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May 8, 2020, 5:17 p.m. EDT

10-Q: MCDERMOTT INTERNATIONAL INC

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(EDGAR Online via COMTEX) -- 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, "McDermott," "MDR," "we," "our," "us" or the "Company" 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 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, 2019 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 28, 2020 (the "2019 Form 10-K").

From time to time, our management or persons acting on our behalf make "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, 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 remaining performance obligations ("RPOs"), revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as "achieve," "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "goal," "intend," "may," "might," "plan," "potential," "predict," "project," "seek," "should," "strategy" 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.

In addition, various statements in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. Those forward-looking statements appear in Item 1, Business, and Item 3, Legal Proceedings, in Part I of this report and in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in the Notes to our Consolidated Financial Statements and elsewhere in this report.

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:

expectations relating to the duration, effects and ultimate outcome of the Chapter 11 cases;

the adequacy of our sources of liquidity and capital resources, including after entering into the DIP Credit Agreement and after completing the Exit Facilities;

implementation of strategies to reduce costs, increase operational efficiencies and lower our capital spending in connection with the COVID-19 pandemic;

future levels of revenues, operating margins, operating income (loss), cash flows, net income (loss) or earnings (loss) per share;

the 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, and the success of, operational activities on specific projects, and the ability of projects to generate sufficient revenues to cover our fixed costs;

estimates of revenues over time and contract profits or losses;

expectations regarding the acquisition or divestiture of assets, including the completion of the Lummus Technology sale and the sale of the remaining portion of our pipe fabrication business and the timing of, and use of proceeds from, those transactions;

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;

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

market outlook for the EPCI market;

expectations regarding cash flows from operating activities;

expectations regarding RPOs;

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;

the ability to alleviate substantial doubt regarding our ability to continue as a going concern;

the impact of the NYSE delisting of our common stock on the liquidity and market price of our common stock;

interest expense;

the effectiveness of our derivative contracts in mitigating foreign currency and interest rate risks;

results of our capital investment program;

the impact of U.S. and non-U.S. tax law changes;

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

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

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:

risks and uncertainties relating to the Chapter 11 Cases, including, but not limited to:

our ability to obtain the Bankruptcy Court's approval with respect to motions or other requests made to the Bankruptcy Court in the Chapter 11 Cases, including maintaining strategic control as debtor-in-possession;

the effects of the Chapter 11 Cases on us and our various constituents, including our stockholders;

Bankruptcy Court rulings in the Chapter 11 Cases as well as the outcome of all other pending litigation and the outcome of the Chapter 11 Cases in general;

third-party motions in the Chapter 11 Cases, which may interfere with our ability to consummate the Plan of Reorganization;

uncertainties and risks associated with the completion of the Lummus Technology sale, which is a condition to consummation of the Plan of Reorganization;

our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of the Chapter 11 Cases;

the length of time we will operate under the Chapter 11 Cases;

attendant risks associated with restrictions on our ability to pursue some of our business strategies;

the potential adverse effects of the Chapter 11 Cases on our liquidity and results of operations;

the potential adverse effects of the Chapter 11 Cases on our access to capital resources, including our continuing access to bilateral letter of credit facilities;

the cancellation of our common stock in the Chapter 11 Cases;

the impact of the NYSE delisting of our common stock on the liquidity and market price of our common stock;

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

the potential material adverse effect of claims that are not discharged in the Chapter 11 Cases;

uncertainties regarding our ability to retain key personnel;

uncertainties regarding the reactions of our customers, subcontractors, prospective customers, suppliers and service providers to the Chapter 11 Cases; and

uncertainties and continuing risks associated with our ability to achieve our stated goals and continue as a going concern;

general economic and business conditions and industry trends;

general developments in the industries in which we are involved;

risks associated with the COVID-19 pandemic and the response thereto;

the volatility of oil and gas prices;

decisions about capital investment to be made by oil and gas companies and other participants in the energy and natural resource industries, demand from which is the largest component of our revenues;

other factors affecting future levels of demand, including investments across the natural gas value chain, including LNG and petrochemicals, investments in power and petrochemical facilities and investments in various types of facilities that require storage structures and pre-fabricated pipe;

the highly competitive nature of the businesses in which we are engaged;

uncertainties as to timing and funding of new contract awards;

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;

cost overruns on fixed-price or similar contracts or failure to receive timely or proper payments on cost-reimbursable contracts, whether as a result of improper estimates, performance, disputes or otherwise;

changes in the costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;

risks associated with labor productivity;

cancellations of contracts, change orders and other modifications and related adjustments to RPOs and the resulting impact from using RPOs 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;

our ability to settle or negotiate unapproved change orders and claims and estimates regarding liquidated damages;

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 agreements and other debt instruments and the availability, terms and deployment of capital;

the unfunded liabilities of our pension and other post-retirement 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, which could lead to increased costs and affect the quality, costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors and give rise to contractually imposed liquidated damages;

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 U.S. and non-U.S. tax laws or regulations;

the continued competitiveness and availability of, and continued demand and legal protection for, our intellectual property assets or rights, including the ability of our patents or licensed technologies to perform as expected and to remain competitive, current, in demand, profitable and enforceable;

our ability to keep pace with rapid technological changes or innovations;

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

the risks associated with failures to protect data privacy in accordance with applicable legal requirements and contractual provisions binding upon us;

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

the risks associated with negotiating divestitures of assets with third parties;

the risks associated with integrating acquired businesses;

the risks associated with forming and operating joint ventures, including exposure to joint and several liability for failures in performance by our co-venturers;

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

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

the consequences of significant changes in foreign currency and interest rate risks and our ability to manage or obtain adequate hedge arrangements for those or similar risks;

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 new financing arrangements;

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 subsidiaries; 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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We believe the items we have outlined above are important factors that could cause estimates in our consolidated 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 in the 2019 Form 10-K and elsewhere in this report, including those mentioned under the caption "Risk Factors." These factors are not necessarily all the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report and in the 2019 Form 10-K 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.

Overview

We are a fully integrated provider of engineering, procurement, construction and installation ("EPCI") and technology solutions to the energy industry and design and build end-to-end infrastructure and technology solutions to transport and transform oil and gas into a variety of products. Our customers include national, major integrated and other oil and gas companies as well as producers of petrochemicals and electric power. Our proprietary technologies, integrated expertise and comprehensive solutions are utilized for liquefied natural gas ("LNG"), power, offshore and subsea, and downstream (includes downstream oil and gas processing facilities and licensed technologies and catalysts) energy projects around 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. Contracts are usually awarded through a competitive bid process.

Recent Developments Affecting Industry Conditions and Our Business

On March 11, 2020, the World Health Organization declared the ongoing coronavirus (COVID-19) outbreak a pandemic and recommended containment and mitigation measures worldwide. The pandemic has reached more than 200 countries and has resulted in widespread adverse impacts on the global economy and financial markets, and on our employees, customers, subcontractors, suppliers and other parties with whom we have business relations. We have experienced some resulting disruptions to our business operations, as the pandemic has continued to spread through most of our markets. For example, since mid-March, we have had to restrict access to our administrative offices around the world and quarantine personnel and assets as required by various governmental authorities and our own safety protocols.

Our first priority in our response to this crisis has been the health and safety of our employees and those of our customers, subcontractors and other business counterparties. We have implemented preventative measures and developed corporate and regional response plans to minimize unnecessary risk of exposure and prevent infection, while supporting our customers' global operations to the best of our ability in the circumstances. We have a Crisis Management Team for health, safety and environmental matters and personnel issues, and we have established a COVID-19 Response Team to address various impacts of the situation, as they have been developing. We also have modified certain business practices (including those related to employee travel, employee work locations and cancellation of physical participation in meetings, events and conferences) and implemented new protocols to promote social distancing and enhance sanitary measures in our offices and facilities to conform to government restrictions and best practices encouraged by the Centers for Disease Control and Prevention, the World Health Organization and other governmental and regulatory authorities.

There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, us or our subcontractors or other business counterparties to experience operational delays, delays in the delivery of materials and supplies that are sourced from around the globe, and have caused, and may continue to cause, milestones or deadlines on EPCI or other projects to be missed. We have received notices from some of our subcontractors, suppliers and other business counterparties, and provided notices to several customers, regarding performance or delivery delays resulting from the pandemic. We are working to minimize these delays, as best as possible in the circumstances. However, these actions may result in some disputes and could strain our relations with customers and others. In general, our EPCI and other projects are long-term in nature and, to the extent financial investment decisions have already been made, we generally do not expect projects to be abandoned by our customers. However, if and to the extent performance or other delays by us, our subcontractors, suppliers or other business counterparties result in material modifications or cancellations of the underlying contracts with customers, we could experience reductions in our currently reported backlog and in the anticipated conversion of backlog into revenues in future periods. In addition, worsening economic conditions could result in reductions in backlog over time, which would impact our future financial performance.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

One of the impacts of the pandemic has been a significant reduction in global demand for oil and natural gas. For example, global demand for oil has dropped by approximately 14 million barrels per day since mid-February. This significant decline in demand has been met with a sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of the Organization of Petroleum Exporting Countries, or OPEC, and other foreign, oil-exporting countries. The resulting supply/demand imbalance is having disruptive impacts on the oil and natural gas exploration and production industry and on other industries that serve exploration and production companies. These industry conditions, coupled with those resulting from the COVID-19 pandemic, are expected to lead to significant global economic contraction generally and in our industry in particular.

We expect to see continued volatility in oil and natural gas prices for the foreseeable future, which may, over the long term, adversely impact our business. A significant decline in exploration and development activities and related spending by our customers, whether due to decreases in demand or prices for oil and natural gas or otherwise, would have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.

As of the date of this report, our efforts to respond to the challenges presented by the conditions described above and minimize the impacts to our business have yielded some benefits. Our fabrication yards and customer construction sites generally have remained operational, and our vessels have continued to perform. We have moved quickly to implement strategies to reduce costs, increase operational efficiencies and lower our capital spending. In addition, as of March 31, 2020, we had $1.57 billion of cash, cash equivalents and restricted cash on our balance sheet, which remains available to support our operations. We have not required any funding under any COVID-19-related, U.S. federal or other governmental programs to support our operations, and we do not expect to have to utilize any such funding. We have experienced some increased absenteeism in our hourly workforce, but, so far, we have not experienced any resulting problems that we have not been able to manage. We are continuing to address concerns to protect the health and safety of our employees and those of our customers and other business counterparties, and this includes changes to comply with health-related guidelines as they are modified and supplemented.

We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments beyond our control, which are highly uncertain and cannot be predicted, including, among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by members of OPEC and other foreign, oil-exporting countries, governmental authorities, customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. We expect to negotiate recovery of a significant portion of these estimated additional project costs from our customers, however we have not recognized such recovery in our current project cost estimates as of March 31, 2020.

For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A "Risk Factors" in this report.

Restructuring Support Agreement and Chapter 11 Proceedings

On January 21, 2020 (the "Petition Date"), McDermott and certain of its subsidiaries (collectively, the "Debtors"): (1) entered into a Restructuring Support Agreement (together with all exhibits and schedules thereto, the "RSA") with certain of their lenders, letter of credit issuers and holders of the 10.625% senior notes due 2024 (the "Senior Notes") issued by certain of the Debtors and guaranteed by McDermott and certain of the other Debtors (such lenders, letter of credit issuers and holders of the Senior Notes are referred to as the "Consenting Parties")? and (2) filed voluntary petitions (the "Bankruptcy Petitions") for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") to pursue a joint prepackaged Chapter 11 Plan of Reorganization of the Debtors (the "Plan of Reorganization"). The Chapter 11 cases are being jointly administered under the caption In re McDermott International, Inc., Case No. 20-30336 (the "Chapter 11 Cases"). On March 14, 2020, the Bankruptcy Court issued an amended order (the "Confirmation Order") approving the Debtor's disclosure statement and confirming the second amended Plan of Reorganization. As of March 31, 2020, certain conditions precedent to consummation of the Plan of Reorganization and emergence from the Chapter 11 proceedings had not yet been met, and, as a result, we continued to operate our businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

The key terms of the RSA include the following:

access to an aggregate $2.81 billion of debtor-in-possession financing, described below;

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

equitization of funded debt held by senior secured term lenders for 94% of the equity of the reorganized McDermott;

commitments from certain of our lenders to provide letter of credit capacity during the Chapter 11 proceedings and upon emergence from the Chapter 11 proceedings in an exit facility;

sale of the Lummus Technology business for approximately $2.725 billion (subject to certain adjustments), the proceeds of which will fund a minimum cash balance of $820 million for the Debtors' go-forward business and the repayment of the funded obligations under the DIP Credit Agreement, as defined and described below;

recovery to the holders of the Senior Notes of 6% of the equity of the . . .

May 08, 2020

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