Summary of MCDERMOTT INTERNATIONAL INC

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

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included under Item 1 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, 2008.

In this quarterly report on Form 10-Q, unless the context otherwise indicates, "we," "us" and "our" mean MII and its consolidated subsidiaries.

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.

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 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," "believe," "expect," "anticipate," "plan," "goal" or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.

In addition, various statements in this quarterly report on Form 10-Q, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these

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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;

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

· decisions on spending by the U.S. Government and electric power generating companies;

· the highly competitive nature of most of our businesses;

· cancellations of and adjustments to backlog and the resulting impact from using backlog as an indicator of future earnings;

· our ability to perform projects in our Offshore Oil and Gas Construction segment on time, in accordance with the schedules established by the applicable contracts with customers;

· changes in legislation and regulations which impact the ability of inverted companies and their subsidiaries to obtain contracts from the U.S. Government;

· the ability of our suppliers to deliver raw materials in sufficient quantities and in a timely manner;

· volatility and uncertainty of the credit markets;

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

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

· the continued availability of qualified personnel;

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

· 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 emissions in the future;

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

· rapid technological changes;

· the realization of deferred tax assets, including through a reorganization we completed in December 2006;

· 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 businesses we acquire;

· the risk we might not be successful in updating and replacing current key financial and human resources legacy systems with enterprise systems;

· social, political and economic situations in foreign countries where we do business, including countries in the Middle East and Asia Pacific and the former Soviet Union;

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

· the affects of asserted and unasserted claims;

· 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 insurance captives; and

· the impact of the loss of certain insurance rights as part of the Chapter 11 bankruptcy settlement.

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 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, 2008. 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

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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

GENERAL

Capital Intensive Business Segments

In general, our business segments are composed of capital-intensive businesses that rely on large contracts for a substantial amount of their revenues. Each of our business segments is financed under a separate credit facility. Our debt covenants limit using the financial resources of or the movement of excess cash from one segment for the benefit of the other. For further discussion, see "Liquidity and Capital Resources" below.

Accounting for Contracts

As of September 30, 2009, in accordance with the percentage-of-completion method of accounting, we have provided for our estimated costs to complete 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. The risk on fixed-priced contracts is that revenue from the customer does not rise to cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, pipeline lay rates or steel and other raw material prices. In some instances, we guarantee completion dates related to our projects. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated results of operations, financial condition and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated results of operations, financial condition and cash flows.

Some of our contracts contain penalty 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 these provisions. These contracts define the conditions under which our customers may make claims against us for liquidated damages. In many cases in which we have had potential exposure for liquidated damages, such damages ultimately were not asserted by our customers. As of September 30, 2009, we have liquidated damage contingencies of approximately $100 million based on our failure to meet such specified contractual milestone dates, all in our Offshore Oil and Gas Construction segment, of which $14 million has been recorded in our financial statements. We do not believe any additional claims for these potential liquidated damages are probable of being assessed. The trigger dates for these potential liquidated damages range from June of 2008 to September 30, 2009. We are in active discussions with our customers on the issues giving rise to delays in these projects, and we believe we will be successful in obtaining schedule extensions that should resolve the potential for liquidated damages being assessed. However, we may not achieve relief on some or all of the issues.

Regulation of Inverted Companies

As a result of our reorganization we completed in 1982 through a transaction commonly referred to as an "inversion," the parent company of our group of companies is McDermott International, Inc. ("MII"), a corporation organized under the laws of the Republic of Panama. Certain prior and current U.S. legislative proposals and enactments have sought to prohibit the U.S. Government from contracting with so-called "inverted" companies and their subsidiaries in connection with various government operations. To date, such legislative actions have not adversely affected our U.S. Government contract work, although there can be no assurance that this would continue to be the case.

Additionally, on July 1, 2009, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the "FAR Councils"), acting under the U.S. Federal Acquisition Regulation (the "FAR"), adopted interim rules, with an immediate effective date, that established contracting procedures to implement a mandate in the Omnibus Appropriations Act, 2009, that generally prohibits federal agencies from awarding new contracts to inverted companies and their subsidiaries with U.S. federal appropriated funds for fiscal year 2009 and certain prior fiscal years. The current version of the proposed U.S. federal appropriations legislation for 2010 contains restrictions on contracting with inverted companies similar to those in the 2009 Omnibus Appropriations Act. The public comment period for the interim rules under the FAR ended on August 31, 2009. As of the date of this report, it is uncertain as to when the FAR councils will adopt final rules and whether and the extent to which the final rules may differ from the interim rules. We believe the interim rules do not have any impact on any of our existing contracts, and we believe that they should not impact our ability to enter into subcontracts relating to any government projects. The

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interim rules are not clear as to how joint ventures are impacted, including those in which we are the majority or controlling owner.

The impact that the adoption of the interim rules under the FAR will have on our ability to pursue new contract awards, directly or indirectly, with the U.S. Government and its agencies is unclear. Additionally, the form in which, or the scope of, any final rules under the FAR or any other rules or regulations governing U.S. federal contracts using appropriated funds that may be adopted, or any potential future legislation impacting such rules and regulations, is also unclear. We are taking steps to determine what actions may be appropriate to mitigate any adverse impact. These steps could include, in addition to seeking, to the extent available, any appropriate waivers under the rules, one or more transactions that would result in significant changes to our corporate organization and structure. Depending on the application of the interim rules and the actual provisions of the anticipated final rules and regulations, we may not be able to mitigate, fully or partially, any material adverse impact from the adoption of such rules or regulations. We derive a substantial amount of our revenues and profits from services provided to the U.S. Government, mainly through our Government Operations segment, and any exclusion from pursuing future U.S. Government contract work could have a material adverse effect on our financial condition, results of operations or cash flows.

Taxation of Inverted Companies

As a result of our reorganization in 1982 discussed above, MII is the parent company of our group of companies. Tax legislative proposals intending to eliminate some perceived tax advantages of companies that have legal domiciles outside the U.S. but operate in the U.S. through one or more subsidiaries have repeatedly been introduced in the U.S. Congress. Recent examples include, but are not limited to, legislative proposals that would broaden the circumstances in which a non-U.S. company would be considered a U.S. resident for U.S. tax purposes. It is possible that, if legislation is enacted in this area, we could be subject to a substantial increase in our corporate income taxes and, consequently, decrease our future net income and increase our future cash outlays for taxes. Although we are unable to predict the form in which any proposed legislation might become law or the nature of regulations that may be promulgated under any such future legislative enactments, such laws or regulations could have a material adverse effect on our financial condition, results of operations or cash flows.

Offshore Oil and Gas Construction Segment

Our Offshore Oil and Gas Construction segment's activity depends mainly on the capital expenditures for offshore construction services of oil and gas companies and on foreign governments for construction of development projects in the regions in which we operate. This segment's operations are generally capital intensive, and a number of factors influence its activities, including:
· oil and gas prices, along with expectations about future prices;

· the cost of exploring for, producing and delivering oil and gas;

· the terms and conditions of offshore leases;

· the discovery rates of new oil and gas reserves in offshore areas;

· the ability of businesses in the oil and gas industry to raise capital; and

· local and international political and economic conditions.

Government Operations Segment

The revenues of our Government Operations segment are largely a function of defense spending by the U.S. Government. As a supplier of major nuclear components for certain U.S. Government programs, this segment is a significant participant in the defense industry.

Power Generation Systems Segment

Our Power Generation Systems segment's overall activity depends mainly on the capital expenditures of electric power generating companies and other steam-using industries. Several factors influence these expenditures, including:
· prices for electricity, along with the cost of production and distribution;

· prices for coal and natural gas and other sources used to produce electricity;

· demand for electricity, paper and other end products of steam-generating facilities;

· availability of other sources of electricity, paper or other end products;

· requirements for environmental improvements;

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

· level of capacity utilization at operating power plants, paper mills and other steam-using facilities;

· requirements for maintenance and upkeep at operating power plants and paper mills to combat the accumulated effects of wear and tear;

· ability of electric generating companies and other steam users to raise capital; and

· relative prices of fuels used in boilers, compared to prices for fuels used in gas turbines and other alternative forms of generation.

Research and Development

Research and development activities are related to development and improvement of new and existing products and equipment, as well as conceptual and engineering evaluation for translation into practical applications. We charge to cost of operations the costs of research and development unrelated to specific contracts as incurred. Substantially all of these costs are in our Power Generation Systems segment and include costs related to the development of carbon capture and sequestration and our modular and scalable nuclear reactor business, mPower. For the three months ended September 30, 2009 and 2008, our net research and development expense included in cost of operations totaled approximately $12.8 million and $9.9 million, respectively. For the nine months ended September 30, 2009 and 2008, our net research and development expense totaled approximately $33.9 million and $28.7 million, respectively. We expect to continue significant spending on research and development projects, as we continue development on our carbon capture sequestration efforts and our commercial nuclear and mPower reactor projects.

For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited condensed consolidated financial statements, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended December 31, 2008. There have been no material changes to these policies during the nine months ended September 30, 2009, except as disclosed in Note 1 of the notes to condensed consolidated financial statements included in this report.

RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2009 VS. THREE MONTHS ENDED SEPTEMBER 30, 2008

McDermott International, Inc. (Consolidated)

Revenues increased approximately 1%, or $10.8 million, to $1,675.7 million in the three months ended September 30, 2009 compared to $1,664.9 million for the corresponding period of 2008. In the third quarter of 2009, as compared to the third quarter of 2008, our Offshore Oil and Gas Construction segment experienced a $212.0 million, or 26%, increase in revenues and our Government Operations segment experienced a $37.4 million or 17% increase in revenues. These increases were partially offset by our Power Generation Systems segment which experienced a $241.4 million, or 38%, reduction in its revenues, primarily due to a decrease in its utility steam and system fabrication business revenues.

Segment operating income increased $60.9 million to $147.8 million in the three months ended September 30, 2009 from $86.9 million for the corresponding period of 2008. The segment operating income of our Offshore Oil and Gas Construction segment increased $125.7 million in the three months ended September 30, 2009 as compared to the third quarter of 2008, primarily attributable to improved project performance in our Middle East region. The segment operating income of our Government Operations and Power Generation Systems segments decreased by $15.8 million and $49.0 million, respectively, in the three months ended September 30, 2009 compared to the corresponding period in 2008. We experienced a significant increase in our pension plan expense in the three months ended September 30, 2009 compared to the corresponding period in 2008 totaling approximately $29.4 million. This increase was primarily attributable to amortization of losses on pension plan assets experienced in the year ended 2008.

For purpose of this discussion and the discussions that follow, segment operating income is before equity in income (loss) of investees and gains (losses) on asset disposals - net.

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Offshore Oil and Gas Construction

Revenues increased 26%, or $212.0 million, to $1,026.7 million in the three months ended September 30, 2009 compared to $814.7 million in the corresponding period of 2008, primarily attributable to increases in our Middle East ($306.8 million) and Caspian ($42.5 million) regions, partially offset by decreases in our Asia Pacific ($76.3 million) and Americas ($20.9 million) regions.

Segment operating income increased $125.7 million from a loss of $18.7 million in the three months ended September 30, 2008 to income of $107.0 million in the three months ended September 30, 2009, primarily attributable to improvements in project performance in our Middle East region. In the three months ended September 30, 2008, we recognized approximately $90.0 million of contract losses on the expected costs to complete various projects primarily in our Middle East region. In the three months ended September 30, 2009 we also experienced increased segment operating income from our Asia Pacific region as a result of project improvements and increased segment operating income from our Caspian region, partially offset by a decrease in segment operating income from our Americas region. In addition, we realized benefits from project close-outs totaling approximately $14.0 million in the three months ended September 30, 2009 compared to approximately $16.0 million in the corresponding period of 2008.

Government Operations

Revenues increased approximately 17%, or $37.4 million, to $259.8 million in the three months ended September 30, 2009 compared to $222.4 million for the corresponding period of 2008, primarily attributable to our acquisition of Nuclear Fuel Services, Inc. ("NFS") ($32.9 million) and additional volume in the manufacture of nuclear components of certain U.S. Government programs and recovery work. These improvements were partially offset by lower volumes in the manufacture of components for a commercial uranium enrichment project ($10.4 million) and lower volumes in engineering and laboratory services. Additionally, we experienced lower revenues from our management and operating contracts at several government sites.

Segment operating income decreased $15.8 million to $10.8 million in the three months ended September 30, 2009 compared to $26.6 million for the corresponding period of 2008, primarily attributable to losses incurred at NFS due to production delays and poor productivity with respect to its downblending contracts. We also experienced increased pension expense in the three months ended September 30, 2009 compared to the corresponding period of 2008. In addition, we experienced lower volumes related to a commercial uranium enrichment project and lower margins from our management and operating contracts at several government sites. These decreases were partially offset by additional volumes in the manufacture of nuclear components for certain U.S. Government programs and recovery work.

Equity income of investees increased $1.1 million to $9.1 million in the three months ended September 30, 2009 compared to $8.0 million in the corresponding period of 2008, primarily attributable to decreases in expenses and higher fees earned at two of our sites in Tennessee, partially offset by lower fees earned from a contract in Idaho.

Power Generation Systems

Revenues decreased approximately 38%, or $241.4 million, to $389.6 million in the three months ended September 30, 2009, compared to $631.0 million in the corresponding period of 2008, primarily attributable to decreased revenues from our utility steam and system fabrication business ($160.1 million), fabrication, repair and retrofit of existing facilities business ($53.2 million), replacement parts business ($10.0 million), boiler auxiliary equipment business ($9.8 million), industrial boilers business ($6.8 million), and nuclear service business ($6.2 million).

Segment operating income decreased $49.0 million to $30.0 million in the three months ended September 30, 2009 compared to $79.0 million in the corresponding period of 2008, primarily attributable to lower volumes in our utility steam and system fabrication business, fabrication, repair and retrofit of existing facilities business, replacement parts business, and industrial boilers business, combined with lower margins in our nuclear service business. We also experienced higher pension expense in the three months ended September 30, 2009 compared to the corresponding period in 2008. These decreases were partially offset by profit increases attributable to improved margins in our operations and maintenance business.

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Equity in income of investees decreased $0.9 million to $4.6 million in the three months ended September 30, 2009 from $5.5 million in the corresponding period of 2008, primarily attributable to our joint venture in China.

Corporate

Unallocated Corporate expenses increased $8.4 million to $15.7 million in the three months ended September 30, 2009, as compared to $7.3 million for the corresponding period of 2008, primarily attributable to increased pension expense attributable to amortization of losses on pension plan assets experienced in the year ended 2008, and higher compensation expenses. We also experienced an increase in information technology expenses in the three months ended September 30, 2009 compared to the corresponding period of 2008. These increases were partially offset by improvements in our captive insurers attributable primarily to favorable results from our actuarially determined workmen's compensation liabilities.

Other Income Statement Items

Interest income (expense) - net decreased $3.0 million to $2.2 million of income in the three months ended September 30, 2009, primarily due to lower average interest rates on our investments, and an increase in interest expense attributable to borrowings and amortization of fees under our credit facilities. These decreases were partially offset by an increase in capitalized interest.

Other income (expense) - net decreased by $6.0 million to expense of $3.1 million in the three months ended September 30, 2009 from income of $2.9 million for the corresponding period of 2008, primarily due to higher currency translation exchange losses incurred in the third quarter of 2009.

Provision for Income Taxes

For the three months ended September 30, 2009, the provision for income taxes increased $9.5 million to $23.8 million, while income before provision for income taxes increased $43.7 million to $143.8 million. Our effective tax rate for the three months ended September 30, 2009 was approximately 16.5%, as compared to 14.3% for the three months ended September 30, 2008. The 2008 quarter included $45 million of additional tax assets and benefits resulting . . .