Mcdermott International (MDRIQ) DEFA14A Additional proxy soliciting materials

UNITED STATES

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EXPLANATORY NOTE

Beginning on March 21, 2016, the following materials are being provided to certain stockholders of McDermott International, Inc. (the “Company”) in connection with the solicitation of proxies for the Company’s 2016 Annual Meeting of Stockholders to be held on April 29, 2016.

© Copyright 2016 McDermott International, Inc. All Rights Reserved

Investor Presentation:

2016 Annual Meeting of Stockholders

1

About McDermott

Leading provider of integrated engineering, procurement, construction and installation services for oil and gas field

developments worldwide

At any given time, 40 or fewer active contracts typically spanning a duration of one to three years, performed in a variety of

jurisdictions

and each ranging from less than $50 million to more than $2 billion in total contract value

Engaged and Highly Qualified Board

Board consists of highly qualified, independent directors with a breadth and variety of experience

Committed to thoughtful Board refreshment process, demonstrated by the recent appointment of a new, independent

director with Middle East expertise

Stockholder input is a priority for the Board as evidenced by fall 2015 outreach to approximately 40% of our outstanding

common stock, leading to meetings with stockholders representing approximately 30% of our outstanding common stock led

by the Chair of our Compensation Committee and the Chair of our Governance Committee

Strong Compensation Practices

Significant emphasis on variable, “at risk” compensation that aligns pay with performance

Rigorous

financial performance metrics directly linked to Company strategy with disclosed performance goals

Compensation program reflects adherence to strong compensation governance practices

Improved Financial and Operating Performance

TSR for FY 2015 was 15%, as compared to our proxy peer group’s TSR of -33%

FY 2015 operating income of $91.2 million, which exceeded FY 2014 of $8.6 million and FY 2013 of ($456.7) million

Order

intake

of

$3.7

billion

in

FY

2015

exceeded

the

amount

of

order

intake

for

FY

2014

and

FY

2013

combined

and

assisted

in

achieving year-end backlog of $4.2 billion, a $600 million increase from 2014

Executive Summary

2

McDermott Today

A vertically integrated offshore and subsea engineering and

construction company executing projects from concept to installation

Strategically located fabrication yards and a versatile marine fleet

Strong long-term relationships with leading energy customers globally

Market Cap:

~$1.0B

2015 Revenue:

$3B

Headquarters:

Houston, TX

Global Operations: ~20 Locations

Employees:

~10,600

Engineering

Help bring offshore

exploration into

production

Procurement

Ensure quality

materials, right price,

optimal schedule

Construction

Fabricate complex

structures for

delivery worldwide

Installation

Execute installation

campaigns for

success

1

As of March 17, 2016

1

3

Operational Turnaround

Through the turnaround McDermott has remained highly focused on developing and

implementing its operating strategy

2015

2013

2014

2015

2016

Mar 2014:

All financial

guidance was

withdrawn and

guidance for the

foreseeable

future was

suspended

Apr 2014:

Refinanced

existing credit

agreement, issued

senior notes and

tangible equity

units representing

$1.3B

January 2015:

Launched McDermott

Profitability Initiative to

increase organizational

efficiency, centralize various

front-

and back office

functions, and recognize

operational cost initiatives

Mar 2015:

Reinitiated

financial

guidance

following

withdrawal

in March

2014

Dec 2015:

McDermott

Profitability

Initiative

completed with

over $100M in

savings

Oct –

Dec 2013:

David Dickson joined

McDermott in October

2013 and was appointed

President and CEO and

member of the Board in

December

Jan –

Aug 2014:

Executive changes:

•

EVP & CFO

•

EVP Offshore

•

EVP Subsea

•

SVP HR

•

Regional Vice Presidents

May 2014:

Gary Luquette

assumed role of

independent

Chairman of the

Board

Apr –

Nov 2015:

Board engaged in a

stockholder outreach

program to discuss

stockholder perspectives

on governance and

compensation

Dec

2015

–

Feb

2016:

Board considered and

implemented stockholder

feedback regarding

executive compensation

program and proxy

disclosure

4

2015 Significantly Improved Financial

Performance

Despite the deteriorating oil and gas environment, McDermott improved financial performance

and outperformed peers in 2015

($ in millions, except as noted)

FY

2015

FY

2014

Y/Y Change

Orders

$3,701

$1,100

+ $2,601

Backlog

$4,231

$3,601

+ $630

Revenue

$3,070

$2,301

+ $769

Profitability Metrics

Gross Profit

$379

$188

+ $191

Gross Profit

Margin

12.3%

8.2%

+ 4.1%

Operating Income

$91

$9

+ $82

OI Margin

Percentage

3.0%

0.4%

+ 2.6%

Diluted EPS

($0.08)

($0.32)

+ $0.24

15%

-33%

-31%

MDR

Peer Group

Brent Crude

MDR 2015 TSR

vs. Peers TSR and Oil Price

Erich Kaeser

Retired CEO

Siemens Middle East

Focused and Engaged Board of Directors

Thoughtful Succession Planning Process and Impact on Board Refreshment

Middle East Markets

Energy/Infrastructure Services Industry

Executive Leadership

Financial Oversight

Knowledge of Core Customers

International Operations

Relevant Skills and Experience

3

4

2

3 years or less

4 to 7 years

8 years or more

Tenure Balance

Board

Self-evaluations

Director

Recruitment

Director

Onboarding

Conduct annual

self-evaluations to

determine whether

the Board and its

Committees are

functioning effectively

Use skills matrix to

assess the Board’s

effectiveness and

engage a search

firm to recruit top

director talent

Onboarding

program

for new directors

allows each individual

to make meaningful

contributions quickly

New Independent Director Appointed

in February 2016

Board Independence

Independent Directors

Non-independent Directors

5

9

9

9

7

7

5

Executive Leadership

Energy/Oilfield Services

International Operations

Financial Oversight Responsibilities

Public Company Board

Corporate Governance

Experience with Core Customers

8

6

Compensation Program Changes Informed by

Stockholder Engagement with Directors

Outreach in 2015

Reached out to stockholders

representing ~40% of

outstanding

common

stock

and

proxy advisory firms to

understand their perspectives

on a variety of topics including

governance and compensation

Director Participation

Conducted in-person meetings

with stockholders representing

~30% of outstanding common

stock

Meetings were led by

Compensation Committee

Chair or Governance

Committee Chair

Stockholder Feedback

Feedback from these meetings

was collected and ultimately

shared with the full Board

The Board factored this

feedback into its decision

making process as detailed

below

Board Response

The Board is committed to

understanding and addressing

stockholder feedback and

looks

forward

to

continuing

the

dialogue

What

we heard from stockholders

Actions

the Board has taken in response

Enhance

transparency in proxy disclosures

Provided

clarity

and

transparency

in

the

proxy

on

compensation

matters,

including

disclosure

on how compensation is linked to

strategy and specific targets of the programs

Keep

executive compensation plans consistent

Compensation

Committee

approved

continuing

use

of

2014

and

2015

metrics

in

2016

annual

incentive plan

Consider a relative metric for LTIP awards

Compensation

Committee

approved

the

use

of

Return

on

Average

Invested

Capital

relative

to

a

competitor peer group as the performance

metric for the 2016 Performance Unit awards

Require double-trigger vesting of equity awards

upon a change in control

2016

LTIP

provides

for

double-trigger

vesting

upon

a

change

in

control,

except

where

the

awards

are not assumed in the transaction

Consider composition of peer group

Added

a

competitive

peer

group

of

both

domestic

and

international

peers

for

determining

performance

under the 2016 Performance Unit awards

Maintain

strong

corporate

governance

foundation

and commitment to Board refreshment

Demonstrated

commitment

to

Board

refreshment

by

appointing

a

new

independent

director

with experience

in the Middle East

Continue stockholder engagement

Board has prioritized engagement

and will continue its vigorous outreach program

7

13% Annual Base

Fixed cash compensation

recognizing an executive

officer’s experience, skill and

performance

13% Annual Incentives

Variable compensation

designed to reward

achievement of short-term

business goals and strategic

objectives, while recognizing

individual contributions

74% Long-Term Incentives

Variable compensation

designed to align interests of

executives with those of our

stockholders with a focus on

long-term performance results

Elements of 2015 Direct Compensation

McDermott’s 2015 compensation programs utilized metrics that were directly related to the

Company’s 2015 strategies and goals

Annual Incentive Components

Long-Term Incentive Components

25% Operating Income: Promotes improved project execution

25% Free Cash Flow: Prioritizes liquidity needs

30% Order Intake: Incentivizes increasing backlog and booking

new work

20% Order Intake Operating Margin: Promotes pricing

discipline on order intake

McDermott Profitability Initiative (“MPI”) Modifier:

Incentivizes achievement of goals relating to MPI

50% Performance Units: 3-Year Aggregate Consolidated Order

Intake incentivizes increasing backlog and booking new work,

increased to 50% in 2015 from 40% in 2014

50% Restricted Stock Units: The weighting of RSUs decreased

to 50% in 2015 from 60% in 2014

87% At Risk

CEO Target 2015 Compensation

8

Strong Tie Between Strategy and

Performance Metrics

Drive profitability via

improved

project execution

Our

operating

strategy

–

to

drive

a

sustainable,

profitable

and

growth-oriented

business,

with

a

focus

on

stockholders,

customers

and

other

stakeholders

–

has

contributed

to

the

achievement

of

2015

goals

Prioritize liquidity

needs

Support future business

Promote pricing discipline

on new work

Implement McDermott

Profitability Initiative

(“MPI”), to increase

profitability and operational

flexibility

2015 Goal

Performance

Metric

Performance

Thresholds

Actual

Result

Operating Income

Free Cash Flow

Order

Intake

Order Intake Operating

Margin

2015 Operating

Income

Savings Attributable to

MPI

Threshold:

Target:

Maximum:   

$40M

$53M

$67M

$91.2M

$(47.6)M*

$3,700.7M

7.3%

$115M

*Actual result for free cash flow was ($47.6M), which would have resulted in a funding multiple of 2.0x for this metric under the EICP. However, such result was reduced by the Compensation

Committee in determining the funding multiple for this metric to ($250.4M), or a funding multiple of 1.071x, in consideration of the slippage in the delivery schedule of our vessel under

construction, the DLV 2000, resulting in delay of our final shipyard payment until 2016.

Threshold:

Target:

Maximum:

$(320)M

$(255)M

$(190)M

Threshold:

Target:

Maximum:

$3,000M

$5,900M

$6,500M

Threshold:  

Target:

Maximum:

7%

10%

12%

Threshold: 

= Target:

Maximum:

$30M = 0.67x

$40M = 1.0x

$50M = 1.33x

9

Significantly Improved Financial Performance

Driven by Compensation Plan Design

Backlog

Free Cash Flow

Order Intake

Operating Income

Operating income implemented as PSU metric in 2014 after 2013 operating loss of ($456.7M)

Operating income increased to $8.6M in 2014 and $91.2M in 2015

Free cash flow used as metric in annual incentive plan in 2014 and 2015 after 2013 free cash flow of ($540.6M)

Free cash flow increased to ($314.2M) in 2014 and ($47.6M) in 2015

Order intake implemented as PSU metric in 2015 after order intake of $1.1B in 2014, a decrease of more than 50% from 2013

Order intake increased to $3.7B in 2015 and backlog increased to $4.2B

Order intake margin implemented as metric in annual incentive plan in 2014 and 2015

Promotes margin bidding discipline in a difficult macro oil and gas environment

Note: figures as of December 31

10

Evolution of Compensation Program

Compensation program has evolved to drive company turnaround and growth goals

Annual

Incentive Plan

Long-Term

Incentive Plan

Changes Made in 2014

Changes Made in 2016

Changes Made in 2015

Other

Utilized four financial metrics

(rather than a single metric as

in 2013)

Introduced a corporate

performance goal

Introduced metric based on

individual performance

Included same four financial

plan components as 2014

Eliminated non-financial

corporate and individual goals

introduced in 2014

Introduced McDermott Profit-

ability Initiative (MPI) modifier

Included same four financial plan components

as 2014 and 2015 but eliminated MPI modifier

used only in 2015

Included effects of Accelerated Overhead

Reduction Program in targets

Enhanced disclosure to better communicate

target and actual performance of non-

competitively sensitive metrics

Introduced cumulative order

intake metric

Returned the performance

unit weighting to 50%

Approved use of relative ROAIC

as

performance metric

Added competitive peer group for

determining performance

Provided the same number of units as in 2015

absent any change in target value of LTI Award

Reduced target value of CEO award from $5

million to $4 million

Enhanced disclosure to better communicate

target and actual performance

Eliminated options: RSU and

Performance Shares only

Introduced aggregate

consolidated operating

income metric (rather than

ROIC as in 2013)

Reduced Performance Shares

weighting from 50% to 40%

No material changes made to

other compensation elements

in 2014

No material changes made to

other compensation elements

in 2015

Removed single trigger provisions on a go-

forward basis

11

Strong Corporate Governance and

Compensation Practices Remain a Priority

The Board is actively engaged in shareholder

outreach efforts

Independent Board Chairman

Commitment to director refreshment

Use independent director search firm in

selecting director candidates

Majority voting for director elections

Annual Board and Committee evaluation

process

Succession planning oversight

Board risk oversight

Board and Governance

Long-term incentive compensation is subject

to forfeiture

Annual incentive compensation is subject to

linear and capped payouts

Use of multiple performance metrics

Significant stock ownership guidelines for

directors and executive officers

Double-trigger change-in-control agreements

Annual review of share utilization

Independent compensation consultant

Annual review of peer group

Clawback policy

No repricing of underwater stock options

No excise tax gross-ups

No derivatives trading, hedging or pledging of

Company stock

No employment contracts

Compensation Practices

Our Board believes in sound corporate governance and places significant weight on stockholder

feedback in making decisions on governance processes and compensation programs