BUSINESS COMBINATION (Tables)

9 Months Ended

Sep. 30, 2018

Purchase Consideration―We completed the Combination for a gross purchase price of approximately $4.6 billion ($4.1 billion net of cash acquired), detailed as follows (in millions, except per share amounts):

		(In millions, except per share amounts)
CB&I shares for Combination consideration		103
Conversion Ratio: 1 CB&I share = 0.82407 McDermott shares		85
McDermott stock price on May 10, 2018		19.92
Equity Combination consideration transferred	$	1,684
Fair value of converted awards earned prior to the Combination		9
Total equity Combination consideration transferred		1,693
Cash consideration transferred		2,872
Total Combination consideration transferred		4,565
Less: Cash acquired		(498)
Total Combination consideration transferred, net of cash acquired	$	4,067

Summary of Preliminary Purchase Price Allocation

The following summarizes our preliminary purchase price allocation at the Combination Date (in millions):

	May 10, 2018
Net tangible assets:
Cash	$	498
Accounts receivable		879
Inventory		62
Contracts in progress		341
Assets held for sale ⁽¹⁾		71
Other current assets		240
Deferred tax assets		45
Investments in unconsolidated affiliates⁽²⁾		433
Property, plant and equipment		405
Other non-current assets		145
Accounts payable		(472	)
Advance billings on contracts ⁽³⁾		(2,278	)
Deferred tax liabilities		(17	)
Other current liabilities		(1,200	)
Other non-current liabilities		(452	)
Noncontrolling interest		(26	)
Total net tangible assets		(1,326	)
Project related intangible assets/liabilities, net ⁽⁴⁾		142
Other intangible assets ⁽⁵⁾		1,041
Net identifiable assets		(143	)
Goodwill ⁽⁶⁾		4,708
Total Combination consideration transferred		4,565
Less: Cash acquired		(498	)
Total Combination consideration transferred, net of cash acquired	$	4,067

⁽¹⁾	Assets held for sale includes CB&I’s former administrative headquarters within Corporate and various fabrication facilities within NCSA. During the third quarter of 2018, we completed the sale of CB&I’s former administrative headquarters for proceeds of $52 million.

⁽²⁾

Investments in unconsolidated affiliates includes a fair value adjustment of $221 million associated with the Combination. Approximately $118 million of the fair value adjustment is attributable to the basis difference between McDermott’s investment and the underlying equity in identifiable assets of unconsolidated affiliates, and will be amortized to Investment in unconsolidated affiliate related amortization over a range of two to 30 years based on the life of assets to which the basis difference is attributed.

⁽³⁾

Advance billings on contracts includes accrued provisions for estimated losses on projects of $349 million. See the discussions below and in Note 4, Revenue Recognition, for information concerning our acquired significant loss projects, including changes since our initial preliminary estimates reported for the second quarter of 2018.

⁽⁴⁾

Project related intangible assets/liabilities, net includes intangible asset and liabilities of $239 million and $97 million, respectively. The balances represent the fair value of acquired RPOs and normalized profit margin fair value associated with acquired long-term contracts that were deemed to be lower than fair value (excluding amounts recorded in Advance billings on contracts and Contracts in progress) as of the Combination Date. The project related intangible assets and liabilities will be amortized as the applicable projects progress over a range of two to six years within Project intangibles amortization in our Statements of Operations.

⁽⁵⁾

Other intangible assets are reflected in the table below and recorded at estimated fair value, as determined by our management, based on available information which includes a preliminary valuation from outside experts. The estimated useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.

	May 10, 2018
	Fair value		Useful Life Range	Weighted Average Life
	(In millions)
Process technologies	$	498	10-30		27
Trade names		401	10-20		12
Customer relationships		115	4-11		10
Trademarks		27	10		10
Total	$	1,041

⁽⁶⁾

Goodwill resulted from the acquired established workforce, which does not qualify for separate recognition, as well as expected future cost savings and revenue synergies associated with the combined operations. Of the $4.7 billion of estimated goodwill recorded in conjunction with the Combination, $1.7 billion is deductible for tax purposes. Given the proximity of the Combination Date to the reporting date of September 30, 2018, the allocation of goodwill for each of our operating groups is in process, and therefore has not been presented.

Schedule of Other Intangible Assets

⁽¹⁾

	May 10, 2018
	Fair value		Useful Life Range	Weighted Average Life
	(In millions)
Process technologies	$	498	10-30		27
Trade names		401	10-20		12
Customer relationships		115	4-11		10
Trademarks		27	10		10
Total	$	1,041

Summary of Pro Forma Financial Information

Further, the pro forma financial information does not purport to project the future operating results of the combined business operations following the Combination.

	Three Months Ended September 30,		Nine Months Ended September 30,
	2018 ⁽¹⁾	2017	2018 ⁽¹⁾	2017
	(In millions)
Pro forma revenue	$2,289	$2,866	$7,135	$7,390
Pro forma net income (loss) attributable to McDermott	33	67	128	(270)
Pro forma net income (loss) per share attributable to McDermott:
Basic	0.18	0.37	0.71	(1.50)
Diluted	0.18	0.37	0.71	(1.50)

Basic ⁽²⁾	180	180	180	180
Diluted	181	181	181	180

⁽¹⁾

Adjustments, net of tax, included in the pro forma net income above that were of a non-recurring nature totaled $28 million and $136 million for the three and nine months ended September 30, 2018, respectively. The adjustments reflect the elimination of restructuring and integration costs ($24 million and $90 million) and transaction costs ($4 million and $35 million) for the three and nine months ended September 30, 2018, respectively, and debt extinguishment costs of $11 million incurred in the first half of 2018, that were included in McDermott and CB&I’s historical results for the three and nine months ended September 30, 2018, respectively. For the comparative three and nine months ended September 30, 2017, adjustments, net of tax, included in the pro forma net income (loss) above that were of a non-recurring nature totaled $17 million and $20 million, respectively, and reflect the elimination of restructuring costs that were included in CB&I’s historical results. These pro forma results exclude the effect of adjustments to the opening balance sheet associated with fair value purchase accounting estimates.

⁽²⁾

Pro forma net income (loss) per share was calculated using weighted average basic and diluted shares outstanding during the three months ended September 30, 2018. The effects of dilutive securities were not included in the calculation of diluted EPS for the nine months ended September 30, 2017 due to the net loss for that period.