Edgar Filing: MCDERMOTT INTERNATIONAL INC

mdr-10q_20160630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-08430

McDERMOTT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

REPUBLIC OF PANAMA		72-0593134
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

757 N. ELDRIDGE PKWY HOUSTON, TEXAS		77079
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (281) 870-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	þ	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

The number of shares of the registrant’s common stock outstanding at July 22, 2016 was 240,571,660.

McDERMOTT INTERNATIONAL, INC.

INDEX—FORM 10-Q


	PAGE
PART I—FINANCIAL INFORMATION	1
Item 1—Consolidated Financial Statements	1
Consolidated Statements of Operations	1
Consolidated Statements of Comprehensive Income	2
Consolidated Balance Sheets	3
Consolidated Statements of Cash Flows	4
Consolidated Statements of Stockholders’ Equity	5
Notes to the Consolidated Financial Statements	6
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3—Quantitative and Qualitative Disclosures about Market Risk	39
Item 4—Controls and Procedures	41
PART II—OTHER INFORMATION	42
Item 1—Legal Proceedings	42
Item 1A—Risk Factors	42
Item 6—Exhibits	49
SIGNATURES	51

PART I—FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(In thousands, except share and per share amounts)
Revenues	$	706,627		$	1,046,537		$	1,435,659		$	1,597,000

Costs and Expenses:
Cost of operations		595,442			925,522			1,211,475			1,400,981
Selling, general and administrative expenses		52,075			47,793			90,403			99,469
Impairment loss		-			6,808			32,311			6,808
Loss (gain) on asset disposals		(362	)		1,910			(362	)		1,543
Restructuring expenses		2,484			15,391			8,851			25,780
Total costs and expenses		649,639			997,424			1,342,678			1,534,581

Operating income		56,988			49,113			92,981			62,419

Other income (expense):
Interest expense, net		(12,655	)		(12,985	)		(23,893	)		(25,164	)
Gain (loss) on foreign currency, net		(1,974	)		1,943			(5,157	)		475
Other expense, net		(877	)		(359	)		(1,085	)		(456	)
Total other expense		(15,506	)		(11,401	)		(30,135	)		(25,145	)

Income before provision for income taxes		41,482			37,712			62,846			37,274

Provision for income taxes		19,804			16,541			39,134			21,410

Income before income (loss) from investments in unconsolidated affiliates		21,678			21,171			23,712			15,864

Income (loss) from investments in unconsolidated affiliates		127			(7,481	)		(4,351	)		(14,222	)

Net income		21,805			13,690			19,361			1,642

Less: Net income attributable to noncontrolling interest		1,148			2,164			876			4,623

Net income (loss) attributable to McDermott International, Inc.	$	20,657		$	11,526		$	18,485		$	(2,981	)

Income (loss) per share
Net income (loss) attributable to McDermott International, Inc.
Basic:		0.09			0.05			0.08			(0.01	)
Diluted:		0.07			0.04			0.07			(0.01	)

Shares used in the computation of income (loss) per share:
Basic:		240,338,540			238,332,012			239,739,204			237,918,366
Diluted:		284,909,414			289,689,981			283,132,238			237,918,366

See accompanying Notes to the Consolidated Financial Statements.

McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in thousands)
Net income	$	21,805		$	13,690		$	19,361		$	1,642
Other comprehensive income, net of tax:
Unrealized gain on investments		12			4			17			16
Gain on derivatives		4,621			27,559			35,412			10,674
Foreign currency translation		(4,027	)		(4,944	)		(7,370	)		(6,986	)
Other comprehensive income, net of tax		606			22,619			28,059			3,704
Total comprehensive income	$	22,411		$	36,309		$	47,420		$	5,346
Less: Comprehensive income attributable to non-controlling interests		1,140			2,117			855			4,543
Comprehensive income attributable to McDermott International, Inc.	$	21,271		$	34,192		$	46,565		$	803

See accompanying Notes to the Consolidated Financial Statements.

McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

	June 30, 2016			December 31, 2015
	(In thousands, except share and per share amounts)
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	470,023		$	664,844
Restricted cash and cash equivalents		112,792			116,801
Accounts receivable—trade, net		273,625			208,474
Accounts receivable—other		54,998			66,689
Contracts in progress		304,790			435,829
Other current assets		44,549			34,641
Total current assets		1,260,777			1,527,278
Property, plant and equipment		2,559,108			2,467,352
Less accumulated depreciation		(853,463	)		(856,493	)
Net property, plant and equipment		1,705,645			1,610,859
Accounts receivable—long-term retainages		128,190			155,061
Investments in unconsolidated affiliates		27,866			26,551
Deferred income taxes		13,154			18,822
Other assets		38,296			48,505
Total assets	$	3,173,928		$	3,387,076

Liabilities and Equity
Current liabilities:
Notes payable and current maturities of long-term debt	$	52,802		$	24,882
Accounts payable		215,987			279,821
Accrued liabilities		269,277			330,943
Advance billings on contracts		101,421			164,773
Income taxes payable		21,833			23,787
Total current liabilities		661,320			824,206
Long-term debt		704,108			819,001
Self-insurance		19,975			18,653
Pension liability		23,940			24,066
Non-current income taxes		58,379			52,559
Other liabilities		109,746			101,870
Commitments and contingencies
Stockholders' Equity:
Common stock, par value $1.00 per share, authorized 400,000,000 shares;
issued 248,646,454 and 246,841,128 shares, respectively		248,646			246,841
Capital in excess of par value (including prepaid common stock purchase contracts)		1,689,103			1,687,059
Accumulated deficit		(242,399	)		(260,884	)
Accumulated other comprehensive loss		(65,875	)		(93,955	)
Treasury stock, at cost: 8,074,794 and 7,824,204 shares, respectively		(93,792	)		(92,262	)
Stockholders' Equity—McDermott International, Inc.		1,535,683			1,486,799
Noncontrolling interest		60,777			59,922
Total Equity		1,596,460			1,546,721
Total Liabilities and Equity	$	3,173,928		$	3,387,076

See accompanying Notes to the Consolidated Financial Statements.

McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	Six Months Ended June 30,
	2016			2015
	(In thousands)
Cash flows from operating activities:
Net income	$	19,361		$	1,642
Non-cash items included in net income:
Depreciation and amortization		41,997			51,371
Drydock amortization		6,932			9,658
Impairment loss		32,311			6,808
Stock-based compensation charges		9,242			9,891
Loss from investments in unconsolidated affiliates		4,351			14,222
Loss (gain) on asset disposals		(362	)		1,543
Restructuring (gain) expense		(1,500	)		9,153
Deferred income taxes		5,667			(1,215	)
Other non-cash items		1,143			(495	)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(30,835	)		(147,293	)
Contracts in progress, net of advance billings on contracts		67,698			(129,932	)
Accounts payable		(65,212	)		120,586
Accrued and other current liabilities		(45,523	)		48,380
Pension liability		(751	)		(942	)
Other assets and liabilities		31,271			(19,443	)
Total cash provided by (used in) operating activities		75,790			(26,066	)

Cash flows from investing activities:
Purchases of property, plant and equipment		(170,674	)		(47,985	)
(Increase) decrease in restricted cash and cash equivalents		4,009			(6,842	)
Investments in unconsolidated affiliates		(4,105	)		(4,783	)
Proceeds from asset dispositions		388			10,510
Sales and maturities of available-for-sale securities		-			2,875
Other investing activities		-			(232	)
Total cash used in investing activities		(170,382	)		(46,457	)

Cash flows from financing activities:
Repayment of debt		(88,845	)		(13,402	)
Repurchase of common stock		(2,572	)		(1,448	)
Payment of debt issuance costs		(8,211	)		-
Other		-			(13	)
Total cash used in financing activities		(99,628	)		(14,863	)

Effects of exchange rate changes on cash and cash equivalents		(601	)		(1,348	)
Net decrease in cash and cash equivalents		(194,821	)		(88,734	)
Cash and cash equivalents at beginning of period		664,844			665,309
Cash and cash equivalents at end of period	$	470,023		$	576,575

See accompanying Notes to the Consolidated Financial Statements.

McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF EQUITY
					(Unaudited)
											Accumulated
		Common Stock Par Value			Capital in Excess of Par Value			Accumulated Deficit			Other Comprehensive Loss			Treasury Stock			Stockholders' Equity			Noncontrolling Interest ("NCI")			Total Equity
	(in thousands)
Balance at January 1, 2016		$	246,841		$	1,687,059		$	(260,884	)	$	(93,955	)	$	(92,262	)	$	1,486,799		$	59,922		$	1,546,721
Net income			-			-			18,485			-			-			18,485			876			19,361
Other comprehensive income (loss), net of tax			-			-			-			28,080			-			28,080			(21	)		28,059
Common stock issued			2,206			(2,206	)		-			-			-			-			-			-
Stock-based compensation charges			-			4,891			-			-			-			4,891			-			4,891
Purchase of treasury shares			-			-			-			-			(2,572	)		(2,572	)		-			(2,572	)
Retirement of common stock			(401	)		(641	)		-			-			1,042			-			-			-
Balance at June 30, 2016		$	248,646		$	1,689,103		$	(242,399	)	$	(65,875	)	$	(93,792	)	$	1,535,683		$	60,777		$	1,596,460

See accompanying Notes to the Consolidated Financial Statements.

McDERMOTT INTERNATIONAL, INC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) TABLE OF CONTENTS	PAGE
Note 1—Basis of Presentation and Significant Accounting Policies	7
Note 2—Revenue Recognition	9
Note 3—Use of Estimates	10
Note 4—Restructuring	11
Note 5—Accounts Receivable	14
Note 6—Contracts in Progress and Advance Billings on Contracts	14
Note 7—Debt	15
Note 8—Pension and Postretirement Benefits	17
Note 9—Derivative Financial Instruments	17
Note 10—Fair Value Measurements	19
Note 11—Stockholders’ Equity	20
Note 12—Earnings Per Share	22
Note 13—Commitments and Contingencies	22
Note 14—Segment Reporting	23

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

NOTE 1—BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

McDermott International, Inc. (“MDR”), a corporation incorporated under the laws of the Republic of Panama in 1959, is a leading provider of integrated engineering, procurement, construction and installation (“EPCI”) and module fabrication services for upstream field developments worldwide. We deliver fixed and floating production facilities, pipeline installations and subsea systems from concept to commissioning for complex offshore and subsea oil and gas projects. Operating in approximately 20 countries across Americas, Europe, Africa, the Middle East, Asia and Australia, our integrated resources include a diversified fleet of marine vessels, fabrication facilities and engineering offices. We support our activities with comprehensive project management and procurement services, while utilizing our fully integrated capabilities in both shallow water and deepwater construction. Our customers include national, major integrated and other oil and gas companies, and we operate in most major offshore oil and gas producing regions throughout the world. We execute our contracts through a variety of methods, principally fixed-price, but also including cost reimbursable, cost-plus, day-rate and unit-rate basis or some combination of those methods. In these Notes to our Consolidated Financial Statements, unless the context otherwise indicates, “we,” “us” and “our” mean MDR and its consolidated subsidiaries.

Basis of Presentation

The accompanying Consolidated Financial Statements are unaudited and have been prepared from our books and records in accordance with Rule 10-1 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. In the opinion of our management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of results of operations for a full year. These Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in MDR’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 22, 2016.

Classification

Certain prior year amounts have been reclassified for consistency with the current year presentation. Our Consolidated Financial Statements previously reported income and loss from investment in unconsolidated affiliates as components of operating income. In the first quarter of 2016, we concluded that classification of loss from investments in unconsolidated affiliates after provision for income tax better reflected how the operations of our unconsolidated affiliates relate to our business as a whole.

Recently Issued and Adopted Accounting Guidance

Stock Compensation—In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, earnings per share and classification in the statement of cash flows. We adopted this ASU in the second quarter of 2016. Our adoption did not have a material impact on the presentation of our Consolidated Financial Statements.

Income Tax—In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under this ASU an entity shall classify deferred tax assets and liabilities as noncurrent. We adopted ASU 2015-17 in the first quarter of 2016. Our adoption of that ASU did not have a material impact on the presentation of our Consolidated Financial Statements. All comparable periods presented have been revised to reflect this change.

Consolidation—In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This ASU eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment.

In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis, which amends and changes the consolidation analysis currently required under U.S. GAAP. This ASU modifies the process used to evaluate whether

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

limited partnerships and similar entities are variable interest entities or voting interest entities; affects the analysis performed by reporting entities regarding variable interest entities, particularly those with fee arrangements and related party relationships; and provides a scope exception for certain investment funds.

The amendments in ASUs 2015-16 and 2015-02 are effective for annual and interim periods beginning after December 15, 2015. Early adoption was permitted. We adopted these ASUs in the first quarter of 2016. Our adoption of these ASUs did not have a material impact on the accompanying Consolidated Financial Statements.

Accounting Guidance Issued But Not Adopted as of June 30, 2016

Financial Instruments—In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU will require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. A valuation account, allowance for credit losses, will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. This ASU is effective for interim and annual periods beginning after December 15, 2019. We are currently assessing the impact of this guidance on our future Consolidated Financial Statements and related disclosures.

Derivatives—In March 2016, the FASB issued ASU 2016-06, Derivatives and hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This ASU clarifies that a contingent put or call option embedded in a debt instrument would be evaluated for possible separate accounting as a derivative instrument without regard to the nature of the exercise contingency. This ASU is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. We are currently assessing the impact of this guidance on our future Consolidated Financial Statements and related disclosures.

In March 2016, the FASB issued ASU 2016-05, Derivatives and hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not require de-designation of that hedging relationship, provided that all other hedge accounting criteria continue to be met. This ASU is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. The application of this ASU is not expected to have a material impact on our Consolidated Financial Statements.

Leases—In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU will require entities that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet. This ASU is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this ASU on our future Consolidated Financial Statements and related disclosures.

Financial Assets and Liabilities—In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. Under this new guidance, entities will be required to measure all investments in equity securities that are not subject to equity method or consolidation accounting at fair value, with changes recognized in net income. Fair value changes related to instrument-specific credit risk in financial liabilities accounted for under the fair value option in Accounting Standards Codification 825 must be recorded in other comprehensive income instead of earnings. ASU 2016-01 also changes presentation and disclosure requirements for financial assets and liabilities. ASU 2016-01 is effective for interim and annual periods beginning after December 15, 2017, with early adoption not permitted except related to changes in fair value for financial liabilities. We are currently assessing the impact of these amendments on our future Consolidated Financial Statements and related disclosures.

Going Concern—In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Currently, there is no guidance in effect under U.S. GAAP regarding management’s responsibility to assess whether there is substantial doubt about an entity’s ability to continue as a going concern. Under ASU 2014-15, we will be required to assess our ability to continue as a going concern each interim and annual reporting period and provide certain disclosures if there is substantial doubt about our ability to continue as a going concern, including management’s plan to alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter with early adoption permitted. We are currently assessing the impact of ASU 2014-15 on our future Consolidated Financial Statements and related disclosures.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

Revenue—In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. It also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 to annual periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting revenue Gross versus Net), which improves the operability and understandability of the Topic 606 implementation guidance on principal versus agent considerations. Effective date and transition requirements for this ASU are the same as effective date and transition requirements for ASU 2014-09.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarifying guidance for identifying performance obligations and the licensing implementation guidance. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements for ASU 2014-09.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in a few narrow areas and adds some practical expedients to the guidance. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements for ASU 2014-09.

We are currently evaluating the requirements of these ASUs and have not yet determined their impacts on our future Consolidated Financial Statements and related disclosures.

NOTE 2—REVENUE RECOGNITION

Unapproved Change Orders

As of June 30, 2016, total unapproved change orders included in our estimates at completion aggregated approximately $122 million, of which approximately $24 million was included in backlog. As of June 30, 2015, total unapproved change orders included in our estimates at completion aggregated approximately $159 million, of which approximately $38 million was included in backlog.

Claims Revenue

The amount of revenues and costs included in our estimates at completion (i.e., contract values) associated with claims was $16 million and $7 million as of June 30, 2016 and 2015, respectively, all in our Middle East segment. These amounts are determined based on various factors, including our analysis of the underlying contractual language and our experience in making and resolving claims. Our unconsolidated joint ventures did not include any material claims revenue or associated costs in their financial results for the quarters ended June 30, 2016 and 2015.

None of the claims included in our estimates at completion at June 30, 2016 were the subject of any litigation proceedings. We continue to actively engage in negotiations with our customers on our outstanding claims. However, these claims may be resolved at amounts that differ from our current estimates, which could result in increases or decreases in future estimated contract profits or losses.

Loss Recognition

We have provided for our estimated costs to complete on all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full when determined.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

For loss projects, it is possible that our estimates of gross profit could increase or decrease based on changes in productivity, actual downtime and the resolution of change orders and claims with the customers.

As of June 30, 2016, there were no active projects which were in a significant loss position.

NOTE 3—USE OF ESTIMATES

We use estimates and assumptions to prepare our financial statements in conformity with U.S. GAAP. Those estimates and assumptions affect the amounts we report in our Consolidated Financial Statements and accompanying Notes. Our actual results could differ from those estimates, and variances could materially affect our financial condition and results of operations in future periods. Changes in project estimates generally exclude change orders and changes in scope, but may include, without limitation, changes in cost recovery estimates, unexpected changes in weather conditions, changes in productivity, unidentified required vessel repairs, customer and vendor delays and other costs. We generally expect to experience a reasonable amount of unanticipated events, and some of those events can result in significant cost increases above cost amounts we previously estimated. As of June 30, 2016, we have provided for our estimated costs to complete on all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. Variations from estimated contract performance could result in material adjustments to operating results. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full when determined.

The following is a discussion of our most significant changes in estimates that impacted operating income for the three and six months ended June 30, 2016 and 2015.

Three months ended June 30, 2016

Operating income for the three months ended June 30, 2016 was positively impacted by net favorable changes in estimates totaling approximately $28 million across all segments.

Americas, Europe and Africa Segment (“AEA”)—This segment was positively impacted by net favorable changes in estimates aggregating approximately $7 million, primarily attributable to productivity improvement and associated cost savings related to our DB 50 and NO 102 vessels’ marine campaigns undertaken in the Gulf of Mexico in the second quarter of 2016.

Middle East Segment (“MEA”)—This segment was positively impacted by net favorable changes in estimates aggregating approximately $10 million, primarily due to (1) productivity improvements and associated cost savings related to the Intermac 406 vessel, and productivity improvements and associated cost savings related to the DB 27 vessel, both associated with Saudi Aramco projects; and (2) other miscellaneous projects, which individually were not material.

Asia Segment (“ASA”)—This segment was positively impacted by net favorable changes in estimates aggregating approximately $11 million which were primarily driven by productivity improvements and associated cost savings and agreement on outstanding change orders on our active projects.

Six months ended June 30, 2016

Operating income for the six months ended June 30, 2016 was positively impacted by net favorable changes in estimates totaling approximately $68 million across all segments.

AEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $23 million, primarily due to (1) successful execution and close-out improvements on two significant projects, PB Litoral and Exxon Julia Subsea Tieback; and (2) productivity improvement and associated cost savings related to our DB 50 and NO 102 vessels’ marine campaigns undertaken in the Gulf of Mexico. Included in the change was a reversal of a $7 million provision for liquidated damages due to an agreed extension of the PB Litoral project completion date. Those changes were partially offset by net unfavorable changes, none of which were material individually.

MEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $17 million, primarily due to (1) productivity improvements and associated cost savings related to the DB 27 vessel and productivity improvements on the Intermac 406 vessel and associated cost savings, both associated with Saudi Aramco projects; and (2) other miscellaneous projects, none of which were material individually.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

ASA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $28 million, primarily driven by productivity improvements and associated cost savings and agreement on outstanding change orders on active and completed projects.

Three months ended June 30, 2015

Operating income for the three months ended June 30, 2015 was positively impacted by net favorable changes in estimates totaling approximately $7 million across all segments.

AEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $3 million, primarily due to reduced cost estimates attributable to the contract close-out process associated with the Papa Terra EPCI project in Brazil.

MEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $1 million. A project in Saudi Arabia was positively impacted by $7 million due to productivity improvements and associated cost savings on the Intermac 406 vessel, which was working on a cable lay project. These favorable changes were partially offset by a $5 million increase in pipelay cost estimates on a U.A.E. project, primarily due to changes in execution plan, and a $1 million unfavorable change in estimates for multiple projects.

ASA—This segment was positively impacted by net favorable changes in estimates and productivity bonuses earned totaling approximately $3 million, driven by multiple projects, none of the individual results of which were material.

Six months ended June 30, 2015

Operating income for the six months ended June 30, 2015 was positively impacted by net favorable changes in estimates totaling approximately $29 million across all segments.

AEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $10 million. Improvements primarily related to reduced cost estimates of approximately $3 million attributable to the Papa Terra project, $4 million due to productivity improvements on the Agile charter and reduced cost estimates of $4 million attributable to a revised demobilization plan for one of our vessels, the North Ocean 105 (the “NO 105”), which was working on a subsea project in Brazil, partially offset by a $1 million unfavorable impact driven by multiple projects.

MEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $10 million. An EPCI project in Saudi Arabia was positively impacted by $7 million due to changes in revenue recovery and cost savings based on an agreement with a customer on design optimization. Another project in Saudi Arabia was positively impacted by $8 million of changes mostly due to productivity improvements and associated cost savings on the Intermac 406, which was working on a cable lay project. A project in the U.A.E. improved by $5 million as a result of an agreement with the customer on compensation for vessel downtime due to weather and standby delays. We also had favorable changes of $1 million from multiple projects, none of the individual results of which were material. These favorable changes were partially offset by a $6 million negative impact on another EPCI project in Saudi Arabia, primarily due to an increase in cost estimates, as a result of a change in marine execution plans, and a $5 million increase in pipelay cost estimates on a U.A.E. project, as a result of changes in execution plan.

ASA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $9 million, driven by multiple projects, none of the individual results of which were material.

NOTE 4—RESTRUCTURING

In 2014 we completed a major review of our cost structure, and subsequently implemented a plan, which we referred to as the McDermott Profitability Initiative (the “MPI”), to increase our profitability and flexibility through reduced fixed and variable costs. The plan included personnel reductions, centralization of operational activities, other cost reduction initiatives and certain asset impairments. The previously announced move of our ASA regional headquarters from Singapore to Kuala Lumpur, along with additional sourcing initiatives, is substantially complete.

We continued our efforts to improve our cost structure by initiating the Additional Overhead Reduction program (“AOR”) during fourth quarter of 2015. AOR actions, which have included personnel reductions affecting direct operating and selling, general and administrative expenses are now expected to be substantially complete in the third quarter of 2016.

During 2013 and 2014, we implemented a restructuring of our Americas operations, which involved our Morgan City, Louisiana, Houston, Texas, New Orleans, Louisiana and some Brazil locations. The restructuring involved, among other things, reductions of management, administrative, fabrication and engineering personnel, and the discontinued utilization of the Morgan City facility.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

We completed a Corporate restructuring during 2014. Costs associated with our Corporate restructuring activities primarily included severance, relocation and other personnel-related costs and costs for advisors, as well as costs for certain executive management changes that became effective during the fourth quarter of 2013.

The following table presents amounts incurred during the three and six months ended June 30, 2016 and 2015, as well as amounts incurred from the inception of our restructuring efforts up to June 30, 2016 and amounts expected to be incurred in the future by major type of cost and by segment.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

	Incurred in the three months ended June 30,					Incurred in the six months ended June 30,					Incurred from inception to		Estimate of remaining amounts
	2016			2015		2016			2015		June 30, 2016		to be incurred		Total
	(in thousands)
Americas Restructuring
Impairments and write offs	$	-		$	-	$	-		$	-	$	12,923	$	-	$	12,923
Severance and other personnel-related costs		-			1,621		-			2,502		13,981		-		13,981
Morgan City environmental reserve		(1,500	)		-		(1,500	)		-		4,425		-		4,425
Morgan City yard-related expenses		-			820		-			1,734		12,557		-		12,557
Other		-			-		-			-		158		-		158
		(1,500	)		2,441		(1,500	)		4,236		44,044		-		44,044

Corporate Restructuring		-			-		-			-		6,601		-		6,601

MPI
Severance and other personnel-related costs
AEA					898		-			2,150		6,646		250		6,896
MEA		-			304		-			911		856		-		856
ASA		992			1,786		1,425			3,586		7,529		1,000		8,529
Corporate and other					400		-			1,119		1,611		-		1,611
Asset impairment and disposal																-
ASA		-			3,303		-			7,471		7,471		-		7,471
Legal and other advisor fees																-
ASA		-			-		-			-		-		-		-
Corporate		49			2,732		222			2,780		11,639		-		11,639
Other																-
AEA		-			-		-			-		692		-		692
ASA		1,541			3,527		2,436			3,527		8,370		-		8,370
Corporate and other		-			-		-			-		983		-		983
		2,582			12,950		4,083			21,544		45,797		1,250		47,047
AOR
Severance and other personnel-related costs
AEA		1,022			-		3,208			-		3,208		-		3,208
ASA		-			-		-			-		-		400		400
Corporate		51			-		836			-		836		100		936
Legal and other advisor fees												-
Corporate		240			-		1,968			-		2,768		-		2,768
Other
AEA		16			-		166			-		166		-		166
MEA		-			-		17			-		17		-		17
Corporate		73			-		73			-		73		1,000		1,073
		1,402			-		6,268			-		7,068		1,500		8,568

Total	$	2,484		$	15,391	$	8,851		$	25,780	$	103,510	$	2,750	$	106,260

By segment
AEA	$	(462	)	$	3,339	$	1,874		$	6,386	$	54,756	$	250	$	55,006
MEA		-			304		17			911		873		-		873
ASA		2,533			8,616		3,861			14,584		23,370		1,400		24,770
Corporate		413			3,132		3,099			3,899		24,511		1,100		25,611
Total	$	2,484		$	15,391	$	8,851		$	25,780	$	103,510	$	2,750	$	106,260

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

NOTE 5—ACCOUNTS RECEIVABLE

Accounts Receivable—Trade, Net

A summary of contract receivables is as follows:

	June 30, 2016			December 31, 2015
	(in thousands)
Contract receivables:
Contracts in progress	$	201,505			164,898
Completed contracts		33,725			35,702
Retainages		48,410			17,896
Unbilled		4,303			4,303
Less allowances		(14,318	)		(14,325	)
Accounts receivable—trade, net	$	273,625		$	208,474

Contract retainages generally represent amounts withheld by our customers until project completion, in accordance with the terms of the applicable contracts. The following is a summary of retainages on our contracts:

	June 30, 2016		December 31, 2015
	(in thousands)
Retainages expected to be collected within one year	$	48,410	$	17,896
Retainages expected to be collected after one year		128,190		155,061
Total retainages	$	176,600	$	172,957

NOTE 6—CONTRACTS IN PROGRESS AND ADVANCE BILLINGS ON CONTRACTS

A detail of the components of contracts in progress and advance billings on contracts is as follows:

	June 30, 2016		December 31, 2015
	(In thousands)
Costs incurred less costs of revenue recognized	$	93,047	$	112,819
Revenues recognized less billings to customers		211,743		323,010
Contracts in Progress	$	304,790	$	435,829

Billings to customers less revenue recognized		30,484		265,618
Costs incurred less costs of revenue recognized		70,937		(100,845	)
Advance Billings on Contracts	$	101,421	$	164,773

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

NOTE 7—DEBT

The carrying values of our long-term debt obligations, net of debt issuance costs of $18 million and $20 million as of June 30, 2016 and December 31, 2015, respectively, are as follows:

	June 30, 2016		December 31, 2015
	(In thousands)
Senior Notes	$	492,690	$	491,890
Term Loan		212,364		289,979
North Ocean 105 Construction Financing		34,760		38,263
Amortizing Notes		14,726		21,205
Capital lease obligation		2,370		2,546
		756,910		843,883
Less: Amounts due within one year		52,802		24,882
Total long-term debt	$	704,108	$	819,001

Credit Agreement, Senior Notes and Amortizing Notes

In April 2014 we entered into a credit agreement (the “Credit Agreement”), which initially provided for a $400 million first-lien, first-out three-year letter of credit facility (the “LC Facility”), scheduled to mature in 2017, and a $300 million first-lien, second-out five-year term loan (the “Term Loan”), scheduled to mature in 2019. We also completed the issuance of (a) $500 million of second-lien, seven-year, senior secured notes; and (b) $288 million of tangible equity units (“TEUs”) composed of (1) three-year amortizing, senior unsecured notes, in an aggregate principal amount of $48 million, and (2) prepaid common stock purchase contracts.

In October 2015, we entered into an Amendment No. 1, which amended the Credit Agreement primarily to increase the existing LC Facility from $400 million to $520 million.

In February 2016, we entered into an Amendment No. 2 to the Credit Agreement, which amended the Credit Agreement to permit us to add to Covenant EBITDA certain cash restructuring expenses related to the conclusion of MPI or implementation of AOR for the quarters ending on or after March 31, 2016 but before April 16, 2017, in an aggregate amount not to exceed $25 million (as of any date of determination).

On April 18, 2016, we entered into an Amendment No. 3 to the Credit Agreement, which, among other things:

replaced the existing EBITDA covenant with new ratios (as defined in Amendment No. 3) as follows:

a minimum fixed charge coverage ratio of 1.15x for the fiscal quarter ended March 31, 2016 and each fiscal quarter thereafter;

a maximum total leverage ratio of 4.5x for the fiscal quarter ended March 31, 2016 and each subsequent fiscal quarter through June 30, 2017, 4.0x for the fiscal quarters ending September 30, 2017 and December 31, 2017, and 3.5x for each fiscal quarter thereafter; and

a maximum secured leverage ratio of 2.0x for the fiscal quarter ended March 31, 2016 and each subsequent fiscal quarter through December 31, 2017, and 1.5x for each fiscal quarter thereafter; and

amended the maximum capital expenditure covenant to limit capital expenditures in 2016 and thereafter to $250 million each fiscal year, with any prior fiscal year unused capital expenditures up to $125 million able to be carried forward and added to the next year’s capital expenditure capacity, for a total of $375 million.

In addition, upon the May 13, 2016 satisfaction of certain conditions set forth in Amendment 3, including the receipt of requisite consents from term lenders under the Credit Agreement, Amendment 3 also amended the Credit Agreement to, among other things:

extend the maturity date of the LC Facility commitments to April 22, 2019, unless the Term Loan has not been repaid or refinanced by January 15, 2019, in which case the LC Facility commitments will expire on January 15, 2019;

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

change the existing letter of credit capacity of $520 million to $450 million;

extend the deadline for mortgaging the DLV 2000 to one year after taking delivery thereof, and give McDermott the option to consider potential financing options for the DLV 2000 during that period;

increase the basket for purchase money indebtedness from $20 million to $150 million;

modify the covenant limiting acquisitions to permit up to $150 million of acquisitions; and

modify the covenant limiting the prepayment or purchase of junior priority debt to permit up to $100 million of such prepayments or purchases.

On May 12, 2016, we entered into an Amendment No. 4 to the Credit Agreement which, among other things:

increased the applicable margin payable on the Term Loan by 3.0% per annum; and

required that the net cash proceeds of any sale (including a sale and leaseback) of the DLV 2000 be applied as a mandatory prepayment of the Term Loan.

On May 13, 2016, McDermott voluntarily prepaid $75 million of the Term Loan and satisfied the other conditions to the “effective date” set forth in Amendment No. 4.

We were in compliance with our financial covenants as of June 30, 2016, as shown below:

Ratios	Requirement	Actual
Minimum fixed charge coverage ratio	1.15x	2.58x
Maximum total leverage ratio	4.5x	2.41x
Maximum secured leverage ratio	2x	0.79x

As of June 30, 2016 and December 31, 2015, the aggregate face amount of letters of credit issued under the LC Facility was $397 million and $384 million, respectively. No financial letters of credit have been issued under the LC Facility.

The LC Facility permits us to deposit up to $300 million with letter of credit issuers to cash collateralize letters of credit issued on a bilateral basis outside the credit facility. As of June 30, 2016 and December 31, 2015, we had an aggregate face amount of approximately $113 million and $102 million of such letters of credit outstanding supported by cash collateral, including financial letters of credit of $43 million and $45 million, respectively. We have included the supporting cash collateral in restricted cash and cash equivalents in the accompanying Consolidated Balance Sheets.

North Ocean Financing

NO 105―On September 30, 2010, MDR, as guarantor, and North Ocean 105 AS, in which we have a 75% ownership interest, as borrower, entered into a financing agreement to finance a portion of the construction costs of the NO 105. Borrowings under the agreement are secured by, among other things, a pledge of all of the equity of North Ocean 105 AS, a mortgage on the NO 105, and a lien on substantially all of the other assets of North Ocean 105 AS. MDR unconditionally guaranteed all amounts to be borrowed under the agreement. Under the current Credit Agreement, we are required to exercise our option under the North Ocean 105 AS joint venture agreement to purchase Oceanteam ASA’s 25% ownership interest in the vessel-owning company and repay the outstanding NO 105 debt by April 2017.

Unsecured Bilateral Lines of Credit

MDR has reimbursement agreements in place with Middle Eastern banks which provide uncommitted lines of credit in support of our contracting activities in the Middle East. There are no administrative or commitment fees associated with these agreements. Bank guarantees issued under these agreements were $191 million and $118 million, as of June 30, 2016 and December 31, 2015, respectively. In April 2016, we entered into an unsecured and uncommitted bilateral letter of credit arrangement for approximately $100 million with a Middle Eastern bank to support our business in the region. As of June 30, 2016, we had an aggregate face amount of approximately $80 million of letters of credit outstanding under that arrangement.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

Surety Bonds

As of June 30, 2016 and December 31, 2015, surety bonds issued under general agreements of indemnity in favor of surety underwriters in support of contracting activities of our subsidiaries J. Ray McDermott de México, S.A. de C.V. and McDermott, Inc. totaled $85 million and $54 million, respectively.

NOTE 8—PENSION AND POSTRETIREMENT BENEFITS

Net periodic cost for our non-contributory qualified defined benefit pension plan and several of our non-qualified supplemental defined benefit pension plans (the “Domestic Plans”) and our J. Ray McDermott, S.A. Third Country National Employees Pension Plan (the “TCN Plan”) includes the following components:

	Domestic Plans
	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
	(In thousands)
Interest cost	$	5,293		$	5,425		$	10,552		$	10,807
Expected return on plan assets		(5,001	)		(6,677	)		(10,004	)		(13,354	)
Net periodic (benefit) cost	$	292		$	(1,252	)	$	548		$	(2,547	)

	TCN Plan
	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
	(In thousands)
Interest cost	$	338		$	406		$	676		$	813
Expected return on plan assets		(397	)		(710	)		(794	)		(1,420	)
Net periodic benefit	$	(59	)	$	(304	)	$	(118	)	$	(607	)

NOTE 9—DERIVATIVE FINANCIAL INSTRUMENTS

We enter into derivative financial instruments primarily to hedge certain firm purchase commitments and forecasted transactions denominated in foreign currencies. We record these contracts at fair value on our Consolidated Balance Sheets. Depending on the hedge designation at the inception of the contract, the related gains and losses on these contracts are either: (1) deferred as a component of Accumulated Other Comprehensive Income (“AOCI”) until the hedged item is recognized in earnings; (2) offset against the change in fair value of the hedged firm commitment through earnings; or (3) recognized immediately in earnings. At inception and on an ongoing basis, we assess the hedging relationship to determine its effectiveness in offsetting changes in cash flows or fair value attributable to the hedged risk. We exclude from our assessment of effectiveness the portion of the fair value of the forward contracts attributable to the difference between spot exchange rates and forward exchange rates. The ineffective portion of a derivative’s change in fair value and any portion excluded from the assessment of effectiveness are immediately recognized in earnings. Gains and losses on derivative financial instruments that are immediately recognized in earnings are included as a component of gain (loss) on foreign currency—net in our Consolidated Statements of Operations.

As of June 30, 2016, the majority of our foreign currency forward contracts were designated as cash flow hedging instruments. In addition, we deferred approximately $29 million of net losses on those derivative financial instruments in AOCI, and we expect to reclassify approximately $18 million of deferred losses out of AOCI by June 30, 2017, as hedged items are recognized. The notional value of our outstanding derivative contracts totaled $357 million at June 30, 2016, with maturities extending through 2017. Of this amount, approximately $214 million is associated with various foreign currency expenditures we expect to incur on one of our ASA segment EPCI projects. These instruments consist of contracts to purchase or sell foreign-denominated currencies. As of June 30, 2016, the fair value of these contracts was in a net liability position totaling approximately $8 million. The fair value of outstanding derivative instruments is determined using observable financial market inputs, such as quoted market prices, and is classified as Level 2 in nature.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

The following tables summarize our derivative financial instruments:

Asset and Liability Derivatives

	June 30, 2016		December 31, 2015
	(In thousands)
Derivatives Designated as Hedges:
Location:
Accounts receivable-other	$	1,911	$	1,668
Other assets		-		215
Total asset derivatives	$	1,911	$	1,883

Accounts payable	$	8,735	$	26,649
Other liabilities		1,281		4,018
Total liability derivatives	$	10,016	$	30,667

The Effects of Derivative Instruments on our Financial Statements

	Three Months Ended June 30,					Six Months Ended June 30,
	2016			2015		2016			2015
	(in thousands)
Derivatives Designated as Hedges:
Amount of gain (loss) recognized in other comprehensive income (loss)	$	(10,304	)	$	8,034	$	10,230		$	(28,656	)
Income reclassified from AOCI into income (loss): effective portion
Location: Cost of operations		14,932			19,572		24,611			39,426
Gain (loss) recognized in income (loss): ineffective portion and amount excluded from effectiveness testing
Location : Gain (loss) on foreign currency—net		(344	)		2,047		(1,549	)		3,864

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

NOTE 10—FAIR VALUE MEASUREMENTS

The following table presents the financial instruments outstanding as of June 30, 2016 and December 31, 2015 that are measured at fair value on a recurring basis and financial instruments that are not measured at fair value on a recurring basis.

	June 30, 2016
	Carrying Amount			Fair Value			Level 1		Level 2			Level 3
	(In thousands)
Recurring
Forward contracts	$	(8,105	)	$	(8,105	)	$	-	$	(8,105	)	$	-
Non-recurring
Cash and cash equivalents		470,023			470,023			470,023		-			-
Restricted cash and cash equivalents		112,792			112,792			112,792		-			-
Debt		(756,910	)		(702,835	)		-		(645,524	)		(57,311	)

	December 31, 2015
	Carrying Amount			Fair Value			Level 1		Level 2			Level 3
	(In thousands)
Recurring
Forward contracts	$	(28,784	)	$	(28,784	)	$	-	$	(28,784	)	$	-
Non-recurring
Cash and cash equivalents		664,844			664,844			664,844		-			-
Restricted cash and cash equivalents		116,801			116,801			116,801		-			-
Debt		(843,883	)		(777,634	)		-		(707,492	)		(70,142	)

We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:

Cash and cash equivalents and restricted cash and cash equivalents. The carrying amounts that we have reported in the accompanying consolidated balance sheets for cash, cash equivalents and restricted cash and cash equivalents approximate their fair values and are classified as Level 1 within the fair value hierarchy.

Short-term and long-term debt. The fair value of debt instruments valued using a market approach based on quoted prices for similar instruments traded in active markets is classified as Level 2 within the fair value hierarchy.

Quoted prices are not available for the amortizing notes included within the TEUs or the NO 105 financing. The income approach was used to value these instruments based on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. These instruments are classified as Level 3 within the fair value hierarchy.

Forward contracts. The fair value of forward contracts is classified as Level 2 within the fair value hierarchy and is valued using observable market parameters for similar instruments traded in active markets. Where quoted prices are not available, the income approach is used to value forward contracts, which discounts future cash flows based on current market expectations and credit risk.

Fair Value Disclosure of Non-financial Assets

During the first quarter of 2016, we impaired our Agile vessel upon termination of its current charter in May 2016, given the lack of opportunities for this type of vessel. In connection with that decision, we recognized a non-cash impairment charge of $32 million during the first quarter of 2016, which equaled the vessel’s carrying value, in accordance with ASC 360-10, Property, Plant and Equipment.

Another vessel, the DB101, which was held and used in our ASA segment, was written down to a fair value of $14 million, resulting in a non-cash impairment charge of $4 million in the first quarter of 2015, and was disposed of in the second quarter of 2015. An impairment loss of $3 million was recognized in the second quarter of 2015 and was included in restructuring expenses.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

In the second quarter of 2015, we abandoned a marine pipelay welding system project and recognized a $7 million non-cash impairment charge, which equaled the carrying value of that asset.

NOTE 11—STOCKHOLDERS’ EQUITY

The changes in the number of shares outstanding and treasury shares held by the Company are as follows:

	Six Months Ended June 30,
	2016			2015
Shares outstanding
Beginning balance		239,016,924			237,809,823
Common stock issued		2,206,027			1,472,897
Purchase of common stock		(651,291	)		(401,986	)
Ending balance		240,571,660			238,880,734

Shares held as Treasury shares
Beginning balance		7,824,204			7,400,027
Purchase of common stock		651,291			401,986
Retirement of common stock		(400,701	)		-
Ending balance		8,074,794			7,802,013

Ordinary shares issued at the end of the period		248,646,454			246,682,747

Accumulated Other Comprehensive Income (Loss) (AOCI)

The components of AOCI included in stockholders’ equity are as follows:

	June 30, 2016			December 31, 2015
	(In thousands)
Foreign currency translation adjustments (“FCTA”)	$	(37,295	)	$	(29,925	)
Net unrealized gain on investments		264			247
Net loss on derivative financial instruments		(28,844	)		(64,277	)
Accumulated other comprehensive loss	$	(65,875	)	$	(93,955	)

During the first quarter of 2016, we recorded a $7 million adjustment decreasing FCTA, with an offsetting reduction of Loss on foreign currency, net, to correct amounts accounted for inappropriately in a previous period.

In the second quarter of 2016, foreign currency instruments associated with construction of our DLV 2000 vessel were settled upon the final payment to the vendor. These instruments were designated as cash flow hedges and as such $20 million of cumulative loss is recorded in AOCI and will be amortized consistent with the depreciation of the vessel.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

The following table presents the components of AOCI and the amounts that were reclassified during the periods indicated:

2016 Period
For the three months ended June 30, 2016	Foreign currency translation adjustments			Unrealized holding gain (loss) on investments		Gain (loss) on derivative⁽¹⁾				TOTAL
	(In thousands)
Balance, March 31, 2016	$	(33,268	)	$	252	$	(33,473	)		$	(66,489	)
Other comprehensive income (loss) before reclassification		(4,027	)		12		(10,304	)			(14,319	)
Amounts reclassified from AOCI		-			-		14,933		⁽²⁾		14,933
Net current period other comprehensive income (loss)		(4,027	)		12		4,629				614
Balance, June 30, 2016	$	(37,295	)	$	264	$	(28,844	)		$	(65,875	)

For the six months ended June 30, 2016	Foreign currency translation adjustments			Unrealized holding gain (loss) on investments		Gain (loss) on derivatives⁽¹⁾				TOTAL
	(In thousands)
Balance, January 1, 2016	$	(29,925	)	$	247	$	(64,277	)		$	(93,955	)
Other comprehensive income (loss) before reclassification		(7,370	)		17		10,230				2,877
Amounts reclassified from AOCI		-			-		25,203		⁽²⁾		25,203
Net current period other comprehensive income (loss)		(7,370	)		17		35,433				28,080
Balance, June 30, 2016	$	(37,295	)	$	264	$	(28,844	)		$	(65,875	)

2015 Period
For the three months ended June 30, 2015	Foreign currency translation adjustments			Unrealized holding gain (loss) on investments		Gain (loss) on derivative(1)				TOTAL
	(In thousands)
Balance, March 31, 2015	$	(17,254	)	$	253	$	(99,689	)		$	(116,690	)
Other comprehensive income (loss) before reclassification		(2,701	)		4		8,034				5,337
Amounts reclassified from AOCI		(2,243	)		-		19,572		⁽²⁾		17,329
Net current period other comprehensive income (loss)		(4,944	)		4		27,606				22,666
Balance, June 30, 2015	$	(22,198	)	$	257	$	(72,083	)		$	(94,024	)

For the six months ended June 30, 2015	Foreign currency translation adjustments			Unrealized holding gain (loss) on investments		Gain (loss) on derivative(1)				TOTAL
	(In thousands)
Balance, January 1, 2015	$	(15,212	)	$	241	$	(82,837	)		$	(97,808	)
Other comprehensive income (loss) before reclassification		(4,743	)		16		(28,656	)			(33,383	)
Amounts reclassified from AOCI		(2,243	)		-		39,410		⁽²⁾		37,167
Net current period other comprehensive income (loss)		(6,986	)		16		10,754				3,784
Balance, June 30, 2015	$	(22,198	)	$	257	$	(72,083	)		$	(94,024	)

⁽¹⁾

Refer to Note 9 for additional details.

⁽²⁾

Reclassified to Cost of operations and Gain on foreign currency, net.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

NOTE 12—EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per common share:

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(In thousands, except share and per share amounts)
Net income (loss) attributable to McDermott International, Inc.	$	20,657	$	11,526	$	18,485	$	(2,981	)

Weighted average common shares (basic)		240,338,540		238,332,012		239,739,204		237,918,366
Effect of dilutive securities:
Tangible equity units		40,896,300		40,896,300		40,896,300		-
Stock options, restricted stock and restricted stock units		3,674,574		10,461,669		2,496,734		-
Adjusted weighted average common shares and assumed exercises of stock options and vesting of stock awards (diluted)		284,909,414		289,689,981		283,132,238		237,918,366

Income (loss) per share
Net income (loss) attributable to McDermott International, Inc.
Basic:		0.09		0.05		0.08		(0.01	)
Diluted:		0.07		0.04		0.07		(0.01	)

Approximately 2 million shares underlying outstanding stock-based awards were excluded from the computation of diluted earnings per share because they were anti-dilutive for the three and six months ended June 30, 2016. Approximately 3 million shares underlying outstanding stock-based awards were excluded from the computation of diluted earnings per share because they were anti-dilutive for the three and six months ended June 30, 2015.

Potential dilutive common shares for the settlement of the common stock purchase contracts totaling 40.9 million shares were considered in the calculation of diluted weighted-average shares for the six months ended June 30, 2015, however, due to our net loss position in that period, they have not been reflected above because they would be anti-dilutive.

NOTE 13—COMMITMENTS AND CONTINGENCIES

Litigation

Due to the nature of our business, we and our affiliates are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including, among other things:

performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and

workers’ compensation claims, Jones Act claims, occupational hazard claims, including asbestos-exposure claims, premises liability claims and other claims.

Based upon our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our consolidated financial condition, results of operations or cash flows; however, because of the inherent uncertainty of litigation and other dispute resolution proceedings and, in some cases, the availability and amount of potentially applicable insurance, we can provide no assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material effect on our consolidated financial condition, results of operations or cash flows for the fiscal period in which that resolution occurs.

Environmental Matters

We have been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”). CERCLA and other environmental laws can impose liability for the entire cost of cleanup on any of the potentially responsible parties, regardless of fault or the lawfulness of the original conduct. Generally, however, where there are multiple responsible parties, a final allocation of costs is made based on the amount and type of

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

wastes disposed of by each party and the number of financially viable parties, although this may not be the case with respect to any particular site. We have not been determined to be a major contributor of wastes to any of these sites. On the basis of our relative contribution of waste to each site, we expect our share of the ultimate liability for the various sites will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows in any given year.

In 2013, we established a $6 million environmental reserve in connection with our plan to discontinue the utilization of our Morgan City fabrication facility. For this site, up to June 30, 2016, we incurred approximately $4 million. During the second quarter of 2016 we received a notice from the State of Louisiana stating that our environmental remediation obligations related to the closure of our Morgan City fabrication facility had been fulfilled. Pursuant to the notice received from the State of Louisiana, as well as our internal assessment, we believe no environmental remediation liability exists with respect to the Morgan City site. As a result, during the second quarter we reversed the remaining $2 million of accrual.

Contracts Containing Liquidated Damages Provisions

Some of our contracts contain provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a claim under those provisions. Those contracts define the conditions under which our customers may make claims against us for liquidated damages. In many cases in which we have historically had potential exposure for liquidated damages, such damages ultimately were not asserted by our customers. As of June 30, 2016, we had approximately $10 million of potential liquidated damages liability, for which no liability is recorded in our Consolidated Financial Statements. We believe we will be successful in obtaining schedule extensions or other customer-agreed changes that should resolve the potential for unaccrued liquidated damages. Accordingly, we believe that no amounts for these unaccrued liquidated damages are probable of being paid by us. However, we may not achieve relief on some or all of the issues involved and, as a result, could be subject to higher damage amounts.

NOTE 14—SEGMENT REPORTING

We disclose the results of each of our operating segments in accordance with ASC 280, Segment Reporting. Each of the operating segments is separately managed by a senior executive who is a member of our Executive Committee (“EXCOM”). EXCOM is led by our Chief Executive Officer, who is the chief operating decision maker. Discrete financial information is available for each of the segments, and the EXCOM uses the operating results of each of the operating segments for performance evaluation and resource allocation.

We manage operating segments along geographic lines consisting of AEA, MEA and ASA. We also report certain corporate and other non-operating activities under the heading “Corporate and Other.” Corporate and Other primarily reflects corporate personnel and activities, incentive compensation programs and other costs, which are generally fully allocated to our operating segments. The only corporate costs currently not being allocated to our operating segments are the restructuring costs associated with our corporate reorganization.

We account for intersegment sales at prices that we generally establish by reference to similar transactions with unaffiliated customers. Reporting segments are measured based on operating income, which is defined as revenues reduced by total costs and expenses and equity in loss of unconsolidated affiliates.

Summarized financial information is shown in the following tables:

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(in thousands)
Revenues⁽¹⁾:
AEA	$	86,810		$	104,701		$	149,435		$	248,014
MEA		317,834			420,221			588,089			574,021
ASA		301,983			521,615			698,135			774,965
Total revenues	$	706,627		$	1,046,537		$	1,435,659		$	1,597,000

Operating income (loss)⁽²⁾:
AEA	$	3,168		$	6,176		$	(21,753	)	$	22,433
MEA		41,959			30,823			80,426			36,065
ASA		12,274			17,157			37,407			9,731
Corporate		(413	)		(5,043	)		(3,099	)		(5,810	)
Total operating income	$	56,988		$	49,113		$	92,981		$	62,419

Capital expenditures⁽³⁾:
AEA	$	941		$	516		$	3,526		$	3,429
MEA		2,469			4,828			4,703			14,942
ASA		134,567			18,669			161,575			29,493
Corporate and Other		797			-			870			121
Total capital expenditures	$	138,774		$	24,013		$	170,674		$	47,985

Depreciation and amortization:
AEA	$	7,172		$	10,464		$	14,315		$	23,287
MEA		6,033			9,019			10,844			14,757
ASA		6,060			3,862			12,449			7,778
Corporate and Other		2,130			2,699			4,389			5,549
Total depreciation and amortization	$	21,395		$	26,044		$	41,997		$	51,371

Drydock amortization:
AEA	$	2,234		$	3,161		$	5,410		$	6,244
MEA		529			550			1,064			1,163
ASA		229			675			458			2,251
Total drydock amortization	$	2,992		$	4,386		$	6,932		$	9,658

⁽¹⁾	Intersegment transactions included in revenues were not significant for either of the periods presented.

⁽²⁾

The AEA segment’s operating results for the six months ended June 30, 2016 include an impairment charge of $32 million related to the Agile vessel. The ASA segment’s operating results in the six months ended June 30, 2015 included a $4 million impairment charge for the DB 101 and $3 million of loss on disposal of this asset.

⁽³⁾

Total capital expenditures represent expenditures for which cash payments were made during the period. Capital expenditures for the three months ended June 30, 2016 included $1 million of cash payments for liabilities outstanding as of March 31, 2016 and for the six months ended June 30, 2016 excluded $2 million in accrued liabilities outstanding at the end of the period. Capital expenditures for the three and six months ended June 30, 2015 included $8 million and $11 million, respectively, of cash payments for accrued capital expenditures outstanding at the end of the respective periods.

McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

	June 30, 2016		December 31, 2015
	(In thousands)
Segment assets:
AEA	$	751,607	$	896,822
MEA		942,281		971,170
ASA		915,546		774,365
Corporate and Other		564,494		744,719
	$	3,173,928	$	3,387,076

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this quarterly report on Form 10-Q, unless the context otherwise indicates, “we,” “us” and “our” mean McDermott International, Inc. and its consolidated subsidiaries.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords. This information should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto included in Item 1 of this report and the audited Consolidated Financial Statements and the related Notes and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual report on Form 10-K for the year ended December 31, 2015.

From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These statements may include projections and estimates concerning the scope, execution, timing and success of specific projects and our future backlog, revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “forecast,” “believe,” “expect,” “anticipate,” “plan,” “seek,” “goal,” “could,” “may,” or “should” or other words that convey the uncertainty of future events or outcomes. Sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.

These forward-looking statements include, but are not limited to, statements that relate to, or statements that are subject to risks, contingencies or uncertainties that relate to:

future levels of revenues, operating margins, income from operations, cash flows, net income or earnings per share;

outcome of project awards and scope, execution and timing of specific projects, including timing to complete and cost to complete these projects;

future project activities, including the commencement and subsequent timing of marine or installation campaigns on specific projects, and the ability of projects to generate sufficient revenues to cover our fixed costs;

estimates of percentage of completion and contract profits or losses;

anticipated levels of demand for our products and services;

global demand for oil and gas and fundamentals of the oil and gas industry;

expectations regarding offshore development of oil and gas;

market outlook for the EPCI market;

expectations regarding cash flows from operating activities;

expectations regarding backlog;

future levels of capital, environmental or maintenance expenditures;

the success or timing of completion of ongoing or anticipated capital or maintenance projects;

the adequacy of our sources of liquidity and capital resources;

interest expense;

the effectiveness of our derivative contracts in mitigating foreign currency risk;

results of our capital investment program;

expectations regarding the acquisition or divestiture of assets;

our ability to dispose of assets held for sale in a timely manner or for a price at or above net realizable value;

the potential effects of judicial or other proceedings on our business, financial condition, results of operations and cash flows;

the anticipated effects of actions of third parties such as competitors, or federal, foreign, state or local regulatory authorities, or plaintiffs in litigation; and

the results and estimated cost of personnel reductions affecting direct operating expense and selling, general and administrative (“SG&A”) functions.

These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:

general economic and business conditions and industry trends;

general developments in the industries in which we are involved;

the volatility of oil and gas prices;

decisions about offshore developments to be made by oil and gas companies;

the highly competitive nature of our industry;

our ability to appropriately bid, estimate and effectively perform projects on time, in accordance with the schedules established by the applicable contracts with customers;

changes in project design or schedule;

changes in scope or timing of work to be completed under contracts;

cancellations of contracts, change orders and other modifications and related adjustments to backlog and the resulting impact from using backlog as an indicator of future revenues or earnings;

the collectability of amounts reflected in change orders and claims relating to work previously performed on contracts;

the capital investment required to construct new-build vessels and maintain and/or upgrade our existing fleet of vessels;

the ability of our suppliers and subcontractors to deliver raw materials in sufficient quantities and/or perform in a timely manner;

volatility and uncertainty of the credit markets;

our ability to comply with covenants in our credit agreement, indentures and other debt instruments and availability, terms and deployment of capital;

the unfunded liabilities of our pension plans, which may negatively impact our liquidity and, depending upon future operations, may impact our ability to fund our pension obligations;

the continued availability of qualified personnel;

the operating risks normally incident to our lines of business, including the potential impact of liquidated damages;

natural or man-caused disruptive events that could damage our facilities, equipment or our work-in-progress and cause us to incur losses and/or liabilities;

equipment failure;

changes in, or our failure or inability to comply with, government regulations;

adverse outcomes from legal and regulatory proceedings;

impact of potential regional, national and/or global requirements to significantly limit or reduce greenhouse gas and other emissions in the future;

changes in, and liabilities relating to, existing or future environmental regulatory matters;

changes in tax laws;

rapid technological changes;

the consequences of significant changes in interest rates and currency exchange rates;

difficulties we may encounter in obtaining regulatory or other necessary approvals of any strategic transactions;

the risks associated with integrating acquired businesses and making joint ventures operational;

the risk we may not be successful in updating and replacing current information technology and the risks associated with information technology systems interruptions and cybersecurity threats;

social, political and economic situations in countries where we do business;

the risks associated with our international operations, including local content or similar requirements;

interference from adverse weather or sea conditions;

the possibilities of war, other armed conflicts or terrorist attacks;

the effects of asserted and unasserted claims and the extent of available insurance coverages;

our ability to obtain surety bonds, letters of credit and financing;

our ability to maintain builder’s risk, liability, property and other insurance in amounts and on terms we consider adequate and at rates that we consider economical;

the aggregated risks retained in our captive insurance subsidiary; and

the impact of the loss of insurance rights as part of the Chapter 11 Bankruptcy settlement concluded in 2006 involving several of our former subsidiaries.

We believe the items we have outlined above are important factors that could cause estimates in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this quarterly report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2015. These factors are not necessarily all the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our security holders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.

Business Segments and Results of Operations

Business Segments

We report financial results under three reporting segments consisting of (1) the Americas, Europe and Africa (“AEA”), (2) the Middle East (“MEA”) and (3) Asia (“ASA”). We also report certain corporate and other non-operating activities under the heading “Corporate and Other.” Corporate and Other primarily reflects corporate personnel and activities, incentive compensation programs and other costs that are generally fully allocated to our operating segments. For financial information about our segments, see Note 14, Segment Reporting, to our Consolidated Financial Statements.

AEA Segment

Through our AEA segment, which includes the Americas, Europe and Africa, we serve the needs of customers primarily in the United States, Brazil, Mexico, Trinidad, the North Sea, West Africa and East Africa. Project focus in this segment includes the fabrication and offshore installation of fixed and floating structures and the installation of pipelines and subsea systems. Engineering and procurement services are supported by engineering resources in Chennai, India, Dubai, U.A.E., London, the United Kingdom, Mexico City, Mexico and Houston, Texas. Our primary facilities for this segment are our fabrication facility in Altamira, Mexico and our spoolbase facility in Gulfport, Mississippi.

MEA Segment

Through our MEA segment, which includes the Caspian region, we serve the needs of customers in Saudi Arabia, the U.A.E., Qatar, Kuwait, Azerbaijan and Russia. Project focus in this segment relates primarily to the fabrication and offshore installation of fixed and floating structures and the installation of pipelines and subsea systems. The majority of our projects in this segment are performed on an EPCI basis. Engineering and procurement services are provided by our Dubai, U.A.E., Chennai, India and Al Khobar, Saudi Arabia offices and are supported by additional resources from our Houston, Texas office. The primary fabrication facility for this segment is located in Dubai, U.A.E.

ASA Segment

Through our ASA segment, we serve the needs of customers primarily in Australia, Indonesia, Brunei, India, Malaysia, Vietnam and Thailand. Project focus in this segment includes the fabrication and offshore installation of fixed and floating structures and the installation of pipelines and subsea systems. The majority of our projects in this segment are performed on an EPCI basis. Engineering and procurement services are currently provided by our Kuala Lumpur office, in Malaysia and are supported by additional resources located in Chennai, India, Dubai, U.A.E. and Houston, Texas. The primary fabrication facility for this segment is located on Batam Island, Indonesia. Additionally, through our equity ownership interest in two separate ventures, we have access to fabrication capacity in China and Malaysia.

The above-mentioned fabrication facilities in each segment are equipped with a wide variety of heavy-duty construction and fabrication equipment, including cranes, welding equipment, machine tools and robotic and other automated equipment. Project installation is performed by major construction vessels, which we own or lease and are stationed throughout the various regions and provide structural lifting/lowering and pipelay services. These major construction vessels are supported by our multi-function vessels and chartered vessels from third parties to perform a wide array of installation activities that include anchor handling, pipelay, cable/umbilical lay, dive support and hookup/commissioning.

Results of Operations

Selected Financial Data:

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(In thousands)
Revenues:
AEA	$	86,810		$	104,701		$	149,435		$	248,014
MEA		317,834			420,221			588,089			574,021
ASA		301,983			521,615			698,135			774,965
Total revenues		706,627			1,046,537			1,435,659			1,597,000

Costs and Expenses:
Cost of operations		595,442			925,522			1,211,475			1,400,981
Selling, general and administrative expenses		52,075			47,793			90,403			99,469
Impairment loss		-			6,808			32,311			6,808
Loss (gain) on asset disposals		(362	)		1,910			(362	)		1,543
Restructuring expenses		2,484			15,391			8,851			25,780
Total costs and expenses		649,639			997,424			1,342,678			1,534,581

Operating income (loss):
AEA		3,168			6,176			(21,753	)		22,433
MEA		41,959			30,823			80,426			36,065
ASA		12,274			17,157			37,407			9,731
Corporate		(413	)		(5,043	)		(3,099	)		(5,810	)
Total operating income		56,988			49,113			92,981			62,419

Other income (expense):
Interest expense, net		(12,655	)		(12,985	)		(23,893	)		(25,164	)
Gain (loss) on foreign currency, net		(1,974	)		1,943			(5,157	)		475
Other expense, net		(877	)		(359	)		(1,085	)		(456	)
Total other expense		(15,506	)		(11,401	)		(30,135	)		(25,145	)

Income before provision for income taxes		41,482			37,712			62,846			37,274

Provision for income taxes		19,804			16,541			39,134			21,410

Income before income (loss) from investments in unconsolidated affiliates		21,678			21,171			23,712			15,864

Income (loss) from investments in unconsolidated affiliates		127			(7,481	)		(4,351	)		(14,222	)

Net income		21,805			13,690			19,361			1,642

Less: Net income attributable to noncontrolling interest		1,148			2,164			876			4,623

Net income (loss) attributable to McDermott International, Inc.	$	20,657		$	11,526		$	18,485		$	(2,981	)

Three months ended June 30, 2016 compared to the three months ended June 30, 2015

Revenues

Revenues decreased by 32%, or $340 million, in the second quarter of 2016 compared to the second quarter of 2015.

AEA—Revenues in our AEA segment decreased by 17%, or $18 million, in the second quarter of 2016 compared to the second quarter of 2015, primarily due to a reduction in active projects in the 2016 period compared to the 2015 period.

In the second quarter of 2016, the following projects contributed to revenue: (1) fabrication/spooling and installation of jumpers and control umbilicals at the Jack St. Malo project in the Gulf of Mexico, which was completed in the second quarter of 2016; (2) transportation, installation and marine campaigns undertaken by our DB 50 and NO 105 vessels on the EOG Sercan project in Trinidad, West Indies; (3) the Agile charter marine campaign, which was terminated in the second quarter of 2016; and (4) fabrication activity progress on the Ayatsil-C jacket replacement and deck installation project at our Altamira facility.

In the second quarter of 2015, revenues were contributed to by the following: (1) NO 102 and NO 105 vessel charter campaigns, all of which were substantially complete in 2015; (2) a mobile drilling structure installation project executed by our DB 50 vessel, which commenced and was completed in the second quarter of 2015; (3) fabrication work on our Exxon Julia Subsea Tieback project in the Gulf of Mexico, which was completed in the first quarter of 2016; (4) the Agile charter marine campaign, which was terminated in the second quarter of 2016; (5) fabrication activity on our PB Litoral project, which was substantially complete in the first quarter of 2016; and (6) project close-out payments associated with our Papa Terra project in Brazil.

MEA—Revenues decreased by 24%, or $102 million, in the second quarter of 2016 compared to the second quarter of 2015, primarily due to the following projects which are now either complete or were substantially complete in 2015: Karan 45, Abu Ali Cables, Safaniya Phase 2 and Manifa facilities, all with Saudi Aramco, and the ADMA 4 GI project, in the U.A.E.

In the second quarter of 2016, those decreases were partially offset by revenue contribution by the following projects: (1) fabrication and marine activities on the Marjan power system replacement project; (2) fabrication and installation progress on a twelve jackets supply project; and (3) engineering activities on a lump-sum EPCI project under the second Long-Term Agreement (“LTA-II”), all with Saudi Aramco. The commencement in 2016 of a large pipeline-related project in the Middle East and offshore marine hookup campaign progress on a wellhead jacket and umbilical project in Qatar also contributed to the 2016 second quarter revenue.

ASA—Revenues in our ASA segment decreased by 42%, or $220 million, primarily due to reduced activity on (1) the Ichthys EPCI project in Australia as the project progresses through the marine transportation and installation phase; and (2) the Brunei Shell Petroleum (“BSP”) pipeline replacement project, which was substantially complete in 2015. Those decreases were partially offset by commencement of the following new projects in 2016: (1) the Yamal module fabrication project awarded in the third quarter of 2015; and (2) the Bergading offshore installation project in Malaysia which was completed in the second quarter of 2016.

Cost of Operations

Cost of operations decreased by 36%, or $330 million, in the second quarter of 2016 compared to the second quarter of 2015, primarily due to lower activities in the 2016 period across all segments.

AEA—Cost of operations in our AEA segment decreased by 13%, or $11 million, in the second quarter of 2016 compared to the second quarter of 2015, primarily due to a reduction in active projects in the 2016 period compared to the 2015 period.

Cost of operations in the second quarter of 2016 included costs associated with the following projects: (1) fabrication/spooling and installation of jumpers and control umbilicals at the Jack St. Malo project in the Gulf of Mexico, which commenced in the first quarter of 2016; (2) transportation, installation and marine campaigns undertaken by our DB 50 and NO 105 vessels on the EOG Sercan project in Trinidad, West Indies; (3) the Agile charter marine campaign, which was terminated in the second quarter of 2016; and (4) fabrication activity progress on the Ayatsil-C jacket replacement and deck installation project at our Altamira facility.

Cost of operations in the second quarter of 2015 was primarily related to: (1) the NO 102, NO 105 and DB 50 vessel charter campaigns in Brazil and in the Gulf of Mexico; (2) the PB Litoral project; (3) a mobile drilling structure installation project executed by our DB 50 vessel; and (4) the Exxon Julia Subsea Tieback project.

MEA—Cost of operations in our MEA segment decreased by 30%, or $111 million, in the second quarter of 2016 compared to the second quarter of 2015, primarily due to the following projects which are now either complete or were substantially complete in 2015: Karan 45, Abu Ali Cables, Safaniya Phase 2 and Manifa facilities, all with Saudi Aramco, and the ADMA 4 GI project in the U.A.E.

The second quarter of 2016 cost of operations included costs associated with: (1) fabrication and marine activities on the Marjan power system replacement project; (2) a lump-sum EPCI project under the LTA-II; and (3) fabrication and installation progress on a twelve jackets supply project, all with Saudi Aramco. The 2016 second quarter cost of operations also included costs related to the

commencement in 2016 of: (1) a large pipeline-related project in the Middle East; and (2) offshore marine campaign hookup progress on a wellhead jacket and umbilical project in Qatar.

ASA—Cost of operations in our ASA segment decreased by 44%, or $208 million, in the second quarter of 2016 compared to the second quarter of 2015. The decrease was primarily due to (1) lower activity on the Ichthys EPCI project in Australia, as the project progresses through the marine transportation and installation phase; and (2) completion of the BSP pipeline replacement project. Those decreases were partially offset by costs incurred on (1) the Yamal module fabrication project, awarded in the third quarter of 2015; and (2) the Bergading offshore installation project in Malaysia which was completed in the second quarter of 2016.

Operating Income

Operating income is frequently influenced by the resolution of change orders, project close-outs and settlements, which generally can cause operating margins to improve during the period in which these items are approved or finalized. While we expect change orders, close-outs and settlements to continue as part of our normal business activities, the period in which they are recognized is largely driven by the finalization of agreements with customers and suppliers and, as a result, is difficult to predict. Additionally, the future margin increases or decreases associated with these items are difficult to predict, due to, among other items, the difficulty of predicting the timing of recognition of change orders, close-outs and settlements and the timing of new project awards.

Segment Analysis

Operating results for the three months ended June 30, 2016 and 2015 were $57 million and $49 million, respectively, an increase of $8 million, primarily due to improvements in our MEA segment.

AEA—Operating income decreased by $3 million from $6 million in the second quarter of 2015 to $3 million in the second quarter of 2016.

The decline in AEA segment’s second quarter of 2016 operating income was primarily driven by lower cost recovery associated with our fabrication facility at Altamira and our vessels due to a reduction in active projects. Those decreases were partially offset by close-out improvements on two significant projects, PB Litoral and the Exxon Julia Subsea Tieback, and net favorable changes in estimates aggregating approximately $7 million, primarily attributable to productivity improvement and associated cost savings related to our DB 50 and NO 102 vessels’ marine campaigns undertaken in the Gulf of Mexico.

Operating income during the second quarter of 2015 benefited from the settlement of a $12 million weather-related change order on our Papa Terra project, which was not repeated in the second quarter of 2016.

MEA—Operating income improved by $11 million from $31 million in the second quarter of 2015 to $42 million in the second quarter of 2016, primarily due to: (1) jacket fabrication and installation activity on a project to supply twelve jackets; (2) productivity improvements and associated cost savings related to the DB 27 and Intermac 406 vessels; (3) increased engineering and marine activities on the Marjan power systems replacement project; and (4) engineering activity on the LTA-II project, all with Saudi Aramco. The commencement in 2016 of: (1) a large pipeline-related project in the Middle East; and (2) an offshore marine hookup campaign progress on a wellhead jacket and umbilical project in Qatar also contributed to our MEA segment operating income.

In the second quarter of 2015, operating income included $40 million of benefits from: (1) improved marine productivity and efficient demobilization on a cable-lay project; (2) improved productivity and efficient demobilization on a deck installation project; and (3) higher fabrication activity and a marine campaign for installation of observation platforms and jackets. Those projects were substantially complete in 2015.

ASA—Operating income decreased by $5 million from $17 million in the second quarter of 2015 to $12 million in the second quarter of 2016. The decrease was primarily due to the completion of our BSP pipeline replacement project and other projects that were active in the second quarter of 2015. The operating income for the second quarter of 2016 was primarily driven by marine transportation and installation activity, improved productivity, project execution cost savings and recognition of approved change orders on our active projects, notably the Ichthys project in Australia, the Bergading project in Malaysia and fabrication activity at our Batam facility.

Other Items in Operating Income

Restructuring expenses—Restructuring expenses included in operating income were $2 million and $15 million in the second quarter of 2016 and 2015, respectively. See Note 4, Restructuring, to the accompanying Consolidated Financial Statements.

Other income (Expense)

Interest expense, net―Interest expense, net was $13 million in each of the second quarters of 2016 and 2015. Interest expense for both periods is associated with our long-term debt obligations discussed in Note 7, Debt, to the accompanying Consolidated Financial Statements.

Loss on foreign currency, net―Foreign currency loss was $2 million in the second quarter of 2016 and foreign currency gain was $2 million in the second quarter of 2015. In the second quarter of 2016, losses related to foreign currency remeasurement were $2 million and losses on hedging activities were immaterial. In the second quarter of 2015, gains related to hedging activities were $2 million and losses related to foreign currency remeasurement were immaterial.

Provision for Income Taxes

For the three months ended June 30, 2016, the Company recognized income before provision for income taxes of $41 million, compared to income before provision for income taxes of $37 million in the three months ended June 30, 2015. In the aggregate, the provision for income taxes was $20 million and $17 million for the three months ended June 30, 2016 and 2015, respectively. The increase in the provision for income taxes was mainly driven by increase in profits in certain taxable jurisdictions in which we operate (primarily Australia and Saudi Arabia), which was partially offset by losses in certain jurisdictions where we did not recognize a tax benefit.

Losses from investments in unconsolidated affiliates

We participate with third parties in the ownership of certain entities, which we sometimes refer to as “joint ventures,” for convenience of reference. Those entities are organized in various forms, including as corporations, limited liability companies and other companies with limited liability. By using the term “joint venture,” we are not implying that those entities constitute general partnerships. Some of those joint venture entities are not consolidated and are generally accounted for under the equity method of accounting. We refer to those entities as “unconsolidated affiliates.”

The loss from investments in our unconsolidated affiliates in the second quarter of 2015 was $7 million compared to an immaterial gain in the second quarter of 2016. The improvements were primarily attributable to two of our joint ventures.

Noncontrolling Interests

Net income attributable to noncontrolling interests was $1 million and $2 million in the second quarters of 2016 and 2015, respectively. The change was primarily due to losses incurred by our Malaysian joint venture, Berlian McDermott Sdn. Bhd.

Six Months ended June 30, 2016 Compared to Six Months ended June 30, 2015

Revenue

Revenues decreased by 10%, or $161 million, in the six months ended June 30, 2015 compared to the six months ended June 30, 2015, primarily due to decreases in our AEA and ASA segments, partially offset by an increase in our MEA segment.

AEA—Revenues decreased by 40%, or $99 million, primarily due to a reduction in active projects in 2016 compared to 2015.

In the first half of 2016, the following projects provided revenues (1) fabrication/spooling and installation of jumpers and control umbilicals at the Jack St. Malo project in the Gulf of Mexico, which was completed in the second quarter of 2016; (2) transportation, installation and marine campaigns executed by our DB 50 and NO 105 vessels on the EOG Sercan project in Trinidad, West Indies; (3) hookup activities associated with the PB Litoral project, which was substantially complete in the first quarter of 2016; (4) completion of the LLOG Otis subsea tieback project in the Gulf of Mexico; (5) fabrication activity progress on the Ayatsil-C jacket replacement and deck installation project at our Altamira facility; and (6) marine campaigns executed by our DB 50 vessel on our Exxon Julia Subsea Tieback project in the Gulf of Mexico.

In first half of 2015, the following projects which were complete or substantially complete in 2015 contributed to revenue: (1) the NO 102, NO 105 and Agile vessel charter campaigns in Brazil; (2) fabrication activity on our PB Litoral project, which was substantially complete in the first quarter of 2016 in the Gulf of Mexico; (3) Ayatsil-A, a T&I project; (4) a mobile drilling structure installation project executed by our DB 50 vessel in the Gulf of Mexico; and (5) project close-out payments associated with our Papa Terra project in Brazil.

MEA—Revenues increased by 2%, or $14 million, in the six months ended June 30, 2016 and 2015, respectively.

In the first half of 2016, revenues were contributed by the following projects: (1) fabrication and installation progress on a twelve jackets supply project, fabrication and marine activities on the Marjan power system replacement project, and engineering activities on

a lump-sum EPCI project under the LTA-II, all with Saudi Aramco; and (2) engineering and fabrication activity on our KJO Hout project in the Neutral Zone. The commencement in 2016 of: (1) a large pipeline-related project in the Middle East; (2) offshore marine hookup campaign progress on a wellhead jacket and umbilical project; and (3) a RasGas EPCI contract awarded in the third quarter of 2015 in Qatar also contributed to the 2016 revenue.

In the first half of 2015, the following projects, which are now either complete or were substantially complete in 2015, contributed to revenue: (1) the Karan 45, Abu Ali Cables, Safaniya phase 2 and Manifa facilities projects, all with Saudi Aramco; (2) the ADMA 4 GI project in the U.A.E.; and (3) the KJO Ratawi project in the Neutral Zone.

ASA—Revenues decreased 10%, or $77 million, primarily due to completion or near completion in 2015 of: (1) the BSP pipeline replacement project; (2) the Gorgon MRU project; and (3) the Bukit-Tua platform/subsea spools installation project. Reduced activity on our Ichthys EPCI project in Australia also contributed to the decrease in revenues as the project progresses through the marine transportation and installation phase. Those decreases were partially offset by commencement of the following new projects in 2016: (1) the Yamal module fabrication project awarded in the third quarter of 2015; and (2) the Bergading offshore installation project in Malaysia which was completed in the second quarter of 2016.

Cost of Operations

Cost of operations decreased by 14%, or $190 million, in the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

AEA—Cost of operations decreased 39%, or $76 million, due to the completion or substantial completion of: (1) NO 102, NO 105 and Agile vessel charter campaigns in Brazil; (2) the Ayatsil-A project; (3) a mobile drilling structure installation project executed by our DB 50 vessel in the Gulf of Mexico; and (4) PB Litoral project at our Altamira fabrication facility in 2015.

In 2016, those decreases were partially offset by: (1) transportation, installation and marine campaigns executed by our DB 50 and NO105 vessels on the EOG Sercan project in Trinidad, West Indies; (2) the Jack St. Malo fabrication/spooling and installation of jumpers and control umbilicals project in the Gulf of Mexico; (3) the LLOG Otis subsea tieback project in the Gulf of Mexico; and (4) fabrication progress on the Ayatsil-C jacket replacement and deck installation project at our Altamira facility.

MEA—Cost of operations decreased by 6%, or $28 million, primarily due: (1) completion or near completion in 2015 of the Karan 45, Abu Ali Cables, Safaniya Phase 2 and Manifa facilities projects, all with Saudi Aramco; and the ADMA 4 GI project in the U.A.E. Those decreases were partially offset by progress in 2016 on contracts awarded in 2015, which include: (1) fabrication and installation progress on a twelve jackets supply project; (2) fabrication and marine activities on the Marjan power systems replacement project; and (3) engineering activities on a lump-sum EPCI project under LTA-II, all with Saudi Aramco. The commencement in 2016 of a large pipeline-related project in the Middle East, offshore marine campaign hookup progress on a wellhead jacket and umbilical projects; and a RasGas EPCI contract awarded in the third quarter of 2015, in Qatar also offset the cost of operations decrease.

ASA—Costs of operations decreased by 12%, or $86 million, primarily due to completion or near completion in 2015 of: (1) the BSP pipeline replacement project; (2) the Gorgon MRU project; and (3) the Bukit-Tua platform/subsea spools installation projects. Reduced activity on our Ichthys EPCI project in Australia also contributed to the decrease in cost of operations as the project progresses through the marine transportation and installation phase. Those decreases were partially offset by commencement of the following new projects in 2016: (1) the Yamal module fabrication project, awarded in the third quarter of 2015; and (2) the Bergading installation project in Malaysia which was completed in the second quarter of 2016.

Operating Income

Operating results for the six months ended June 30, 2016 increased by $31 million over the same period during the prior year, from $62 million of operating income in the first half of 2015 to $93 million of operating income in the first half of 2016, primarily due to improvements in our MEA and ASA segments.

Segment Analysis

AEA—Operating income (loss) decreased $44 million from an operating income of $22 million in the first half of 2015 to an operating loss of $22 million in the first half of 2016.

The AEA segment’s first half of 2016 operating loss was primarily driven by lower cost recovery associated with our fabrication facility at Altamira and our vessels due to a reduction in active projects, as well as a $32 million non-cash impairment charge related to our Agile vessel, discussed below.

Those decreases were partially offset by net favorable changes in estimates aggregating approximately $23 million, primarily due to successful execution and close-out improvements on two significant projects, PB Litoral and the Exxon Julia Subsea Tieback, as well as productivity improvement and associated cost savings related to our DB 50 and NO 102 vessels’ marine campaigns undertaken in the Gulf of Mexico. Included in the $23 million of changes in project estimates was also a reversal of a $7 million provision for liquidated damages due to an agreed extension of the PB Litoral project completion date.

During the first half of 2016, we impaired our Agile vessel upon termination of its charter in May 2016 given the lack of opportunities for this type of vessel. In connection with that decision, we recognized a non-cash impairment charge of $32 million during the first quarter of 2016, which equaled the vessel’s carrying value.

The first half of 2015 operating income in the AEA segment was primarily provided by (1) marine charter activities in Brazil undertaken by the NO 102, NO 105 and Agile vessels; (2) Intermac 600’s marine campaign in the Gulf of Mexico; and (3) $11 million of benefit as a result of favorable outcome in our discussions with the customer on compensation for weather delays related to the Papa Terra project, which were not repeated in the second half of 2016.

MEA—Operating income in the first half of 2016 and 2015 was $80 million and $36 million, respectively, an improvement of $44 million. The improvement was primarily due to: (1) jacket fabrication and installation activity on a project to supply twelve jackets; (2) productivity improvements and associated cost savings related to the DB 27 and Intermac 406 vessels; (3) a benefit from increased engineering and marine activities on a power systems replacement project; (4) favorable discussions with a customer on reimbursement of weather and standby delays; and (5) engineering activity on the LTA-II project, all with Saudi Aramco. The commencement in 2016 of: (1) a large pipeline-related project in the Middle East; and (2) an offshore marine hookup campaign progress on a wellhead jacket and umbilical project in Qatar also contributed to our MEA segment operating income.

In the first half of 2015, operating income included $64 million of benefits from: (1) improved marine productivity and efficient demobilization on a cable-lay project; (2) improved productivity and efficient demobilization on a deck installation project; (3) the award of an EPCI change order on the KJO Hout project; and (4) higher fabrication activity and a marine campaign for an installation observation platforms and jackets project.

ASA—Operating income in the first half of 2016 and 2015 was $37 million and $10 million, respectively, an increase of $27 million. The increase was primarily attributable to (1) improved productivity and project execution cost savings and recognition of approved change orders on active projects; and (2) close-out improvements on our completed projects. The first half of 2015 operating income also included a $4 million impairment related to the DB 101 vessel and a $3 million loss on disposal of an asset, which were not repeated in 2016.

Other Items in Operating Income

Selling, general and administrative expenses (“SG&A”)—SG&A was $90 million and $99 million in the six months ended June 30, 2016 and 2015, respectively. We continue our efforts to improve our cost structure, and the implementation of both our MPI and AOR programs contributed to lower SG&A expense in the six months ended June 30, 2016 compared to the corresponding 2015 period.

Restructuring expenses—Restructuring expenses included in operating income were $9 million and $26 million in the six months ended June 30, 2016 and 2015, respectively, a decrease of $17 million. See Note 4, Restructuring, to the accompanying Consolidated Financial Statements. As a part of the restructuring, in the first quarter of 2015, one of our vessels, the DB 101, which was held and used in the ASA segment, was written down to a fair value of $14 million, resulting in a non-cash impairment charge of $4 million. In the second quarter of 2015, we disposed of the asset and recognized an additional loss of $3 million.

Other Items

Interest expense, net―Interest expense, net was $24 million and $25 million in the six months ended June 30, 2016 and 2015, respectively. Interest expense for both periods is associated with our long-term debt obligations discussed in Note 7, Debt, to the accompanying Consolidated Financial Statements.

Loss on foreign currency, net―Foreign currency losses were $5 million in the six months ended June 30, 2016. Losses related to foreign currency remeasurement were $11 million and hedging activities were $1 million, which were partially offset by a $7 million correction as described in Note 11, Stockholders’ Equity. Foreign currency gain in the six months ended June 30, 2015 was not material.

Provision for Income Taxes

For the six months ended June 30, 2016, the Company recognized income before provision for income taxes of $63 million, compared to an income before provision for income taxes of $37 million in the six months ended June 30, 2015. In the aggregate, the provision for income taxes was $39 million and $21 million for the six months ended June 30, 2016 and 2015, respectively. The increase in the provision for income taxes was mainly driven by increased taxable profits in certain jurisdictions in which we operate (primarily Australia and Saudi Arabia), which was partially offset by losses in certain jurisdictions where we did not recognize a tax benefit.

Losses from Investments in Unconsolidated Affiliates

The loss from investments in our unconsolidated affiliates was $4 million and $14 million in the first half of 2016 and 2015, respectively. The improvements were primarily attributable to two of our joint ventures.

Noncontrolling Interests

Net income attributable to noncontrolling interests decreased by $4 million to $1 million in the six months ended June 30, 2016 from $5 million in the six months ended June 30, 2015, primarily due to lower profitability in our Indonesian joint venture and losses incurred by our Malaysian joint venture, Berlian McDermott Sdn. Bhd.

Critical Accounting Policies and Estimates

For a discussion of critical accounting policies and estimates we use in the preparation of our Consolidated Financial Statements, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 22, 2016. See Note 1 to our unaudited Consolidated Financial Statements included in this report for information on recently adopted accounting standards.

Backlog

Backlog represents the dollar amount of revenues we expect to recognize in the future from contracts awarded and those that are in progress. These amounts are presented in U.S. dollars. Currency risk associated with backlog contracts that is not mitigated within the contract is generally mitigated with the use of foreign currency derivative (hedging) instruments, when deemed significant. However, these actions may not eliminate all currency risk exposure included within our long-term contracts. Backlog is not a measure defined by generally accepted accounting principles and is not a measure of contract profitability. Our methodology for determining backlog may not be comparable to methodologies used by other companies in determining their backlog amounts. The backlog values we disclose include anticipated revenues associated with: (1) the original contract amounts; (2) change orders for which we have received written confirmations from the applicable customers; (3) change orders for which we expect to receive confirmations in the ordinary course of business; and (4) claims that we have made against our customers. We do not include expected revenues of contracts related to unconsolidated joint ventures in our backlog, except to the extent of any contract awards we may receive from those joint ventures.

We include unapproved change orders for which we expect to receive confirmations in the ordinary course of business in backlog, generally to the extent of the lesser of the amounts we expect to recover or the associated costs incurred. Any revenue that would represent profit associated with unapproved change orders is generally excluded from backlog until written confirmation is obtained from the applicable customer. However, consideration is given to our history with the customer, as well as the contractual basis under which we may be operating. Accordingly, in certain cases based on our historical experience in resolving unapproved change orders with a customer, the associated profit may be included in backlog. At June 30, 2016 and December 31, 2015, the total unapproved change orders included in our estimates at completion aggregated approximately $122 million, of which approximately $24 million and $21 million, respectively, were included in backlog. If an unapproved change order is disputed or rejected by the customer, the associated amount of revenue is treated as a claim.

We include claims in backlog only when we have a legal basis to do so, consider collection to be probable and believe we can reliably estimate the ultimate value. Claims revenue is included in backlog to the extent of the lesser of the amounts we expect to recover or associated costs incurred. Claims revenue in backlog at June 30, 2016 and December 31, 2015 was not material.

Backlog may not be indicative of future operating results, and projects in our backlog may be cancelled, modified or otherwise altered by customers. We can provide no assurance as to the profitability of our contracts reflected in backlog. It is possible that our estimates of profit could increase or decrease based on, among other things, changes in productivity, actual downtime and the resolution of change orders and claims with the customers.

The following table summarizes changes to our backlog (in thousands):

Backlog at December 31, 2015	$	4,231,447
Bookings from new awards		1,416,162
Additions and reductions on existing contracts		157,894
Less: Amounts recognized in revenues		1,435,659
Backlog at June 30, 2016⁽¹⁾	$	4,369,844

⁽¹⁾

At June 30, 2016, approximately 54% of this backlog revenue was attributable to Saudi Aramco

Our backlog by segment was as follows:

	June 30, 2016
	(in approximate millions)
AEA	$	630	14	%
MEA		2,838	65	%
ASA		902	21	%
Total Backlog	$	4,370	100	%

Of the June 30, 2016 backlog, we expect to recognize revenues as follows:

	2016		2017		Thereafter
	(in approximate millions)
Total backlog	$	1,136	$	2,364	$	870

Liquidity and Capital Resources

Our primary internal source of liquidity is cash flow generated from operations and cash and cash equivalents on hand. Capacity under our existing credit arrangements is also available, if necessary, to provide letters of credit, bank guarantees and surety bonds. These letters of credit, bank guarantees and surety bonds are generally issued to customers in the ordinary course of business to support advance payments and performance guarantees, in lieu of retention on our contracts.

Credit Agreement, Senior Notes and Amortizing Notes

In October 2015, we entered into an Amendment No. 1, which amended the Credit Agreement primarily to increase the existing LC Facility from $400 million to $520 million.

On April 18, 2016, we entered into an Amendment No. 3 to the Credit Agreement, which, among other things:

replaced the existing EBITDA covenant with new ratios (as defined in Amendment No. 3) as follows:

a minimum fixed charge coverage ratio of 1.15x for the fiscal quarter ended March 31, 2016 and each fiscal quarter thereafter;

a maximum secured leverage ratio of 2.0x for the fiscal quarter ended March 31, 2016 and each subsequent fiscal quarter through December 31, 2017, and 1.5x for each fiscal quarter thereafter; and

In addition, upon the May 13, 2016 satisfaction of certain conditions set forth in Amendment 3, including the requisite consents from term lenders, Amendment 3 also amended the Credit Agreement to, among other things: