UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
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Exchange Act of 1934 (Amendment No. )
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McDermott International, Inc.
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EXPLANATORY NOTE
Beginning on March 21, 2016, the following materials are being provided to certain stockholders of McDermott International, Inc. (the “Company”) in connection with the solicitation of proxies for the Company’s 2016 Annual Meeting of Stockholders to be held on April 29, 2016.
 ©
Copyright 2016 McDermott International, Inc. All Rights Reserved
Investor Presentation:
2016 Annual Meeting of Stockholders |
 1 About McDermott Leading provider of integrated engineering, procurement, construction and installation services for oil and gas field
developments worldwide
At any given time, 40 or fewer active contracts typically spanning a duration
of one to three years, performed in a variety of
jurisdictions
and each ranging from less than $50 million to more than $2 billion in total
contract value Engaged and Highly Qualified Board
Board consists of highly qualified, independent directors with a breadth and
variety of experience Committed to thoughtful Board refreshment
process, demonstrated by the recent appointment of a new, independent director with Middle East expertise Stockholder input is a priority for the Board as evidenced by fall 2015 outreach to approximately 40% of our outstanding
common stock, leading to meetings with stockholders representing approximately
30% of our outstanding common stock led by the Chair of our
Compensation Committee and the Chair of our Governance Committee
Strong Compensation Practices
Significant emphasis on variable, “at risk” compensation that aligns
pay with performance Rigorous
financial performance metrics directly linked to Company strategy with
disclosed performance goals Compensation program reflects
adherence to strong compensation governance practices Improved
Financial and Operating Performance TSR for FY 2015 was 15%, as
compared to our proxy peer group’s TSR of -33% FY 2015
operating income of $91.2 million, which exceeded FY 2014 of $8.6 million and FY 2013 of ($456.7) million Order intake of $3.7 billion in FY 2015 exceeded the amount of order intake for FY 2014 and FY 2013 combined and assisted in achieving year-end backlog of $4.2 billion, a $600 million increase from 2014
Executive Summary |
 2 McDermott Today A vertically integrated offshore and subsea engineering and construction company executing projects from concept to installation Strategically located fabrication yards and a versatile marine fleet Strong long-term relationships with leading energy customers globally
Market Cap: ~$1.0B 2015 Revenue: $3B Headquarters: Houston, TX Global Operations:
~20 Locations Employees: ~10,600 Engineering Help bring offshore exploration into production Procurement Ensure quality materials, right price, optimal schedule Construction Fabricate complex structures for delivery worldwide Installation Execute installation campaigns for success 1 As of March 17, 2016 1 |
 3 Operational Turnaround Through the turnaround McDermott has remained highly focused on developing and
implementing its operating strategy
2015 2013 2014 2015 2016 Mar 2014: All financial guidance was withdrawn and guidance for the foreseeable future was suspended Apr 2014: Refinanced existing credit agreement, issued senior notes and tangible equity units representing $1.3B January 2015: Launched McDermott Profitability Initiative to increase organizational efficiency, centralize various front- and back office functions, and recognize operational cost initiatives Mar 2015: Reinitiated financial guidance following withdrawal in March 2014 Dec 2015: McDermott Profitability Initiative completed with over $100M in savings Oct – Dec 2013: David Dickson joined McDermott in October 2013 and was appointed President and CEO and member of the Board in December Jan – Aug 2014: Executive changes: • EVP & CFO • EVP Offshore • EVP Subsea • SVP HR • Regional Vice Presidents May 2014: Gary Luquette assumed role of independent Chairman of the Board Apr – Nov 2015: Board engaged in a stockholder outreach program to discuss stockholder perspectives on governance and compensation Dec 2015 – Feb 2016: Board considered and implemented stockholder feedback regarding executive compensation program and proxy disclosure |
 4 2015 Significantly Improved Financial Performance Despite the deteriorating oil and gas environment, McDermott improved financial performance
and outperformed peers in 2015
($ in millions, except as noted)
FY 2015 FY 2014 Y/Y Change Orders $3,701 $1,100 + $2,601 Backlog $4,231 $3,601 + $630 Revenue $3,070 $2,301 + $769 Profitability Metrics Gross Profit $379 $188 + $191 Gross Profit Margin 12.3% 8.2% + 4.1% Operating Income $91 $9 + $82 OI Margin Percentage 3.0% 0.4% + 2.6% Diluted EPS ($0.08) ($0.32) + $0.24 15% -33% -31% MDR Peer Group Brent Crude MDR 2015 TSR vs. Peers TSR and Oil Price |
 Erich Kaeser Retired CEO Siemens Middle East Focused and Engaged Board of Directors Thoughtful Succession Planning Process and Impact on Board Refreshment Middle East Markets Energy/Infrastructure Services Industry Executive Leadership Financial Oversight Knowledge of Core Customers International Operations Relevant Skills and Experience 3 4 2 3 years or less 4 to 7 years 8 years or more Tenure Balance Board Self-evaluations Director Recruitment Director Onboarding Conduct annual self-evaluations to determine whether the Board and its Committees are functioning effectively Use skills matrix to assess the Board’s effectiveness and engage a search firm to recruit top director talent Onboarding program for new directors allows each individual to make meaningful contributions quickly New Independent Director Appointed in February 2016 Board Independence Independent Directors Non-independent Directors 5 9 9 9 7 7 5 Executive Leadership Energy/Oilfield Services International Operations Financial Oversight Responsibilities Public Company Board Corporate Governance Experience with Core Customers 8 |
 6 Compensation Program Changes Informed by Stockholder Engagement with Directors Outreach in 2015 Reached out to stockholders representing ~40% of outstanding common stock and proxy advisory firms to understand their perspectives on a variety of topics including governance and compensation Director Participation Conducted in-person meetings with stockholders representing ~30% of outstanding common stock Meetings were led by Compensation Committee Chair or Governance Committee Chair Stockholder Feedback Feedback from these meetings was collected and ultimately shared with the full Board The Board factored this feedback into its decision making process as detailed below Board Response The Board is committed to understanding and addressing stockholder feedback and looks forward to continuing the dialogue What we heard from stockholders Actions the Board has taken in response Enhance transparency in proxy disclosures Provided clarity and transparency in the proxy on compensation matters, including disclosure on how compensation is linked to strategy and specific targets of the programs Keep executive compensation plans consistent Compensation Committee approved continuing use of 2014 and 2015 metrics in 2016 annual incentive plan Consider a relative metric for LTIP awards Compensation Committee approved the use of Return on Average Invested Capital relative to a competitor peer group as the performance metric for the 2016 Performance Unit awards Require double-trigger vesting of equity awards upon a change in control 2016 LTIP provides for double-trigger vesting upon a change in control, except where the awards are not assumed in the transaction Consider composition of peer group Added a competitive peer group of both domestic and international peers for determining performance under the 2016 Performance Unit awards Maintain strong corporate governance foundation and commitment to Board refreshment Demonstrated commitment to Board refreshment by appointing a new independent director with experience in the Middle East Continue stockholder engagement Board has prioritized engagement and will continue its vigorous outreach program |
 7 13% Annual Base Fixed cash compensation recognizing an executive officer’s experience, skill and performance 13% Annual Incentives Variable compensation designed to reward achievement of short-term business goals and strategic objectives, while recognizing individual contributions 74% Long-Term
Incentives Variable compensation
designed to align interests of
executives with those of our
stockholders with a focus on
long-term performance results
Elements of 2015 Direct Compensation
McDermott’s 2015 compensation programs utilized metrics that were directly
related to the Company’s 2015 strategies and
goals Annual Incentive Components
Long-Term Incentive Components
25% Operating Income: Promotes improved project execution 25% Free Cash Flow:
Prioritizes liquidity needs 30% Order Intake: Incentivizes increasing backlog and booking new work 20% Order Intake Operating Margin: Promotes pricing discipline on order intake McDermott Profitability Initiative (“MPI”) Modifier: Incentivizes achievement of goals relating to MPI 50% Performance
Units:
3-Year Aggregate Consolidated Order Intake incentivizes increasing backlog and booking new work, increased to 50% in 2015 from 40% in 2014 50% Restricted Stock Units: The weighting of RSUs decreased to 50% in 2015 from 60% in 2014 87% At Risk CEO Target 2015 Compensation |
 8 Strong Tie Between Strategy and Performance Metrics Drive profitability via improved project execution Our operating strategy – to drive a sustainable, profitable and growth-oriented business, with a focus on stockholders, customers and other stakeholders – has contributed to the achievement of 2015 goals Prioritize liquidity needs Support future business Promote pricing discipline on new work Implement McDermott Profitability Initiative (“MPI”), to increase profitability and operational flexibility 2015 Goal Performance Metric Performance Thresholds Actual Result Operating Income Free Cash Flow Order Intake Order Intake Operating Margin 2015 Operating Income Savings Attributable to MPI Threshold: Target: Maximum: $40M $53M $67M $91.2M $(47.6)M* $3,700.7M 7.3% $115M *Actual result for free cash flow was ($47.6M), which would have resulted in a funding multiple of 2.0x for this metric under the EICP.
However, such result was reduced by the Compensation Committee in
determining the funding multiple for this metric to ($250.4M), or a funding multiple of 1.071x, in consideration of the slippage in the delivery schedule of our vessel under construction, the DLV 2000, resulting in delay of our final shipyard payment until 2016.
Threshold: Target: Maximum: $(320)M $(255)M $(190)M Threshold: Target: Maximum: $3,000M $5,900M $6,500M Threshold: Target: Maximum: 7% 10% 12% Threshold: = Target: Maximum: $30M = 0.67x $40M = 1.0x $50M = 1.33x |
 9 Significantly Improved Financial Performance Driven by Compensation Plan Design Backlog Free Cash Flow Order Intake Operating Income Operating income implemented as PSU metric in 2014 after 2013 operating loss of ($456.7M)
Operating income increased to $8.6M in 2014 and $91.2M in 2015
Free cash flow used as metric in annual incentive plan in 2014 and 2015 after
2013 free cash flow of ($540.6M) Free cash flow increased to
($314.2M) in 2014 and ($47.6M) in 2015 Order intake implemented as
PSU metric in 2015 after order intake of $1.1B in 2014, a decrease of more than 50% from 2013 Order intake increased to $3.7B in 2015 and backlog increased to $4.2B Order intake margin implemented as metric in annual incentive plan in 2014 and 2015
Promotes margin bidding discipline in a difficult macro oil and gas
environment Note: figures as of December 31
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 10 Evolution of Compensation Program Compensation program has evolved to drive company turnaround and growth goals
Annual Incentive Plan Long-Term Incentive Plan Changes Made in 2014 Changes Made in 2016 Changes Made in 2015 Other Utilized four financial metrics (rather than a single metric as in 2013) Introduced a corporate performance goal Introduced metric based on individual performance Included same four financial plan components as 2014 Eliminated non-financial corporate and individual goals introduced in 2014 Introduced McDermott Profit- ability Initiative (MPI) modifier Included same four financial plan components as 2014 and 2015 but eliminated MPI modifier used only in 2015 Included effects of Accelerated Overhead Reduction Program in targets Enhanced disclosure to better communicate target and actual performance of non- competitively sensitive metrics Introduced cumulative order intake metric Returned the performance unit weighting to 50% Approved use of relative ROAIC as performance metric Added competitive peer group for determining performance Provided the same number of units as in 2015 absent any change in target value of LTI Award Reduced target value of CEO award from $5 million to $4 million Enhanced disclosure to better communicate target and actual performance Eliminated options: RSU and Performance Shares only Introduced aggregate consolidated operating income metric (rather than ROIC as in 2013) Reduced Performance Shares weighting from 50% to 40% No material changes made to other compensation elements in 2014 No material changes made to other compensation elements in 2015 Removed single trigger provisions on a go- forward basis |
 11 Strong Corporate Governance and Compensation Practices Remain a Priority The Board is actively engaged in shareholder outreach efforts Independent Board Chairman Commitment to director refreshment Use independent director search firm in selecting director candidates Majority voting for director elections Annual Board and Committee evaluation process Succession planning oversight Board risk oversight Board and Governance Long-term incentive compensation is subject to forfeiture Annual incentive compensation is subject to linear and capped payouts Use of multiple performance metrics Significant stock ownership guidelines for directors and executive officers Double-trigger change-in-control agreements Annual review of share utilization Independent compensation consultant Annual review of peer group Clawback policy No repricing of underwater stock options No excise tax gross-ups No derivatives trading, hedging or pledging of Company stock No employment contracts Compensation Practices Our Board believes in sound corporate governance and places significant weight on stockholder
feedback in making decisions on governance processes and compensation
programs |
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