McDermott Reports Fourth Quarter and Full Year 2018 Financial and Operational Results
HOUSTON, Feb. 25, 2019 /PRNewswire/ -- McDermott International, Inc. (NYSE: MDR) today reported revenues of $2.1 billion and net loss of $(2.8) billion, or $(15.33) per diluted share, for the fourth quarter of 2018.
"Our results for the fourth quarter of 2018 were marked by several significant non-recurring charges, including those related to goodwill and deferred tax assets," said David Dickson, President and Chief Executive Officer. "Additionally, our operating performance was unfavorably impacted by a change in estimate on the Calpine gas turbine project, the previously announced change in estimate on the Cameron LNG project and a number of other discrete operating items as noted below. We also recorded an unfavorable change in estimate related to the claim associated with damages sustained from Hurricane Harvey on the Freeport LNG project as an adjustment to the purchase price allocation for the combination with CB&I.
"Although the headline numbers distract from the Company's underlying fundamental strength, McDermott is continuing to progress toward the realization of its full potential as a premier, fully integrated provider of technology, engineering and construction solutions," said Dickson.
"Having closed the book on 2018, we have many reasons for optimism about the Company's future. In particular, we are pleased today to introduce robust earnings guidance for 2019, with a sharp improvement in most of our key metrics, including an expectation for 2019 EBITDA of approximately $1 billion, which is broadly consistent with the expectations outlined at the time of the Combination with CB&I. The market outlook is exceptionally robust for McDermott, and elements of our playbook are generating substantial results. Customer confidence in McDermott is as strong as it has ever been, as demonstrated by robust order intake of approximately $5.5 billion early in the first quarter of 2019 - as well as the 16% sequential-quarter increase in our revenue opportunity pipeline in the fourth quarter of 2018, to approximately $93 billion - which is a record level for us. The LNG cycle is here and continuing, our planned sale of the pipe fabrication and storage tank businesses is progressing well, and our liquidity was $1.4 billion at the end of the fourth quarter."
McDermott's net loss for the fourth-quarter of 2018 was primarily the result of a number of significant non-recurring charges, including:
-- A $2.2 billion goodwill impairment charge due in part to a change in the
Company's cost of capital and risk premium assumptions included in the
discount rates utilized to derive the present value of our cash flows.
-- A $190 million reduction in the carrying value of the Company's deferred
tax assets, due to the impact of a full valuation allowance against all
net deferred tax assets as a result of the goodwill impairment creating
a three-year cumulative loss position.
-- A non-cash impairment charge of $58 million on two of the Company's
marine vessels, primarily related to lower levels of planned future
utilization.
-- Annual fourth quarter, non-cash, actuarial mark-to-market adjustment of
$47 million related to the Company's pension obligations.
-- Transaction, restructuring and integration costs of $32 million.
Adjusting for these items, as shown in an accompanying table, McDermott's net loss for the fourth quarter was $(280) million, or $(1.55) per diluted share.
The Company's operating loss for the fourth quarter of 2018 was $(2.5) billion. The adjusted operating loss, as shown in an accompanying table, was $(241) million. The operating results include $339 million of discrete operating items, as listed below:
-- A $168 million change in estimated costs on the Company's Cameron LNG
project, as previously disclosed, due to unfavorable labor productivity,
and subcontract, commissioning and construction management costs.
-- A $31 million change in estimated costs on the Company's Calpine
project.
-- $54 million of expense on the Abkatun-A2 offshore project in Mexico,
caused by a schedule-driven change in the fabrication plan carrying work
offshore, subsequent weather delays and lack of contractually promised
accommodations for offshore crew.
-- $25 million of corporate expense reported as unallocated direct
operating expense for costs incurred to make alternate arrangements for
a third-party vessel charter because the previously designated vessel
was withdrawn from the market.
-- $33 million of increased SG&A expense associated with information
technology costs, self-insurance programs and other items.
-- $28 million of additional expense, due in part to an unplanned warranty
repair, increased bid expenses and costs associated with commencement of
new projects in APAC.
Separately, a $102 million change in estimate on the Freeport LNG project, due primarily to a reduction in the expected recoveries on a claim related to the impacts of Hurricane Harvey, did not impact the income statement, as the effects were reflected in purchase accounting adjustments.
For the full year 2018, the Company reported a net loss of $(2.7) billion, or $(17.94) per diluted share, due primarily to the factors that impacted fourth quarter results as described above. As detailed in an accompanying table, the adjusted net loss for 2018 was $(148) million, or $(0.99) per diluted share. Our business combination with Chicago Bridge & Iron Company N.V. (the "Combination") was completed on May 10, 2018. Accordingly, results for the full year include legacy McDermott from January 1 through May 10, 2018 and the combined McDermott-CB&I organization for the period from May 11, 2018 through December 31, 2018.
Financial Highlights
Three months Ended Delta Full Year Ended Delta
Dec 31, Dec 31, Qtr-on-Qtr Dec 31, Dec 31, Year-on-
2018 2017 2018 2017 Year
($ in millions, except per share amounts)
Revenues $
2,073 $
718 $
1,355 $
6,705 $
2,985 $
3,720
Operating Income (Loss) (2,499) 45 (2,544) (2,256) 307 (2,563)
Operating Margin -120.5 6.3
% % % % %
% -126.8 -33.6 10.3 -43.9
Net Income (Loss) (2,775) 26 (2,801) (2,691) 179 (2,870)
Diluted EPS(1) (15.33) 0.27 (15.60) (17.94) 1.88 (19.82)
Total Intangibles Amortization(2) 67 67 157 157
Adjusted Operating Income (Loss)(3) (241) 54 (295) 152 316 (164)
Adjusted Operating Margin(3) -11.6 7.5
% % % % %
% -19.1 2.3 10.6 -8.3
Adjusted Net Income (Loss)3,4 (280) 30 (310) (148) 183 (331)
Adjusted Diluted EPS1,3,4 (1.55) 0.32 (1.87) (0.99) 1.92 (2.91)
Adjusted EBITDA(3) (162) 80 (242) 424 416 8
Cash Provided by Operating
Activities (285) (285) (71) 136 (207)
Capital Expenditures 24 22 2 86 119 (33)
Free Cash Flow(3) (309) (22) (287) (157) 17 (174)
Working Capital5 (2,062) 344 (2,406) (2,062) 344 (2,406)
Note: Results for the full year ended
December 31, 2018 include McDermott
for the full period and CB&I for the
period from May 11 to December 31,
2018. 2017 figures are as originally
reported by McDermott and do not
reflect a presentation of combined
results.
1 Diluted EPS and adjusted diluted
EPS were calculated using weighted
average diluted shares of 181
million and 95 million for the three
months ended December 31, 2018 and
2017, respectively, and weighted
average diluted shares of 150
million and 95 million for the full
year ended December 31, 2018 and
2017, respectively.
2 Total intangibles amortization
includes the sum of project-related
intangibles amortization, other
intangibles amortization and
amortization of intangible assets
resulting from investments in
unconsolidated affiliates, all of
which are associated with the
intangible assets and liabilities
acquired in the Combination.
3 Adjusted operating income (loss),
adjusted operating margin, adjusted
net income (loss), adjusted diluted
net income (loss) per share
("adjusted diluted EPS") and
adjusted EBITDA reflect adjustments
to Operating Income and Net Income
computed in accordance with U.S.
generally accepted accounting
principles ("GAAP"). The
reconciliations of these non-GAAP
measures, as well as free cash flow,
to the respective most comparable
GAAP measures are provided in the
appendix entitled "Reconciliation of
Non-GAAP to GAAP Financing
Measures".
4 The calculations of adjusted net
income and adjusted diluted EPS
reflect the tax effects of non-GAAP
adjustments during each applicable
period. In jurisdictions in which we
currently do not pay taxes, no tax
impact is applied to non-GAAP
adjusting items.
5 Working capital is defined as
current assets, less cash and cash
equivalents, restricted cash, and
project-related intangibles, minus
current liabilities, less current
maturities of long-term debt,
current portion of long-term lease
obligations and project-related
intangible liabilities.
Update on Estimated Costs on Selected Projects
For the fourth quarter of 2018, McDermott recorded a total of $199 million of changes in estimates on the Cameron LNG and Calpine Gas Turbine Power projects. The changes directly impacted McDermott's income statement for the fourth quarter. Expected completion dates for the projects are unchanged.
-- Cameron LNG Project - Operationally, the project continues to progress
well and in line with the schedule presented in the third quarter of
2018. The gas turbine solo run was completed ahead of schedule, cold
circulation of hot oil in Train 1 was completed during the fourth
quarter and flare ignition testing was successfully completed on all
flares. All of these events are crucial steps in the commissioning of
Train 1, and we expect to achieve a major milestone with feed gas into
the facility in the first quarter of 2019. As of the end of the fourth
quarter of 2018, the project was 85% complete and had approximately $445
million of McDermott's portion of expected revenues remaining until
expected completion. During the quarter, the project contributed $116
million to revenues and used $39 million of cash flows from operations.
Phase 1 of the Cameron LNG project is scheduled for completion in Q2
2019; Trains 2 and 3 are expected to be completed in Q4 2019 and Q1
2020, respectively. The $168 million change in estimate resulted from
unfavorable labor productivity and subcontract, commissioning and
construction management costs.
-- Calpine Gas Turbine Power Project - First fire was achieved in December
2018, the steam blows have been completed successfully and systems have
been turned over to commissioning. During the fourth quarter of 2018,
the project contributed $3 million to revenues and used $28 million of
cash flows from operations. As of the end of the fourth quarter of 2018,
the project was 95% complete, and substantial completion is expected in
March 2019. The $31 million change in estimate resulted from increased
labor construction costs associated with achieving first fire and
substantial completion.
Separately, McDermott recorded a change in estimate of $102 million on the Freeport LNG project in the fourth quarter of 2018. The change in estimate related primarily to McDermott's view of a reduction in the assumed recovery of the claim and liquidated damages estimates that were filed with the customer relating to damages sustained as a result of Hurricane Harvey. That claim was outstanding at the time of the Combination and, as a result, the reduction in the claim has been recorded under the provisions of purchase accounting as a change in intangible assets. As such, the change in estimate did not directly impact McDermott's statements of operations. Expected completion dates for the project are unchanged.
Operationally, the project continues to perform well, with the completion of lube oil flushing of the propane compressors on Train 1 and beginning of the lube oil flushing on Train 2. As of December 31, 2018, Freeport LNG was approximately 88% complete and had approximately $411 million of McDermott's portion of expected revenues remaining until completion. During the fourth quarter of 2018, the project contributed $175 million to revenues and used $186 million of cash flows from operations. Trains 1, 2 and 3 are expected to be completed in Q3 2019, Q1 2020 and Q2 2020, respectively.
Cash and Liquidity
McDermott's cash from operating activities during the fourth quarter of 2018 was $(285) million, due largely to the continued funding of previously announced cost increases on the Cameron, Freeport and Calpine projects. Total cash availability was $1.4 billion at December 31, 2018, consisting of $520 million of unrestricted cash and $889 million of availability under McDermott's revolving credit facility. McDermott had $2.0 billion of combined availability under its principal letter of credit facilities, uncommitted bilateral credit facilities and surety arrangements. McDermott's cash and liquidity position reflects the receipt of proceeds from the fourth quarter 2018 private placement of $300 million of redeemable preferred stock and warrants to purchase common stock and reflects a $230 million increase in its primary letter-of-credit facilities. The Company was in compliance with all financial covenants under its financing arrangements as of December 31, 2018.
Pipe and Tank Sale
The sale processes for each of the pipe fabrication and tank businesses is going well and as planned. The official sale process has launched for both businesses and there has been a high level of interest for both, and the Company expects proceeds in excess of $1 billion for the two businesses. The Company expects to use a majority of the proceeds for debt reduction. The sale of the pipe fabrication business is expected to close in Q2 2019 and the sale of the tank business is expected to close in Q3 2019.
Combination Profitability Initiative (CPI)
McDermott's integration is largely complete, with primarily IT systems updates remaining. CPI is nearing full implementation with $444 million of the targeted $475 million of annualized cost synergies actioned as of December 31, 2018. McDermott's operating results for the three months ended December 31, 2018 include approximately $62 million of such savings. The CPI target annualized run rate is expected to be fully actioned by the end of 2019. Associated costs of $29 million were recognized in the fourth quarter of 2018 and were $134 million, cumulatively for the year ended December 31, 2018.
Reporting Segment Update
McDermott's segment reporting is presented as: North, Central and South America, or NCSA; Europe, Africa, Russia and Caspian, or EARC; Middle East and North Africa, or MENA; Asia Pacific, or APAC; and Technology, or TECH. The Company also reports results for Corporate. Segment and Corporate results are summarized below.
Segment Financial Highlights
Three Months Ended Dec 31, 2018
Segment Operating Results
NCSA EARC MENA APAC TECH Corporate Total
($ in millions)
New Orders $
404 $
(34) $
118 $
786 $
159
$ $
1,433
Backlog(1) 5,646 1,378 1,834 1,420 632 10,910
Revenue 1,319 120 417 80 137 2,073
Book-to-Bill 0.3 x -0.3 x 0.3 x 9.8 x 1.2 x 0.7 x
Operating Income (Loss) (1,686) (49) 72 (69) (564) (203) (2,499)
Operating Margin -127.8 -40.8 17.3 -86.3 -411.7 -120.5
% % % % % %
Goodwill & Asset Impairment 1,485 40 (0) 52 591 58 2,226
Intangibles Amortization 18 5 10 32 67
Adjusted Operating Income (Loss)(2) (201) (10) 72 (17) 27 (112) (241)
Adjusted Operating Margin(2) -15.2 -8.3 17.3 -21.3 19.7 -11.6
% % % % % %
Capex 8 4 12 24
Product Offering Financial Highlights
Three Months Ended Dec 31, 2018
Offshore & LNG Downstream Power Total
Subsea
(In millions)
New Orders $
940 $
(13) $
625 $
(119) $
1,433
Backlog 3,353 1,184 5,208 1,165 10,910
Revenue 480 375 870 348 2,073
Note: All amounts have been rounded
to the nearest million. Individual
line items may not sum to totals as
a result of rounding.
1 Our backlog is equal to our
Remaining Performance Obligations
(RPOs) as determined in accordance
with U.S. GAAP.
2 Adjusted Operating Income and
Margin, by segment, are non-GAAP
measures. Reconciliations to the
most comparable GAAP measures are
provided in the appendix entitled
"Reconciliation of Segment Non-GAAP
to GAAP Financial Measures."
North, Central and South America (NCSA)
Revenues of $1.3 billion in NCSA were primarily driven by the Cameron LNG, Freeport LNG, LACC and Total Ethane Cracker projects. Additional contributors were the MOX project, the Entergy power projects and the Shintech petrochemical project. The operating loss of $(1.7) billion during the quarter was unfavorably impacted by the $1.5 billion impairment charge, the $199 million in change in estimates on the Cameron and Calpine projects, $54 million of expense driven by weather downtime and related issues on the Abkatun-A2 project in Mexico and the timing of revenue recognition on several other projects. Excluding the impact of goodwill impairment of $1.5 billion, adjusted operating loss for the fourth quarter of 2018 was $(201) million.
Key operational achievements in the quarter included successfully achieving first fire on the Calpine project. Freeport LNG completed lube oil flushing of the propane compressors on Train 1 and began the lube oil flushing on Train 2. The gas turbine solo run was completed ahead of schedule on the Cameron LNG project. LACC continues to work towards achieving mechanical completion. Despite weather delays, the platform float over on Abkatun-2 was successfully achieved during the quarter. Engineering, procurement and construction are ahead of plan on the Montgomery Power Station, and the St. Charles Power Station achieved systems turn over.
Europe, Africa, Russia and Caspian (EARC)
Revenues of $120 million in EARC were primarily driven by progress on the offshore Total Tyra project and continuing activities on two downstream projects in Russia. The operating loss of $(49) million was impacted by the $40 million impairment charge and the impact of fixed costs. Excluding the impact of the impairment charge of $40 million, the adjusted operating loss for the fourth quarter of 2018 was $(10) million.
The Total Tyra project continued to progress on schedule with procurement activities continuing and with material deliveries to our Batam fabrication yard supporting the commencement of fabrication during the fourth quarter. Commencement of engineering and procurement activities on the Lukoil DCU project in Russia took place in the quarter. The segment is executing multiple FEEDs that have the potential to convert to full EPC/I awards, including BP Tortue, Anadarko LNG Mozambique, Rovuma LNG Mozambique and the GALP new reformer unit.
Middle East and North Africa (MENA)
Revenues of $417 million in MENA were primarily driven by procurement, fabrication and hook-up activity on several offshore projects and engineering and procurement activities on various onshore projects. Key offshore contributors were Saudi Aramco Safaniya Phases 5 and 6, LTA II, 13 Jackets and QP Bul Hanine. Key Onshore projects were the ADNOC Crude Flexibility project, Liwa petrochemical EPC lump sum and the DUQM storage tank project. Operating income was $72 million, with an operating income margin of 17.3%, primarily driven by activities on offshore projects.
During the fourth quarter, offshore work on Safaniya Phase 5 was completed with only a few close-out items remaining. Fabrication on the Safaniya Phase 6 project is proceeding as per schedule and dredging of the necessary channel is scheduled to start in the first quarter of 2019. Fabrication on the Bul Hanine project is underway in the Batam fabrication yard and the NKOM fabrication yard in Doha and is currently proceeding as per the project plan. All 13 Jackets on the Saudi Aramco 13 Jackets project have been installed, and all related offshore work has been completed. The ADNOC Crude Flexibility project is progressing well, and engineering, procurement and manufacturing activities on the critical equipment remain on schedule. The SASREF refinery upgrade project is progressing well, reaching over 95% completion on the engineering and procurement scopes.
Asia Pacific (APAC)
Revenues of $80 million in APAC were driven by continuing activities on the Reliance KG-D6 project and activities on the JG Summit storage tank project in the Philippines. The operating loss of $(69) million was impacted by the goodwill impairment of $52 million, reduced close-out opportunities, an unplanned warranty repair, increased bid expenses and costs associated with commencement of work on new projects. Excluding the impact of the goodwill impairment, the adjusted operating loss for the fourth quarter of 2018 was $(17) million.
Key operational achievements in the quarter included the commencement of engineering on the KG-DWN 98/2 SURF project and early procurement of critical items. The DLV 2000 and support vessels were mobilized on the Reliance KG-D6 project to commence the first pipelay campaign and installation activities. The Posco Daewoo Shwe project continues to progress well and the JG Summit Storage tank project continues to achieve good progress with a strong safety record in the Philippines.
Technology (TECH)
Revenues of $137 million were primarily driven by licensing, heater and catalyst sales in the petrochemical and refining markets. The operating loss of $(564) million was due largely to the goodwill impairment of $591 million and intangibles amortization of $32 million. Excluding the impact of the goodwill impairment, adjusted operating income for the fourth quarter of 2018 was $27 million, representing an adjusted operating income margin of 19.7%. Adjusted operating income was positively impacted by strong execution progress, earned fees and process performance.
Highlights from the quarter include successful start-up of CDAlky (gasoline alkylate) projects in Korea and China and several new awards, including ethylene heaters for Irkutsk Oil and two petrochemical license contracts in China.
Corporate
Corporate expenses include various corporate and other non-operating activities. Corporate expense in the fourth quarter of 2018 was $203 million, mainly attributable to selling, general, administrative and other expenses of $47 million; impairment of two marine vessels of $58 million due to lower levels of planned future utilization; $62 million of certain unallocated operating costs, including expenses related to unplanned vessel substitution; and $32 million of costs for restructuring, integration and transaction-related costs from the Combination.
Revenue Opportunity Pipeline
McDermott's revenue opportunity pipeline consists of Backlog, Bids & Change Orders Outstanding and Target Projects, which are those projects McDermott expects to be awarded in the market in the next five quarters. McDermott defines Backlog as Remaining Performance Obligations (RPOs) as determined in accordance with GAAP.
At the end of the fourth quarter of 2018, McDermott's revenue opportunity pipeline was approximately $93 billion, primarily driven by NCSA and MENA with anticipated market inflection in the offshore/subsea, downstream and LNG markets.
Revenue Opportunity Pipeline
As of
Dec 31, Sep 30, Jun 30, Mar 31, Dec 31,
2018 2018 2018 2018 2017
($ in billions)
Backlog $
10.9 $
11.5 $
10.2 $
3.4 $
3.9
Bids & Change Orders Outstanding(1) 20.3 20.7 19.0 7.5 4.4
Targets(2) 61.9 48.1 49.3 14.1 16.2
Total 93.1 80.3 78.5 25.0 24.5
Revenue Pipeline by Segment
As of Dec 31, 2018
---
NCSA EARC MENA APAC TECH Total
($ in billions)
Backlog $
5.6 $
1.4 $
1.8 $
1.4 $
0.6 $
10.9
Bids & Change Orders Outstanding(1) 8.3 6.1 3.5 2.4 20.3
Targets(2) 23.6 11.1 20.2 5.4 1.6 61.9
Total 37.5 18.6 25.5 9.2 2.2 93.1
Note: All amounts have been
rounded to the nearest tenth
of a billion. Individual line
items may not sum to totals
as a result of rounding.
1 There is no assurance that
bids outstanding will be
awarded to McDermott or that
outstanding change orders
ultimately will be approved
and paid by the applicable
customers in the full amounts
requested or at all.
2 Target projects are those
that McDermott has identified
as anticipated to be awarded
by customers or prospective
customers in the next five
quarters through competitive
bidding processes and capable
of being performed by
McDermott. There is no
assurance that target
projects will be awarded to
McDermott or at all.
2019 Guidance
McDermott is introducing guidance for 2019, based on its current portfolio of businesses. The Company expects that its first quarter of 2019 is likely to be the softest quarter of the year and that operating performance in the second half of 2019 is likely to be stronger than the first half, reflecting the cumulative benefit of the execution of newly booked backlog, cost synergies under the Combination Profitability Initiative and an expected reduction in the negative cash flow associated with the three focus projects.
Full Year 2019 Guidance
Full Year 2019 Guidance
($ in millions, except per share
amounts or as indicated)
Revenues
$9.5 - 10.5B
Operating Income
$725 - $775
Operating Margin 7.0 - 8.0%
Net Interest Expense(1)
~$380
Income Tax Expense
~$65
Accretion of Redeemable
Preferred Stock
~$15
Dividends on Redeemable
Preferred Stock
~$36
Net Income
$250 - $275
Diluted Net Income, Per
Share
$1.40 - $1.50
Diluted Share Count
~187
EBITDA(2)
$1.0 - $1.05B
Adjustment
Costs to Achieve CPI(3)
$40 - $50
Adjusted Earnings Metrics
Adjusted Operating Income(2)
$765 - $825
Adjusted Operating Margin(2) 7.5 - 8.5%
Adjusted Net Income(2)
$290 - $325
Adjusted Diluted EPS(2)
$1.65 - $1.75
Adjusted EBITDA(2)
$1.04 - $1.1B
Cash Flow & Other Metrics
Cash from Operating
Activities
$(100) - $(50)
Capex
~$165
Free Cash Flow(2)
$(265) - $(215)
Cash Interest /DIC
Amortization Interest
~$345 / ~$40
Cash Taxes
~$65
Corporate and Other
Operating Income4
$(370) - $(400)
Cash, Restricted Cash and
Cash Equivalents
$510 - $560
Gross Debt5
~$3,530
Net Working Capital
~$(1.3B)
(1) Net interest expense is gross
interest expense less capitalized
interest and interest income.
(2) The calculations of EBITDA,
adjusted operating income, adjusted
operating margin, adjusted net
income, adjusted diluted EPS,
adjusted EBITDA and free cash flow,
which are non-GAAP measures, are
shown in the appendix entitled
"Reconciliation of Forecast Non-
GAAP Financial Measures to Forecast
GAAP Financial Measures."
(3) Costs to achieve CPI include
restructuring and integration costs.
4 Corporate and Other Operating
Income represents the operating
income (loss) from corporate and
non-operating activities, including
corporate expenses, certain
centrally managed initiatives,
impairments, year-end actuarial
mark-to-market pension adjustment,
costs not attributable to a
particular reporting segment, and
unallocated direct operating
expenses associated with the
underutilization of marine vessels.
5 Ending gross debt excludes debt
issuance costs and finance lease
obligations.
Conference Call
McDermott has scheduled a conference call and webcast related to its fourth quarter 2018 results at 7:30 a.m., U.S. Central time, today. Shareholders and other interested parties are invited to listen to the call by visiting www.mcdermott-investors.com or by calling 1-706-634-2259 (Conference ID: 5780117). A presentation of supplemental financial information will be available on McDermott's Investor Relations site at that time. A replay of the webcast will be available on McDermott's website for seven days after the call.
About the Company
McDermott is a premier, fully integrated provider of technology, engineering and construction solutions to the energy industry. For more than a century, customers have trusted McDermott to design and build end-to-end infrastructure and technology solutions to transport and transform oil and gas into the products the world needs today. Our proprietary technologies, integrated expertise and comprehensive solutions deliver certainty, innovation and added value to energy projects around the world. Customers rely on McDermott to deliver certainty to the most complex projects, from concept to commissioning. It is called the "One McDermott Way." Operating in over 54 countries, McDermott's locally focused and globally integrated resources include approximately 32,000 employees and engineers, a diversified fleet of specialty marine construction vessels and fabrication facilities around the world. To learn more, visit www.mcdermott.com.
Non-GAAP Measures
This communication includes several "non-GAAP" financial measures as defined under Regulation G of the U.S. Securities Exchange Act of 1934, as amended. We report our financial results in accordance with GAAP but believe that certain non-GAAP financial measures provide useful supplemental information to investors regarding the underlying business trends and performance of our ongoing operations and are useful for period-over-period comparisons of those operations. The forecast non-GAAP measures we have presented in this communication include forecast EBITDA, adjusted operating income, adjusted operating income margin, adjusted net income, adjusted diluted EPS, free cash flow and adjusted EBITDA. We believe these forward-looking financial measures are within reasonable measure.
Non-GAAP measures include adjusted operating income, adjusted operating income margin, adjusted net income, adjusted diluted EPS, free cash flow, EBITDA and adjusted EBITDA, in each case excluding the impacts of certain identified items. The excluded items represent items that our management does not consider to be representative of our normal operations. We believe that these metrics are useful for investors to review, because they provide more consistent measures of the underlying financial results of our ongoing business and, in our management's view, allow for a supplemental comparison against historical results and expectations for future performance. Furthermore, our management uses each of these metrics as measures of the performance of our operations for budgeting and forecasting, as well as employee incentive compensation. However, Non-GAAP measures should not be considered as substitutes for operating income, net income or other data prepared and reported in accordance with GAAP and should be viewed in addition to our reported results prepared in accordance with GAAP.
We define free cash flow as cash flows from operations less capital expenditures. We believe investors consider free cash flow as an important measure, because it generally represents funds available to pursue opportunities that may enhance stockholder value, such as making acquisitions or other investments. Our management uses free cash flow for that reason. We define EBITDA as net income plus depreciation and amortization, interest expense, net, and provision for income taxes. We define adjusted EBITDA as EBITDA adjusted to exclude significant, non-recurring transactions to our operating income, both gains and charges. We have included EBITDA and adjusted EBITDA disclosures in this communication because EBITDA is widely used by investors for valuation and comparing our financial performance with the performance of other companies in our industry. Our management also uses EBITDA and adjusted EBITDA to monitor and compare the financial performance of our operations. EBITDA and adjusted EBITDA do not give effect to the cash that we must use to service our debt or pay our income taxes, and thus do not reflect the funds actually available for capital expenditures, dividends or various other purposes. Our presentations of free cash flow, EBITDA and adjusted EBITDA may not be comparable to similarly titled measures in other companies' reports. You should not consider free cash flow, EBITDA and adjusted EBITDA in isolation from, or as substitutes for, net income or cash flow measures prepared in accordance with U.S. GAAP.
Reconciliations of these non-GAAP financial measures and forecast non-GAAP financial measures to the most comparable GAAP measures are provided in the tables included in this communication.
Forward-Looking Statements
In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, McDermott cautions that statements in this communication which are forward-looking, and provide other than historical information, involve risks, contingencies and uncertainties that may impact actual results of operations of McDermott. These forward-looking statements include, among other things, statements about 2019 guidance, project milestones and percentage of completion and expected timetables, cost estimates on identified projects, cost recoveries and schedule-based incentives on projects, assessments and beliefs with respect to legacy CB&I projects (including the three Focus projects), the market outlook, backlog, bids and change orders outstanding, target projects and revenue opportunity pipeline, to the extent these may be viewed as indicators of future revenues or profitability, the potential for FEEDs to convert to full EPCI awards, the contemplated sale of the U.S. pipe fabrication and tank storage businesses and the anticipated timing and total proceeds, and the use of proceeds, from those transactions, targeted savings from cost synergies and the other expected impacts of the CPI, including anticipated CPI implementation costs, the expected timing for completion of the CPI, the Company's potential and our beliefs with respect to the combination with CB&I. Although we believe that the expectations reflected in those forward-looking statements are reasonable, we can give no assurance that those expectations will prove to have been correct. Those statements are made by using various underlying assumptions and are subject to numerous risks, contingencies and uncertainties, including, among others: the possibility that the expected CPI savings will not be realized, or will not be realized within the expected time period; adverse changes in the markets in which McDermott operates or credit markets; the inability of McDermott to execute on contracts in backlog successfully; changes in project design or schedules; the availability of qualified personnel; changes in the terms, scope or timing of contracts; contract cancellations; change orders and other modifications and actions by customers and other business counterparties of McDermott; changes in industry norms; and adverse outcomes in legal or other dispute resolution proceedings. If one or more of these risks materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected. You should not place undue reliance on forward-looking statements. For a more complete discussion of these and other risk factors, please see each of McDermott's annual and quarterly filings with the U.S. Securities and Exchange Commission, including McDermott's annual report on Form 10-K for the year ended December 31, 2018. This communication reflects the views of McDermott's management as of the date hereof. Except to the extent required by applicable law, McDermott undertakes no obligation to update or revise any forward-looking statement.
Contact:
Investors & Financial Media
Scott Lamb
Vice President, Investor Relations
+1 832 513 1068
Scott.Lamb@mcdermott.com
Global Media Relations
Gentry Brann
Global Vice President, Communications
+1 281 870 5269
Gentry.Brann@mcdermott.com
START OF APPENDIX
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months
Full Year
Ended Dec 31
Ended Dec 31
2018 2017 2018 2017
($ in millions, except per share amounts)
Revenues $
2,073 $
718 $
6,705 $
2,985
Costs and Expenses:
Cost of operations 2,156 597 6,104 2,449
Project related intangibles amortization 41 83
---
Total cost of operations 2,197 597 6,187 2,449
Research and development expenses 7 2 20 5
Selling, general and administrative expenses 94 62 282 204
Other intangibles amortization 27 62
Transaction costs 3 9 48 9
Restructuring and integration costs 29 134
Goodwill impairment 2,168 2,168
Impairment loss 58 1 58 1
Other operating expenses (income), net 1 3 (2)
---
Total expenses 4,584 671 8,962 2,666
Income (loss) from investments in unconsolidated affiliates 11 (2) 13 (12)
Investment in unconsolidated affiliates-related amortization 1 (12)
---
Operating income (loss) (2,499) 45 (2,256) 307
Other expense:
Interest expense, net (89) (11) (259) (63)
Other non-operating income (expense), net (43) 7 (56) 5
---
Total other expense, net (132) (4) (315) (58)
Income (loss) before provision for income taxes (2,631) 41 (2,571) 249
Income tax expense (benefit) 123 16 104 69
Non-operating loss from investments in unconsolidated affiliates (3) (3) (3) (2)
---
Net income (loss) (2,757) 28 (2,678) 178
Less: Net (loss) income attributable to noncontrolling interests 14 (2) 9 (1)
---
Net income (loss) attributable to McDermott (2,771) 26 (2,687) 179
---
Dividends on redeemable preferred stock (3) (3)
Accretion of redeemable preferred stock (1) (1)
Net income (loss) attributable to common stockholders $
(2,775) $
26 $
(2,691) $
179
---
Net income per share attributable to common stockholders
Basic $
(15.33) $
0.28 $
(17.94) $
1.97
Diluted $
(15.33) $
0.27 $
(17.94) $
1.88
Shares used in the computation of net income per share:
Basic 181 91 150 91
Diluted 181 95 150 95
McDERMOTT INTERNATIONAL, INC.
EARNINGS PER SHARE COMPUTATION
Three months Full Year
Ended Dec 31 Ended Dec 31
2018 2017 2018 2017
($ in millions, except share and per share amounts)
Net income (loss) attributable to common stockholders $
(2,775) $
26 $
(2,691) $
179
Weighted average common shares (basic) 181 91 150 91
Effect of dilutive securities:
Tangible equity units 3 3
Stock options, restricted stock and restricted stock units 1 1
Adjusted weighted average common shares and assumed exercises of stock options and vesting of stock awards (diluted) 181 95 150 95
Net income (loss) attributable to common stockholders
Basic $
(15.33) $
0.28 $
(17.94) $
1.97
Diluted $
(15.33) $
0.27 $
(17.94) $
1.88
SUPPLEMENTARY DATA
Three months Full Year
Ended Dec 31 Ended Dec 31
2018 2017 2018 2017
($ in millions)
Depreciation & amortization $
92 $
23 $
279 $
101
Capital expenditures 24 22 86 119
Backlog 10,910 3,901 10,910 3,901
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2018 2017
(In millions, except per share
amounts)
Assets
Current assets:
Cash and cash equivalents ($146 and $0 related to variable interest entities ("VIEs")) $
520 $
390
Restricted cash and cash equivalents 325 18
Accounts receivable-trade, net ($29 and $0 related to VIEs) 932 328
Accounts receivable-other ($57 and $0 related to VIEs) 175 42
Contracts in progress ($144 and $0 related to VIEs) 704 621
Project-related intangible assets, net 137
Inventory 101
Other current assets ($24 and $0 related to VIEs) 139 36
---
Total current assets 3,033 1,435
---
Property, plant and equipment, net 2,067 1,666
Accounts receivable-long-term retainages 62 39
Investments in unconsolidated affiliates 452 8
Goodwill 2,654
Other intangibles, net 1,009
Deferred income taxes 18
Other non-current assets 163 57
---
Total assets $
9,440 $
3,223
---
Liabilities, Mezzanine Equity and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $
30 $
24
Current portion of long-term lease obligations 8
Accounts payable ($277 and $0 related to VIEs) 595 279
Advance billings on contracts ($717 and $0 related to VIEs) 1,954 32
Project-related intangible liabilities, net 66
Accrued liabilities ($136 and $0 related to VIEs) 1,564 372
---
Total current liabilities 4,217 707
Long-term debt 3,393 512
Long-term lease obligations 66 1
Deferred income taxes 47 28
Other non-current liabilities 664 186
---
Total liabilities 8,387 1,434
---
Commitments and contingencies
Mezzanine equity:
Redeemable preferred stock 230
Stockholders' equity:
Common stock, par value $1.00 per share, authorized 255 shares; issued 183 and 98 shares, respectively 183 98
Capital in excess of par value 3,539 1,858
Accumulated deficit (2,719) (48)
Accumulated other comprehensive loss (107) (51)
Treasury stock, at cost: 3 and 3 shares, respectively (96) (96)
---
Total McDermott Stockholders' Equity 800 1,761
Noncontrolling interest 23 28
---
Total stockholders' equity 823 1,789
---
Total liabilities and stockholders' equity $
9,440 $
3,223
---
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2018 2017
(In millions)
Cash flows from operating activities:
Net income $
(2,678) $
178
Non-cash items included in net income:
Depreciation and amortization 279 101
Debt issuance cost amortization 36 13
Stock-based compensation charges 44 23
Deferred taxes 21 7
Goodwill impairment 2,168
Other asset impairments 58 1
Actuarial pension (loss) gain 47 (5)
Other non-cash items (6)
Changes in operating assets and liabilities, net of effects of businesses acquired:
Accounts receivable 300 91
Contracts in progress, net of Advance billings on contracts (278) (450)
Accounts payable (156) 105
Other current and non-current assets 63 (22)
Investments in unconsolidated affiliates (9) 14
Other current and non-current liabilities 34 86
---
Total cash (used in) provided by operating activities (71) 136
---
Cash flows from investing activities:
CB&I combination consideration, net of cash acquired of $498 (2,374)
Purchases of property, plant and equipment (86) (119)
Advances related to proportionately consolidated consortiums (241)
Proceeds from asset dispositions 69 56
Investments in unconsolidated affiliates (16) (2)
---
Total cash used in investing activities (2,648) (65)
---
Cash flows from financing activities:
Proceeds from issuance of long-term debt 3,560
Repayment of debt and capital lease obligations (545) (235)
Debt and letter of credit issuance costs (217) (21)
Proceeds from issuance of redeemable preferred stock 290
Dividends paid to holders of redeemable preferred stock (3)
Redeemable preferred stock issuance costs (18)
Advances related to equity method joint ventures and proportionately consolidated consortiums 158
Debt extinguishment costs (10)
Repurchase of common stock (14) (7)
Acquisition of NCI (11)
Dividends paid to NCI (1)
---
Total cash provided by (used in) financing activities 3,201 (275)
---
Effects of exchange rate changes on cash, cash equivalents and restricted cash (45)
Net increase (decrease) in cash, cash equivalents and restricted cash 437 (204)
Cash, cash equivalents and restricted cash at beginning of period 408 612
---
Cash, cash equivalents and restricted cash at end of period $
845 $
408
---
McDermott reports its financial results in accordance with U.S. generally accepted accounting principles ("GAAP"). This press release also includes several Non-GAAP financial measures as defined under the SEC's Regulation G. The following tables reconcile certain Non-GAAP financial measures used in this press release to comparable GAAP financial measures. Additional reconciliations are provided in the accompanying tables.
McDERMOTT INTERNATIONAL, INC.
RECONCILIATION OF SEGMENT NON-GAAP TO GAAP FINANCIAL MEASURES
Three Months Ended Dec 31, 2018
Segment Operating Results
NCSA EARC MENA APAC TECH Corporate Total
($ in millions)
Revenues $
1,319 $
120 $
417 $
80 $
137 $
2,073
GAAP Operating Income (Loss) (1,686) (49) 72 (69) (564) (203) (2,499)
-127.8 -40.8 17.3
% % % % %
GAAP Operating Margin % -86.3 -411.7 -120.5
Adjustments
Goodwill impairment(1) 1,485 40 52 591 2,168
Marine assets impairment(2) 58 58
Restructuring, Transaction & Integration Costs(3) 32 32
Total Non-GAAP Adjustments 1,485 40 52 591 90 2,258
Non-GAAP Operating Income (Loss) $
(201) $
(10) $
72 $
(17) $
27 $
(112) $
(241)
-15.2 -8.3 17.3
% % % %
Non-GAAP Adjusted Operating Margin % % -21.3 19.7 -11.6
Note: Individual line items may not
sum to totals as a result of
rounding.
1 Goodwill impairment is due in part
to a change in our cost of capital
and risk premium assumptions included
in the discount rates utilized to
derive the present value of our cash
flows. The goodwill impairment was
allocated to the segments based on
the amount by which the carrying
value of that segment exceeded its
fair value.
2 Marine assets impairment on two
vessels related to lower levels of
planned future utilization.
(3) Restructuring, transaction and
integration costs associated with the
Combination during the three months
ended December 31, 2018.
McDERMOTT INTERNATIONAL, INC.
RECONCILIATION OF NON-GAAP TO GAAP FINANCIAL MEASURES
Three months Ended Full Year Ended
Dec 31, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017
($ in millions, except share and per share amounts)
GAAP Net Income Attributable to Common Stockholders $
(2,775) $
26 $
(2,691) $
179
Less: Adjustments
Goodwill impairment(1) 2,168 2,168
Marine asset impairment(2) 58 58
Transaction costs(3) 3 9 48 9
Costs to achieve CPI4 29 134
Non-cash actuarial loss (gain) on benefit plans5 47 (5) 47 (5)
Deferred tax asset adjustment for three-year cumulative loss6 190 190
Tax benefit on intercompany transfer of IP7 (111)
Debt extinguishment costs8 14
Total Non-GAAP Adjustments 2,495 4 2,548 4
Tax Effect of Non-GAAP Changes9 (5)
Total Non-GAAP Adjustments (After Tax) 2,495 4 2,543 4
Non-GAAP Adjusted Net Income Attributable to Common Stockholders $
(280) $
30 $
(148) $
183
GAAP Operating Income (Loss) $
(2,499) $
45 $
(2,256) $
307
Non-GAAP Adjustments10 2,258 9 2,408 9
Non-GAAP Adjusted Operating Income $
(241) $
54 $
152 $
316
Non-GAAP Adjusted Operating Margin -11.6 7.5 2.3 10.6
% % % %
GAAP Diluted EPS $
(15.33) $
0.27 $
(17.94) $
1.88
Non-GAAP Adjustments 13.78 0.05 16.95 0.04
Non-GAAP Adjusted Diluted EPS $
(1.55) $
0.32 $
(0.99) $
1.92
Shares used in computation of income per share:
Basic 181 91 150 91
Diluted 181 95 150 95
Net Income Attributable to Common Stockholders $
(2,775) $
26 $
(2,691) $
179
Depreciation & Amortization 92 23 279 101
Interest Expense, Net 89 11 259 63
Provision for Income Taxes 123 16 104 69
Accretion and Dividends on redeemable preferred stock 4 4
EBITDA
11 (2,467) 76 (2,045) 412
Non-GAAP Adjustments 2,305 4 2,469 4
Adjusted EBITDA
11 $
(162) $
80 $
424 $
416
Cash flows from operating activities $
(285)
$ $
(71) $
136
Capital expenditures (24) (22) (86) (119)
Free cash flow $
(309) $
(22) $
(157) $
17
GAAP Revenues $
2,073 $
718 $
6,705 $
2,985
Note: Individual line items may not
sum to totals as a result of
rounding.
1 Goodwill impairment is due in
part to a change in our cost of
capital and risk premium
assumptions included in the
discount rates utilized to derive
the present value of our cash
flows. The goodwill impairment was
allocated to each of the segments
based on the amount by which the
carrying value of that segment
exceeded its fair value.
2 Marine asset impairment on two
vessels related to lower levels of
planned future utilization.
(3)Transaction costs associated
with the private placement of
preferred stock and warrants to
purchase common stock during the
three months ended December 31,
2018 and the Combination for the
full year ended December 31, 2018.
4 Costs to achieve CPI include
integration and restructuring
costs.
5 Non-cash actuarial mark-to-
market pension plan adjustment.
Actuarial gains and losses are
primarily driven by changes in the
actuarial assumptions, discount
rates and actual return on pension
assets.
6 Adjustment relates to the impact
of a full valuation allowance
against net deferred tax assets as
a result of the goodwill
impairment, creating a three-year
cumulative loss position.
7 Tax benefit resulting from the
internal transfer of certain
intellectual property rights
during the second quarter of 2018
in conjunction with the
Combination.
8 As part of financing of the
Combination and establishment of
new capital structure, expense
recognized during the second
quarter of 2018 for prepayment of
our prior credit facility and
senior secured notes, including a
make-whole premium and the
accelerated write-off of debt
issuance costs.
9 The adjustments to GAAP Net
Income have been income tax
effected when included in net
income based upon the respective
tax jurisdictions the adjustments
were incurred in.
10 Includes the non-GAAP
adjustments described in footnotes
1 through 4 above. Adjustments to
operating income do not include
non-GAAP adjustments described in
footnotes 5 through 9 above, as
those items are not included in
the computation of operating
income.
11 We define EBITDA as net income
plus depreciation and
amortization, interest expense,
net, and provision for income
taxes. We define adjusted EBITDA
as EBITDA adjusted to exclude
significant, non-recurring
transactions, both gains and
charges, to our operating income
as described in footnotes 1
through 4 above. We have included
EBITDA and adjusted EBITDA
disclosures in this press release
because EBITDA is widely used by
investors for valuation and
comparing our financial
performance with the performance
of other companies in our industry
and because adjusted EBITDA
provides a consistent measure of
EBITDA relating to our underlying
business. Our management also
uses EBITDA and adjusted EBITDA to
monitor and compare the financial
performance of our operations.
EBITDA and adjusted EBITDA do not
give effect to the cash that we
must use to service our debt or
pay our income taxes, and thus do
not reflect the funds actually
available for capital
expenditures, dividends or various
other purposes. In addition, our
presentation of EBITDA and
adjusted EBITDA may not be
comparable to similarly titled
measures in other companies'
reports. You should not consider
EBITDA or adjusted EBITDA in
isolation from, or as a substitute
for, net income or cash flow
measures prepared in accordance
with U.S. GAAP.
McDERMOTT INTERNATIONAL, INC.
RECONCILIATION OF FORECAST NON-GAAP FINANCIAL MEASURES TO GAAP FINANCIAL MEASURES
Full Year 2019 Guidance
($ in millions, except per share
amounts or as indicated)
Revenues
$9.5 - 10.5B
Operating Income
$725 - $775
Operating Margin 7.0 - 8.0%
Costs to Achieve CPI
$40 - $50
Total Non-GAAP Adjustments
$40 - $50
Adjusted Operating Income
$765 - $825
Adjusted Operating Margin 7.5 - 8.5%
Net Income
$250 - $275
Total Non-GAAP Adjustments
$40 - $50
Tax Impact of Adjustments
~$ -
Adjusted Net Income
$290 - $325
Diluted Share Count
~187
Adjusted Diluted EPS
$1.65 - $1.75
Cash Flows from Operating Activities
$(100) - $(50)
Capital Expenditures
~$165
Free Cash Flow
$(265) - $(215)
GAAP Net Income (Loss) Attributable to Common Stockholders
$250 - $275
Add:
Depreciation and amortization
$250 - $280
Interest expense, net
~$380
Provision for taxes
~$65
Accretion of Redeemable Preferred Stock
~$15
Dividends on Redeemable Preferred Stock
~$36
EBITDA
$1.0 - $1.05B
Costs to Achieve CPI
$40 - $50
Adjusted EBITDA
$1.04 - $1.1B
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SOURCE McDermott International, Inc.
