PENSION AND POSTRETIREMENT BENEFITS

12 Months Ended

Dec. 31, 2018

Compensation And Retirement Disclosure [Abstract]

NOTE 15—PENSION AND POSTRETIREMENT BENEFITS

Defined Contribution Plans

We sponsor multiple defined contribution plans for eligible employees with various features, including voluntary employee pre-tax and Roth-based contributions, and employer matching and other contributions. We expensed $22 million in 2018, including $16 million associated with the acquired CB&I plans from the Combination Date through December 31, 2018, and $5 million in each of 2017 and 2016 for these plans. We also provide benefits under the McDermott International, Inc. Director and Executive Deferred Compensation Plan (the “Deferred Compensation Plan”), which is a non-qualified defined contribution plan. In addition, we sponsor multiple defined contribution plans that cover eligible employees for which we do not provide contributions. The cost of these plans was not significant to us in 2018, 2017 or 2016.

Defined Benefit Pension and Other Postretirement Plans

We sponsor various defined benefit pension plans covering eligible employees and provide specific post-retirement benefits for eligible retired U.S. employees and their dependents through health care and life insurance benefit programs. These plans may be changed or terminated by us at any time. The following tables present information for our defined benefit pension and other postretirement plans:

Components of Net Periodic Benefit Cost

	U. S. Pension Plans									Non-U. S. Pension Plans									Other Postretirement Plans
	Year Ended December 31,									Year Ended December 31,									Year Ended December 31,
	2018			2017			2016			2018			2017			2016			2018				2017		2016
	(In millions)
Components of periodic benefit cost:
Service cost	$	-		$	-		$	-		$	8		$	-		$	-		$		-		$	-	$	-
Interest cost		18			20			21			12			1			1				1			-		-
Expected return on plan assets		(19	)		(20	)		(20	)		(17	)		(1	)		(1	)			-			-		-
Actuarial loss (gain)		15			(5	)		(4	)		33			-			(1	)		(1		)		-		-
Net periodic benefit cost (income) ^{(1) (2)}	$	14		$	(5	)	$	(3	)	$	36		$	-		$	(1	)	$	-			$	-	$	-

⁽¹⁾

^{The components of periodic benefit cost (income) other than the service cost component are included within Other non-operating expense (income) in our Statements of Operations. The service cost component is included in Cost of operations and SG&A expenses, in our Statements of Operations, along with other compensation costs rendered by the participating employees.}

⁽²⁾	^{Net periodic benefit cost for 2018 included expense of $37 million for the acquired CB&I plans from the Combination Date through December 31, 2018.}

Change in Projected Benefit Obligation and Plan Assets

	U. S. Pension Plans						Non-U. S. Pension Plans						Other Postretirement Plans
	2018			2017			2018			2017			2018			2017
	(In millions)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	511		$	505		$	-		$	31		$	-		$	-
Acquisition ⁽¹⁾		16			-			933			-			31			-
Service cost		-			-			8			-			-			-
Interest cost		18			20			12			1			1			-
Actuarial loss (gain) ⁽²⁾		(27	)		23			(7	)		1			(1	)		-
Prior service cost ⁽³⁾		-			-			5			-			(11	)		-
Plan participants' contribution		-			-			2			-			1			-
Benefits paid		(37	)		(37	)		(27	)		(3	)		(1	)		-
Settlements ⁽⁴⁾		-			-			-			(30	)		-			-
Currency translation ⁽⁵⁾		-			-			(24	)		-			-			-
Projected benefit obligation at end of year	$	481		$	511		$	902		$	-		$	20		$	-

Change in plan assets:
Fair value of plan assets at beginning of year	$	497		$	485		$	1		$	32		$	-		$	-
Acquisition ⁽¹⁾		12			-			763			-			-			-
Actual return (loss) on plan assets		(23	)		48			(23	)		2			-			-
Company contributions		1			1			5			-			1			-
Plan participants' contributions		-			-			2						-
Benefits paid		(37	)		(37	)		(25	)		(3	)		(1	)		-
Settlements ⁽⁴⁾		-			-			-			(30	)		-			-
Currency translation ⁽⁵⁾		-			-			(20	)		-			-			-
Fair value of plan assets at end of year		450			497			703			1			-			-
Net funded status	$	(31	)	$	(14	)	$	(199	)	$	1		$	(20	)	$	-

Amounts recognized in balance sheet consist of:
Prepaid benefit cost within Other non-current assets	$	-		$	1		$	4		$	1		$	-		$	-
Accrued benefit cost within accrued liabilities		(2	)		(1	)		(2	)		-			(2	)		-
Accrued benefit cost within Other non-current liabilities		(29	)		(14	)		(201	)		-			(18	)		-
Net funded status recognized	$	(31	)	$	(14	)	$	(199	)	$	1		$	(20	)	$	-

Unrecognized net prior service cost (credits)	$	-		$	-		$	4		$	-		$	(11	)	$	-
Accumulated other comprehensive loss (income), before taxes ⁽⁶⁾	$	-		$	-		$	4		$	-		$	(11	)	$	-

⁽¹⁾	^{Acquisition amounts include the benefit obligation and plan assets at the Combination Date associated with acquired CB&I pension plans.}

⁽²⁾	^{Actuarial gain for 2018 was primarily associated with an increase in discount rate assumptions for a qualified plan in the United States.}

⁽³⁾	^{Prior service cost for 2018 primarily related to plan changes for our plans in the U.K. and our U.S. retiree welfare plan. Prior service cost for plan changes is deferred to accumulated other comprehensive income and amortized into Other non-operating expense (income).}

⁽⁴⁾

^{In August 2017, one of our non-U.S. defined benefit plans was amended to issue lump-sum distributions of certain accrued benefits or allow transfer of such benefits into a defined contribution plan. As of December 31, 2017, all investments in the trust for the defined benefit plan were converted to cash and cash equivalents to facilitate settlements, which were substantially complete. As of December 31, 2018, total benefits remaining under the defined plan were less than $1 million.}

⁽⁵⁾	The currency translation gain for 2018 was primarily associated with the strengthening of the U.S. Dollar against the currencies associated with our international pension plans, primarily the Euro and British Pound.

⁽⁶⁾	^{During 2019, we expect to recognize approximately $0.2 and $1 million of previously unrecognized net prior service costs and credits, respectively, related to our non-U.S. and other post retirement plans, respectively.}

Accumulated Benefit Obligations—As of December 31, 2018 and 2017, the accumulated benefit obligation for all defined benefit pension plans was $1.4 billion and $511 million, respectively. The following table includes summary information for those defined benefit plans with an accumulated benefit obligation in excess of plan assets:

	U. S. Pension Plans				Non-U. S. Pension Plans				Other Postretirement Plans
	2018		2017		2018		2017		2018		2017
	(In millions)
Projected benefit obligation	$	481	$	511	$	796	$	-	$	20	$	-
Accumulated benefit obligation	$	481	$	511	$	777	$	-	$	20	$	-
Fair value of plan assets	$	450	$	497	$	594	$	1	$	-	$	-

Plan Assumptions —The following table presents the weighted-average assumptions used to measure our defined benefit pension and other postretirement plans:

	U. S. Pension Plans						Non-U. S. Pension Plans						Other Postretirement Plans
	2018			2017			2018			2017			2018			2017
Weighted average assumptions used to determine net periodic benefit obligations at December 31,
Discount rate		4.1	%		3.6	%		2.1	%		3.95	%		4.1	%	N/A
Rate of compensation increase ⁽¹⁾	N/A			N/A				1.6	%	N/A			N/A			N/A
Weighted average assumptions used to determine net periodic benefit cost:
Discount rate		3.6	%		4.1	%		2.1	%		4.1	%		4.1	%	N/A
Expected return on plan assets ⁽²⁾		4.0	%		4.2	%		3.5	%		4.7	%	N/A			N/A
Rate of compensation increase ⁽¹⁾	N/A			N/A				1.6	%	N/A			N/A			N/A

⁽¹⁾	^{The rate of compensation increase relates solely to the defined benefit plans that factor compensation increases into the valuation.}

⁽²⁾	^{The expected long-term rate of return on plan assets was derived using historical returns by asset category and expectations of future performance.}

The following table illustrates the sensitivity to changes in certain assumptions, holding all other assumptions constant, for our pension plans.

	Effect on
	Pretax Pension		Pension Benefit
	Expense in		Obligation at
	2018 ⁽¹⁾		December 31, 2018
	(in millions)
25-basis-point change in discount rate	$	48	$	46

⁽¹⁾	^{A 25-basis-point change in the expected rate of return on plan assets would not have a material impact on pretax pension expense in 2018.}

Investment Strategy—Our investment strategy for defined benefit plan assets seeks to optimize the proper risk-return relationship considered appropriate for each respective plan’s investment goals, using a global portfolio of various asset classes diversified by market segment, economic sector and issuer. The primary goal is to optimize the asset mix to fund future benefit obligations, while managing various risk factors and each plan’s investment return objectives.

Our defined benefit plan assets in the U.S. are invested in well-diversified portfolios of equity (including U.S. large, mid and small-capitalization and international equities) and fixed income securities (including corporate and government bonds). Non-U.S. defined benefit plan assets are similarly invested in well-diversified portfolios of equity, fixed income and other securities. As of December 31, 2018, our target weighted-average asset allocations by asset category were: equity securities (20%-25%), fixed income securities (70%-75%) and other investments (5%-10%).

Our pension assets are categorized within the valuation hierarchy based on the lowest level of input that is significant to the fair value measurement. Assets that are valued using quoted prices are classified within level 1 of the valuation hierarchy, assets that are valued using internally developed models that use, as their basis, readily observable market parameters, are classified within level 2 of the valuation hierarchy, and assets that are valued based on models with significant unobservable market parameters are classified within level 3 of the valuation hierarchy.

The following tables present the fair values of our plan assets by investment category and valuation hierarchy level as of December 31, 2018 and 2017:

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Asset category	(In millions)
Fixed income securities:
U.S. fixed income securities	$	148	$	223	$	6	$	377
International government bonds ⁽¹⁾		-		245		-		245
International corporate bonds ⁽²⁾		-		94		-		94
International mortgage funds ⁽³⁾		-		69		-		69
All other fixed income securities ⁽⁴⁾		-		41		-		41
Equity securities:
U.S. equities		57		-		-		57
International funds ⁽⁵⁾		-		157		-		157
Emerging markets growth funds		-		13		-		13
U.S. equity funds		-		12		-		12
Other investments:
Asset allocation funds ⁽⁶⁾		-		74		-		74
Cash and Accrued Items		14		-		-		14
Total Investments	$	219	$	928	$	6	$	1,153

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Asset category	(In millions)
Fixed income securities:
U.S. fixed income securities	$	160	$	246	$	5	$	411
Equity securities:
U.S. equities		73		-		-		73
Cash and Accrued Items		14		-		-		14
Total Investments	$	247	$	246	$	5	$	498

The following provides descriptions for plan asset categories with significant balances in the tables above:

⁽¹⁾	^{Investments in predominately E.U. government securities and U.K. Treasury securities, with credit ratings primarily AAA.}

⁽²⁾	^{Investments in European and U.K. fixed interest securities, with credit ratings of primarily BBB and above.}

⁽³⁾	^{Investments in international mortgage funds.}

⁽⁴⁾	^{Investments predominantly in various international fixed income obligations that are individually insignificant.}

⁽⁵⁾	^{Investments in various funds that track international indices.}

⁽⁶⁾	^{Investments in fixed income securities, equities and alternative asset classes, including commodities and property assets.}

Benefit Payments —The following table includes the expected defined benefit and other postretirement plan payments for the next 10 years:

	U. S. Pension Plans		Non-U. S. Pension Plans		Other Postretirement Plans
	(In millions)
Expected employer contributions to trusts of defined benefit plans:
2019	$	2	$	14	$	2
Expected benefit payments:
2019	$	37	$	35	$	2
2020		37		35		2
2021		37		35		2
2022		36		36		2
2023		35		36		1
2024-2028		165		189		6

Health Care Cost Inflation—As noted above, we provide specific postretirement health care benefits for eligible retired U.S. employees and their dependents. Eligible current retirees can elect coverage on a retiree-pay-all basis; there is no longer a company subsidy for the cost of coverage. Future retirees and new employees are not eligible for these post-retirement health care benefits. Additionally, there is a closed group of retirees for which we assume some or all of the cost of coverage. For this group, health care cost trend rates are projected at annual rates ranging from 6.5% in 2019 down to 5.0% in 2025 and after. A change in the assumed health care cost trends by one percentage point is estimated to have an immaterial impact on the total service and interest cost components of net postretirement health care cost for 2018 and the accumulated postretirement benefit obligation as of December 31, 2018.

Multi-Employer Pension Plans

We contribute to certain union sponsored multi-employer defined benefit pension plans in the United States and Canada. Benefits under these plans are generally based upon years of service and compensation levels. Under U.S. legislation regarding such pension plans, the risks of participation are different than single-employer pension plans as (1) assets contributed to the plan by a company may be used to provide benefits to participants of other companies, (2) if a participating company discontinues contributions to a plan, other participating companies may have to cover any unfunded liability that may exist, and (3) a company is required to continue funding its proportionate share of a plan’s unfunded vested benefits in the event of withdrawal (as defined by the legislation) from a plan or plan termination. The following table provides additional information regarding our significant multi-employer defined benefit pension plans, including the funding level of each plan (or zone status, as defined by the Pension Protection Act), whether actions to improve the funding level of the plan have been implemented, where required (a funding improvement plan (“FIP”) or rehabilitation plan (“RP”)), and our contributions to each plan and total contributions for 2018, among other disclosures:

			Pension Protection Act (% Funded) ⁽¹⁾			Total Company Contributions ⁽²⁾						Expiration Date of Collective-Bargaining Agreement ⁽³⁾
Pension Fund	EIN/Plan Number	Plan Year End	2018	2017	FIP/RP Plan	2018		2017		2016
Boilermaker-Blacksmith National Pension Trust	48-6168020-001	12/31	65%-80%	N/A	Yes	$	6	$	-	$	-	Various
Boilermakers' National Pension Plan (Canada)	366708	12/31	N/A	N/A	N/A		1		-		-	04/19
All Other ⁽⁴⁾							3		-		-
Total						$	10	$	-	$	-

(1)

Pension Protection Act Zone Status and FIP/RP plans are applicable to our U.S.-registered plans only, as these terms are not defined within Canadian pension legislation. In the United States, plans funded less than 65% are in the red zone, plans funded at least 65%, but less than 80%, are in the yellow zone, and plans funded at least 80% are in the green zone. The requirement for FIP or RP plans in the United States is based on the funding level or zone status of the applicable plan.

(2)

Our 2018 contributions as a percentage of total plan contributions were not available for any of our plans. The level of our contributions to each plan noted above varies from period to period based upon the level of work being performed that is covered under the applicable collective bargaining agreement.

(3)	The expiration dates of our labor agreements associated with the plans noted as “Various” above vary based upon the duration of the applicable projects.

(4)	Our remaining contributions in 2018 to various U.S. and Canadian plans were individually immaterial.

We also contribute to our multi-employer plans for annuity benefits covered under the defined contribution portion of the plans as well as health benefits. In 2018, we made contributions to our multi-employer plans of $11 million for these additional benefits.