MCDERMOTT INTERNATIONAL INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q
(Mark One)

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

For the period ended March 31, 2003

OR

[ ] 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. 1-8430

McDERMOTT INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

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

1450 Poydras Street, New Orleans, Louisiana 70112-6050
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(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (504) 587-5400
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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 and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]

The number of shares of the registrant's common stock outstanding at April 28,
2003 was 65,417,216.

Mc DERMOTT INTERNATIONAL, INC.

INDEX - FORM 10-Q

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PART I

McDERMOTT INTERNATIONAL, INC.

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

4

5

McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

See accompanying notes to condensed consolidated financial statements.

6

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

See accompanying notes to condensed consolidated financial statements.

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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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CONTINUED

See accompanying notes to condensed consolidated financial statements.

9

McDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

We have presented our condensed consolidated financial statements in U.S.
Dollars in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information.
Accordingly, they do not include all of the information and GAAP footnotes
required for complete financial statements. We have included all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. These condensed consolidated financial statements include the
accounts of McDermott International, Inc. and its subsidiaries and controlled
joint ventures. We use the equity method to account for investments in joint
ventures and other entities we do not control, but over which we have
significant influence. We have eliminated all significant intercompany
transactions and accounts. We have reclassified certain amounts previously
reported to conform with the presentation at and for the three-month period
ended March 31, 2003. We present the notes to our condensed consolidated
financial statements on the basis of continuing operations, unless otherwise
stated.

McDermott International, Inc., a Panamanian corporation ("MII"), is the parent
company of the McDermott group of companies, which includes:

o J. Ray McDermott, S.A., a Panamanian subsidiary of MII
("JRM"), and its consolidated subsidiaries;

o McDermott Incorporated, a Delaware subsidiary of MII ("MI"),
and its consolidated subsidiaries;

o Babcock & Wilcox Investment Company, a Delaware subsidiary of
MI ("BWICO");

o BWX Technologies, Inc., a Delaware subsidiary of BWICO
("BWXT"), and its consolidated subsidiaries; and

o The Babcock & Wilcox Company, an unconsolidated Delaware
subsidiary of BWICO ("B&W").

Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2003. For further information, refer to the consolidated financial statements
and footnotes thereto included in MII's annual report on Form 10-K for the year
ended December 31, 2002.

On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. B&W and these subsidiaries took this action as a means to
determine and comprehensively resolve their asbestos liability. As of February
22, 2000, B&W's operations are subject to the jurisdiction of the Bankruptcy
Court and, as a result, our access to cash flows of B&W and its subsidiaries is
restricted.

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Due to the bankruptcy filing, beginning on February 22, 2000, we stopped
consolidating the results of operations of B&W and its subsidiaries in our
condensed consolidated financial statements, and we account for our investment
in B&W on the cost method. During the year ended December 31, 2002, due to
increased uncertainty with respect to the amounts, means and timing of the
ultimate settlement of asbestos claims and the recovery of our investment in
B&W, we wrote off our net investment in B&W. On December 19, 2002, drafts of a
joint plan of reorganization and settlement agreement, together with a draft of
a related disclosure statement, were filed in the Chapter 11 proceedings, and we
determined that a liability related to the proposed settlement was probable and
that the value was reasonably estimable. Accordingly, as of December 31, 2002,
we established an estimate for the cost of the settlement of the B&W bankruptcy
proceedings of $110 million, including tax expense of $23.6 million. At March
31, 2003, we have updated our estimated cost of the settlement to reflect
current conditions and recorded an aggregate reduction in the provision of $23.6
million, net of tax expense of $0.5 million, primarily due to a decrease in our
stock price. See Note 9 for details regarding this estimate and for further
information regarding developments in negotiations relating to the B&W Chapter
11 proceedings.

Effective January 1, 2003, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 143 requires us to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, we capitalize a cost by increasing the carrying amount of
the related long-lived asset. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, we will
either settle the obligation for its recorded amount or incur a gain or loss
upon settlement. As a result of the adoption of SFAS No. 143, we recorded income
of approximately $3.7 million as the cumulative effect of an accounting change,
which is net of tax expense of $2.2 million. See Note 4 to our condensed
consolidated financial statements for disclosures relating to our asset
retirement obligations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." It also rescinds SFAS No. 44, "Accounting
for Intangible Assets of Motor Carriers" and amends SFAS No. 13, "Accounting for
Leases." In addition, it amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings or describe their
applicability under changed conditions. We adopted the provisions of SFAS No.
145 related to the rescission of SFAS No. 4 as of January 1, 2003, and
reclassified the extraordinary gain on extinguishment of debt we recorded in the
three months ended March 31, 2002, because (as a result of the change in
accounting principles) it no longer meets the criteria for classification as an
extraordinary item. We reclassified the gain of $0.5 million to other-net and
the associated taxes of $0.2 million to the provision for income taxes.

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In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. Effective January 1, 2003, we adopted the initial
recognition and measurement provisions of this Interpretation on a prospective
basis for guarantees issued or modified after December 31, 2002. The adoption of
the recognition and measurement provisions of this Interpretation did not have a
material effect on our consolidated financial position or results of operations.

NOTE 2 - STOCK-BASED COMPENSATION

At March 31, 2003, we have several stock-based employee compensation plans. We
account for those plans using the intrinsic value method under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations. Under APB 25, if the exercise price of
the employee stock option equals or exceeds the fair value of the underlying
stock on the measurement date, no compensation expense is recognized. If the
measurement date is later than the date of grant, compensation expense is
recorded to the measurement date based on the quoted market price of the
underlying stock at the end of each reporting period.

The following table illustrates the effect on net income (loss) and earnings
(loss) per share if we had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.

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NOTE 3 - DISCONTINUED OPERATIONS

At March 31, 2002, we classified our subsidiary Hudson Products Corporation
("HPC") as an asset held for sale in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." Accordingly, for the three
months ended March 31, 2002, we reported the results of operations for HPC in
discontinued operations. On July 10, 2002, we completed the sale of HPC.
Condensed financial information for our operations reported in discontinued
operations follows:

NOTE 4 - ASSET RETIREMENT OBLIGATIONS

Effective January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations," and recorded income of approximately $3.7 million as
the cumulative effect of an accounting change, which is net of tax expense of
$2.2 million. Prior to our adoption of SFAS No. 143, we accrued the estimated
cost of remediation activities over the economic life of the related assets and
our accrued liabilities at December 31, 2002 totaled approximately $4.6 million
more than the asset retirement obligations measured at January 1, 2003 under the
provisions of SFAS No. 143. In addition, as of January 1, 2003, we recorded
additions to property, plant and equipment totaling $1.3 million under the
provision of SFAS No. 143.

Substantially all of our asset retirement obligations relate to the remediation
of our Nuclear Analytical Laboratory in our Government Operations segment. The
following table reflects actual and pro forma information for our asset
retirement obligations:

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NOTE 5 - ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss included in stockholders'
deficit are as follows:

NOTE 6 - INVESTIGATIONS AND LITIGATION

In June 1998, Shell Offshore, Inc. and several related entities filed a lawsuit
in the U.S. District Court for the Southern District of Texas against MII, JRM,
MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema and
others, alleging that the defendants engaged in anticompetitive acts in
violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). As
detailed in our annual report on Form 10-K for the year ended December 31, 2002,
various other parties intervened as plaintiffs in the Shell Litigation and we
had executed settlement agreements with many of them. In April 2003, we agreed
to a settlement in principle with Amerada Hess Corporation.

In December 1998, a subsidiary of JRM (the "Operator Subsidiary") was in the
process of installing the south deck module on a compliant tower in the Gulf of
Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main
hoist load line failed, resulting in the loss of the module. In December 1999,
Texaco filed a lawsuit seeking consequential damages for delays resulting from
the incident, as well as costs incurred to complete the project with another
contractor and uninsured losses. This lawsuit was filed in the U. S. District
Court for the Eastern District of Louisiana against a number of parties, some of
which brought third-party claims against the Operator Subsidiary and another
subsidiary of JRM, the owner of the vessel that attempted the lift of the deck
module (the "Owner Subsidiary"). Both the Owner Subsidiary and the Operator
Subsidiary were subsequently tendered as direct defendants to Texaco. In
addition to Texaco's claims in the federal court action, damages for the loss of
the south deck module have been sought by Texaco's builder's risk insurers in
claims against the Owner Subsidiary and the other defendants, excluding the
Operator Subsidiary, which was an additional insured under the policy. Total
damages sought by Texaco and its builder's risk insurers in the federal court
proceeding approximate $280 million. Texaco's federal court claims against the
Operator Subsidiary were stayed in favor of a pending binding arbitration
proceeding between them required by contract, which the Operator Subsidiary
initiated to collect $23 million due for work performed under the contract, and
in which Texaco also sought the same consequential damages and uninsured losses
as it seeks in the federal court action, and also seeks approximately $2 million
in other damages not sought in the federal court action. The federal court
trial, on the issue of liability only, commenced in October 2001. On March 27,
2002, the Court orally found that the Owner Subsidiary was

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liable to Texaco, specifically finding that Texaco had failed to sustain its
burden of proof against all named defendants except the Owner Subsidiary
relative to liability issues, and, alternatively, that the Operator Subsidiary's
highly extraordinary negligence served as a superceding cause of the loss. The
finding was subsequently set forth in a written order dated April 5, 2002, which
found against the Owner Subsidiary on the claims of Texaco's builder risk
insurers in addition to the claims of Texaco. On May 6, 2002, the Owner
Subsidiary filed a notice of appeal of the April 5, 2002 order, which appeal it
subsequently withdrew without prejudice for technical reasons. On January 13,
2003, the district court granted the Owner Subsidiary's motions for summary
judgment with respect to Texaco's claims against the Owner Subsidiary, and
vacated its previous findings to the contrary. On March 31, 2003, the district
court granted the Owner Subsidiary's similar motion for dismissal against
Texaco's builder risk underwriters. No final judgment has yet been entered in
the district court proceeding from which an appeal could be taken. The trial in
the binding arbitration proceeding commenced on January 13, 2003 and has
proceeded on various dates through March 14, and will recommence on May 26, 2003
for one week and at various times thereafter. We plan to vigorously pursue the
arbitration proceeding and any appeals process, if necessary, in the federal
court action, and we do not believe that a material loss with respect to these
matters is likely. In addition, we believe our insurance will provide coverage
for the builder's risk and consequential damage claims in the event of
liability. However, the ultimate outcome of the proceedings is uncertain, and an
adverse ruling in either the arbitration, any appeal of the district court
proceeding or any bonding requirements applicable to any appeal from an adverse
ruling, could have a material adverse impact on our consolidated financial
position, results of operations and cash flow.

In early April 2001, a group of insurers that includes certain underwriters at
Lloyd's and Turegum Insurance Company (the "Plaintiff Insurers") who have
previously provided insurance to B&W under our excess liability policies filed
(1) a complaint for declaratory judgment and damages against MII in the B&W
Chapter 11 proceedings in the U.S. District Court for the Eastern District of
Louisiana and (2) a declaratory judgment complaint against B&W in the Bankruptcy
Court, which actions have been consolidated before the U.S. District Court for
the Eastern District of Louisiana, which has jurisdiction over portions of the
B&W Chapter 11 proceeding. The insurance policies at issue in this litigation
provide a significant portion of B&W's excess liability coverage available for
the resolution of the asbestos-related claims that are the subject of the B&W
Chapter 11 proceeding. The consolidated complaints contain substantially
identical factual allegations. These include allegations that, in the course of
settlement discussions with the representatives of the asbestos claimants in the
B&W bankruptcy proceeding, MII and B&W breached the confidentiality provisions
of an agreement they entered into with these Plaintiff Insurers relating to
insurance payments by the Plaintiff Insurers as a result of asbestos claims. Our
agreement with the underwriters went into effect in April 1990 and has served as
the allocation and payment mechanism to resolve many of the asbestos claims
against B&W. The Plaintiff Insurers also allege that MII and B&W have wrongfully
attempted to expand the underwriters' obligations under that settlement
agreement and the applicable policies through the filing of a

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plan of reorganization in the B&W bankruptcy proceeding that contemplates the
transfer of rights under that agreement and those policies to a trust that will
manage the pending and future asbestos-related claims against B&W and certain of
its affiliates. The complaints seek declarations that, among other things, the
defendants are in material breach of the settlement agreement with the Plaintiff
Insurers and that the Plaintiff Insurers owe no further obligations to MII and
B&W under that agreement. With respect to the insurance policies, if the
Plaintiff Insurers should succeed in vacating the settlement agreement, they
seek to litigate issues under the policies in order to reduce their coverage
obligations. The complaint against MII also seeks a recovery of unspecified
compensatory damages. B&W filed a counterclaim against the Plaintiff Insurers,
which asserts a claim for breach of contract for amounts owed and unpaid under
the settlement agreement, as well as a claim for anticipatory breach for amounts
that will be owed in the future under the settlement agreement. B&W seeks a
declaratory judgment as to B&W's rights and the obligations of the Plaintiff
Insurers and other insurers under the settlement agreement and under their
respective insurance policies with respect to asbestos claims. On October 2,
2001, MII and B&W filed dispositive motions with the District Court seeking
dismissal of the Plaintiff Insurers' claim that MII and B&W had materially
breached the settlement agreement at issue. In a ruling issued January 4, 2002,
the District Court granted MII's and B&W's motion for summary judgment and
dismissed the declaratory judgment action filed by the Plaintiff Insurers. The
ruling concluded that the Plaintiff Insurers' claims lacked a factual or legal
basis. We believe this ruling reflects the extent of the underwriter's
contractual obligations and underscores that this coverage is available to
settle B&W's asbestos claims. As a result of the January 4, 2002 ruling, the
only claims that remained in the litigation were B&W's counterclaims against the
Plaintiff Insurers and against other insurers. The parties agreed to dismiss
without prejudice those of B&W's counterclaims seeking a declaratory judgment
regarding the parties' respective rights and obligations under the settlement
agreement. B&W's counterclaim seeking a money judgment for approximately $6.5
million due and owing by insurers under the settlement agreement remains
pending. A trial of this counterclaim is not currently scheduled but will likely
be set to be held in early summer 2003. The parties have reached a preliminary
agreement in principle to settle B&W's counterclaim for in excess of the claimed
amounts, and approximately $4.3 million has been received to date from the
insurers, subject to reimbursement in the event a final settlement agreement is
not reached. Following the resolution of this remaining counterclaim, the
Plaintiff Insurers will have an opportunity to appeal the January 4, 2002
ruling. At this point, the Plaintiff Insurers have not indicated whether they
intend to pursue an appeal.

On or about November 5, 2001, The Travelers Indemnity Company and Travelers
Casualty and Surety Company (collectively, "Travelers") filed an adversary
proceeding against B&W and related entities in the U.S. Bankruptcy Court for the
Eastern District of Louisiana seeking a declaratory judgment that Travelers is
not obligated to provide any coverage to B&W with respect to so-called
"non-products" asbestos bodily injury liabilities on account of previous
agreements entered into by the parties. On or about the same date, Travelers
filed a similar declaratory judgment against MI and MII in the U.S. District
Court for the Eastern District of Louisiana. The cases filed against MI and MII
have been consolidated before the District Court

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and the Asbestos Claimants Committee (the "ACC") and the Future Claimants
Representative (the "FCR") have intervened in the action. On February 4, 2002,
B&W and MII filed answers to Travelers' complaints, denying that previous
agreements operate to release Travelers from coverage responsibility for
asbestos "non-products" liabilities and asserting counterclaims requesting a
declaratory judgment specifying Travelers' duties and obligations with respect
to coverage for B&W's asbestos liabilities. The Court has bifurcated the case
into two phases, with Phase I addressing the issue of whether previous
agreements between the parties serve to release Travelers from any coverage
responsibility for asbestos "non-products" claims. On August 14, 2002, the Court
granted B&W's and MII's motion for leave to file an amended answer and
counterclaims, adding additional counterclaims against Travelers. Discovery was
completed in September 2002 and the parties filed cross-motions for summary
judgment, which were heard on February 26, 2003. We are awaiting the Court's
ruling on these motions. No trial date has been scheduled.

On April 30, 2001, B&W filed a declaratory judgment action in its Chapter 11
proceeding in the U.S. Bankruptcy Court for the Eastern District of Louisiana
against MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology,
Inc. seeking a judgment, among other things, that (1) B&W was not insolvent at
the time of, or rendered insolvent as a result of, a corporate reorganization
that we completed in the fiscal year ended March 31, 1999, which included, among
other things, B&W's cancellation of a $313 million note receivable and B&W's
transfer of all the capital stock of Hudson Products Corporation, Tracy Power,
BWXT and McDermott Technology, Inc. to BWICO, and (2) the transfers are not
voidable. As an alternative, and only in the event that the Bankruptcy Court
finds B&W was insolvent at a pertinent time and the transactions are voidable
under applicable law, the action preserved B&W's claims against the defendants.
The Bankruptcy Court permitted the ACC and the FCR in the Chapter 11 proceeding
to intervene and proceed as plaintiff-intervenors and realigned B&W as a
defendant in this action. The ACC and the FCR are asserting in this action,
among other things, that B&W was insolvent at the time of the transfers and that
the transfers should be voided. The Bankruptcy Court ruled that Louisiana law
applied to the solvency issue in this action. Trial commenced on October 22,
2001 to determine B&W's solvency at the time of the corporate reorganization and
concluded on November 2, 2001. In a ruling filed on February 8, 2002, the
Bankruptcy Court found B&W solvent at the time of the corporate reorganization.
On February 19, 2002, the ACC and FCR filed a motion with the District Court
seeking leave to appeal the February 8, 2002 ruling. On February 20, 2002, MI,
BWICO, BWXT, Hudson Products Corporation and McDermott Technology, Inc. filed a
motion for summary judgment asking that judgment be entered on a variety of
additional pending counts presented by the ACC and FCR that we believe are
resolved by the February 8, 2002 ruling. On March 20, 2002, at a hearing in the
Bankruptcy Court, the judge granted this motion and dismissed all claims
asserted in complaints filed by the ACC and the FCR regarding the 1998 transfer
of certain assets from B&W to its parent, which ruling was memorialized in an
Order and Judgment dated April 17, 2002 that dismissed the proceeding with
prejudice. On April 26, 2002, the ACC and FCR filed a notice of appeal of the
April 17, 2002 Order and Judgment and on June 20, 2002 filed their appeal brief.
On July 22, 2002, MI, BWICO,

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BWXT, Hudson Products Corporation and McDermott Technology, Inc. filed their
brief in opposition. The ACC and FCR have not yet filed their reply brief
pending discussions regarding settlement and a consensual joint plan of
reorganization. If a consensual joint plan of reorganization is confirmed, the
ACC and the FCR have agreed to dismiss this appeal with prejudice. In addition,
an injunction preventing asbestos suits from being brought against nonfiling
affiliates of B&W, including MI, JRM and MII, and B&W subsidiaries not involved
in the Chapter 11 proceedings extends through July 14, 2003. See Note 9 to our
consolidated financial statements for information regarding B&W's potential
liability for nonemployee asbestos claims and additional information concerning
the B&W Chapter 11 proceedings.

In September 2002, we were advised that the Securities and Exchange Commission
and the New York Stock Exchange were conducting inquiries into the trading of
MII securities occurring prior to our public announcement of August 7, 2002 with
respect to our second quarter 2002 results, our revised 2002 guidance and
developments in negotiations relating to the B&W Chapter 11 proceedings. As we
reported in our annual report on Form 10-K for the year ended December 31, 2002,
the SEC has issued a formal order of investigation in connection with its
inquiry, pursuant to which the staff of the SEC has requested additional
information from us and several of our current and former officers and
directors. We continue to cooperate fully with both inquiries and have provided
all information that has been requested. Several of our current and former
officers and directors have voluntarily given interviews and have responded, or
are in the process of responding, to SEC subpoenas requesting additional
documents and testimony.

Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation or subject to disputes or claims related to our
business activities, including performance- or warranty-related matters under
our customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes and claims will have a
material adverse effect on our consolidated financial position, results of
operations or cash flows.

Other than as noted above, the following legal proceedings have had no change in
status from that disclosed in Item 3 - "Legal Proceedings," included in Part I
of MII's annual report on Form 10-K for the year ended December 31, 2002:

o The Department of Justice investigations into allegations of
wrongdoing by a limited number of former employees of MII and JRM
concerning the heavy-lift business of JRM's Heeremac joint venture
with Heerema Offshore Construction Group, Inc. and the heavy-lift
business of JRM and into possible anticompetitive activity in the
marine construction business of McDermott-ETPM East, Inc., one of
the operating companies within JRM's former McDermott-ETPM joint
venture with ETPM, S.A., a French company.

o The June 1998 lawsuit filed by Phillips Petroleum Company and
several related entities against MII and others, referred to as the
"Phillips Litigation" in our annual report.

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o The June 1998 lawsuit filed by Shell Offshore, Inc. and several
related entities against MII and others, referred to as the "Shell
Litigation" in our annual report.

o The December 2000 lawsuits filed by a number of Norwegian oil
companies against MII and others alleging violations of the
Norwegian Pricing Act of 1953 in connection with projects in Norway.

o The lawsuit filed by Donald F. Hall, Mary Ann Hall and others
against B&W and Atlantic Richfield Company, referred to as the "Hall
Litigation" in our annual report, as well as the controversy between
B&W and its insurers as to the amount of coverage available under
the liability policies covering the facilities involved in this
litigation.

o The claims involving AE Energietechnic GmbH ("Austrian Energy") and
Babcock and Wilcox Volund ApS ("Volund"). Austrian Energy and Volund
are jointly and severally liable pursuant to their consortium
agreement as well as their contract with the ultimate customer, SK
Energi, for construction of a biomass boiler facility in Denmark.

For a detailed description of these proceedings, please refer to Note 10 to the
consolidated financial statements included in Part II of MII's annual report on
Form 10-K for the year ended December 31, 2002. Also, see Note 9 to the
condensed consolidated financial statements for information regarding B&W's
potential liability for nonemployee asbestos claims and the settlement
negotiations and other activities related to the B&W Chapter 11 reorganization
proceedings commenced by B&W and certain of its subsidiaries on February 22,
2000.

NOTE 7 - SEGMENT REPORTING

We have not changed our basis of segmentation or our basis of measurement of
segment profit or loss from our last annual report. An analysis of our
operations by segment is as follows:

Segment Information for the Three Months Ended March 31, 2003 and 2002.

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NOTE 8 - EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted earnings
(loss) per share:

At March 31, 2002, incremental shares of 2,199,012 related to stock options and
restricted stock were excluded from the diluted share calculation as their
effect would have been antidilutive.

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NOTE 9 - THE BABCOCK & WILCOX COMPANY

General

As a result of asbestos-containing commercial boilers and other products B&W and
certain of its subsidiaries sold, installed or serviced in prior decades, B&W is
subject to a substantial volume of nonemployee liability claims asserting
asbestos-related injuries. All of the personal injury claims are similar in
nature, the primary difference being the type of alleged injury or illness
suffered by the plaintiff as a result of the exposure to asbestos fibers (e.g.,
mesothelioma, lung cancer, other types of cancer, asbestosis or pleural
changes).

On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon,
Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International,
Inc. (collectively, the "Debtors"). The Debtors took this action as a means to
determine and comprehensively resolve all pending and future asbestos liability
claims against them. Following the filing, the Bankruptcy Court issued a
preliminary injunction prohibiting asbestos liability lawsuits and other actions
for which there is shared insurance from being brought against nonfiling
affiliates of the Debtors, including MI, JRM and MII. The preliminary injunction
is subject to periodic hearings before the Bankruptcy Court for extension.
Currently, the preliminary injunction extends through July 14, 2003.

Settlement Negotiations

We are continuing our discussions with the ACC and FCR concerning a potential
settlement. On December 19, 2002, B&W and its filing subsidiaries, the ACC, the
FCR and MI filed drafts of a joint plan of reorganization and settlement
agreement, together with a draft of a related disclosure statement. On March 28,
2003, the parties filed amended drafts of the joint plan of reorganization and
the disclosure statement, which, along with related documents, include the
following key terms:

o MII would effectively assign all its equity in B&W to a trust to be
created for the benefit of the asbestos personal injury claimants.

o MII and all its subsidiaries would assign, transfer or otherwise
make available their rights to all applicable insurance proceeds to
the trust.

o MII would issue 4.75 million shares of restricted common stock and
cause those shares to be transferred to the trust. The resale of the
shares would be subject to certain limitations, in order to provide
for an orderly means of selling the shares to the public. Certain
sales by the trust would also be subject to an MII right of first
refusal. If any of the shares issued to the trust are still held by
the trust after three years, and to the extent those shares could
not have been sold in the market at a price greater than or equal to
$19.00 per share (based on quoted market prices), taking into
account the restrictions on sale and any waivers of those
restrictions that may be granted by MII from time to time, MII would
effectively guarantee that those shares would have a value of $19.00
per share on the third anniversary of the date of their issuance.
MII would be

22

able to satisfy this guaranty obligation by making a cash payment or
through the issuance of additional shares of its common stock. If
MII elects to issue shares to satisfy this guaranty obligation, it
would not be required to issue more than 12.5 million shares.

o MI would issue promissory notes to the trust in an aggregate
principal amount of $92 million. The notes would be unsecured
obligations and would provide for payments of principal of $8.4
million per year to be payable over 11 years, with interest payable
on the outstanding balance at the rate of 7.5% per year. The payment
obligations under those notes would be guaranteed by MII.

o MII and all its past and present directors, officers and affiliates,
including its captive insurers, would receive the full benefit of
Section 524(g) of the Bankruptcy Code with respect to personal
injury claims attributable to B&W's use of asbestos and would be
released and protected from all pending and future asbestos-related
claims stemming from B&W's operations, as well as other claims
(whether contract claims, tort claims or other claims) of any kind
relating to B&W, including but not limited to claims relating to the
1998 corporate reorganization that has been the subject of
litigation in the Chapter 11 proceedings.

o The settlement would be conditioned on the approval by MII's Board
of Directors and stockholders of the terms of the settlement
outlined above.

As the settlement discussions proceed, we expect that some of the court
proceedings in or relating to the B&W Chapter 11 case will continue and that the
parties will continue to maintain their previously asserted positions. The
parties filed a second amended disclosure statement on May 5, 2003, that, among
other things, updated the status of the negotiations, and a disclosure statement
hearing is scheduled for May 8, 2003. Following that hearing, the Bankruptcy
Court will schedule further proceedings concerning this matter. The process of
finalizing and implementing the settlement could take up to a year, depending
on, among other things, the nature and extent of any objections or appeals in
the bankruptcy case.

Despite our progress in our settlement discussions, there are continuing risks
and uncertainties that will remain with us until the requisite approvals are
obtained and the final settlement is reflected in a plan of reorganization that
is confirmed by the Bankruptcy Court pursuant to a final, nonappealable order of
confirmation.

As of December 31, 2002, we determined that a final settlement was probable and
established an estimate for the cost of the settlement of $110 million,
including tax expense of $23.6 million, reflecting the present value of our
contributions and contemplated payments to the trusts as outlined above. At
March 31, 2003, we have updated our estimated cost to reflect current conditions
and recorded an aggregate reduction in the provision of $23.6 million, net of
tax expense of $0.5 million. The provision for the estimated cost of the B&W
settlement is comprised of the following:

23

The fair value of the promissory notes to be issued was based on the present
value of future cash flows discounted at borrowing rates currently assumed to be
available for debt with similar terms and maturities. The MII common shares to
be issued were valued at our closing stock price on March 31, 2003 and December
31, 2002 of $2.90 and $4.38, respectively. The fair value of the share price
guaranty obligation as of each of those dates was based on a present value
calculation using our closing stock price on that date, assuming the number of
shares to be issued is 12.5 million. The value of the future tax reimbursements
was based on a preliminary negotiated present value of projected future tax
reimbursements to be received from B&W. The final value of the overall
settlement and each of its components may differ significantly from the
estimates currently recorded depending on a variety of factors, including
changes in market conditions and the market value of our common shares when
issued. Accordingly, we will revalue the estimate of the settlement on a
quarterly basis and at the time the securities are issued. Upon issuance of the
debt and equity securities, we will record such amounts as liabilities or
stockholders' equity based on the nature of the individual securities.

Remaining Issues to be Resolved

While the Chapter 11 reorganization proceedings continue to progress, there are
a number of issues and matters related to the Debtors' asbestos liability to be
resolved prior to their emergence from the proceedings. Remaining issues and
matters to be resolved include, among other things, the following:

o the ultimate asbestos liability of the Debtors;

o the outcome of negotiations with the ACC, the FCR and other
participants in the Chapter 11 proceedings, concerning, among other
things, the size and structure of the settlement trusts to satisfy
the asbestos liability and the means for funding those trusts;

o the outcome of negotiations with our insurers as to additional
amounts of coverage of the Debtors and their participation in a plan
to fund the settlement trusts;

o the Bankruptcy Court's decisions relating to numerous substantive
and procedural aspects of the Chapter 11 proceedings, including the
Bankruptcy Court's periodic determinations as to whether to extend
the existing preliminary injunction that prohibits asbestos
liability lawsuits and other actions for

24

which there is shared insurance from being brought against nonfiling
affiliates of B&W, including MI, JRM and MII;

o the continued ability of our insurers to reimburse B&W and its
subsidiaries for payments made to asbestos claimants and the
resolution of claims filed by insurers for recovery of insurance
amounts previously paid for asbestos personal injury claims;

o the ultimate resolution of the appeals from the ruling issued by the
Bankruptcy Court on February 8, 2002, which found B&W solvent at the
time of a corporate reorganization completed in the fiscal year
ended March 31, 1999, and the related ruling issued on April 17,
2002. See Note 6 for further information;

o the outcome of objections and potential appeals involving approval
of the disclosure statement and confirmation of the plan of
reorganization;

o final agreement regarding the proposed spin-off of the MI/B&W
pension plan, which could significantly impact amounts recorded at
March 31, 2003; and

o final agreement on a tax sharing and tax separation arrangement
between MI and B&W.

Insurance Coverage and Pending Claims

Prior to their bankruptcy filing, the Debtors had engaged in a strategy of
negotiating and settling asbestos personal injury claims brought against them
and billing the settled amounts to insurers for reimbursement. At March 31,
2003, receivables of $21.1 million were due from insurers for reimbursement of
settled claims paid by the Debtors prior to the Chapter 11 filing. Currently,
certain insurers are refusing to reimburse the Debtors for these receivables
until the Debtors' assumption, in bankruptcy, of their pre-bankruptcy filing
contractual reimbursement arrangements with such insurers.

Pursuant to the Bankruptcy Court's order, a March 29, 2001 bar date was set for
the submission of allegedly unpaid pre-Chapter 11 settled asbestos claims and a
July 30, 2001 bar date for all other asbestos personal injury claims, asbestos
property damage claims, derivative asbestos claims and claims relating to
alleged nuclear liabilities arising from the operation of the Apollo/Parks
Township facilities against the Debtors. As of the March 29, 2001 bar date, over
49,000 allegedly settled claims had been filed. The Debtors have accepted
approximately 9,200 as pre-Chapter 11 binding settled claims at this time, with
an aggregate liability of approximately $77 million. The Bankruptcy Court has
disallowed approximately 33,000 claims as settled claims, and the Debtors are in
the process of challenging virtually all the remaining claims. If the Bankruptcy
Court determines these claims were not settled prior to the filing of the
Chapter 11 petition, these claims may be refiled as unsettled personal injury
claims. As of July 30, 2001, approximately 223,000 additional asbestos personal
injury claims, 60,000 related party claims, 183 property damage claims, 225
derivative asbestos claims and 571 claims relating to the Apollo/Parks Township
facilities had been filed. Since the July 30, 2001 bar date, approximately
15,000 additional personal injury claims were filed, including at least 10,000
claims originally filed as allegedly settled claims that were disallowed by the
Bankruptcy Court as settled claims and subsequently refiled as unsettled
personal injury claims. Approximately 3,800 additional related party claims, 26

25

property damage claims, 190 derivative claims and 3 Apollo/Parks Township claims
also were filed since the July 30, 2001 bar date. A bar date of January 15, 2003
was set for the filing of certain general unsecured claims. As of January 15,
2003, more than 2,700 general unsecured claims were filed, and the Debtors have
commenced an analysis of these claims. Although the analysis is incomplete, the
Debtors have identified a number of claims that they intend to contest,
including claims filed by various insurance companies seeking recovery from the
Debtors under various theories and priority tax claims, which appear to be
estimates of liability by taxing authorities for ongoing audits of MI. As to
both categories of claims, the Debtors believe that the claims are without merit
and intend to contest them. The Debtors will continue to analyze the remaining
claims. The estimated total alleged liability, as asserted by the claimants in
the Chapter 11 proceeding and in filed proofs of claim, of the asbestos-related
claims, including the alleged settled claims, exceeds the combined value of the
Debtors and certain assets transferred by B&W to its parent in a corporate
reorganization completed in fiscal year 1999 and the known available products
liability and property damage insurance coverages. The Debtors filed a proposed
Litigation Protocol with the U. S. District Court on October 18, 2001, setting
forth the intention of the Debtors to challenge all unsupported claims and
taking the position that a significant number of those claims may be disallowed
by the Bankruptcy Court. The ACC and FCR filed briefs opposing the Litigation
Protocol and requesting an estimation of pending and future claims.

Debtor-In-Possession Financing

In connection with the bankruptcy filing, the Debtors entered into a $300
million debtor-in-possession revolving credit facility (the "DIP Credit
Facility") with a group of lenders providing for a three-year term. The
Bankruptcy Court approved the full amount of this facility, giving all amounts
owed under the facility a super-priority administrative expense status in
bankruptcy. The Debtors' obligations under the facility are (1) guaranteed by
substantially all of B&W's other domestic subsidiaries and B&W Canada Ltd. and
(2) secured by a security interest on B&W Canada Ltd.'s assets. Additionally,
B&W and substantially all of its domestic subsidiaries granted a security
interest in their assets to the lenders under the DIP Credit Facility, effective
upon the defeasance or repayment of MI's public debt. The DIP Credit Facility
generally provides for borrowings by the Debtors for working capital and other
general corporate purposes and the issuance of letters of credit, except that
the total of all borrowings and nonperformance letters of credit issued under
the facility cannot exceed $100 million in the aggregate. The DIP Credit
Facility also imposes certain financial and nonfinancial covenants on B&W and
its subsidiaries. There were no borrowings under this facility at March 31, 2003
or December 31, 2002. A permitted use of the DIP Credit Facility is the issuance
of new letters of credit to backstop or replace pre-existing letters of credit
issued in connection with B&W's and its subsidiaries' business operations, but
for which MII, MI or BWICO was a maker or guarantor. As of February 22, 2000,
the aggregate amount of all such pre-existing letters of credit totaled
approximately $172 million (the "Pre-existing LCs"), $8.8 million of which
remains outstanding at March 31, 2003. MII, MI and BWICO have agreed to
indemnify and reimburse the Debtors for any customer draw on any letter of
credit issued under the DIP Credit Facility to backstop or replace any
Pre-existing LC for which they already have exposure and for the associated
letter of credit fees paid under the facility. As of March 31, 2003,
approximately $169.7 million in letters of

26

credit has been issued under the DIP Credit Facility of which approximately $53
million was to replace or backstop Pre-existing LCs. The DIP Credit Facility,
which was scheduled to expire on February 22, 2003, has been amended and
extended to February 22, 2004, with an additional one-year extension at the
option of B&W. The amendment also provides for a reduction of the facility from
$300 million to $227.75 million.

In the course of the conduct of B&W's and its subsidiaries' business, MII and MI
have agreed to indemnify two surety companies for B&W's and its subsidiaries'
obligations under surety bonds issued in connection with their customer
contracts. At March 31, 2003, the total value of B&W's and its subsidiaries'
customer contracts yet to be completed covered by such indemnity arrangements
was approximately $105 million, of which approximately $29.4 million relates to
bonds issued after February 21, 2000.

As to the guarantee and indemnity obligations related to B&W's letters of credit
and surety bonds, the proposed B&W Chapter 11 settlement contemplates
indemnification and other protections for MII, MI and BWICO.

Financial Results and Reorganization Items

Summarized financial data for B&W is as follows:

INCOME STATEMENT INFORMATION

BALANCE SHEET INFORMATION

(1) Includes liabilities subject to compromise of approximately $1.7 billion,
which primarily result from asbestos-related issues.

27

B&W's ability to continue as a going concern depends on its ability to settle
its ultimate asbestos liability from its net assets, future profits and cash
flow and available insurance proceeds, whether through the confirmation of a
plan of reorganization or otherwise. The B&W summarized financial information
set forth above has been prepared on a going-concern basis, which contemplates
continuity of operations, realization of assets and liquidation of liabilities
in the ordinary course of business. As a result of the bankruptcy filing and
related events, we can provide no assurance that the carrying amounts of B&W's
assets will be realized or that B&W's liabilities will be liquidated or settled
for the amounts recorded. The independent accountant's report on the separate
consolidated financial statements of B&W for the years ended December 31, 2002,
2001 and 2000 includes an explanatory paragraph indicating that these issues
raise substantial doubt about B&W's ability to continue as a going concern.

NOTE 10 - RISKS AND UNCERTAINTIES

During 2002, our Marine Construction Services segment experienced material
losses totaling $149.3 million on its three EPIC spar projects: Medusa, Devils
Tower and Front Runner. These contracts are first-of-a-kind as well as long term
in nature. We have experienced schedule delays and cost overruns on these
contracts that have adversely impacted our financial results. These projects
continue to face significant issues. The remaining challenges to completing
Medusa within its revised schedule and budget are finishing the topsides
fabrication and the marine installation portion of the project. Our revised
schedule requires installation activities during the second quarter of 2003. In
our annual report on Form 10-K for the year ended December 31, 2002, we noted
that the major challenge in completing Devils Tower within its revised budget
was to remain on track with the revised schedule for topsides fabrication due to
significant liquidated damages that are associated with the contract. At that
time, it appeared that a substantial portion of the costs and delay impacts on
Devils Tower were attributable to remedial activities undertaken with regard to
the paint application, and on March 21, 2003, we filed an action against the
paint vendors for recovery of the remediation costs, delays and other damages.
During the third week of April 2003, we encountered difficulties in installing
the piles necessary to moor the Devils Tower hull in place and suspended
offshore work on this activity. At this time, we believe the pile installation
problem was caused or contributed to by soil conditions encountered at the pile
installation locations which were different from the information we had been
provided to design the piles and plan their installation. However, the precise
cause or causes for this pile installation problem and the technical solution
have yet to be determined. The ultimate resolution of this problem could result
in further revision to the completion schedule for Devils Tower, and depending
on the ultimate cause or causes of this problem, result in a significant
decrease or increase in our exposure to liquidated damages for delay in
completion of the overall project. The key issues for the Front Runner contract
relate to subcontractors and liquidated damages due to schedule slippage either
by JRM or one or more of the subcontractors. At March 31, 2003, we have provided
for our estimated losses on these contracts. It is reasonably possible that
current estimates could change due to unforeseen events, which

28

could result in adjustments to overall contract costs, and these may continue to
be significant in future periods.

NOTE 11 - LIQUIDITY

As a result of the B&W bankruptcy filing in February 2000, our access to the
cash flows of B&W and its subsidiaries has been restricted. In addition, as
discussed in Note 10, JRM has incurred substantial overruns on its three EPIC
spar projects. We also have recently received credit downgrades. Accordingly,
our access to additional financing beyond what we currently have available may
be limited, particularly at JRM. Further, MI is restricted, as a result of
covenants in its debt instruments, in its ability to transfer funds to MII and
MII's other subsidiaries, including JRM, through cash dividends or through
unsecured loans or investments. Given these issues, we have assessed our ability
to continue as a viable business and have concluded that we can fund our
operating activities and capital requirements. Management's plans with regards
to these issues are as follows:

o B&W Chapter 11 Filing. Our ability to obtain a successful and timely
resolution of the B&W Chapter 11 proceedings has impacted our access to,
and sources of, capital. We believe the completion of the overall
settlement outlined in Note 9 will alleviate the impact of this
uncertainty.

o JRM's Negative Cash Flows Resulting from EPIC Spar Projects. Due primarily
to the losses anticipated to be incurred on the three EPIC spar projects
recorded during the year ended December 31, 2002, we expect JRM to
experience negative cash flows during 2003. Completion of the EPIC spar
projects has, and will continue to, put a strain on JRM's liquidity. JRM
intends to fund its cash needs through borrowings on our credit facility,
intercompany loans from MII and sales of nonstrategic assets, including
certain marine vessels. In addition, under the terms of our new credit
facility, JRM's letter of credit capacity was reduced from $200 million to
$100 million. This reduction has not negatively impacted our ability to
execute the contracts in our current backlog. However, it will likely
limit JRM's ability to pursue projects from certain customers who require
letters of credit as a condition of award. We are exploring other
opportunities to improve our liquidity position, including better
management of working capital through process improvements, negotiations
with customers to relieve tight schedule requirements and to accelerate
certain portions of cash collections, and alternative financing sources
for letters of credit for JRM. In addition, we plan to refinance BWXT on a
stand-alone basis, thereby freeing up additional letter of credit capacity
for JRM and are currently in the process of evaluating terms and
conditions with certain financial institutions. We also intend to seek a
replacement credit facility for JRM prior to the scheduled expiration of
our credit facility, in order to provide for increased letter of credit
capacity. Our ability to obtain such a replacement facility will depend on
numerous factors, including JRM's operating performance and overall market
conditions. If JRM experiences additional significant contract costs on
its EPIC spar projects as a result of unforeseen events, we may be unable
to fund all of our budgeted capital expenditures and meet all of our
funding requirements for our contractual commitments. In this instance, we
would be required to defer certain capital expenditures, which in turn
could result in curtailment of certain of our operating activities or,

29

alternatively, require us to obtain additional sources of financing which
may not be available to us or may be cost prohibitive.

o MI's Liquidity Issues. MI experienced negative cash flows in 2002,
primarily due to payments of taxes resulting from the exercise of MI's
rights under an intercompany agreement. MI expects to meet its cash needs
in 2003 through intercompany borrowings from BWXT, which BWXT may fund
through operating cash flows or borrowings under our new credit facility.

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

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.

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 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:

o general economic and business conditions and industry trends;

o the continued strength of the industries in which we are involved;

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

o the deregulation of the U.S. electric power market;

o the highly competitive nature of our businesses;

o our future financial performance, including compliance with
covenants in our credit facilities, availability, terms and
deployment of capital;

o the continued availability of qualified personnel;

30

o operating risks normally incident to offshore exploration,
development and production operations;

o our ability to replace or extend our current credit facility on or
before April 30, 2004, given our results of operations in 2002 and
our current credit rating;

o the ability of JRM to maintain its forecasted financial performance,
including its ability to manage costs associated with its EPIC spar
projects;

o changes in, or our failure or inability to comply with, government
regulations and adverse outcomes from legal and regulatory
proceedings, including the results of ongoing civil lawsuits
involving alleged anticompetitive practices in our marine
construction business;

o estimates for pending and future nonemployee asbestos claims against
B&W and potential adverse developments that may occur in the Chapter
11 reorganization proceedings and related settlement discussions
involving B&W and certain of its subsidiaries and MII;

o the ultimate resolution of the appeals from the ruling issued by the
Bankruptcy Court on February 8, 2002, which found B&W solvent at the
time of a corporate reorganization completed in the fiscal year
ended March 31, 1999 and the related ruling issued on April 17,
2002;

o the potential impact on available insurance due to the recent
increases in bankruptcy filings by asbestos-troubled companies;

o the potential impact on our insurance subsidiaries of B&W
asbestos-related claims under policies issued by those subsidiaries;

o legislation recently proposed by members of the U.S. Congress that,
if enacted, could reduce or eliminate the tax advantages we derive
from being organized under the laws of the Republic of Panama;

o recently proposed legislation that, if enacted, could limit or
prohibit us from entering into contracts with the U.S. Government;

o changes in existing environmental regulatory matters;

o rapid technological changes;

o realization of deferred tax assets;

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

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

o social, political and economic situations in foreign countries where
we do business, including among others, countries in the Middle East
and Southeast Asia;

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

o effects of asserted and unasserted claims;

o our ability to obtain surety bonds and letters of credit;

o the continued ability of our insurers to reimburse us for payments
made to asbestos claimants; and

o our ability to maintain builder's risk, liability and property
insurance in amounts we consider adequate at rates that we consider
economical, particularly after the impact on the insurance industry
of the September 11, 2001 terrorist attacks.

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, 2002. These factors are not necessarily all the
important factors that could affect us. Unpredictable or unknown factors we have
not discussed in this report could also have material adverse effects on actual
results of matters that are the subjects 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 important factors not referred to above could

31

affect the accuracy of our forward-looking statements and (2) use caution and
common sense when considering our forward-looking statements.

GENERAL

In general, our business segments are composed of capital-intensive businesses
that rely on large contracts for a substantial amount of their revenues.

The amount of revenues we generate from our Marine Construction Services segment
largely depends on the level of oil and gas development activity in the world's
major hydrocarbon-producing regions. Our revenues from this segment reflect the
variability associated with the timing of significant oil and gas development
projects. We expect our Marine Construction Services segment's revenues to
increase during 2003, primarily for deepwater projects and projects in the
Azerbaijan sector of the Caspian Sea. We believe the oil and gas exploration and
production industry will continue to migrate to deepwater projects. JRM's future
success is heavily dependent on its ability to compete successfully in the
deepwater market. While we expect our Marine Construction Services segment
revenues to increase in 2003, our Gulf of Mexico marine operations will face
challenges in 2003, due to an extremely competitive environment. We are in the
process of performing a strategic analysis of our Gulf of Mexico marine business
and plan to take a number of actions to improve our ability to compete in this
market on a rational basis. These actions may include downsizing our operational
support base, selling or disposing of some of our marine equipment and other
cost cutting measures. These factors may have a significant impact on our
anticipated Marine Construction Services segment income in future periods.

The revenues of our Government Operations segment are largely a function of
capital spending by the U.S. Government. As a supplier of nuclear components for
the U.S. Navy, BWXT is a significant participant in the defense industry. We
recognized an increase in bookings during the year ended December 31, 2002 that
has allowed us to reach a record backlog in our Government Operations.
Additionally, with BWXT's unique capability of full life-cycle management of
special nuclear materials, facilities and technologies, BWXT is poised to
continue to participate in the continuing cleanup and management of the
Department of Energy's nuclear sites and weapons complexes. We currently expect
the operating results of this segment to continue to improve in 2003.

The results of operations of our Power Generation Systems segment include
primarily the results of Babcock and Wilcox Volund ApS ("Volund"), which we sold
to B&W on October 11, 2002.

As a result of the Chapter 11 reorganization proceedings involving B&W and
several of its subsidiaries, beginning on February 22, 2000, we stopped
consolidating the results of operations of B&W and its subsidiaries in our
consolidated financial statements and we have been presenting our investment in
B&W on the cost method. The Chapter 11 filing, along with subsequent filings and
negotiations, led to increased

32

uncertainty with respect to the amounts, means and timing of the ultimate
settlement of asbestos claims and the recovery of our investment in B&W. Due to
this increased uncertainty, we wrote off our net investment in B&W in the year
ended December 31, 2002. On December 19, 2002, drafts of a joint plan of
reorganization and settlement agreement, together with a draft of a related
disclosure statement, were filed in the Chapter 11 proceedings, and we
determined that a liability related to the proposed settlement was probable and
that the value was reasonably estimable. Accordingly, at December 31, 2002, we
established an estimate for the cost of the settlement of the B&W bankruptcy
proceedings of $110 million, including related tax expense of $23.6 million. At
March 31, 2003, we have updated our estimated cost of the settlement to reflect
current conditions and recorded an aggregate reduction in the provision of $23.6
million, net of tax expense of $0.5 million, primarily due to a decrease in our
stock price. See Note 9 to our condensed consolidated financial statements for
details regarding this estimate and for further information regarding
developments in negotiations relating to the B&W Chapter 11 proceedings.

As a result of our reorganization in 1982, which we completed through a
transaction commonly referred to as an "inversion," our company is a corporation
organized under the laws of the Republic of Panama. Recently, the U.S. House and
Senate have considered legislation that would change the tax law applicable to
corporations that have completed inversion transactions. We have engaged an
independent consultant to undertake an analysis of the potential
re-domestication of MII from Panama to the U.S. Additionally, we recently
entered into an agreement with two of our shareholders pursuant to which
management will sponsor and recommend a proposal for re-domestication in the
proxy statement for a future annual meeting if the tax, costs and other
considerations impacted by re-domestication are determined by our Board of
Directors to be in the best interests of our shareholders. If that
re-domestication is determined by our Board of Directors not to be in the best
interests of our shareholders, pursuant to our agreement described above, our
management will present the re-domestication proposal on the proxy but may
recommend against it. The timing of any such management proposal is contingent
upon the completion of the analysis by the independent consultant and the
completion of the B&W reorganization proceedings.

For a summary of our accounting policies that we believe are important to an
understanding of our financial statements, please refer to Item 7 included in
Part II of our annual report on Form 10-K for the year ended December 31, 2002.

RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2003 VS. THREE MONTHS ENDED
MARCH 31, 2002

Marine Construction Services

Revenues increased 54% to $405.8 million. The increase was the result of
increased activity on a fabrication and installation project offshore of India,
fabrication of FPSO topsides and fabrication of wellhead platforms in Southeast
Asia, a pipeline contract in Southeast Asia, topsides fabrication and pipeline
installation projects in the Azerbaijan sector of the Caspian Sea and a topsides
fabrication contract at our Morgan City fabrication facility.

33

These increases were partially offset by reduced activity on a fabrication and
installation project in Southeast Asia and other Gulf of Mexico projects.

Segment operating income, which is before equity in income from investees,
improved $28 million from a loss of $10.2 million to income of $17.8 million,
primarily due to improved margins from customer accepted change orders on a deck
fabrication project in the Middle East for the West African market, topsides
fabrication and pipeline installation projects in the Azerbaijan sector of the
Caspian Sea, higher volumes from fabrication of FPSO topsides in Southeast Asia
and a topsides fabrication contract at our Morgan City fabrication facility. In
addition, in the quarter ended March 31, 2002, we recorded losses on the first
EPIC spar project and other Gulf of Mexico projects. Lower activity from a
fabrication and installation project in Southeast Asia partially offset these
improvements.

Equity in income from investees decreased $1.3 million to $0.3 million,
primarily due to an international joint venture now being accounted for on the
cost method.

Government Operations

Revenues decreased $4.1 million to $117.7 million, primarily due to lower
volumes from our management and operating contract at the U.S. Government-owned
facility in Miamisburg, Ohio. We are no longer the prime contractor but are now
a subcontractor for this site and record only our fee in revenues rather than
the full revenues from the contract. In addition, we had lower revenues from
contract research activities and other government operations. Higher volumes
from the manufacture of nuclear components for certain U.S. Government programs
partially offset these decreases.

Segment operating income, which is before equity in income from investees,
increased $4.2 million to $16.1 million, primarily due to higher volumes from
the manufacture of nuclear components for certain U.S. Government programs
resulting from higher earned engineering hours and higher margins from the
management and operating contracts for U.S. Government-owned facilities
including favorable resolution of a contract dispute. In addition, we reduced
spending on fuel cell research and development projects. However, we received an
insurance settlement relating to environmental restoration costs in the prior
year. In addition, we had lower volumes and margins from other government
operations.

Equity in income from investees increased $1.4 million to $7.4 million,
primarily due to improved operating results from our joint ventures operating in
Idaho, Texas and Tennessee. The Department of Energy has recently announced that
the contract to manage the Idaho National Engineering and Environmental
Laboratory will be re-bid as of October 1, 2004. We plan to participate in the
re-bid process for this site.

Corporate

Corporate expenses increased $15.7 million to $26.4 million, primarily due to
higher qualified pension plan expenses as a result of changes in our discount
rate and plan asset performance.

34

Other Income Statement Items

Interest income decreased $2.5 million to $1 million, primarily due to decreases
in investments and prevailing interest rates.

Interest expense decreased $3.5 million to $3.7 million, primarily due to the
repayment of MI's remaining 9.375% Notes due March 15, 2002.

Other-net income decreased $0.8 million, primarily due to foreign currency
transaction losses.

We recorded income of $3.7 million as the cumulative effect of an accounting
change, which is net of tax expense of $2.2 million, as a result of our adoption
of Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations." See Note 4 to our condensed consolidated financial
statements for further information.

For the three months ended March 31, 2003, the $24.1 million of income from the
reduction in the estimated cost of the B&W bankruptcy settlement had little
associated tax expense. In addition, for the three months ended March 31, 2003,
we increased our valuation allowance for the realization of deferred tax assets
by $2.4 million to $217.2 million. We operate in many different tax
jurisdictions. Within these jurisdictions, tax provisions vary because of
nominal rates, allowability of deductions, credits and other benefits and tax
bases (for example, revenue versus income). These variances, along with
variances in our mix of income from these jurisdictions, are responsible for
shifts in our effective tax rate.

Backlog

At March 31, 2003, our Marine Construction Services' backlog included $281.2
million related to uncompleted work on our three EPIC spar projects and $257
million related to other contracts in loss positions.

At March 31, 2003, our Government Operations' backlog with the U. S. Government
was $1.5 billion, of which $258.4 million had not been funded.

Liquidity and Capital Resources

On February 11, 2003, we entered into definitive agreements with a group of
lenders for a new credit facility (the "New Credit Facility") to replace our
previous facilities, which consisted of a $100 million credit facility for

35

MII and BWXT (the "MII Credit Facility") and a $200 million credit facility for
JRM and its subsidiaries that were scheduled to expire on February 21, 2003. The
New Credit Facility initially provides for borrowings and issuances of letters
of credit in an aggregate amount of up to $180 million, with certain sublimits
on the amounts available to JRM and BWXT. On May 13, 2003, the maximum amount
available under the New Credit Facility will be reduced to $166.5 million. The
obligations under the New Credit Facility are (1) guaranteed by MII and various
subsidiaries of JRM and (2) collateralized by all our capital stock in MI, JRM
and certain subsidiaries of JRM and substantially all the JRM assets and various
intercompany promissory notes. The New Credit Facility requires us to comply
with various financial and nonfinancial covenants and reporting requirements.
The financial covenants require us to maintain a minimum amount of cumulative
earnings before taxes, depreciation and amortization; a minimum fixed charge
coverage ratio; a minimum level of tangible net worth (for MII as a whole, as
well as for JRM and BWXT separately); and a minimum variance on expected costs
to complete the Front Runner EPIC spar project. In addition, we must provide as
additional collateral 50% of any net after-tax proceeds from significant asset
sales. The New Credit Facility is scheduled to expire on April 30, 2004.

Proceeds from the New Credit Facility may be used by JRM and BWXT, with
sublimits for JRM of $100 million for letters of credit and $10 million for cash
advances and for BWXT of $60 million for letters of credit and $50 million for
cash advances. At May 1, 2003, we had $10.9 million in cash advances and $107.6
million in letters of credit outstanding under this facility. Pricing for cash
advances under the New Credit Facility is prime plus 4% or Libor plus 5% for JRM
and prime plus 3% or Libor plus 4% for BWXT. Commitment fees are charged at the
rate of 0.75 of 1% per annum on the unused working capital commitment, payable
quarterly.

The MII Credit Facility was canceled resulting in the release of $107.8 million
in cash collateral that has been used, together with an additional $10 million
of cash, to provide JRM and BWXT with intercompany loans in the amount of $90
million and $25 million, respectively. JRM and BWXT are using the proceeds of
those intercompany loans for working capital needs and general corporate
purposes.

During 2002, JRM experienced material losses totaling $149.3 million on its
three EPIC spar projects: Medusa, Devils Tower and Front Runner. These contracts
are first-of-a-kind as well as long term in nature. We have experienced schedule
delays and cost overruns on these contracts that have adversely impacted our
financial results. These projects continue to face significant issues. The
remaining challenges to completing Medusa within its revised schedule and budget
are finishing the topsides fabrication and the marine installation portion of
the project. Our revised schedule requires installation activities during the
second quarter of 2003. In our annual report on Form 10-K for the year ended
December 31, 2002, we noted that the major challenge in completing Devils Tower
within its revised budget was to remain on track with the revised schedule for
topsides fabrication due to significant liquidated damages that are associated
with the contract. At that time, it appeared that a substantial portion of the
costs and delay impacts on Devils Tower were attributable to remedial activities
undertaken with regard to the paint application, and on March 21, 2003, we filed
an action against the paint vendors for recovery of the remediation costs,
delays and other damages. During the third week of April 2003, we encountered
difficulties in installing the

36

piles necessary to moor the Devils Tower hull in place and suspended offshore
work on this activity. At this time, we believe the pile installation problem
was caused or contributed to by soil conditions encountered at the pile
installation locations which were different from the information that we had
been provided to design the piles and plan their installation. However, the
precise cause or causes for this pile installation problem and the technical
solution have yet to be determined. The ultimate resolution of this problem
could result in further revision to the completion schedule for Devils Tower,
and depending on the ultimate cause or causes of the problem, result in a
significant decrease or increase in our exposure to liquidated damages for delay
in completion of the overall project. The key issues for the Front Runner
contract relate to subcontractors and liquidated damages due to schedule
slippage either by JRM or one or more of the subcontractors. At March 31, 2003,
we have provided for our estimated losses on these contracts. Although we
continually strive to improve our ability to estimate our contract costs
associated with these projects, it is reasonably possible that current estimates
could change and adjustments to overall contract costs may continue to be
significant in future periods.

Due primarily to the losses incurred on the three EPIC spar projects, we expect
JRM to experience negative cash flows during 2003. Completion of the EPIC spar
projects has and will continue to put a strain on JRM's liquidity. JRM intends
to fund its cash needs through borrowings on the New Credit Facility,
intercompany loans from MII and sales of nonstrategic assets, including certain
marine vessels. In addition, under the terms of the New Credit Facility, JRM's
letter of credit capacity was reduced from $200 million to $100 million. This
reduction has not negatively impacted our ability to execute the contracts in
our current backlog. However, it will likely limit JRM's ability to pursue
projects from certain customers who require letters of credit as a condition of
award. We are exploring other opportunities to improve our liquidity position,
including better management of working capital through process improvements,
negotiations with customers to relieve tight schedule requirements and to
accelerate certain portions of cash collections, and alternative financing
sources for letters of credit for JRM. In addition, we plan to refinance BWXT on
a stand-alone basis, thereby freeing up additional letter of credit capacity for
JRM and are currently in the process of evaluating terms and conditions with
certain financial institutions. We also intend to seek a replacement credit
facility for JRM prior to the scheduled expiration of the New Credit Facility,
in order to provide for increased letter of credit capacity. Our ability to
obtain such a replacement facility will depend on numerous factors, including
JRM's operating performance and overall market conditions. If JRM experiences
additional significant contract costs on the EPIC spar projects as a result of
unforeseen events, we may be unable to fund all our budgeted capital
expenditures and meet all of our funding requirements for our contractual
commitments. In this instance, we would be required to defer certain capital
expenditures, which in turn could result in curtailment of certain of our
operating activities or, alternatively, require us to obtain additional sources
of financing which may not be available to us or may be cost prohibitive.

MI experienced negative cash flows in 2002, primarily due to payments of taxes
resulting from the exercise of MI's rights under an intercompany agreement. MI
expects to meet its cash needs in 2003 through intercompany borrowings from
BWXT, which BWXT may fund through operating cash flows or borrowings

37

under the New Credit Facility. MI is restricted, as a result of covenants in its
debt instruments, in its ability to transfer funds to MII and MII's other
subsidiaries through cash dividends or through unsecured loans or investments.

On a consolidated basis, we incurred negative cash flows for the first quarter
and expect to incur negative cash flows in the next two quarters of 2003. In
addition, in March 2003, Moody's Investor Service lowered MI's credit rating
from B2 to B3. In April 2003, Standard and Poor's also lowered our corporate
credit rating from B to CCC+ and our senior debt rating from B to CCC-. These
factors may further impact our access to capital and our ability to refinance
the New Credit Facility, which is scheduled to expire in April 2004. Our current
credit rating and operating performance in 2002 could limit our alternatives and
ability to refinance the New Credit Facility.

At March 31, 2003 and December 31, 2002, we had available various uncommitted
short-term lines of credit from banks totaling $10.2 million. We had no
borrowings against these lines at March 31, 2003 or December 31, 2002.

At March 31, 2003, we had total cash, cash equivalents and investments of $242.6
million. Our investment portfolio consists primarily of investments in
government obligations and other highly liquid debt securities. The fair value
of our investments at March 31, 2003 was $62 million. As of March 31, 2003, we
had pledged approximately $46.4 million fair value of these investments to
secure a letter of credit in connection with certain reinsurance agreements.

At May 1, 2003, our liquidity position was as follows (in millions):

(1) Reflects amount available for cash advances. We had an additional $13
million in letter of credit capacity.

On February 21, 2000, B&W and certain of its subsidiaries entered into the DIP
Credit Facility to satisfy their working capital and letter of credit needs
during the pendency of their bankruptcy case. As a condition to borrowing or
obtaining letters of credit under the DIP Credit Facility, B&W must comply with
certain financial covenants. B&W had no borrowings outstanding under this
facility at March 31, 2003 or December 31, 2002. Letters of credit outstanding
under the DIP Credit Facility at March 31, 2003 totaled approximately $169.7
million. This facility, which was scheduled to expire on February 22, 2003, has
been amended and extended to February 22, 2004, with an additional one-year
extension at the option of B&W. The amendment also provides

38

for a reduction of the facility from $300 million to $227.75 million. See Note 9
to our condensed consolidated financial statements for further information on
the DIP Credit Facility.

At March 31, 2003, MII was a maker or guarantor on $8.8 million of letters of
credit issued in connection with B&W's operations prior to B&W's Chapter 11
filing. In addition, MII, MI and BWICO have agreed to indemnify B&W for any
customer draw on $53 million in letters of credit that have been issued under
the DIP Facility to replace or backstop letters of credit on which MII, MI and
BWICO were makers or guarantors as of the time of B&W's Chapter 11 filing. We
are not aware that B&W has ever had a letter of credit drawn on by a customer.
However, MII, MI and BWICO do not currently have sufficient cash or other liquid
resources available, either individually or combined, to satisfy their primary,
guaranty or indemnity obligations relating to letters of credit issued in
connection with B&W's operations should customer draws occur on a significant
amount of these letters of credit. In addition, as of March 31, 2003, MII
guaranteed surety bonds of approximately $118.4 million, of which $105 million
related to the business operations of B&W and its subsidiaries. We are not aware
that either MII or any of its subsidiaries, including B&W, have ever had a
surety bond called. However, MII does not currently have sufficient cash or
other liquid resources available if contract defaults require it to fund a
significant amount of its surety bond guarantee obligations. As to the guarantee
and indemnity obligations involving B&W, the proposed B&W Chapter 11 settlement
contemplates indemnification and other protections for MII, MI and BWICO.

As a result of its bankruptcy filing, B&W and its filing subsidiaries are
precluded from paying dividends to shareholders and making payments on any
pre-bankruptcy filing accounts or notes payable that are due and owing to any
other entity within the McDermott group of companies (the "Pre-Petition
Intercompany Payables") and other creditors during the pendency of the
bankruptcy case, without the Bankruptcy Court's approval.

As a result of the B&W bankruptcy filing, our access to the cash flows of B&W
and its subsidiaries has been restricted. In addition, MI and JRM and their
respective subsidiaries are limited, as a result of covenants in debt
instruments, in their ability to transfer funds to MII and its other
subsidiaries through cash dividends or through unsecured loans or investments.
Completion of the EPIC spar projects has and will continue to put a strain on
JRM's liquidity. As a result, we have assessed our ability to continue as a
viable business and have concluded that we can continue to fund our operating
activities and capital requirements. However, our ability to obtain a successful
and timely resolution to the B&W Chapter 11 proceedings has impacted our ability
to obtain additional financing. Our current credit rating has also impacted our
access to, and sources of, capital and has resulted in additional collateral
requirements for our debt obligations, as reflected under the New Credit
Facility.

As discussed in Note 9 to our condensed consolidated financial statements, we
are continuing our discussions with the ACC and FCR concerning a potential
settlement. On December 19, 2002, B&W and its filing

39

subsidiaries, the ACC, the FCR, and MI filed drafts of a joint plan of
reorganization and settlement agreement, together with a draft of a related
disclosure statement. On March 28, 2003, the parties filed amended drafts of the
joint plan or reorganization and the disclosure statement, which, along with
related documents, include the following key terms:

o MII would effectively assign all its equity in B&W to a trust to be
created for the benefit of the asbestos personal injury claimants.

o MII and all its subsidiaries would assign, transfer or otherwise
make available their rights to all applicable insurance proceeds to
the trust.

o MII would issue 4.75 million shares of restricted common stock and
cause those shares to be transferred to the trust. The resale of the
shares would be subject to certain limitations, in order to provide
for an orderly means of selling the shares to the public. Certain
sales by the trust would also be subject to an MII right of first
refusal. If any of the shares issued to the trust are still held by
the trust after three years, and to the extent those shares could
not have been sold in the market at a price greater than or equal to
$19.00 per share (based on quoted market prices), taking into
account the restrictions on sale and any waivers of those
restrictions that may be granted by MII from time to time, MII would
effectively guarantee that those shares would have a value of $19.00
per share on the third anniversary of the date of their issuance.
MII would be able to satisfy this guaranty obligation by making a
cash payment or through the issuance of additional shares of its
common stock. If MII elects to issue shares to satisfy this guaranty
obligation, it would not be required to issue more than 12.5 million
shares.

o MI would issue promissory notes to the trust in an aggregate
principal amount of $92 million. The notes would be unsecured
obligations and would provide for payments of principal of $8.4
million per year to be payable over 11 years, with interest payable
on the outstanding balance at the rate of 7.5% per year. The payment
obligations under those notes would be guaranteed by MII.

o MII and all its past and present directors, officers and affiliates,
including its captive insurers, would receive the full benefit of
Section 524(g) of the Bankruptcy Code with respect to personal
injury claims attributable to B&W's use of asbestos and would be
released and protected from all pending and future asbestos-related
claims stemming from B&W's operations, as well as other claims
(whether contract claims, tort claims or other claims) of any kind
relating to B&W, including but not limited to claims relating to the
1998 corporate reorganization that has been the subject of
litigation in the Chapter 11 proceedings.

o The settlement would be conditioned on the approval by MII's Board
of Directors and stockholders of the terms of the settlement
outlined above.

As the settlement discussions proceed, we expect that some of the court
proceedings in or relating to the B&W Chapter 11 case will continue and that the
parties will continue to maintain their previously asserted

40

positions. The parties filed a second amended disclosure statement on May 5,
2003, that, among other things, updated the status of the negotiations, and a
disclosure statement hearing is scheduled for May 8, 2003. Following that
hearing, the Bankruptcy Court will schedule further proceedings concerning this
matter. The process of finalizing and implementing the settlement could take up
to a year, depending on, among other things, the nature and extent of any
objections or appeals in the bankruptcy case.

Based on developments in the settlement negotiations through December 31, 2002,
we determined that a liability related to the proposed settlement was probable
and that the value was reasonably estimable. Accordingly, at December 31, 2002,
we established an estimate for the cost of the settlement of the B&W bankruptcy
proceedings of $110 million, including tax expense of $23.6 million. At March
31, 2003, we have updated our estimated cost of the settlement to reflect
current conditions and recorded an aggregate reduction in the provision of $23.6
million, net of tax expense of $0.5 million, primarily due to a decrease in our
stock price. For details regarding this estimate, see Note 9 to our consolidated
financial statements.

Despite our progress in our settlement discussions, there are continuing risks
and uncertainties that will remain with us until the requisite approvals are
obtained and the final settlement is reflected in a plan of reorganization that
is confirmed by the Bankruptcy Court pursuant to a final, nonappealable order of
confirmation. One of the remaining issues to be resolved as negotiations
relating to the B&W Chapter 11 proceedings continue relates to the proposed
spin-off of the MI/B&W pension plan. In our judgment, it has become probable
pending continuing negotiations that we will spin off the portion of MI's
qualified pension plan related to the active and retired employees of B&W as
part of a final settlement. If we effect such a spin-off, we will be required to
recognize any curtailment and settlement gains or losses associated with the
spin-off at the time we effect the spin-off. Curtailment and settlement gains or
losses are determined based on actuarial calculations as of the date of the
spin-off. As disclosed in Item 7 of our annual report on Form 10-K for the year
ended December 31, 2002, based on data provided by our actuary, if this
anticipated spin-off had occurred at December 31, 2002, we would have recorded
curtailment and settlement losses through a charge to earnings totaling $117
million, with no associated tax benefits. In addition, based on data provided by
our actuary at December 31, 2002, we would have also recorded a reduction in our
charge to Other Comprehensive Income for recognition of our minimum pension
liability totaling approximately $226 million. If we had recorded these items at
December 31, 2002, our Stockholders' Deficit would have improved by
approximately $109 million. We anticipate that the spin-off will occur in 2003.
We will record the effect of the spin-off based on actuarial calculations as of
the date of the spin-off, which could be materially different from the effect
described in this paragraph that we would have recorded if the spin-off had
occurred at December 31, 2002.

Members of the U.S. Congress are currently discussing legislative proposals with
regard to a national resolution of all asbestos-related litigation in the United
States. We cannot estimate the impact on the proposed settlement, if any, of
such legislative proposals.

41

See Note 1 to the condensed consolidated financial statements for information on
new accounting standards.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposures to market risks have not changed materially from those disclosed
in Item 7A included in Part II of our annual report on Form 10-K for the year
ended December 31, 2002.

Item 4. Controls and Procedures

Within the 90-day period immediately preceding the filing of this report, our
chief executive officer and chief financial officer have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934). Based on that evaluation, our chief executive officer and
chief financial officer concluded that the design and operation of our
disclosure controls and procedures were effective as of the date of that
evaluation. There have been no significant changes in our internal controls or
in other factors that could significantly affect those controls subsequent to
the date of that evaluation.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding ongoing investigations and litigation, see Note 6 to
the condensed consolidated financial statements in Part I of this report, which
we incorporate by reference into this Item. In addition, see Note 9 to the
condensed consolidated financial statements included in this report regarding
B&W's potential liability for nonemployee asbestos claims and the Chapter 11
reorganization proceedings commenced by B&W and certain of its subsidiaries on
February 22, 2000, which we incorporate by reference into this Item.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibit 3.1*- McDermott International, Inc.'s Articles of
Incorporation, as amended (incorporated by reference to Exhibit 3.1 to
McDermott International, Inc.'s Annual Report on Form 10-K for the
fiscal year ended March 31, 1996 (File No. 1-08430)).

Exhibit 3.2* - McDermott International, Inc.'s Amended and Restated
By-Laws (incorporated by reference to Exhibit 3.2 to McDermott
International, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 1-08430)).

Exhibit 3.3*- Amended and Restated Certificate of Designation of
Series D Participating Preferred Stock (incorporated by reference to
Exhibit 3.1 to McDermott International, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001 (File No.
1-08430)).

Exhibit 4.1* - Omnibus Credit Agreement dated as of February 10, 2003
among J. Ray McDermott, S.A., J. Ray McDermott Holdings, Inc., J. Ray
McDermott, Inc. and BWX Technologies, Inc., as borrowers, McDermott
International, Inc., as parent guarantor, the initial lenders and
initial issuing banks named therein, Citicorp USA, Inc., as
administrative agent and collateral agent, Salomon Smith Barney Inc.,
as lead arranger and book runner, The Bank of Nova Scotia, as
documentation agent, and Credit Lyonnais New York Branch, as
syndication agent (incorporated by reference to Exhibit 4.2 of

42

McDermott International, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2002 (File No. 1-08430)).

Exhibit 4.2* - Security Agreement dated February 10, 2003 from the
grantors referred to therein to Citicorp USA, Inc., as collateral
agent (incorporated by reference to Exhibit 4.3 of McDermott
International, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 1-08430)).

Exhibit 4.3* - Form of Subsidiary Guarantee related to the Omnibus
Credit Agreement (incorporated by reference to Exhibit 4.4 of
McDermott International, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2002 (File No. 1-08430)).

(b) Reports on Form 8-K

On February 12, 2003, we filed a current report on Form 8-K dated
February 11, 2003, reporting under Item 5 - Other Events that we had
issued a press release in which we announced that we had entered into
definitive agreements with our lenders providing for a new credit
facility to replace existing credit facilities, which were scheduled
to expire on February 21, 2003.

On February 27, 2003, we filed a current report on Form 8-K dated
February 27, 2003, reporting under Item 5 - Other Events that one of
our subsidiaries, J. Ray McDermott, S.A., had named a new president
and chief operating officer effective March 1, 2003.

On March 25, 2003, we filed a current report on Form 8-K dated March
25, 2003, reporting under Item 5 - Other Events that we had announced
our results for the fourth quarter of 2002 and guidance for 2003.

- ----------

* Incorporated by reference to the filing indicated.

43

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

McDERMOTT INTERNATIONAL, INC.

/s/ Francis S. Kalman
-----------------------------------

By: Francis S. Kalman
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer
and Duly Authorized Representative)

May 6, 2003

44

CERTIFICATIONS

I, Bruce W. Wilkinson, chief executive officer of McDermott International, Inc.,
certify that:

1. I have reviewed this quarterly report on Form 10-Q of McDermott
International, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

May 6, 2003

/s/ Bruce W. Wilkinson
----------------------------------
Bruce W. Wilkinson
Chief Executive Officer

45

I, Francis S. Kalman, chief financial officer of McDermott International, Inc.,
certify that:

1. I have reviewed this quarterly report on Form 10-Q of McDermott
International, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

May 6, 2003

/s/ Francis S. Kalman
--------------------------------
Francis S. Kalman
Chief Financial Officer

46

EXHIBIT INDEX

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* Incorporated by reference to the filing indicated.