Item 3. LEGAL PROCEEDINGS
Due to the nature of its business, the Delaware Company is, from time to time, involved in litigation. It is management's opinion that none of this litigation will have a material adverse effect on the consolidated financial position of the Delaware Company.
For a discussion of the Delaware Company's potential liability for non-employee products liability asbestos claims, see Item 1F and Note 1 to the consolidated financial statements.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.
PART I I
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
As a result of the plan of reorganization announced by the Delaware Company on October 28, 1982 and completed on March 15, 1983, all of the Delaware Company's outstanding Common Stock is owned by International and, consequently, there is no market for the Delaware Company's Common Stock. For restrictions on the Delaware Company's present or future ability to pay dividends, see Note 6 to notes to the consolidated financial statements.
Item 6.
Item 6. SELECTED FINANCIAL DATA
In fiscal year 1994, Net Income (Loss) includes a cumulative effect of accounting change of $100,750,000 due to the adoption of Emerging Issues Task Force Issue No. 93-5 which resulted in a provision for estimated future costs resulting from possible gaps in insurance coverage with respect to non-employee products liability asbestos claims. Inherent in the estimate of such future costs are assumptions which may vary significantly as claims are filed and settled, and accordingly, the ultimate loss may differ materially from the amount provided. In fiscal year 1993, Net Income (Loss) includes a cumulative effect of an accounting change of $240,042,000 due to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 106. See Note 1 to the consolidated financial statements regarding the above and the adoption of SFAS No. 109 in fiscal year 1993, Note 2 regarding the acquisition of Delta Catalytic Corporation and Note 14 regarding discontinued operations.
In fiscal years 1993 and 1992, Income (Loss) from Continuing Operations before Extraordinary Items and Cumulative Effect of Accounting Changes includes after tax gains from the sale of the Delaware Company's interests in its two commercial nuclear joint ventures of $15,667,000 and $35,436,000, respectively (see Note 3 to the consolidated financial statements).
All of the Common Stock of the Delaware Company is owned by International and, therefore, no per share data is shown above.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
FISCAL YEAR 1994 VS FISCAL YEAR 1993
Power Generation Systems and Equipment's revenues increased $92,978,000 to $1,613,954,000. 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 $11,018,000 to $57,527,000. The decrease was primarily due to lower volume and margins from extended scope of supply and fabrication of industrial boilers as well as defense and space- related products other than nuclear fuel assemblies and reactor components. There were also lower margins on plant enhancements, replacement parts, and repair and alteration of existing fossil fuel steam systems, as well as higher royalty income recorded in the prior year. These decreases were partially offset by higher volume and margins on replacement nuclear steam generators, nuclear fuel assemblies and reactor components for the U.S. Government and higher volume on fabrication and erection of fossil fuel steam and environmental control systems. There were also lower general and administrative expenses, and lower warranty expense, primarily due to net favorable warranty reserve adjustments (See Note 16 to the consolidated financial statements).
Power Generation Systems and Equipment's equity in income of investees increased $2,457,000 to $8,635,000 due primarily to improved results in three domestic joint ventures which own and operate a cogeneration plant and two small power plants.
Backlog for this segment at March 31, 1994 was $2,398,285,000 compared to $2,614,709,000 at March 31, 1993. At March 31, 1994, this segment's backlog with the U. S. Government was $775,909,000 (of which $17,055,000 had not yet been funded). These amounts reflect the impact of Congressional budget reductions on the advanced solid rocket motor and super conducting super collider projects. Also, additional U.S. Government budget reductions have negatively affected this segment's other government operations. The current competitive economic environment has also negatively affected demand for other industrial related product lines and these markets are expected to remain very competitive.
The current competitive economic environment and uncertainties created by passage of the Energy Policy Act of 1992 and the Clean Air Act Amendments of 1990 have caused U.S. utilities to defer repairs and refurbishments on existing plants. However, the Clean Air Act has created demand for environmental control equipment and related plant enhancements. Most utilities have already purchased equipment to comply with Phase I of the Clean Air Act,
and they will purchase equipment to comply with Phase II deadlines in a gradual manner, spread out over the next several years as various deadlines approach. Electric utilities in Asia are active purchasers of large, new baseload generating units, due to the rapid growth of the Pacific Rim economies and to the small existing stock of electrical generating capacity in most developing countries.
Marine Construction Services' revenues increased $183,073,000 to $632,242,000 primarily due to the acquisition of DCC. This increase was partially offset by lower volume in fabrication and engineering operations, and procured materials.
Marine Construction Services' segment operating income increased $5,029,000 to $8,445,000, primarily due to the acquisition of DCC, improved margins on fabrication operations, and the accelerated depreciation and write-off of certain fabrication facilities and marine construction equipment in the prior year. These increases were partially offset by lower volume in fabrication and engineering operations.
Backlog for this segment at March 31, 1994 was $430,338,000 (including $233,299,000 from DCC). Excluding DCC, this was down from backlog of $305,390,000 at March 31, 1993. This segment's markets are expected to be at a low level in the U.S. during 1995. The overcapacity of marine equipment will continue to result in a competitive environment and put pressure on profit margins.
Interest expense decreased $21,275,000 to $53,870,000, 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.
Other-net expense increased $6,829,000 to $9,066,000. The increase was primarily due to the inclusion of DCC's minority interest expense in the current period and gains on the sale of interests in two commercial nuclear joint ventures (See Note 3 to the consolidated financial statements), all in the prior period.
Provision for (benefit from) income taxes increased $6,473,000 to a provision of $915,000 from a benefit of $5,558,000 while loss before the provision for (benefit from) income taxes, extraordinary items and cumulative effect of accounting changes decreased $7,236,000 to $25,401,000. The increase in the provision for income taxes is due primarily to the increase in income from foreign operations.
Net loss decreased $146,759,000 to $127,066,000 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 $240,042,000 in the prior year, in addition to the other items described above.
FISCAL YEAR 1993 VS FISCAL YEAR 1992
Power Generation Systems and Equipment's revenues decreased $70,489,000 to $1,520,976,000. This was primarily due to lower revenues from nuclear fuel assemblies and reactor components for the U.S. Government and plant enhancements. Additionally, the segment's controlling interest in its commercial nuclear joint ventures was sold during December 1991, and revenue from this activity is no longer included in this segment's revenues. These decreases were partially offset by higher revenues from fabrication and erection of fossil fuel steam and environmental control systems and extended scope of supply and fabrication of industrial boilers.
Power Generation Systems and Equipment's segment operating income decreased $35,740,000 to $68,545,000. This was primarily due to non-recurring items which benefitted 1992's results. These items included a Department of Energy grant for decommissioning and restoration of an inactive nuclear facility, the inclusion of the commercial nuclear fuel joint venture's results through December 1991, and the reduction of a provision to relocate a manufacturing plant. The decrease was also due to lower volume and margins on plant enhancements and lower volume from nuclear fuel assemblies and reactor components for the U.S. Government. This decrease was partially offset by higher volume on fabrication and erection of fossil fuel steam and environmental control systems and higher margins on defense and space-related products other than nuclear fuel assemblies and reactor components.
Marine Construction Services' revenues decreased $274,243,000 to $449,169,000 due to lower volume in fabrication and offshore operations. Segment operating income decreased $1,655,000 to $3,416,000 primarily due to the lower volume in fabrication and offshore operations and lower margins on fabrication operations. These were partially offset by improved margins on offshore operations and reduced general and administrative expenses. There were also higher equipment writedowns and a contract loss provision in 1992.
Equity in income of investees decreased $4,598,000 to $6,655,000. This decrease principally resulted from equity income of $5,179,000 from the commercial nuclear services joint venture in 1992.
Interest expense increased $1,389,000 to $75,145,000. This increase resulted from changes in debt obligations and interest rates prevailing thereon, which was partially offset by a reduction in the provision for interest on proposed income tax deficiencies and lower interest expense resulting from interest rate swap agreements.
Other-net decreased $48,256,000 to expense of $2,237,000 from income of $46,019,000. The decrease was principally due to lower gains on the sale of its interests in two commercial nuclear joint ventures (see Note 3 to the consolidated financial statements.) In addition, income from management fees and services applicable to the two commercial nuclear joint ventures of $8,446,000 was recorded in 1992.
Provision for (benefit from) income taxes decreased $34,253,000 to a benefit of $5,558,000 from a provision of $28,695,000, while income (loss) from continuing operations before provision for (benefit from) income taxes, extraordinary items and cumulative effect of
accounting changes decreased $91,189,000 to a loss of $32,637,000 from income of $58,552,000. The decrease in the provision for income taxes is due primarily to a decrease in income from continuing operations.
Net Income (Loss) decreased $300,314,000 to a loss of $273,825,000 from income of $26,489,000, reflecting the cumulative effect of the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," of $240,042,000, in addition to other items described above.
Effect of Inflation and Changing Prices
The Delaware Company's financial statements are prepared in accordance with generally accepted accounting principles, using historical dollar accounting (historical cost). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the dollar, especially during times of significant and continued inflation.
The management of the Delaware Company is cognizant of the effects of inflation and, in order to minimize the negative impact of inflation on its operations, attempts to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimation of such changes, which is reflected in the original fixed price, or through price escalation clauses in its contracts.
Liquidity and Capital Resources
During 1994, the Delaware Company's cash and cash equivalents decreased $24,185,000 to $47,364,000 and total debt decreased $79,815,000 to $606,060,000. During the same period, the Delaware Company provided cash of $21,020,000 from operating activities and used cash of $28,249,000 for the acquisition of Delta Catalytic Corporation ("DCC"), $207,646,000 for repayment of long-term debt, and $15,719,000 for cash dividends on the Delaware Company's preferred stocks. The Delaware Company provided cash of $92,841,000 from the issuance of long-term debt and received cash of $100,000,000 as a capital contribution from International. Also, during the third quarter of fiscal year 1994, the Delaware Company received a capital contribution from International of $132,283,000 comprised of long-term investments of $129,930,000 (market value $130,214,000), primarily corporate bonds, and the accrued interest thereon of $2,353,000. Lower net contracts in progress and advance billings reflect the timing of billings on certain foreign Power Generation Systems and Equipment segment contracts.
Pursuant to an agreement with the majority of its principal insurers, the Delaware Company negotiates and settles products liability asbestos claims from non-employees and bills these amounts to the appropriate insurers. As a result of collection delays inherent in this process, reimbursement is usually delayed for three months or more. The Delaware Company has outstanding receivables of $29,079,000 at March 31, 1994 from its insurers for reimbursement of these claims. The number of claims, which management believes peaked in fiscal year 1990, has declined moderately. However, the average amount of these claims (historical average of less than $3,000 per claim) has continued to rise. Claims paid in fiscal year 1994 were $112,271,000, including $7,810,000 applicable to insolvent insurers and $3,315,000 relating to the policy year 1979 (see Note 1 to consolidated financial statements). Settlement of the estimated liability of $135,053,000 at March 31, 1994 for
future costs relating to insolvent insurers and policy year 1979 is expected to occur over the next 30 years. The Delaware Company's estimated future costs relating to policy year 1979 and certain insolvent insurers are derived from its loss history and constitute management's best estimate of such future costs. Inherent in the estimate of such future costs are assumptions which may vary significantly as claims are filed and settled. Accordingly, the amount ultimately paid may differ materially from the amount provided in the consolidated financial statements. The collection delays and the amount of claims paid that are related to insolvent insurance carriers and the policy year 1979 have not had a material adverse effect upon the Delaware Company's liquidity, and management believes, based on information currently available, that they will not have a material adverse effect on liquidity in the future.
The Delaware Company's expenditures for property, plant and equipment increased $4,983,000 to $62,650,000 in 1994. While the majority of these expenditures were incurred to maintain and replace existing facilities and equipment, $5,000,000 was expended in connection with the purchase of a fabrication yard in Nueces County, Texas and $8,098,000 was expended on a new combustion and emission test facility at its Alliance, Ohio research center. The Delaware Company has committed to make capital expenditures of approximately $52,964,000 during fiscal year 1995. In addition to maintaining the Delaware Company's existing facilities, these expenditures include $38,560,000 for a new concept steam generator for the Naval Reactor Program in Lynchburg, Virginia, the anticipated purchase of a barge currently leased and the completion of a new combustion and emission facility in Alliance, Ohio.
During April and May 1993, the Delaware Company issued $87,000,000 of Series B Medium Term Notes at maturities ranging from four to twenty-nine years and interest rates ranging from 6.50% to 8.75%. These notes have an average maturity of approximately twenty years and an average interest rate of approximately 7.95%.
At March 31, 1994 and 1993, The Babcock & Wilcox Company had sold, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable of approximately $170,000,000 under an agreement with a certain U.S. Bank. The maximum sales limit available under this agreement was $225,000,000 at March 31, 1994 (See Note 8 to the consolidated financial statements).
At March 31, 1994 and 1993, the Delaware Company had available to it various uncommitted short-term lines of credit from banks totalling $204,699,000 and $114,136,000, respectively. Borrowings outstanding against these facilities at March 31, 1994 were $15,519,000. There were no borrowings against these facilities at March 31, 1993. The Babcock & Wilcox Company has 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, and it is a condition to borrowing under the revolving credit facility that the borrower's consolidated net tangible assets exceed a certain level. There were no borrowings against this facility at March 31, 1994 or 1993. DCC had available from a certain Canadian bank, an unsecured and committed revolving credit facility of $14,493,000 which expires on May 31, 1997. No borrowings were outstanding against this facility at March 31, 1994.
The Delaware Company is restricted, as a result of covenants in certain agreements, in its
ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. At March 31, 1994, substantially all of the net assets of the Delaware Company were subject to such restrictions. At March 31, 1994, the most restrictive of these covenants with respect to the payment of dividends by the Delaware Company would prohibit the payment of dividends other than current dividends on existing preferred stock.
Effective February 1, 1989, the Delaware Company and a subsidiary of International, McDermott International Investments Co., Inc. ("MIICO"), entered into a reverse repurchase agreement whereby either party acting as a "buyer" would purchase for cash certain U. S. Government obligations owned by the other party acting as a "seller", and, at the date of purchase, the "seller" would agree to repurchase the same securities at a set price (including accrued interest) at a future specified date. At March 31, 1994, MIICO had repurchased all government obligations purchased by the Delaware Company under this agreement.
The Delaware Company and MIICO are parties to an agreement pursuant to which the Delaware Company may borrow up to $150,000,000 from MIICO at interest rates computed at the applicable federal rate determined by the IRS. There were no borrowings against this agreement at March 31, 1994 or 1993.
Working capital increased to $146,797,000 at March 31, 1994 from $41,215,000 at March 31, 1993. During 1995, the Delaware Company expects to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, and additional borrowings. Leasing agreements for equipment, which are short-term in nature, are not expected to impact the Delaware Company's liquidity nor capital resources.
The Delaware Company's quarterly dividends of $0.55 per share on the Series A $2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series B $2.60 Cumulative Preferred Stock were the same in 1994 and 1993.
The Delaware Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This standard requires, among other things, recognition of future tax benefits, measured by enacted tax rates, attributable to deductible temporary differences between the financial statement and income tax basis of assets and liabilities and to tax net operating loss carryforwards, to the extent that realization of such benefits is more likely than not.
The Delaware Company has provided a valuation allowance ($10,239,000 at March 31, 1994) primarily for certain state and local deferred tax assets which cannot be realized through carrybacks and future reversals of existing taxable temporary differences. Management believes that remaining deferred tax assets ($351,666,000 at March 31, 1994) in all other tax jurisdictions are realizable through carrybacks and future reversals of existing taxable temporary differences and, if necessary, the implementation of tax planning strategies involving sales and sale/leasebacks of appreciated assets. Major uncertainties that affect the ultimate realization of deferred tax assets include the risks of incurring operating losses in the future and the possibility of declines in value of appreciated assets involved in identified tax planning strategies. These factors have been considered in determining the valuation allowance. Management will continue to assess the adequacy of the valuation allowance on a quarterly basis.
New Accounting Standards
The Delaware Company adopted SFAS No. 106 effective April 1, 1992 for all domestic plans. The Delaware Company plans to adopt SFAS No. 106 for foreign plans during fiscal year 1996 and the adoption is not expected to have a material effect on the consolidated financial statements of the Delaware Company. The new standard does not have any impact on the cash requirements of any domestic or foreign postretirement health and welfare plan.
In November 1992, the FInancial Accounting Standards Board ("FASB") issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits," effective for fiscal years beginning after December 15, 1993. SFAS No. 112 requires accrual accounting, under certain conditions, for the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement. The new standard will have no impact on the cash requirements for any postemployment benefits, and will not have a material effect on the consolidated financial statements of the Delaware Company.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective for fiscal years beginning after December 15, 1993. SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Based on its current portfolio management practices, the Delaware Company will report its investments at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholder's equity. The initial impact of the new standard will not have a material effect on the consolidated financial statements of the Delaware Company.
Item 8.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders McDermott Incorporated
We have audited the accompanying consolidated balance sheet of McDermott Incorporated as of March 31, 1994 and 1993, and the related consolidated statements of income (loss) and retained earnings and cash flows for each of the three years in the period ended March 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McDermott Incorporated at March 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company has provided for estimated future costs for non- employee products liability asbestos claims. Inherent in the estimate of such future costs are assumptions which may vary significantly as claims are filed and settled. Accordingly, the ultimate loss may differ materially from the amount provided in the consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company changed its methods of accounting for recoveries of products liability claims in 1994 and income taxes and postretirement benefits other than pensions in 1993.
ERNST & YOUNG
New Orleans, Louisiana May 9, 1994
MCDERMOTT INCORPORATED CONSOLIDATED BALANCE SHEET MARCH 31, 1994 AND 1993
See accompanying notes to consolidated financial statements.
McDERMOTT INCORPORATED CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT) FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
See accompanying notes to consolidated financial statements. Significant related party transactions are disclosed in Note 5.
McDERMOTT INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Continued
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
See accompanying notes to consolidated financial statements.
MCDERMOTT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of McDermott Incorporated and all subsidiaries. Investments in joint venture and other entities in which McDermott Incorporated has a 20% to 50% interest are accounted for on the equity method. Differences between the cost of equity method investments and the amount of underlying equity in net assets of the investees are amortized systematically to income. All significant intercompany transactions and accounts have been eliminated. Certain amounts previously reported have been reclassified to conform with the presentation at March 31, 1994. The notes to consolidated financial statements are presented on the basis of continuing operations, unless otherwise stated.
Unless the context otherwise requires, hereinafter, the "Delaware Company" will be used to mean McDermott Incorporated and its consolidated subsidiaries (including Babcock & Wilcox Investment Company and its principal subsidiary, The Babcock & Wilcox Company), and "International" will be used to mean McDermott International, Inc., a Panamanian corporation. International is the parent company of the Delaware Company.
Changes in Accounting Policies
Products Liabilities - As a result of the consensus reached on Emerging Issues Task Force ("EITF") Issue No. 93-5, a company is no longer permitted to offset, for recognition purposes, reasonably possible recoveries against probable losses which had been the Delaware Company'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, the Delaware Company adopted this provision of EITF Issue No. 93-5 as a change in accounting principle and provided for estimated future costs to the extent that recovery from its insurers is not determined to be probable. The Delaware Company has an agreement with a majority of its principal insurers concerning the method of allocation of products liability asbestos claim payments to the years of coverage. However, amounts allocable to policy year 1979 are excluded from this agreement, and the Delaware Company's ability to recover these amounts, and amounts allocable to certain insolvent insurers, is only reasonably possible, thus a provision for these estimated future costs has been recognized. The Delaware Company's estimated future costs relating to policy year 1979 and certain insolvent insurers are derived from its loss history and constitute management's best estimate of such future costs. As of March 31, 1994, the estimated amount of liabilities arising from all pending and future asbestos claims for non-employees was in excess of $1,100,000,000, of which less than $100,000,000 has been asserted. The estimated amount of future liabilities and costs allocable to insolvent insurers and the policy year 1979 was $135,053,000. Inherent in the estimate of such future costs are expected trends in claim
severity and frequency and other factors, including recoverability from insurers, which may vary significantly as claims are filed and settled. Accordingly, the ultimate loss may differ materially from the amount provided in the consolidated financial statements.
The cumulative effect of the accounting change at April 1, 1993 was a charge of $100,750,000 (net of income taxes of $54,250,000) in fiscal year 1994. The adoption of this provision of EITF Issue No. 93-5 resulted in a decrease in Loss before Cumulative Effect of Accounting Change of $19,947,000 in fiscal year 1994, as costs that would have been recognized under the Delaware Company's prior practice are included in the cumulative effect of the accounting change. Pro forma amounts reflecting the effect of retroactive application of the accounting change to prior periods are not presented because the amounts are not determinable.
Postretirement Health Care Benefits - During the fourth quarter of 1993 and effective April 1, 1992, the Delaware Company adopted Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Statement requires the accrual method of accounting for the cost of providing health and welfare benefits and expanded postretirement health and welfare plan disclosures. In accordance with the Statement, the Delaware Company elected immediate recognition of its transition obligation and recorded $240,042,000 (net of income tax benefit of $136,228,000) 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 $4,460,000. Postretirement benefit cost for prior years has not been restated and was recognized by expensing the insurance programs' premiums, the self-insured program's claims paid, and the estimated unpaid liability for claims incurred by plan participants. The aggregate cost, including discontinued operations, was $24,696,000 in fiscal year 1992.
Income Taxes - Effective April 1, 1992, the Delaware Company adopted SFAS No. 109, "Accounting for Income Taxes". This statement establishes new accounting and reporting standards for the effects of income taxes. It continues the liability approach provided by its predecessor standard, SFAS No. 96, which was adopted by the Delaware Company in fiscal year 1989, but contains new requirements for asset recognition. It also contains new requirements regarding balance sheet classification and prior business combinations. The cumulative effect of the accounting change reflects the impact of the net reduction in enacted tax rates on temporary differences resulting from adjustments of remaining assets and liabilities acquired in the acquisition of The Babcock & Wilcox Company in 1978 from net of tax to pre-tax amounts. The cumulative effect of the accounting change on prior years at April 1, 1992 was $3,727,000. 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; an analysis of these adjustments follows:
Foreign currency transaction adjustments are reported in income. Included in Other Income (Expense) are transaction gains (losses) of $1,695,000, ($47,000), and ($411,000) for fiscal years 1994, 1993 and 1992, 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 $51,337,000 and $41,658,000 relating to commercial and U. S. Government contracts claims whose final settlement is subject to future determination through negotiations or other procedures which had not been completed at March 31, 1994 and 1993, respectively.
The Delaware Company is usually entitled to financial settlements relative to the individual circumstances of deferrals or cancellations of Power Generation Systems and Equipment contracts. The Delaware Company does not recognize such settlements or claims for additional compensation until final settlement is reached.
Included in accounts receivable - trade are amounts representing retainages on contracts as follows:
Of its long-term retainages at March 31, 1994, the Delaware Company anticipates collection as follows: $18,704,000 in fiscal year 1996, $17,452,000 in fiscal year 1997, and $3,214,000 in fiscal year 1998.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined on an average cost basis except for certain materials inventories, for which the last-in-first-out (LIFO) method is used. The cost of approximately 22% and 18% of total inventories was determined using the LIFO method at March 31, 1994 and 1993, respectively. Consolidated inventories at March 31, 1994 and 1993 are summarized as follows:
Warranty Expense - ----------------
Estimated warranty expense which may be required to satisfy contractual requirements, primarily of the Power Generation Systems and Equipment segment, is accrued relative to revenue recognition on the respective contracts. In addition, specific provisions are made where the costs of warranty are expected to significantly exceed such accruals.
Environmental Clean-up Costs
The Delaware Company accrues for future decommissioning and decontamination of its nuclear facilities that will permit the release of these facilities to unrestricted use at the end of each facility's life, which is a condition of its licenses from the Nuclear Regulatory Commission. Such accruals are based on the estimated cost of those activities over the economic useful life of each facility, which is estimated at 40 years. During fiscal year 1992, the provision was reduced $14,900,000 as a result of a Department of Energy grant for one facility.
Research and Development
The cost of research and development which is not performed on specific contracts is charged to operations as incurred. Such expense was approximately $19,583,000, $18,914,000 and $20,900,000 in fiscal years 1994, 1993 and 1992, respectively. In addition, expenditures on research and development activities of approximately $48,112,000, $42,082,000 and $67,100,000 in fiscal years 1994, 1993 and 1992, respectively, were paid for by customers of the Delaware Company.
Depreciation, Maintenance and Repairs and Drydocking Expenses
Except for major marine vessels, property, plant and equipment is depreciated on the straight-line method, using estimated economic useful lives of 8 to 40 years for buildings and 2 to 28 years for machinery and equipment.
Major marine vessels are depreciated on the units-of-production method based on the utilization of each vessel. Depreciation expense calculated under the units-of-production method may be less than, equal to, or greater than depreciation expense calculated under the straight-line method in any period. The annual depreciation based on utilization of each vessel will not be less than the greater of 25% of annual straight-line depreciation, or 50% of cumulative straight-line depreciation.
Maintenance, repairs and renewals which do not materially prolong the useful life of an asset are expensed as incurred except for drydocking costs for the marine fleet, which are estimated and accrued over the period of time between drydockings, and such accruals are charged to operations currently.
Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased Businesses
Excess of the cost over fair value of net assets of purchased businesses primarily pertains to The Babcock & Wilcox Company, which is being amortized on a straight-line basis over forty years.
Capitalization of Interest Cost
In fiscal years 1994, 1993 and 1992, total interest cost incurred was $55,187,000, $76,808,000 and $76,286,000, respectively, of which $1,317,000, $1,663,000 and $2,530,000, respectively, was capitalized.
Cash Equivalents
Cash equivalents are highly liquid investments, with maturities of three months or less when purchased, which are not held as part of the long-term investment portfolio.
Investments
Investments held as long term investments (primarily corporate bonds) are carried at amortized cost. At March 31, 1994, the market and face values of the investments (including $989,000 of short-term investments carried at amortized cost) were $129,630,000 and $131,110,000, respectively. See Management's Discussion and Analysis of Financial Condition and Results of Operations regarding the future adoption of FASB Statement No. 115, "Accounting for Investments in Debt and Equity Securities."
Forward Exchange Contracts
The Delaware Company enters into forward exchange contracts primarily as hedges relating to identifiable currency positions. These financial instruments are designed to minimize exposure and reduce risk from exchange rate fluctuations in the regular course of business. Gains and losses on forward exchange contracts which hedge exposures on firm foreign currency commitments are deferred and recognized as adjustments to the bases of those assets. Gains and losses on forward exchange contracts which hedge foreign currency assets or liabilities are recognized in income as incurred. Such amounts effectively offset gains and losses on the foreign currency assets or liabilities that are hedged.
At March 31, 1994, the Delaware Company has forward exchange contracts to purchase $300,302,000 in foreign currencies (primarily Canadian Dollars), and to sell $233,425,000 in foreign currencies (primarily Canadian dollars and Japanese Yen), at varying maturities from fiscal year 1995 through 1998.
NOTE 2 - ACQUISITION OF DELTA CATALYTIC CORPORATION
During June 1993, the Delaware Company acquired a controlling interest in Delta Catalytic Corporation ("DCC") of Calgary, Alberta, Canada for $28,249,000. This was the first step in a two-step transaction which will be completed during fiscal year 1997, when the Delaware Company intends to acquire the balance of DCC. The purchase price for the second step in fiscal 1997 will be determined based upon DCC's earnings for the period from November 1992 to October 1996. DCC provides engineering, procurement, construction, and maintenance services to industries worldwide; including oil, gas, marine construction and hydrocarbon processing. The purchase has been reflected in the consolidated balance sheet of the Delaware Company. Results of DCC's operations from the date of acquisition to March 31, 1994 are included in the Delaware Company's consolidated results and are included in the Marine Construction Services' segment. Revenues, segment operating income and net income were $228,822,000, $7,207,000, and $182,000, respectively, for the ten months ended March 31, 1994. The following pro forma income statement information for the Delaware Company is presented as though the acquisition of DCC had occurred on April 1, 1992:
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisition of DCC been consummated as of the above dates, nor are they necessarily indicative of future operating results.
The acquisition was accounted for under the purchase method and the excess of cost over fair value of net assets of the purchased business is being amortized over a period of 10 years. The
purchase price has been allocated to the underlying assets and liabilities based on fair values at the date of acquisition. A summary of the purchase price allocation is as follows:
NOTE 3 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
During December 1991, the Delaware Company reduced its participation in the nuclear fuel assembly and commercial nuclear services business by selling a portion of its interests in B&W Fuel Company ("BWFC") and B&W Nuclear Service Company ("BWNSC") to a consortium of U. S. subsidiaries of three French companies and the U.S. subsidiary of Framatome S.A. ("Framatome"), respectively. The Delaware Company retained a 25% interest in BWFC and BWNSC. Both joint ventures were accounted for on a cost basis after the sale as the Delaware Company no longer exercised significant influence over these joint ventures. Prior to the sale BWFC was part of the Delaware Company's consolidated financial statements and BWNSC was accounted for as an equity investment. Under the terms of the December 1991 sales agreements, Framatome purchased a 25% interest in BWNSC for $45,000,000 and the three French companies, which included Framatome, purchased a 26% interest in BWFC for $13,800,000. In addition, the Delaware Company was paid $17,000,000 relating to fees earned from, and the termination of, a management services agreement and received $33,820,000 in loan proceeds. On March 30, 1993, the Delaware Company sold its remaining interests in BWFC and BWNSC to the same parties for $10,150,000 and $32,440,000, respectively, and the loans of $33,820,000 were repaid.
Included in the Consolidated Statement of Income (Loss) and Retained Earnings (Deficit) were revenues of $44,639,000 and a loss of $419,000 applicable to BWFC operations, for the fiscal year ended March 31, 1992. Included in Equity in Income of Investees was income applicable to BWNSC of $5,179,000 for the fiscal year ended March 31, 1992. Included in Other-net were gains on the sales of $23,968,000 and $57,397,000 for the fiscal years ended March 31, 1993 and 1992, respectively, and income from management fees and services applicable to these operations of $8,446,000 for the fiscal year ended March 31, 1992.
The Delaware Company's investments in entities which are accounted for on the equity method were $27,695,000 and $21,703,000 at March 31, 1994 and 1993, respectively. Transactions with entities for which investments are accounted for on the equity method included sales to ($5,443,000, $5,909,000 and $8,368,000 in fiscal years 1994, 1993 and 1992, respectively) and purchases from ($3,510,000, $330,000 and $11,452,000 in fiscal years 1994, 1993 and 1992, respectively) these entities.
Summarized combined balance sheet and income statement information based on the most recent financial information for the Delaware Company's equity investments in joint ventures and other entities are presented below:
NOTE 4 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the financial and tax bases of assets and liabilities. Significant components of deferred tax assets and liabilities as of March 31, 1994 and 1993 were as follows:
Income (loss) from continuing operations 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 effective income tax rate on continuing operations is reconciled to the statutory federal income tax rate as follows:
Undistributed earnings of consolidated foreign subsidiaries amounted to approximately $40,700,000 at March 31, 1994. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state and local income taxes has been provided. Upon distribution of those earnings, the Delaware Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign jurisdictions. The unrecognized deferred income tax liability is estimated to be approximately $15,800,000. Withholding taxes of $3,700,000 would be payable upon remittance of all previously unremitted earnings at March 31, 1994.
During fiscal year 1992, a decision was entered in the United States Tax Court concerning the Delaware Company's U.S. income tax liability for the fiscal year ended March 31, 1983 disposing of all significant U.S. federal income tax issues for that year. The IRS has issued notices for fiscal years 1984 through 1988 asserting deficiencies in the amount of net operating losses and taxes reported. The deficiencies are based on issues substantially similar to those of earlier years. The Delaware Company believes that any income taxes ultimately assessed will not exceed amounts already provided.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Delaware Company has material transactions with International and its other subsidiaries occurring in the normal course of operations. Transactions which are included in the Delaware Company's revenues include the sales of engineering and design services and fabrication services ($7,415,000, $45,832,000, and $106,492,000 in fiscal years 1994, 1993 and 1992 respectively) and the leasing of equipment ($16,107,000, $25,195,000 and $23,343,000, in fiscal years 1994, 1993 and 1992, respectively). Other transactions include the allocation of general and administrative and other costs to International ($8,491,000, $8,304,000 and $6,458,000 in fiscal years 1994, 1993 and 1992, respectively), placing certain insurance coverage (at prices determined on an annual basis of $24,582,000, $18,096,000, and $47,478,000 in fiscal years 1994, 1993 and 1992, respectively, including discontinued operations) through commercial insurance carriers which in turn substantially reinsure such exposure to a wholly-owned subsidiary of International, and the management of certain of the investments of the Delaware Company and its pension plans by a wholly-owned subsidiary of International for which the Delaware Company paid fees of $2,528,000, $2,451,000 and $2,220,000 in fiscal years 1994, 1993 and 1992, respectively.
Effective February 1, 1989, the Delaware Company and a subsidiary of International, McDermott International Investments Co., Inc., ("MIICO"), entered into a reverse repurchase agreement whereby either party acting as a "buyer" would purchase for cash certain U. S. Government obligations owned by the other party acting as a "seller", and, at the date of purchase, the "seller" would agree to repurchase the same securities at a set price (including accrued interest) at a future specified date. At March 31, 1993, the Delaware Company held securities which it had purchased with aggregate principal amounts of $78,860,000 under this agreement. At March 31, 1994, MIICO had repurchased all government obligations purchased by the Delaware Company under the agreement. Included in Interest income is interest resulting from these reverse repurchase agreements of $560,000, $3,545,000 and $1,161,000 for fiscal years 1994, 1993 and 1992, respectively.
The Delaware Company and MIICO are parties to an agreement pursuant to which the Delaware Company may borrow up to $150,000,000. There were no borrowings against this agreement at March 31, 1994 or 1993.
At March 31, 1994, property, plant and equipment and accumulated depreciation included $376,266,000 ($397,002,000 at March 31, 1993) and $270,813,000 ($275,923,000 at March 31, 1993), respectively, of marine equipment which is leased by the Delaware Company to International.
Under a reorganization during the fiscal year ended March 31, 1983, International became the parent of the McDermott group of companies, which includes the Delaware Company which prior to the reorganization was the parent company. The Delaware Company's investment in International represents its right to the undistributed earnings of International existing at the time of the reorganization less subsequent distributions by International to the Delaware Company. In order to preserve the Delaware Company's right to the undistributed earnings and provide for the distribution of such earnings to the Delaware Company should either the Delaware Company or International elect not to keep these earnings invested with International, the Delaware Company retained its ownership of 100,000 shares of International Common Stock, received 100,000 shares of International Series A Participating Preferred Stock and 100,000 shares of International Series B Non-Voting Preferred Stock, and entered into a stock purchase and sale agreement with International (the "Intercompany Agreement"). Both Series A and Series B Preferred Stocks have certain rights in the event of liquidation of International. Series B Preferred Stock is currently callable by International at $275 per share and 10,000 shares are to be redeemed by International each year at $250. Such redemption began in November 1992. The Series A and Series B Preferred Stocks are entitled to annual per share dividends of $10 (but no more than ten times the amount of per share dividends paid by International on its Common Stock) and $20, respectively, and such dividends are cumulative to the extent not paid. Shares of Series A Preferred Stock are also entitled to additional dividends whenever dividends in excess of $3 per International Common Share are declared in any fiscal year. Dividends and proceeds from redemption of Series B Preferred Stock received from International have been accounted for as a reduction of the Delaware Company's investment in International.
Pursuant to the Intercompany Agreement, the Delaware Company has the right to sell to International and International has the right to buy from the Delaware Company, 100,000 units, each unit consisting of one share of International Common Stock and one share of International Series A Participating Stock, at a price based primarily upon the stockholders' equity of McDermott International at the close of the fiscal year preceding the date at which the right to sell or buy, as the case may be, is exercised, and, to a limited extent, upon the price-to-book value of the Dow Jones Industrial Average. If a unit is sold to International upon the Delaware Company's exercise of its right to sell under the Intercompany Agreement, the purchase price of such unit will be 90% of the then current value of the unit (the "current unit value"). If a unit is sold to International pursuant to an exercise by International of its right to purchase under the Intercompany Agreement, the purchase price of such unit will be 110% of the current unit value. At April 1, 1994, the current unit value was $2,039 and the aggregate current unit value for the Delaware Company's 100,000 units was $203,943,000. Both parties intend to preserve the Delaware Company's right to the undistributed earnings by not exercising any rights under the Intercompany Agreement that would result in a loss to the Delaware Company. The net proceeds to the Delaware Company from the exercise of any rights under the Intercompany Agreement
would be subject to U.S. federal, state and other applicable taxes. No tax provisions have been established, since there is no present intention by either party to exercise such rights.
The Delaware Company maintains the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the "Thrift Plan"), which is a defined contribution plan that includes a cash or deferred arrangement. Monthly employer contributions are equal to 50% of the first 6% of compensation (as defined in the plan) contributed by participants, and may be made, at the discretion of the Delaware Company, in cash or in common stock of International. When monthly employer contributions are made in stock, the Delaware Company pays cash to International and shares of common stock are issued to the Thrift Plan from the authorized but unissued share capital of International. The number of such shares is determined based on the closing price on the last business day of the month as reported on the New York Stock Exchange Composite Tape with fractional shares paid in cash. During fiscal years 1994, 1993 and 1992, respectively, 300,391, 347,054 and 115,787 shares were purchased by the Delaware Company for $7,984,000, $7,989,000 and $2,347,000.
Certain officers and employees of the Delaware Company participate in certain benefit plans which involve the issuance of International Common Stock.
NOTE 6 - LONG-TERM DEBT AND NOTES PAYABLE
As defined in the Indenture, the 10.25% Notes due 1995 may be redeemed at the option of the holders upon a change of control of International. The Indenture, and the Indenture for the 9.375% Notes due 2002 and the Series A and B Medium Term Notes, contain certain covenants which restrict the amount of funded indebtedness that the Delaware Company may incur, and place limitations on certain restricted payments, certain transactions between affiliates, the creation of certain liens and the amendment of the Intercompany Agreement.
Pursuant to its right of redemption, on March 31, 1993, the Delaware Company deposited cash into trusts for the purpose of redeeming its 9.625% Sinking Fund Debentures, 10% Subordinated Debentures, and 10.20% Sinking Fund Debentures. These redemptions resulted in an extraordinary loss of $2,429,000 (net of income tax benefit of $1,252,000) in fiscal year 1993. Also on March 31, 1993, pursuant to its redemption option, the Delaware Company provided for the loss associated with the redemption and subsequent extinguishment of its 12.25% Senior Subordinated Notes due 1998 resulting in an extraordinary loss of $7,392,000 (net of income tax benefit of $3,808,000). Additionally, during October 1992, the Delaware Company repurchased $10,600,000 aggregate principal amount of its 12.25% Senior Subordinated Notes due 1998 resulting in an extraordinary loss of $610,000 (net of income tax benefit of $314,000).
In management of its net interest costs, the Delaware Company has 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 agreements. Gains realized as a result of terminating agreements in fiscal year 1993 were deferred and were recognized as reductions of interest expense over the original terms of the agreements. Interest rate swaps resulted in a reduction in interest expense of $4,435,000 and $6,961,000 in fiscal years 1994 and 1993, respectively.
The Delaware Company is restricted, as a result of covenants in certain credit agreements, in its ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. At March 31, 1994, substantially all of the net assets of the Delaware Company were subject to such restrictions. At March 31, 1994, the most restrictive of these covenants with respect to the payment of dividends by the Delaware Company would prohibit the payment of dividends other than the current dividends on existing preferred stock.
Maturities of long-term debt during the five fiscal years subsequent to March 31, 1994 are as follows: 1995 - $6,009,000; 1996 - $155,426,000; 1997 - $5,173,000; 1998 - $46,418,000; 1999 - $27,165,000.
At March 31, 1994 and 1993, the Delaware Company had available to it various uncommitted short-term lines of credit from banks totalling $204,699,000 and $114,136,000, respectively. Borrowings outstanding against these facilities at March 31, 1994 were $15,519,000. There were no borrowings against these facilities at March 31, 1993. 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, and it is a condition to borrowing under the revolving credit facility
that the borrower's consolidated net tangible assets exceed a certain level. There were no borrowings against this facility at March 31, 1994 or 1993. DCC had available from a certain Canadian bank, an unsecured and committed revolving credit facility of $14,493,000 which expires on May 31, 1997. No borrowings were outstanding against this facility at March 31, 1994.
NOTE 7 - PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans - The Delaware Company provides retirement benefits, primarily through non-contributory pension plans, for substantially all of its regular full-time employees, except certain non-resident alien employees of foreign subsidiaries who are not citizens of a European Community country or who do not earn income in the United States, Canada, or the United Kingdom. Salaried plan benefits are based on final average compensation and years of service, while hourly plan benefits are based on a flat benefit rate and years of service. The Delaware Company's funding policy is to fund applicable pension plans to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and, generally, to fund other pension plans as recommended by the respective plan actuary and in accordance with applicable law. At January 1, 1994 and 1993, approximately one- half of total plan assets were invested in listed stocks and bonds. The remaining assets were held in foreign equity funds, U.S. Government securities and investments of a short-term nature.
U.S. Pension Plans
Net periodic pension benefit for fiscal years 1994, 1993 and 1992 included the following components:
Due to the sale of its welded tubular line of business, the loss from discontinued operations in fiscal year 1992 included a net after-tax gain of $1,659,000 resulting from the recognition of a curtailment and settlement of a related hourly pension plan.
Due to the sale of interests in its two nuclear joint ventures, income from continuing operations in fiscal year 1992 includes a net after-tax gain of $1,615,000 resulting from the curtailment and settlement of a related salaried pension plan. The reameasurement of net periodic pension cost increased pre-tax income from continuing operations by $2,074,000.
The following table sets forth the plans' funded status and amounts recognized in the Delaware Company's 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 increased the projected benefit obligation at March 31, 1994. This net increase includes an increase of $101,681,000 due to the change in discount rate and a decrease of $15,076,000 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," the Delaware Company recorded, during fiscal years 1994 and 1993, an additional minimum liability for certain of its plans of $7,669,000 and $10,810,000 respectively. These liabilities resulted in recognition of intangible assets of $7,022,000 and $10,803,000 and reductions in stockholder's equity of $620,000 and $5,000, respectively, in fiscal years 1994 and 1993.
The two principal U.S. ERISA pension plans provide that, subject to certain limitations, any excess assets in such plans would be used to increase pension benefits if certain events occurred within a 60-month period following a change in control of International.
Non-U.S Pension Plans
The net periodic pension cost for fiscal years 1994, 1993, and 1992 included the following components:
The following table sets forth the plans' funded status (assets exceed accumulated benefits) and amounts recognized in the Delaware Company's consolidated financial statements:
The assumptions used in determining the funded status of the non-U.S. plans were:
The changes in the discount rate and the rate of increase in future compensation levels for the non-U.S. plans increased the projected benefit obligation at March 31, 1994. This net increase includes an increase of $12,727,000 due to the change in discount rate and a decrease of $4,307,000 due to the change in the rate of increase in future compensation levels.
Multiemployer Plans - One of the Delaware Company's subsidiaries contributes to various multiemployer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. Amounts charged to pension cost and contributed to the plans were $8,367,000, $4,687,000, and $4,886,000 in fiscal years 1994, 1993 and 1992, respectively.
Postretirement Health Care and Life Insurance Benefits - The Delaware Company offers postretirement health care and life insurance benefits to substantially all of its retired regular full-time employees, including those associated with discontinued operations, except certain non-resident alien retirees who are not citizens of a European Community country or who, while employed, did not earn income in the United States, Canada or the United Kingdom. The Delaware Company shares the cost of providing these benefits with all affected retirees, except for certain life insurance plans. Postretirement health care and life insurance benefits are offered under separate defined benefit postretirement plans to union and non-union employees. The health care plans are contributory and contain cost-sharing provisions such as deductibles and coinsurance; the life insurance plans are contributory and non-contributory. The Delaware Company does not fund any of its plans.
The following table sets forth the amounts recognized in the consolidated financial statements at March 31:
The accumulated postretirement benefit obligation in the above table includes $400,698,000 and $354,743,000 for the Delaware Company's health care plans and $41,337,000 and $33,791,000 for the Delaware Company's life insurance plans at March 31, 1994 and 1993, respectively. The increase in the unrecognized net loss at March 31, 1994 was primarily attributable to the change in the discount rate.
Net periodic postretirement benefit cost for fiscal years 1994 and 1993 included the following components:
For measurement purposes, a weighted-average annual assumed rate of increase in the per capita cost of covered health care claims of 12-1/2% was assumed for 1994 and 13-1/2% for 1993. In both years, the rate was assumed to decrease gradually to 5% in 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of March 31, 1994 by $26,370,000 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit costs for fiscal years 1994 by $2,335,000.
Employees of the Delaware Company who are not U. S. citizens and located in certain foreign countries are covered by various foreign postretirement benefit arrangements. The Delaware Company has not yet adopted SFAS No. 106 for these foreign plans. The effect of initial adoption will be reported as the cumulative effect of an accounting change and is not expected to have a material effect on the consolidated financial statements of the Delaware Company.
Postemployment Benefits - See Management's Discussion and Analysis of Financial Condition and Results of Operations regarding future adoption of SFAS No. 112, "Employers' Accounting for Postemployment Benefits."
NOTE 8 - SALE OF ACCOUNTS RECEIVABLE
In December 1992, The Babcock & Wilcox Company renewed an agreement for an additional period of three years with a certain U. S. bank, whereby it can sell, up to a maximum limit of $225,000,000, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable. Under the terms of the agreement, new receivables are added to the pool as collections reduce previously sold accounts receivable. At March 31, 1994, approximately $170,000,000 of receivables had been sold for cash under this agreement. Included in Other-net income were expenses recorded on the sale of receivables which represent bank fees and discounts of $8,699,000, $7,851,000 and $12,564,000 for the fiscal years ended March 31, 1994, 1993 and 1992, respectively.
NOTE 9 - REDEEMABLE PREFERRED STOCKS
At March 31, 1994 and 1993, 13,000,000 shares of Delaware Company Preferred Stock, with a par value of $1 per share, were authorized. Of the authorized shares, 2,818,780 shares of Series A Preferred Stock, and 3,474,652 and 3,724,629 shares, respectively, of Series B Preferred Stock were outstanding (in each case, exclusive of shares owned by the Delaware Company) at March 31, 1994 and 1993. The outstanding shares are entitled to $31.25 per share in liquidation. Both series of Preferred Stock are entitled to general voting rights of one-half vote for each share. The Board of Directors of the Delaware Company may authorize additional series of Preferred Stock, and may set terms of each new series except that the Delaware Company cannot create any series of stock senior to the existing Series A and Series B Preferred Stock without the consent of the holders of at least 50% of the shares of such Preferred Stock.
Each share of the outstanding Series A Preferred Stock is convertible into one share of Common Stock of International plus $0.10 cash. Series A and Series B Preferred Stock are redeemable at the option of the Delaware Company at $31.25 per share, plus accrued dividends. On March 31, 1995 and each subsequent year through March 31, 2008, the Delaware Company is obligated to redeem, at a redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A Preferred Stock. On March 31, 1995, March 31 of the fiscal years 1996 through 2006, and March 31 of the fiscal years 2007 and 2008, the Delaware Company is obligated to redeem 315,877, 252,702 and 189,526 shares of Series B Preferred Stock, respectively. For the five fiscal years subsequent to March 31, 1994, the obligation to redeem the Series A and B Preferred Stock is $19,680,000 for fiscal year 1995, and $17,706,000 for each of the fiscal years 1996 through 1999. The Delaware Company may apply to the mandatory sinking fund obligations any Series A or B Preferred Stock it has reacquired, redeemed or surrendered for conversion which have not been previously credited against the mandatory sinking fund obligations. The Delaware Company applied 313,878 shares of Series A Preferred Stock and 180,700 shares of Series B Preferred Stock that it owned and redeemed 135,177 shares of Series B Preferred Stock to satisfy the March 31, 1994 mandatory sinking fund obligations. During fiscal year 1994, 114,800 shares of Series B Preferred Stock were purchased on the open market. At March 31, 1994, 49,637 shares
of Series A Preferred Stock have been converted to date and the Delaware Company owned 1,575,505 shares of Series A Preferred Stock.
NOTE 10 - CAPITAL STOCK
Changes in Common Stock during the three years ended March 31, 1994 are summarized as follows:
Common shares outstanding at March 31, 1994 consisted of 3,000 voting shares entitled to 12,000 votes per share and 600 non-voting shares.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Litigation - The Delaware Company and certain of its officers, directors and subsidiaries are defendants in numerous legal proceedings. Management believes that the outcome of these proceedings will not have a material adverse effect upon the consolidated financial position of the Delaware Company.
Products Liabilities - See Note 1 regarding products liabilities.
Operating Leases - Future minimum payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at March 31, 1994 are as follows: 1995 - $17,688,000; 1996 - $13,804,000; 1997 - $12,842,000; 1998 - $12,049,000; 1999 - $11,758,000; and thereafter - $34,590,000. Future minimum lease payments and leased property under capital leases are not material. Total rental expense for fiscal years 1994, 1993 and 1992 was $64,515,000, $62,959,000 and $66,314,000, respectively. These expense figures include contingent rentals and are net of sublease income, both of which are not material.
Other - The Delaware Company performs significant amounts of work for the U. S. Government under both prime contracts and subcontracts and thus is subject to continuing reviews by governmental agencies.
The Delaware Company maintains liability and property insurance that it considers normal in the industry. However, certain risks are either not insurable or insurance is available at rates which the Delaware Company considers uneconomical.
The Delaware Company has been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response, Compensation and Liability Act, as amended. Whereas, the Delaware Company has not been determined to be a major contributor of wastes to these sites, each potentially responsible party or contributor of may face assertions of joint and several liability. Based on its relative contribution of wastes to the various sites, of which a determination has not yet been made, the Delaware Company's share of the ultimate liability is not expected to have a material adverse effect on its consolidated financial position.
In addition, remediation projects have been or may be undertaken at certain of the Delaware Company's current and former plant sites, and B&W is currently evaluating a consent order issued by the Department of Environmental Resources of the Commonwealth of Pennsylvania seeking monetary sanctions, and remedial and monitoring relief, relating to B&W's Parks Facilities in Parks Township, Pennsylvania. Any sanctions ultimately assessed, and any costs ultimately incurred on other remediation projects, are not expected to have a material adverse effect on the consolidated financial position of the Delaware Company.
Commitments for capital expenditures amounted to approximately $53,121,000 (including $38,560,000 for a new concept steam generator facility for the Naval Reactor Program in Lynchburg, Virginia, the anticipated purchase of a barge currently leased and the completion of a new combustion and emission facility in Alliance, Ohio) at March 31, 1994, of which approximately $52,964,000 relates to fiscal year 1995.
The Delaware Company is contingently liable under standby letters of credit totaling $197,413,000 at March 31, 1994, issued in the normal course of business.
NOTE 12 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The Delaware Company's Power Generation Systems and Equipment customers are principally the electric utility 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. The principal customers of the Marine Construction Services segment are the large oil and gas companies and the U. S. and other governments. These concentrations of customers may impact the Delaware Company's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic or other conditions. However, the Delaware Company's management believes that the portfolio of receivables is well diversified and that such diversification minimizes any potential credit risk. Receivables are generally not collateralized.
The Delaware Company believes that its provision for possible losses on uncollectible accounts receivable is adequate for its credit loss exposure. At March 31, 1994 and 1993, the allowance for possible losses deducted from Accounts receivable-trade on the balance sheet was $6,427 000 and $3,713,000, respectively.
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Delaware Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Investments under reverse repurchase agreement: The fair value of investments in government obligations under reverse repurchase agreement with an affiliate was estimated based on quoted market prices (including accrued interest) of the securities underlying the agreement.
Investment securities: The fair value of investments are estimated based on quoted market prices. For investments for which there are no quoted market prices, fair values are derived from available yield curves for investments of similar quality and terms.
Long and short-term debt: The fair value of the Delaware Company's debt instruments are based on quoted market prices or, where quoted prices are not available, on estimated prices based on current yields for debt issues of similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred stocks are based on quoted market prices.
Foreign currency exchange contracts: The fair values of foreign currency forward exchange contracts are estimated by obtaining quotes from brokers. At March 31, 1994 and 1993, the Delaware Company had forward exchange contracts outstanding to purchase and sell foreign currencies with a net notional value of $66,877,000 and $253,996,000 and a fair value of $55,202,000 and $250,549,000, respectively.
The estimated fair values of the Delaware Company's financial instruments at March 31, 1994 and 1993 follow:
NOTE 14 - DISCONTINUED OPERATIONS
Welded Tubular Line of Business
In fiscal year 1992, the Delaware Company sold its welded tubular line of business ("Welded") for $30,217,000, consisting of $20,368,000 in cash and receivables of $9,849,000. Revenues applicable to Welded operations were $57,428,000 in fiscal year 1992. Loss from discontinued operations in fiscal year 1992 included income from operations of $182,000 (net of income tax benefit of $114,000) and loss on disposal of $4,790,000 (net of income tax benefit of $2,936,000) including loss from operations of $1,159,000 during the phase out period.
Seamless Tubular Line of Business
During fiscal year 1991, the Delaware Company sold its previously discontinued seamless tubular line of business. A gain of $1,240,000 (net of income taxes of $760,000) resulting from price adjustments is included in Loss from Discontinued Operations in fiscal year 1992.
NOTE 15 - SEGMENT REPORTING
The Delaware Company operates in two industry segments - Power Generation Systems and Equipment, and Marine Construction Services.
Power Generation Systems and Equipment's principal businesses are the supply of fossil-fuel and nuclear steam generating systems and equipment to the electric power generation industry, and nuclear reactor components to the U.S. Navy.
Marine Construction Services supplies services for the offshore oil, natural gas and hydrocarbon processing industries, and to other marine construction companies. These services, which are supplied primarily in North America, 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 the Delaware Company's operations in each segment. Corporate assets are principally cash and cash equivalents, short-term investments, marketable securities and prepaid pension costs.
In fiscal years 1994, 1993 and 1992, the U. S. Government accounted for approximately 17%, 21%, and 23%, respectively, of the Delaware Company's total revenues. These revenues are principally included in the Power Generation Systems and Equipment segment.
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 $6,549,000. This included a decrease of $3,753,000 in the Power Generation Systems and Equipment segment and a decrease of $2,796,000 in the Marine Construction Services segment.
Segment Information For the Three Fiscal Years Ended March 31, 1994.
1. Information about the Delaware Company's Operations in Different Industry Segments.
(2) See Note 3 regarding the deconsolidation of BWFC to a cost method investment and the change of BWNSC from an equity method to a cost method investment during fiscal year 1992. (3) See Note 2 regarding the acquisition of DCC during fiscal year 1994.
2. Information about the Delaware Company's Operations in Different Geographic Areas.
(1) Includes property, plant and equipment of $14,887,000 of DCC in fiscal year 1994 (See Note 2) and the purchase of a fabrication yard in Nueces County, Texas financed by a note payable of $16,250,000. (2) Net of inter-geographic area revenues in fiscal year 1994 as follows: United States -$20,702,000, Canada - $8,167,000, and Other Foreign - $281,000. Inter-geographic eliminations for fiscal years 1993 and 1992 are immaterial.
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial information for the fiscal years ended March 31, 1994 and 1993:
Quarterly results for June and September 1993 have been restated to reflect the adoption of EITF Issue No. 93-5 (See Note 1). The restatement decreased income before cumulative effect of accounting changes and net income by $467,000 and $101,217,000, respectively for the quarter ending June 30, 1993; and increased operating income by $10,367,000 and income before cumulative effect of accounting change and net income by $7,980,000 for the quarter ending September 30, 1993.
Pretax results for the quarter ended June 30, 1993 include a favorable warranty reserve adjustment of $11,000,000. Results for the March 1994 quarter include a provision of approximately $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.
Pretax results for the December 1992 quarter include charges for accelerated depreciation and the write-off of certain fabrication facilities and marine construction equipment due to diminished cost-effectiveness and technical obsolescence of $6,966,000. Results for the March 31, 1993 quarter include a gain on the sale of the remaining interests in two commercial nuclear joint ventures of $23,968,000.
Item 9.
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART I I I
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no family relationships between any of the executive officers, directors or persons nominated to be such, and no executive officer was elected to his position pursuant to any arrangement or understanding between himself and any other person.
Information required by this item is incorporated by reference to the material appearing under the heading "Election of Directors" in the Information Statement for action to be taken without a meeting of shareholders on August 9, 1994.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material appearing under the heading "Cash Compensation of Executive Officers and Certain Relationships and Related Transactions" in the Information Statement for action to be taken without a meeting of shareholders on August 9, 1994.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material appearing under the heading "Election of Directors" in the Information Statement for action to be taken without a meeting of shareholders on August 9, 1994.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the material appearing under the heading "Cash Compensation of Executive Officers and Certain Relationships and Related Transactions" in the Information Statement for action to be taken without a meeting of shareholders on August 9, 1994.
PART I V
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FORM 8-K REPORTS
There were no current reports on Form 8-K filed during the three months ended March 31, 1994.
EXHIBIT 22
MCDERMOTT INCORPORATED SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT FISCAL YEAR ENDED MARCH 31, 1994
The subsidiaries omitted from the foregoing list do not, considered in the aggregate, constitute a significant subsidiary.
EXHIBIT 24
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-54940) of McDermott Incorporated and in the related Prospectus of our report dated May 9, 1994 with respect to the consolidated financial statements of McDermott Incorporated, included in this Annual Report (Form 10-K) for the year ended March 31, 1994.
ERNST & YOUNG
New Orleans, Louisiana May 12, 1994
SIGNATURES OF THE REGISTRANT
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 10, 1994.
McDERMOTT INCORPORATED (REGISTRANT)
By: /s/ Robert E. Howson Robert E. Howson Chairman of the Board and Chief Executive Officer
/s/ Brock A. Hattox Brock A. Hattox Senior Vice President and Chief Financial Officer
/s/ Daniel R. Gaubert Daniel R. Gaubert Vice President and Controller
SIGNATURES OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on May 10, 1994.
/s/ Robert E. Howson Robert E. Howson Chairman of the Board and Chief Executive Officer, and Director
/s/ Brock A. Hattox Brock A. Hattox Senior Vice President and Chief Financial Officer, and Director
/s/ Lawrence R. Purtell Lawrence R. Purtell Senior Vice President and General Counsel and Corporate Secretary, and Director