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BUSINESS COMBINATION

12 Months Ended

Dec. 31, 2019

NOTE 3—BUSINESS COMBINATION

General―On December 18, 2017, we entered into an agreement to combine our business with CB&I, an established downstream provider of industry-leading petrochemical, refining, power, gasification and gas processing technologies and solutions. On May 10, 2018 (the “Combination Date”) we completed the Combination.

Transaction Overview―On the Combination Date, we acquired the equity of certain U.S. and non-U.S. CB&I subsidiaries that owned CB&I’s technology business, as well as certain intellectual property rights, for $2.87 billion in cash consideration that was funded using debt financing, as discussed further in Note 13, Debt, and existing cash. Also, on the Combination Date, CB&I shareholders received 0.82407 shares of McDermott common stock for each share of CB&I common stock tendered in the exchange offer. Each remaining share of CB&I common stock held by CB&I shareholders not acquired by McDermott in the exchange offer was effectively converted into the right to receive the same 0.82407 shares of McDermott common stock that was paid in the exchange offer, together with cash in lieu of any fractional shares of McDermott common stock, less any applicable withholding taxes. Stock-settled equity-based awards relating to shares of CB&I’s common stock were either canceled and converted into the right to receive cash or were converted into comparable McDermott awards on generally the same terms and conditions as prior to the Combination Date. We issued 84.5 million shares of McDermott common stock to the former CB&I shareholders and converted CB&I stock-settled equity awards into McDermott stock-settled equity-based awards to be settled in approximately 2.2 million shares of McDermott common stock.

Transaction Accounting―The Combination was accounted for using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. McDermott is considered the acquirer for accounting purposes based on the following facts at the Combination Date: (1) McDermott’s stockholders owned approximately 53 percent of the combined business on a fully diluted basis; (2) a group of McDermott’s directors, including the Chairman of the Board, constituted a majority of the Board of Directors; and (3) McDermott’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer continued in those roles immediately after the completion of the Combination. The series of transactions resulting in McDermott’s acquisition of CB&I’s entire business is being accounted for as a single accounting transaction, as such transactions were entered into at the same time in contemplation of one another and were collectively designed to achieve an overall commercial effect.

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

Purchase Price Allocation— The aggregate purchase price noted above was allocated to the major categories of assets and liabilities acquired based upon their estimated fair values at the Combination Date, which were based, in part, upon external appraisal and valuation of certain assets, including specifically identified intangible assets and property and equipment. The excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired, totaling approximately $5 billion, was recorded as goodwill. Our final purchase price allocation was completed in the second quarter of 2019.

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

	May 10, 2018
Net tangible assets:
Cash	$	498
Accounts receivable		791
Inventory		111
Contracts in progress		272
Assets held for sale ⁽¹⁾		70
Other current assets		272
Investments in unconsolidated affiliates⁽²⁾		426
Property, plant and equipment		396
Other non-current assets		127
Accounts payable		(499	)
Advance billings on contracts ⁽³⁾		(2,410	)
Deferred tax liabilities		(16	)
Other current liabilities		(1,237	)
Other non-current liabilities		(453	)
Noncontrolling interest		14
Total net tangible liabilities		(1,638	)
Project-related intangible assets/liabilities, net ⁽⁴⁾		150
Other intangible assets ⁽⁵⁾		1,063
Net identifiable liabilities		(425	)
Goodwill ⁽⁶⁾		4,990
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 included 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 $215 million associated with the Combination. Approximately $146 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 affiliates-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 $374 million, primarily associated with the Cameron LNG and Freeport LNG Trains 1 and 2 projects, the now-substantially completed gas power project for a unit of Calpine Corporation (“Calpine”) and the now-completed gas power project for Indianapolis Power & Light Company.}

⁽⁴⁾

^{Project-related intangible assets/liabilities, net includes intangible asset and liabilities of $259 million and $109 million, respectively. The balances represent the fair value of acquired remaining performance obligations (“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-related 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 final valuations prepared by external 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 Useful Life
	(In millions)
Process technologies	$	511	10-30		27
Trade names		400	10-20		12
Customer relationships		126	4-11		10
Trademarks		26	10		10
Total	$	1,063

⁽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 $5 billion of goodwill recorded in conjunction with the Combination, $2.7 billion, $461 million, $50 million, $52 million and $1.7 billion was allocated to our NCSA, EARC, MENA, APAC and Technology reporting segments, respectively. Approximately $1.7 billion of the opening goodwill balance is deductible for tax purposes. See Note 9, Goodwill and Other Intangible Assets, for our discussion of impairment charges recorded during 2019 and our changes in estimates.}

Impact on RPOs—CB&I RPOs totaled approximately $8.3 billion at the Combination Date, after considering conforming accounting policies and project adjustments for acquired in-process projects.

Supplemental Pro Forma Information (Unaudited)—The following unaudited pro forma financial information reflects the Combination and the related events as if they occurred on January 1, 2017 and gives effect to pro forma events that are directly attributable to the Combination, factually supportable, and expected to have a continuing impact on our combined results, following the Combination. The pro forma financial information includes adjustments to: (1) include additional intangibles amortization, investment in unconsolidated affiliates-related amortization, depreciation of property, plant and equipment and net interest expense associated with the Combination; (2) exclude restructuring, integration and transaction costs and debt extinguishment costs that were included in McDermott and CB&I’s historical results and are expected to be non-recurring; and (3) reflect adjustments to 2017 cost of operations for CB&I’s pension actuarial gains and losses to conform to McDermott’s mark-to-market pension accounting policy. This pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the dates indicated. Further, the pro forma financial information does not purport to project the future operating results of the combined business operations following the Combination.

	Year ended December 31,
	2018 ⁽¹⁾			2017 ⁽¹⁾
	(In millions, except per share amounts)
Pro forma revenue	$	9,208		$	9,658
Net (loss) income attributable to common stockholders		(2,523	)		(1,189	)
Pro forma net loss per share attributable to common stockholders
Basic	$	(13.94	)	$	(6.57	)
Diluted	$	(13.94	)	$	(6.57	)

Basic ⁽²⁾		181			181
Diluted		181			181

⁽¹⁾	^{Adjustments, net of tax, included in the pro forma net income above that were of a non-recurring nature include:}

2018—elimination of (1) restructuring and integration costs ($112 million); (2) transaction costs ($37 million); and (3) debt extinguishment costs ($11 million); and

2017—elimination of restructuring costs ($81 million).

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 (loss) income per share was calculated using weighted average basic and diluted shares outstanding during 2018. The effects of restricted stock, warrants and redeemable preferred stock were not included in the calculation of diluted earnings per share for 2018 and 2017, due to the net losses in those periods.}