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McDermott Reports Second Quarter 2019 Financial and Operational Results
HOUSTON, July 29, 2019 /PRNewswire via COMTEX/ -- Copyright (C) 2019 PR Newswire. All rights reserved

McDermott International, Inc. (NYSE: MDR) today reported revenues of $2.1 billion, a net loss of $(146) million, or $(0.80) per diluted share, and an operating loss of $(61) million for the second quarter of 2019.

Excluding a $101 million non-cash loss on the sale of its Alloy Piping Products (APP) business, as well as restructuring, integration and transaction costs of $31 million, as outlined in an accompanying table, McDermott's adjusted net loss for the second quarter of 2019 was $(14) million, or $($0.07) per diluted share, and its adjusted operating income was $71 million.

David Dickson, President and Chief Executive Officer of McDermott, said: "Although the company reported mixed results for the second quarter of 2019, we are encouraged by the record-setting level of backlog and new awards. We are also pleased with the visibility we have into expected 2020 revenues, of which $7.4 billion was already in backlog as of the end of the second quarter of 2019. This is well above the $4.2 billion of 2019 revenues we had in backlog this time last year. This strong market posture continues to demonstrate the benefits of our combination with CB&I and the opportunities available in a strong market environment. McDermott has booked more than $19 billion of awards since the May 2018 combination with CB&I, demonstrating continued customer confidence and healthy end markets. Importantly, as of the end of the second quarter of 2019, legacy CB&I projects represented only about 14% of the current backlog. All the awards we've won since the combination were booked under McDermott's stringent risk management protocols, which we believe pave the way for us to deliver consistent margin performance through the application of the One McDermott Way in the execution of this backlog. The company continues to remain on schedule executing the Cameron and Freeport LNG projects. The Cameron settlement agreement we signed earlier this month is a testament to the mutually productive relationship we have built with this customer since the combination - and the associated incentives provided a meaningful contribution to our second quarter results.

"This is a year of transition as we position McDermott to fully optimize the benefits of our combination with CB&I and as we steadily advance toward completion of the Cameron and Freeport projects," added Dickson. "Nevertheless, the company today has updated its guidance for 2019. The reduction in our guidance is due to four main factors: 1) the weaker than expected operating results for the second quarter of 2019; 2) the impact of reduced revenues and higher unallocated operating expenses due to slippage in certain new awards and customer changes to schedule on several projects; 3) changes in our assumptions about the expected performance of legacy CB&I projects in our NCSA operating segment; and 4) a shift from the fourth quarter of 2019 to 2020 in the assumed timing of remaining incentives on the Cameron LNG project. Even so, we expect to see a sharp improvement in the company's operating income by the fourth quarter of this year, as we build momentum heading into 2020.

"Looking ahead, our revenue opportunity pipeline remains near a historic high and, more specifically, we are seeing steady upward momentum in a number of key areas. For example, in the strategic area of front end engineering design (FEED), our awards through the first half of 2019 are already more than double what we won in all of 2018 - in terms of both man-hours and dollar value - and that's especially important as FEED work positions us for EPC opportunities. This year we have booked $1.5 billion of EPC work as a result of FEED work that's been done since the combination. Further, in our Technology business, we are forecasting the number of license sales to increase by 25% this year versus 2018. One of the recent highlights was our selection as the Master Licensor by S-OIL, an affiliate of Saudi Aramco, in support of its ethylene cracker and downstream petrochemicals complex, being developed as a major expansion of S-OIL's existing refinery in South Korea. Our Technology business gives us unparalleled insight into upcoming EPC opportunities, and we see roughly $40 billion of potential EPC pull-through opportunities in the refining and petrochemical markets over the next five years. We believe the petrochemical market, in particular, is poised for another wave of investment in the next 12 to 24 months, with world ethylene capacity expected to increase by more than 40% between 2019 and 2028."

Second Quarter 2019 Operating Performance

McDermott's adjusted operating income in the second quarter of 2019 was $71 million, which included:

-- The benefit of a settlement agreement on the Cameron LNG project, under which $110 million of progress incentives were recognized during the quarter;

-- $38 million on the Freeport LNG project as a result of increased construction and subcontractor costs; and

-- $33 million on the company's offshore projects for Pemex in the Gulf of Mexico related to disagreements with the customer that have arisen coincident with changes in that company's leadership team and the country's political landscape.

Asset Sales

During the second quarter of 2019, McDermott completed the sale of the APP business, the distribution and manufacturing arm of its pipe fabrication business. McDermott continues to pursue a sale of the remaining portion of its pipe fabrication business.

We have identified potential buyers for our industrial storage tank business, and sales efforts with respect to that business remain ongoing. In connection with that contemplated sale, we may retain a continuing minority ownership or other economic interest in the business. Our anticipated aggregate net cash proceeds from the pipe fabrication and storage tank transactions are now expected to be lower than the approximately $1 billion we previously estimated. Our ongoing competitive sale process is now expected to result in a closing of the sale of the storage tank business in the fourth quarter of 2019.

Cash and Liquidity

Cash used by operating activities in the second quarter of 2019 was $(205) million. This primarily reflected the company's net loss and the usage of cash on the Cameron LNG project. Total cash availability was $1.0 billion at June 30, 2019, consisting of $455 million of unrestricted cash and $568 million of availability under McDermott's revolving credit facility. As of June 30, 2019, McDermott had approximately $1.4 billion of combined availability under its principal letter of credit facilities, uncommitted bilateral credit facilities and surety arrangements. McDermott was in compliance with all financial covenants under its financing arrangements as of June 30, 2019.

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.

North, Central and South America (NCSA)

NCSA reported revenues of $1.3 billion and operating income and margin of $15 million and 1.2%, respectively. Excluding the loss on the sale of the APP business, adjusted operating income and margin for NCSA were $117 million and 9.3%, respectively. Results for the quarter included the benefit of a settlement agreement on the Cameron LNG project, under which $110 million of progress incentives were recognized during the quarter. The results also reflected increased cost estimates on a number of projects, including the $38 million on the Freeport LNG project and $33 million on offshore projects in the Gulf of Mexico.

NCSA achieved significant operational milestones during the second quarter. The first cargo was shipped from Cameron's Train 1 during the quarter, with substantial completion of Phase 1 expected in the third quarter. Trains 2 and 3 continue to progress on schedule, with the overall project reaching 93% completion (on a cumulative basis) during the quarter. Freeport continues to progress well, reaching 95% completion (on a cumulative basis) for all three trains. Commissioning of Train 1 continued with the introduction of feed gas early in the third quarter. The first cargo shipment is expected in the third quarter. First gas was achieved on the Abkatun project during the second quarter, with first oil achieved in early July and substantial completion expected in the third quarter. The Entergy St. Charles power project was completed and turned over to the owner during the quarter. Additionally, NCSA booked several new awards during the quarter, including the Petrobras Sepia Phase 1 field development in Brazil and the ENI Amoca EPC project in Mexico.

Europe, Africa, Russia and Caspian (EARC)

EARC reported revenues of $192 million and operating income and margin of $4 million and 2.1%, respectively. Key contributors to revenues and operating income were the Total Tyra, Lukoil refinery and Afipsky refinery projects.

As the LNG cycle continues to show momentum, the Mozambique LNG EPC contract was awarded to McDermott's joint venture with Saipem and Chiyoda after Anadarko reached final investment decision (FID) during the quarter. We believe our execution of this project will continue to demonstrate the company's ability to deliver comprehensive EPC solutions for world-scale LNG developments. Work on the BP Tortue EPC project commenced during the quarter, with engineering and early procurement activities. The Total Tyra project continued to progress with engineering, procurement and construction, including the delivery of structural steel plates, bulk piping material and electrical equipment. The project reached 38% completion during the quarter. Construction progress continued on the Lukoil refinery project, which reached 25% completion during the quarter.

Middle East and North Africa (MENA)

MENA reported revenues of $399 million and operating income and margin of $29 million and 7.3%, respectively. Key contributors were the Saudi Aramco Safaniya Phases 5 and 6, QP Bul Hanine, ADNOC Crude Flexibility, Sasref and Liwa projects. Operating income was impacted by transitioning from mature backlog to newer contracts.

MENA demonstrated McDermott's continued strength in the region by booking record-level order intake during the second quarter, resulting in the highest level of backlog ever attained by McDermott in the area. Among the new awards during the quarter were two mega projects for Saudi Aramco located in the Marjan field. Safaniya Phase 5 continued with close-out activities, with substantial completion expected in the third quarter. Safaniya Phase 6 continues to progress, with fabrication of 8 out of 11 decks and 7 out of 10 jackets completed and the achievement of an impressive 8 million man hours without a lost-time incident. The QP Bul Hanine project completed the initial pipelay campaign, with installation continuing through the third quarter.

Asia Pacific (APAC)

APAC reported revenues of $133 million and operating income and margin of $2 million and 1.5%, respectively. Operating income was driven by various active projects and closeout-related savings in Australia and India.

During the second quarter of 2019, APAC made significant operational progress across the region. The first of two offshore campaigns for Reliance KG-D6 was successfully completed using the DLV 2000 to perform its first piggy-back pipelay. The second campaign is expected to commence in the fourth quarter of 2019. The ONGC KG 98/2 project continues to progress well, with preparations for the first offshore season well underway and environmental approvals and nearshore work well advanced. The DB 30 mobilized during the quarter to execute the Pan Malaysia field development project. The Posco International Schwe Phase 2 development is well advanced, with preparations underway for work to commence on the Shwe CRP platform in early 2020.

Technology (TECH)

TECH reported revenues of $154 million and operating income and margin of $35 million and 22.7%, respectively, primarily driven by catalyst shipments, execution progress, earned fees and process performance.

In July 2019, the business strengthened its leadership role in process technology with the acquisition of the assets and intellectual property of Siluria Technologies. The acquisition gives McDermott ownership of a proprietary catalytic process that transforms methane--one of the most abundant, inexpensive and widely available hydrocarbons on earth--into valuable commodity chemicals in an efficient, scalable manner using processes that can be integrated into existing industry infrastructure or placed as modules at locations where stranded methane gas is available such as the Permian. Included in the acquisition was a commercial demonstration-scale unit currently operating at a petrochemical facility in Texas.

Corporate

Corporate expenses include various corporate and other non-operating activities. Corporate expense in the second quarter of 2019 was $146 million, mainly attributable to: selling, general, administrative and other expenses of $52 million; $59 million of unallocated operating costs; $20 million of costs for restructuring and integration; and $11 million of transaction-related costs associated with the ongoing process to sell the company's non-core storage tank and pipe fabrication businesses.

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 second quarter of 2019, McDermott's revenue opportunity pipeline was approximately 90.2 billion, primarily driven by MENA, NCSA and EARC with continuing momentum in the offshore/subsea, downstream and LNG markets.

2019 Guidance

The company today has updated its guidance for 2019 driven by four main factors: 1) the weaker than expected operating results for the second quarter of 2019; 2) the impact of reduced revenues and higher unallocated operating expenses due to slippage in certain new awards and customer changes to schedule on several projects; 3) changes in our assumptions about the expected performance of legacy CB&I projects in our NCSA operating segment; and 4) a shift from the fourth quarter of 2019 to 2020 in the assumed timing of remaining incentives on the Cameron LNG project. Full-year guidance assumes a sharp improvement in operating income in the fourth quarter of 2019, as the company builds momentum heading into 2020. (Guidance below is based on the company's existing portfolio of businesses.)

Conference Call

McDermott has scheduled a conference call and webcast related to its second quarter 2019 results at 4:00 p.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: 9386389). 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 McDermott

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 (loss), adjusted operating income margin, adjusted net income, adjusted diluted EPS, free cash flow, EBITDA and adjusted EBITDA. We believe these forward-looking financial measures are within reasonable measure.

Non-GAAP measures include adjusted operating income (loss), 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, provision for income taxes and accretion and dividends on redeemable preferred stock. 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, earnings and cashflow into 2020, 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 Cameron and Freeport LNG projects) and the Mozambique LNG project, the market outlook for our various market sectors, 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, Technology license sales, pull-through opportunities, the contemplated sales of the pipe fabrication and storage tank businesses and the anticipated timing of those transactions, our potential and our beliefs with respect to the benefits of our 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: adverse changes in the markets in which McDermott operates or credit or capital 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; negotiations with third parties with respect to the sale of the pipe fabrication and storage tank businesses; 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 and subsequent quarterly reports on Form 10-Q. 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 Senior Vice President, Communications, Marketing and Administration +1 281 870 5269 Gentry.Brann@McDermott.com

START OF APPENDIX

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.

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