group's nuclear fuel assemblies and reactor components for 14 the U. S. Government and from commercial nuclear environmental services. These increases were partially offset by lower volume and margins on other defense and space-related projects (other than nuclear fuel assemblies and reactor components). Industrial Operations' business unit loss increased $5,787,000 to $10,346,000, primarily due to cost overruns on the engineering, procurement and construction contract for a cogeneration plant and cost overruns on domestic barge construction operations. Other business unit income decreased $24,203,000 from income of $11,558,000 to a loss of $12,645,000, primarily due to a favorable insurance adjustment of $12,000,000 in the prior period and an asset impairment loss of $7,295,000 in the current period. JRM's equity in income (loss) of investees increased $24,756,000 from a loss of $1,903,000 to income of $22,853,000, primarily due to the improved operating results from the HeereMac joint venture. The revenues of the HeereMac and the McDermott-ETPM West, Inc. joint ventures increased from $126,104,000 to $214,404,000 primarily due to increased volume in the North Sea and North America, partially offset by decreased volume in the Far East and West Africa. Equity in income of investees from these two joint ventures increased from $891,000 to $20,561,000 primarily as a result of higher volume and margins and foreign currency transaction gains. There was also higher interest expense as a result of debt issued by the HeereMac joint venture to finance the purchase of major marine vessels it had been chartering, including JRM's DB101 and DB102. Equity in income of investees in the current period also includes income of $2,168,000 from the amortization of the deferred gain resulting from the sale of the DB101 and DB102. Interest income increased $1,091,000 to $9,522,000, primarily due to interest on the promissory note of $105,000,000 received as part of the consideration from the sale of the DB101 and DB102. Interest expense increased $2,382,000 to $23,758,000, primarily due to changes in debt obligations and interest rates prevailing thereon. 15 Other-net increased $2,687,000 to $4,124,000. This increase is primarily due to increases in certain reimbursed financing costs and foreign currency transaction gains in the current period compared to foreign currency transaction losses in the prior period. The provision for income taxes increased $9,531,000 from a benefit of $4,074,000 to a provision of $5,457,000, while income (loss) before provision for income taxes decreased $11,953,000 from income of $4,980,000 to a loss of $6,973,000. The increase in the provision for income taxes is due in part to a reduction in the provision in the prior period resulting from the reappraisal of tax liabilities in certain foreign tax jurisdictions. In addition, 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 often responsible for shifts in the effective tax rate. As a result of these factors, the provision for income taxes was 78% of pretax loss for the three months ended September 30, 1996 compared to a benefit from income taxes of 82% of pretax income for the three months ended September 30, 1995. RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1996 VS. SIX MONTHS ENDED SEPTEMBER 30, 1995 JRM's revenues increased $86,643,000 to $758,305,000, primarily due to higher volume in North America, partially offset by lower activities in the North Sea and lower leasing activities due to the sale of the DB101 and DB102 to the HeereMac joint venture. B&W Operations' revenues decreased $15,590,000 to $696,058,000, primarily due to lower revenues from the Power Generation Group's fabrication and erection of fossil fuel steam and environmental control systems, from Canadian nuclear services, and from replacement nuclear steam generators for domestic customers manufactured at B&W's Cambridge, Ontario location. These decreases were partially offset by higher revenues from the repair and alteration of existing fossil fuel steam systems and plant enhancement projects. In addition, the Government Group's commercial nuclear environmental services had higher revenues. These were partially offset by lower revenues from defense and space- related products (other than nuclear fuel assemblies and reactor components). 16 Industrial Operations' revenues increased $4,168,000 to $269,579,000, primarily due to higher volume from engineering and construction activities in this business unit's Canadian operations and higher barge construction activities in this business unit's domestic operations and ship repair activities in its Mexican operations. These increases were partially offset by lower revenues from engineering and construction activities in this business unit's domestic operations. JRM's business unit income decreased $12,052,000 to $29,500,000, primarily due to lower volume and margins on the Foinaven project, the completion of profitable Offshore Pipelines, Inc. contracts in West Africa last year and lower leasing activities due to the sale of the DB101 and DB102. These decreases were partially offset by higher volume in North America and improved margins in the Far East. B&W Operations' business unit income increased $11,556,000 to $13,084,000, primarily due to improved margins on the repair and alteration of existing fossil fuel steam systems and higher volume and margins on industrial boilers. These increases were offset by lower volume and margins on the fabrication and erection of fossil fuel steam and environmental control systems, lower volume on replacement nuclear steam generators for domestic customers and lower margins on plant enhancement projects. In addition, there were higher volume and margins from the Government Group's nuclear fuel assemblies and reactor components for the U. S. Government, and from commercial nuclear environmental services and lower sales and marketing expenses. These increases were partially offset by lower volume and margins from defense and space-related products (other than nuclear fuel assemblies and reactor components). Industrial Operations' business unit loss increased $6,246,000 to $15,444,000, primarily due to cost overruns on the engineering, procurement and construction contract for a cogeneration plant and cost overruns on domestic barge construction operations. Other business unit income decreased $24,137,000 from income of $10,483,000 to a loss of $13,654,000, primarily due to a favorable insurance adjustment of $12,000,000 in the prior period and an asset impairment loss of $7,295,000 in the current period. 17 JRM's equity in income (loss) of investees increased $26,952,000 from a loss of $2,801,000 to income of $24,151,000, primarily due to the improved operating results from the HeereMac joint venture. The revenues of the HeereMac and McDermott-ETPM West, Inc. joint ventures increased from $318,023,000 to $385,757,000 primarily due to increased volume in the North Sea and North America, partially offset by decreased volume in the Far East and West Africa. Equity in income of investees from these two joint ventures increased from $4,873,000 to $19,356,000 primarily as a result of higher volume and margins. There was also higher interest expense as a result of debt issued by the HeereMac joint venture to finance the purchase of major marine vessels it had been chartering, including JRM's DB101 and DB102. Equity in income of investees in the current period also includes income of $4,313,000 from the amortization of the deferred gain resulting from the sale of the DB101 and DB102. B&W Operations' equity in income of investees decreased $31,568,000 to $4,273,000. This represents the results of approximately fifteen active joint ventures. The decrease is almost entirely due to a nonrecurring equity income gain of $30,612,000 resulting from the sale of power purchase contracts back to a local utility in June 1995. Interest income increased $161,000 to $19,851,000. This increase is primarily due to interest on the promissory note of $105,000,000 received as part of the consideration from the sale of the DB101 and DB102, offset by a decrease resulting from a reduction in investments in government obligations and other investments. Interest expense increased $572,000 to $43,486,000, primarily due to changes in debt obligations and interest rates prevailing thereon. Minority interest expense increased $5,694,000 to $14,840,000, primarily due to minority shareholder participation in the improved operating results of JRM and the McDermott-ETPM joint venture. Other-net increased $4,325,000 from expense of $1,773,000 to income of $2,552,000. This increase is primarily due to increases in certain reimbursed financing costs and lower bank fees and discounts on the sales of certain accounts receivable. 18 The provision for income taxes decreased $3,580,000 to $5,223,000, while income (loss) before provision for income taxes decreased from income of $26,689,000 to a loss of $15,031,000. The decrease in the provision for income taxes is primarily due to a decrease in income, offset, in part, due to a reduction in the provision in the prior period resulting from the reappraisal of tax liabilities in certain foreign tax jurisdictions. In addition, 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 often responsible for shifts in the effective tax rate. As a result of these factors, the provision for income taxes was 35% of pretax loss for the six months ended September 30, 1996 compared to a provision for income taxes of 33% of pretax income for the six months ended September 30, 1995.
Backlog - ------- 9/30/96 3/31/96 ------- ------- (In thousands) Business Unit Backlog: J. Ray McDermott, S.A. $ 1,450,003 $ 977,896 B&W Operations 2,131,288 2,164,507 Industrial Operations 340,117 317,401 Other (including Transfer Eliminations) (25,893) (60,408) - --------------------------------------------------------------------------- TOTAL BACKLOG $ 3,895,515 $3,399,396 ===========================================================================
In general, International's business units are capital intensive and rely on large contracts for a substantial amount of their revenues. JRM's consolidated backlog increased to $1,450,003,000 at September 30, 1996 from $977,896,000 at March 31, 1996, and backlog relating to contracts to be performed by JRM's unconsolidated joint ventures (not included above) increased to $1,474,000,000 at September 30, 1996 from $1,374,000,000 at March 31, 1996. JRM believes its markets are beginning to emerge from the difficult competitive environment that has put pressure on margins in recent years. JRM also believes that these strong markets and increased 19 backlog suggest improving financial results over the longer term. However, in this historically seasonal business, JRM does not expect second half results to be as profitable as in the first half. JRM does expect asset sales in the second half to partially offset the seasonal results. B&W Operations' backlog at September 30, 1996 was $2,131,288,000 compared to $2,164,507,000 at March 31, 1996. At September 30, 1996 this business unit's backlog with the U.S. Government was $678,141,000 (of which $45,913,000 had not been funded) and included orders for nuclear fuel assemblies and reactor components for the U.S. Navy. This business unit's foreign markets for industrial and utility boilers remain strong and the U. S. market for replacement nuclear steam generators is expected to continue to make significant contributions to operating income in the foreseeable future. However, domestic utility markets remain weak. Industrial Operations' backlog at September 30, 1996 was $340,117,000, compared to $317,401,000 at March 31, 1996, and included a four year backlog for the construction of hopper barges at its domestic shipyard. At September 30, 1996, this business unit's backlog with the U.S. Government was $45,979,000 (of which $3,094,000 had not been funded). Liquidity and Capital Resources - ------------------------------- Unless the context otherwise requires, hereinafter the "Delaware Company" will be used to mean McDermott Incorporated, a Delaware corporation which is a subsidiary of International, and the Delaware Company's consolidated subsidiaries, which include The Babcock & Wilcox Company ("B&W"). During the six months ended September 30, 1996, International's cash and cash equivalents increased $17,264,000 to $255,927,000 and total debt increased $355,106,000 to $1,165,620,000 due to increases in short and long-term borrowings of $127,236,000 and $244,375,000 (which includes the issuance of JRM's 9.375% Senior Subordinated Notes), respectively. During this period, International used cash of $70,125,000 in operating activities; $59,158,000 for additions to property, plant and 20 equipment; $187,484,000, net, for purchases of investments; $31,394,000 for dividends on International's common and preferred stock; and $15,238,000 for repayment of long-term debt and received cash proceeds of $20,141,000 from the sale and disposal of assets. Pursuant to an agreement with a majority of its principal insurers, 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 this process, reimbursement is usually delayed for three months or more. While the number of claims received had declined during the last six months of fiscal year 1996, they have increased during the first six months of fiscal year 1997 but not to the levels experienced from October 1994 to September 1995. Management is currently investigating and evaluating the basis for this increase in the number of claims. The average amount of these claims (historical average of approximately $5,500 per claim over the last three years) has continued to rise. Claims paid during the six months ended September 30, 1996 were $79,861,000, of which $71,790,000 has been recovered or is due from insurers. At September 30, 1996, receivables of $79,618,000 were due from insurers for reimbursement of settled claims including $17,059,000 due from certain insurers which have refused to reimburse B&W for amounts paid by B&W to settle claims under applicable policies. B&W has filed a lawsuit against these insurers seeking reimbursement of these claims and expects to prevail in this litigation which may continue beyond fiscal year 1997 unless a settlement is reached. B&W will require that any settlement reimburse B&W for all amounts billed to date and any future payments up to full policy limits. The increase in amounts classified current for products liability asbestos claims and insurance recoverable at September 30, 1996 reflects management's intention to reduce the level of unpaid asserted claims over the next several quarters subject to insurers' concurrence. Estimated liabilities for pending and future non-employee products liability asbestos claims are derived from 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. 21 Accordingly, the ultimate loss may differ materially from amounts provided in the consolidated financial statements. Settlement of the liability is expected to occur over approximately the next 25 years. The collection delays (including the lawsuit mentioned above), and the amount of claims paid for which insurance recovery is not probable, have not had a material adverse effect on 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. Expenditures for property, plant and equipment increased $20,492,000 to $59,158,000 for the six months ended September 30, 1996 compared with the same period last year. In addition to maintaining existing facilities and equipment, these expenditures included $4,887,000 for the purchase of a cable lay vessel and modifications thereon which operates in the North Sea; $4,167,000 for cable lay equipment, which includes a deep bury plow used in the installation of fiber optic cable; and $9,613,000 to upgrade a marine barge operating in the Gulf of Mexico. At September 30, and March 31, 1996, B&W had sold, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable of approximately $87,000,000 and $107,000,000, respectively, under the terms of an agreement with a U.S. bank. The maximum sales limit available under the agreement, which is renewed annually, is $140,000,000. Depending on the amount of qualified accounts receivable available for the pool the amount sold to the bank can vary (but not greater than the maximum sales limit available) from time to time. At September 30, and March 31, 1996, International had available to it various uncommitted short-term lines of credit totaling $433,807,000 and $439,610,000, respectively. Borrowings against these lines of credit at September 30 and March 31, 1996 were $252,175,000 and $149,067,000, respectively. In addition, B&W had available to it a $150,000,000 unsecured and committed revolving credit facility. Borrowings against this facility at September 30 and March 31, 1996 were $75,000,000 and $50,000,000, respectively. It is a condition to borrowing under this revolving credit facility that the borrower's tangible net worth, debt to capitalization, and interest coverage as defined in the agreement meet or exceed certain covenant requirements. JRM also had an unsecured and committed revolving credit facility which contains a debt to 22 capitalization covenant which limit's its incremental borrowing capacity to $2,600,000 at September 30, 1996. There were no borrowings outstanding on this facility at September 30 or March 31, 1996. While JRM has various committed short-term lines of credit with limits in excess of current borrowings ($43,559,000 at September 30, 1996), borrowings against these short-term lines is also limited to an additional $2,600,000. This limitation is not expected to impact the liquidity of JRM, primarily because of the availability of $137,842,000 in cash and cash equivalents. In addition, JRM is restricted, as a result of the consolidated tangible net worth covenant in this agreement, to pay cash dividends to its public shareholders or to transfer funds through cash dividends or through unsecured loans or investments to McDermott International, Inc. and its subsidiaries. At September 30, 1996, approximately $23,000,000 of JRM's net assets were not subject to this restriction. The Delaware Company is restricted, as a result of covenants in certain credit agreements, in its ability to transfer funds to McDermott International, Inc. and its subsidiaries through cash dividends or through unsecured loans or investments. At September 30, 1996, substantially all of the net assets of the Delaware Company were subject to such restrictions. It is not expected that these restrictions will have any significant effect on McDermott International Inc.'s liquidity. International maintains an investment portfolio of government obligations and other investments. The fair value of short-term investments and the long-term portfolio at September 30, 1996 was $432,253,000. At September 30, 1996, approximately $115,494,000 fair value of these investments were pledged to secure a letter of credit in connection with a long-term loan and certain reinsurance agreements. Working capital decreased $128,794,000 from $331,986,000 at March 31, 1996 to $203,192,000 at September 30, 1996 due in part to the current classification of JRM's 12.875% Guaranteed Senior Notes as JRM plans to call the Notes for redemption in the second quarter of fiscal year 1998. During the September quarter, JRM issued $250,000,000 principal amount of 9.375% Senior Subordinated Notes due 2006 and received net proceeds of $244,375,000 which were used primarily to repay intercompany indebtedness (including interest) of approximately $239,000,000 owed to McDermott 23 International, Inc. McDermott International, Inc. used $50,000,000 of the proceeds to reduce short-term debt and invested the remainder of the proceeds in its investment portfolio. During the remainder of fiscal year 1997, International expects to obtain funds to meet working capital, capital expenditure and debt maturity requirements from operating activities, sales of non-strategic assets and borrowings under its short-term lines of credit. Leasing agreements for equipment, which are short-term in nature, are not expected to impact International's liquidity or capital resources. Also during the September quarter, the sale of certain equipment to the HeereMac joint venture was completed. Prior to this sale, JRM had received $30,000,000 as a deposit in March 1996. International has provided a valuation allowance for deferred tax assets which cannot be realized through carrybacks and future reversals of existing taxable temporary differences. Management believes that remaining deferred tax assets in all other tax jurisdictions are realizable through carrybacks and future reversals of existing taxable temporary differences, and, if necessary, the implementation of tax planning strategies involving sales of appreciated assets. A major uncertainty that affects the ultimate realization of deferred tax assets is the possibility of declines in value of appreciated assets involved in identified tax planning strategies. This factor has been considered in determining the valuation allowance. Management will continue to assess the adequacy of the valuation allowance on a quarterly basis. On October 7, 1996, McDermott International, Inc. announced that its board of directors has directed management to begin to implement a series of steps to improve International's financial and operating performance. Management has been directed to focus International on its core business lines and dispose of non-core businesses and underperforming assets. Core business lines include the power generation and government operations of B&W and the marine construction operations of JRM. Management was also directed to realign the operations of B&W's Power Generation Group consistent with the current demands of the worldwide power generation market. This is expected to include the rationalization of manufacturing overcapacity and continued reduction in personnel. Finally, management was directed to continue efforts to reduce personnel and other costs at the operating and corporate headquarters of both International and JRM. Although 24 business and asset disposal plans associated with this directive have not been finalized, it is anticipated that these disposals will negatively impact near- term operating results, while having a positive long-term impact on operations. It is also anticipated that these disposals will have a positive impact on liquidity, both upon disposition and long-term. At the November 7, 1996 Board of Directors Meeting, McDermott International, Inc.'s quarterly dividend on its common stock was reduced from $0.25 per share to $0.05 per share. New Accounting Standard - ----------------------- In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," effective for transactions occurring after December 31, 1996. SFAS No. 125 established accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. This statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. International has not yet finalized its review of the impact of this statement, but it is not expected to have a material impact on the consolidated financial statements. 25 PART II MCDERMOTT INTERNATIONAL, INC. OTHER INFORMATION ----------------- No information is applicable to Part II for the current quarter, except as noted below: Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders held on August 6, 1996, the following matters were submitted to McDermott International, Inc.'s ("International") stockholders with voting as follows: (a) The election of four directors to Class II of the Board for a three year term:
Nominee Votes For Votes Withheld ------- --------- -------------- Theodore H. Black 46,350,376 721,771 John F. Bookout 46,601,814 470,333 J. Howard Macdonald 46,612,686 459,461 William McCollam, Jr. 46,611,069 461,078
Messrs. Thomas D. Barrow, Philip J. Burguieres, Brock A. Hattox, John W. Johnstone, Jr., James L. Dutt, Robert E. Howson and John N. Turner also continued as directors immediately after the meeting, subsequent to which Mr. Hattox resigned and the Board appointed Richard E. Woolbert as a director effective September 19, 1996. (b) a proposal to approve International's 1996 Officer Long-Term Incentive Plan: 31,937,551 votes for, 14,349,585 votes against and 785,011 abstentions, with broker non-votes not applicable. (c) A proposal to retain Ernst & Young LLP as International's independent auditors for the fiscal year ending March 31, 1997: 46,947,353 votes for, 67,320 votes against and 57,474 abstentions, with broker non-votes not applicable. 26 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 - Calculation of Earnings (Loss) Per Common and Common Equivalent Share 27 - Financial Data Schedule (b) Reports on Form 8-K There were no current reports on Form 8-K filed during the three months ended September 30, 1996. Signatures 27 SIGNATURES ---------- Pursuant to the requirements 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. Date: November 11, 1996 By: /s/ Daniel R. Gaubert ------------------------------- (SIGNATURE) Daniel R. Gaubert Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) 28 EXHIBIT INDEX Exhibit Description 11 Calculation of Earnings (Loss) per Common and Common Equivalent Share 27 Financial Data Schedule 29 EX-11 2 CALCULATIONS OF EARNINGS EXHIBIT 11 MCDERMOTT INTERNATIONAL, INC. CALCULATION OF EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (In thousands, except shares and per share amounts) PRIMARY AND FULLY DILUTED
THREE SIX MONTHS ENDED MONTHS ENDED ---------------------- --------------------- 9/30/96 9/30/95 9/30/96 9/30/95 -------- -------- ------- -------- (Unaudited) Net Income (Loss) $(12,430) $ 9,054 $(20,254) $ 17,886 Less dividend requirements of preferred stock, Series C (2,067) (2,067) (4,133) (4,133) - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) for primary computation $(14,497) $ 6,987 $(24,387) $ 13,753 ======================================================================================================================= Weighted average number of common shares outstanding during the period 54,694,402 54,197,329 54,603,746 54,107,556 Common stock equivalents of stock options and stock appreciation rights based on "treasury stock" method - 162,310 - 278,817 - ----------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding during the period 54,694,402 54,359,639 54,603,746 54,386,373 ======================================================================================================================= Net Income (loss) per common and common equivalent share: /(1)/ $ (0.27) $ 0.13 $ (0.45) $ 0.25 ======================================================================================================================= /(1)/ Net Income (Loss) per common and common equivalent share assuming full dilution are the same for the periods presented.
30 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT INTERNATIONAL'S SEPTEMBER 30, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 6-MOS MAR-31-1997 SEP-30-1996 255,927 2,425 598,311 85,081 567,633 1,874,482 1,883,573 1,205,691 4,561,180 1,671,290 694,001 0 2,875 54,741 579,541 4,561,180 1,681,030 1,681,030 1,688,446 1,688,446 0 0 43,486 (15,031) 5,223 (20,254) 0 0 0 (20,254) (0.45) (0.45)
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