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Article by DailyStocks_admin    (10-14-08 08:10 AM)

The Daily Magic Formula Stock for 10/14/2008 is McDermott International Inc. According to the Magic Formula Investing Web Site, the ebit yield is 16% and the EBIT ROIC is 50-75 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

GENERAL

McDermott International, Inc. (“MII”), incorporated under the laws of the Republic of Panama in 1959, is an engineering and construction company with specialty manufacturing and service capabilities and is the parent company of the McDermott group of companies, including J. Ray McDermott, S.A. (“JRMSA”) and The Babcock & Wilcox Company (“B&W”). In this Annual Report on Form 10-K, unless the context otherwise indicates, “we,” “us” and “our” mean MII and its consolidated subsidiaries.

We operate in three business segments: Offshore Oil and Gas Construction, Government Operations and Power Generation Systems.

During 2007, we renamed, and in some cases restructured, many of the principal operating companies within our Government Operations and Power Generation Systems segments. One of the renamed companies, Babcock & Wilcox Power Generation Group, Inc. (“B&W PGG”), was previously named The Babcock & Wilcox Company. See the segment description below for the new names of the other principal operating companies. In addition, we changed the name of the parent company of our Government Operations and Power Generation Systems subsidiaries to The Babcock & Wilcox Company. As a result, The Babcock & Wilcox Company now refers to the parent company of our subsidiaries comprising our Government Operations and Power Generation Systems segments. As used in this Annual Report on Form 10-K, the term B&W is a reference to the renamed The Babcock & Wilcox Company.

Our business segments are outlined as follows:

•

Offshore Oil and Gas Construction includes the business and operations of JRMSA, J. Ray McDermott Holdings, LLC and their respective subsidiaries. This segment supplies services primarily to offshore oil and gas field developments worldwide, including the front-end design and detailed engineering, fabrication and installation of offshore drilling and production facilities and installation of marine pipelines and subsea production systems. This segment operates in most major offshore oil and gas producing regions, including the United States, Mexico, Canada, the Middle East, India, the Caspian Sea and Asia Pacific.

•

Government Operations includes the business and operations of BWX Technologies, Inc., Babcock & Wilcox Nuclear Operations Group, Inc., Babcock & Wilcox Technical Services Group, Inc. and their respective subsidiaries. This segment supplies nuclear components and provides various services to the U.S. Government, including uranium processing, environmental site restoration services and management and operating services for various U.S. Government-owned facilities, primarily within the nuclear weapons complex of the U.S. Department of Energy (“DOE”).

•

Power Generation Systems includes the business and operations of B&W PGG, Babcock & Wilcox Nuclear Power Generation Group, Inc. and their respective subsidiaries. This segment supplies fossil-fired steam generating systems, replacement commercial nuclear steam generators, environmental equipment and components, and related services to customers around the world. It designs, engineers, manufactures and services large utility and industrial power generation systems, including boilers used to generate steam in electric power plants, pulp and paper making, chemical and process applications and other industrial uses. On February 22, 2006, B&W PGG and three of its subsidiaries exited from their asbestos-related Chapter 11 Bankruptcy proceedings (the “Chapter 11 Bankruptcy”), which were commenced on February 22, 2000.



Due to the Chapter 11 Bankruptcy, we did not consolidate the results of operations of these entities in our consolidated financial statements from February 22, 2000 through February 22, 2006.

The following tables summarize our revenues and operating income by business segment for the years ended December 31, 2007, 2006 and 2005.

General

The Offshore Oil and Gas Construction segment’s business involves the front-end design and detailed engineering, fabrication and installation of offshore drilling and production facilities and installation of marine pipelines and subsea production systems. This segment also provides comprehensive project management and procurement services. This segment operates in most major offshore oil and gas producing regions throughout the world, including the United States, Mexico, Canada, the Middle East, India, the Caspian Sea and Asia Pacific.

Vessels and Properties

Through our Offshore Oil and Gas Construction segment, we operate a fleet of marine vessels used in major offshore construction. We currently own and operate one derrick vessel and six combination derrick-pipelaying vessels. We also operate a pipelay vessel and a dive support vessel owned by a subdivision of the state-owned oil company of Azerbaijan. The lifting capacities of our derrick and combination derrick-pipelaying vessels range from 660 to 4,400 tons. These vessels range in length from 350 to 497 feet and are fully equipped with revolving cranes, auxiliary cranes, welding equipment, pile-driving hammers, anchor winches and a variety of additional equipment.

On July 27, 2007, we completed our acquisition of substantially all the assets of Secunda International Limited, including 14 harsh-weather, multi-functional vessels, with capabilities which include subsea construction, pipelay, cable lay and dive support, as well as its shore-based operations.

Seven of our owned and/or operated major construction vessels are self-propelled. We also have a substantial inventory of specialized support equipment for intermediate water and deepwater construction and pipelay. In addition, we own or lease a substantial number of other vessels, such as tugboats, utility boats, launch barges and cargo barges, to support the operations of our major marine construction vessels.


Governmental regulations, our insurance policies and some of our financing arrangements require us to maintain our vessels in accordance with standards of seaworthiness and safety set by governmental authorities or classification societies. We maintain our fleet to the standards for seaworthiness, safety and health set by the American Bureau of Shipping, Den Norske Veritas and other world-recognized classification societies.

Our principal fabrication facilities are located near Morgan City, Louisiana, in Indonesia on Batam Island and in Dubai, U.A.E., and we are currently developing a new fabrication facility on the east coast of Mexico in the Port of Altamira, for which we are targeting to begin operations in the first quarter of 2008. We also operate a portion of the Baku Deepwater Jacket Factory fabrication facility in Baku, Azerbaijan, which is owned by a subsidiary of the State Oil Company of the Azerbaijan Republic. Our fabrication facilities are equipped with a wide variety of heavy-duty construction and fabrication equipment, including cranes, welding equipment, machine tools and robotic and other automated equipment. We fabricate a full range of offshore structures, from conventional jacket-type fixed platforms to intermediate water and deepwater platform configurations employing spar, compliant-tower and tension leg technologies, as well as floating, production, storage and offtake (“FPSO”) technology.

Joint Ventures

Our Offshore Oil & Gas Construction segment participates in the ownership of several entities with third parties. We generally refer to these entities as “joint ventures,” and we account for our investments in them under the equity method of accounting. These entities include:

•

Deepwater Marine Technology LLC. We co-own this entity with Keppel FELS Ltd. This joint venture expands our services related to the solutions involving tension leg platforms (“TLPs”). A TLP is a vertically moored floating structure normally used for the offshore production of oil and gas and is particularly suited for water depth greater than 1,000 feet.

•

FloaTEC LLC. We co-own this entity with Keppel FELS Ltd. This joint venture designs, markets, procures and contracts floating production systems to the deepwater oil and gas industry. The deepwater solutions include TLPs, spars and production semi-submersibles. A significant part of this entity’s strategy is to build on the established presence, reputation and resources of its two owners.

•

Spars International, Inc. We co-own this entity with Technip S.A. This joint venture primarily enters into engineering, procurement, construction and installation customer contracts for spars. Spars are single-hull floating columns designed to support offshore drilling and production equipment and to store oil. This joint venture assists our Offshore Oil and Gas Construction segment in the development and deployment of deepwater spar solutions for the oil and gas industry. Spars International, Inc. installed the first offshore spar platform in the Gulf of Mexico in 1,930 feet of water in 1996.

Foreign Operations


The level of engineering and construction services required by any one customer largely depends upon the amount of that customer’s capital expenditure budget for offshore construction services in any single year. Consequently, customers that account for a significant portion of revenues in one year may represent an immaterial portion of revenues in subsequent years.

Contracts

We have historically performed work on a fixed-price, cost-plus or day-rate basis or a combination of these methods. Most of our long-term contracts have provisions for progress payments. We attempt to cover anticipated increases in costs of labor, material and service costs of our long-term contracts either through an estimate of such charges, which is reflected in the original price, or through price escalation clauses.

We recognize our contract revenues and related costs on a percentage-of-completion basis. Accordingly, we review contract price and cost estimates periodically as the work progresses and reflect adjustments in income proportionate to the percentage of completion in the period when we revise those estimates. To the extent that these adjustments result in a reduction or an elimination of previously reported profits with respect to a project, we would recognize a charge against current earnings, which could be material.

Our arrangements with customers frequently require us to provide letters of credit or bid and performance bonds to secure bids or performance under contracts for offshore construction services. While these letters of credit and bonds may involve significant dollar amounts, historically, there have been no material payments to our customers under these arrangements. These arrangements are typical in the industry for projects outside the U.S. Gulf of Mexico.

In the event of a contract deferral or cancellation, we are generally entitled to recover costs incurred, settlement expenses and profit on work completed prior to deferral or termination. While we have not generally experienced significant project cancellations, significant or numerous cancellations could adversely affect our business, financial condition and results of operations.

Backlog

As of December 31, 2007 and 2006, our Offshore Oil and Gas Construction segment’s backlog amounted to approximately $4.8 billion and $4.1 billion, respectively. This represents approximately 49% and 54% of our total consolidated backlog at December 31, 2007 and 2006, respectively.

In addition to our expected revenue recognition from ending backlog at December 31, 2007, our Offshore Oil and Gas Construction segment also realizes revenues from orders received and completed in the same fiscal quarter.

Backlog is not a measure recognized by generally accepted accounting principles. It is possible that our methodology for determining backlog may not be comparable to methods used by other companies. We generally include expected revenue in our backlog when we receive written confirmation from our customers. It is possible that backlog may not be indicative of future results, and projects in our backlog may be cancelled, modified or otherwise altered by customers.

Because of the more conducive weather conditions in certain geographic regions, most installation operations are conducted in the warmer months of the year in those areas, and many of these contracts are awarded with only a short period of time before the desired time of project performance.

Raw Materials

Our Offshore Oil and Gas Construction segment uses raw materials, such as carbon and alloy steels in various forms, welding gases, paint, fuels and lubricants, which are available from many sources. We generally purchase these raw materials and components as needed for individual contracts. Although shortages of some raw materials and fuels have existed from time to time, no serious shortage exists at the present time. Our Offshore Oil and Gas Construction segment does not depend on a single source of supply for any significant raw materials.

Competition

We believe we are among the few offshore construction contractors capable of providing a full range of services in major offshore oil and gas producing regions of the world. We believe that the substantial capital costs involved in becoming a full-service offshore construction contractor create a significant barrier to entry into the market as a global, fully integrated competitor. We do, however, face substantial competition from regional competitors and less integrated providers of offshore construction services, such as engineering firms, fabrication facilities, pipelaying companies and shipbuilders.

A number of companies compete with us in each of the separate marine pipelay and construction and fabrication phases in various parts of the world. These competitors include Allseas Marine Contractors S.A.; Daewoo Engineering & Construction Co., Ltd.; Global Industries, Ltd.; NPCC (Abu Dhabi); Heerema Group; Hyundai Heavy Industrial Co., Ltd.; Kiewit Offshore Services, Ltd.; Nippon Steel Corporation; Saipem S.p.A.; Acergy S.A.; and Technip S.A. Contracts are usually awarded on a competitive bid basis. Although we believe customers consider, among other things, the availability and technical capabilities of equipment and personnel, efficiency, condition of equipment, safety record and reputation, price competition is normally the primary factor in determining which qualified contractor with available equipment is awarded a contract. Major construction vessels have few alternative uses and, because of their nature and the environment in which they work, have relatively high costs whether or not they are operating. See the discussion in Item 1A, “Risk Factors,” for additional information on the competitive nature of the offshore oil and gas construction business.

Factors Affecting Demand

Our Offshore Oil and Gas Construction segment’s activity depends mainly on the capital expenditures for offshore construction services of oil and gas companies and foreign governments for construction of development projects in the regions we operate. Numerous factors influence these expenditures, including:
•

oil and gas prices, along with expectations about future prices;
•

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

the terms and conditions of offshore leases;
•

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

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

local and international political and economic conditions.

CEO BACKGROUND

Roger A. Brown
63
2005
Until his retirement in 2007, Mr. Brown was Vice President, Strategic Initiatives of Smith International, Inc., a supplier of goods and services to the oil and gas exploration and production industry, the petrochemical industry and other industrial markets from 2005 and President of Smith Technologies (a business unit of Smith International, Inc.) from 1998. Mr. Brown is also a director of Ultra Petroleum Corporation.

Oliver D. Kingsley, Jr.
65
2004
Until his retirement in November 2004, Mr. Kingsley served as President and Chief Operating Officer of Exelon Corporation, an integrated utility company, from May 2003, Senior Executive Vice President from February 2002 and President and Chief Nuclear Officer from October 2000. Mr. Kingsley also served as President and Chief Executive Officer of Exelon’s subsidiary, Exelon Generation, from February 2000 to November 2004 and as President and Chief Nuclear Officer of Unicom Corporation, an integrated electric utility company, from November 1997 to October 2000. Mr. Kingsley is also a director of FPL Group, Inc.

Bruce W. Wilkinson
63
2000
Mr. Wilkinson has been Chairman of the Board and Chief Executive Officer of McDermott since August 2000. Mr. Wilkinson served as President and Chief Operating Officer of McDermott from April 2000 to August 2000 and as President and Chief Operating Officer of our subsidiary J. Ray McDermott, S.A. from July 2002 through February 2003. He is also a director of Cameron International Corporation.

Robert L. Howard
71
1997
Until his retirement in March 1995, Mr. Howard was Vice President of Domestic Operations, Exploration and Production of Shell Oil Company, and President of Shell Western Exploration and Production Inc. from 1992, and President of Shell Offshore, Inc. from 1985. He is also a director of Devon Energy Corporation and serves as lead director for Southwestern Energy Company.

D. Bradley McWilliams
66
2003
From April 1995 until his retirement in April 2003, Mr. McWilliams was Senior Vice President and Chief Financial Officer of Cooper Industries Ltd., a worldwide manufacturer of electrical products, tools and hardware. He was Vice President of Cooper Industries from 1982 until April 1995.

Thomas C. Schievelbein
54
2004
Until his retirement in November 2004, Mr. Schievelbein was President of Northrop Grumman Newport News, a subsidiary of the Northrop Grumman Corporation, a global defense company, from November 2001. From October 1995 to October 2001, he served as Executive Vice President and Chief Operating Officer of Newport News Shipbuilding, Inc.

John F. Bookout III
54
2006
Until his retirement in October 2006, Mr. Bookout was a director of McKinsey & Company, a global management consulting firm. He joined McKinsey in 1978 and most recently was Leader of its Global Industry Practices. He also serves as a director of Tesoro Corporation and, since late 2006, as a senior advisor to First Reserve Corporation, a private equity firm specializing in the energy industry.

Ronald C. Cambre
69
2000
Until December 2001, Mr. Cambre was Chairman of the Board of Newmont Mining Corporation, an international mining company, from January 1995 and served as its Chief Executive Officer from November 1993 until his retirement in December 2000. He was also President of Newmont Mining Corporation from June 1994 to July 1999. Mr. Cambre is also a director of Cleveland-Cliffs Inc. and W. R. Grace & Co.

Robert W. Goldman
66
2005
Since October 2002, Mr. Goldman has served as an independent financial consultant. Previously, Mr. Goldman worked for Conoco Inc., an international, integrated energy company and predecessor to ConocoPhillips, from 1988 to 2002, most recently as Senior Vice President, Finance and Chief Financial Officer from 1998 to 2002. He is currently the Vice President, Finance of the World Petroleum Council and also serves as a director of El Paso Corporation, Parker Drilling Company and Tesoro Corporation.

MANAGEMENT DISCUSSION FROM LATEST 10K

GENERAL

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

We are currently exploring growth strategies across our segments through acquisitions to expand and complement our existing businesses. As we pursue these opportunities, we expect they would be funded by cash on hand, external financing, equity or some combination thereof. It is our policy to not comment on any potential acquisition/transaction until a definitive agreement has been reached.

Offshore Oil and Gas Construction Segment – Recent Operating Results and Outlook

Our Offshore Oil and Gas Construction segment produced strong financial results in 2007. We expect the backlog of approximately $4.8 billion at December 31, 2007 to produce revenues for 2008 of approximately $3.0 billion, not including any change orders or new contracts that may be awarded during the year. Our Offshore Oil and Gas Construction segment is actively bidding on and, in some cases, beginning preliminary work on projects that we expect will be awarded to it in 2008, subject to successful contract negotiations, which are not currently in backlog.

The demand for our Offshore Oil and Gas Construction segment’s products and services is dependent primarily on the capital expenditures of the world’s major oil and gas producing companies and foreign governments for construction of development projects in the regions in which we operate. In recent years, the worldwide demand for energy, along with high prices for oil and gas, has led to strong levels of capital expenditures by the major oil and gas companies and foreign governments. This activity contributed to the strong financial results our Offshore Oil and Gas Construction segment has produced in the recent years. We believe these trends will continue in 2008 and will be a major contributor to our expected 2008 results.

The decision-making process for oil and gas companies in making capital expenditures on offshore construction services for a development project differs depending on whether the project involves new or existing development. In the case of new development projects, the demand for offshore construction services generally follows the exploratory drilling and, in some cases, initial development drilling activities. Based on the results of these activities and evaluations of field economics, customers determine whether to install new platforms and new infrastructure, such as subsea gathering lines and pipelines. For existing development projects, demand for offshore construction services is generated by decisions to, among other things, expand development in existing fields and expand existing infrastructure.

Government Operations Segment – Recent Operating Results and Outlook

Our Government Operations Segment produced strong financial results in 2007. We expect the backlog of approximately $1.8 billion at December 31, 2007 to produce revenues for 2008 of approximately $630 million, not including any change orders or new contracts that may be awarded during the year.

The revenues of our Government Operations segment are largely a function of defense spending by the U.S. Government. As a supplier of major nuclear components for certain U.S. Government programs, this segment is a significant participant in the defense industry. With its unique capability of full life-cycle management of special nuclear materials, facilities and technologies, our Government Operations segment is well positioned to continue to participate in the continuing cleanup, operation and management of the nuclear sites and weapons complexes maintained by the U.S. Department of Energy (the “DOE”).

Power Generation Systems Segment – Recent Operating Results and Outlook

Our Power Generation Systems segment produced strong financial results in 2007. We expect the backlog of approximately $3.3 billion at December 31, 2007 to produce revenues for 2008 of approximately $1.6 billion, not including any change orders or new contracts that may be awarded during the year. Our Power Generation Systems segment is actively bidding on and, in some cases, beginning preliminary work on projects that we expect will be awarded to it in 2008, subject to successful contract negotiations, which are not currently in backlog.

In June 2006, our Power Generation Systems segment was awarded separate contracts to supply eight supercritical, coal-fired boilers and selective catalytic reduction (“SCR”) systems as part of TXU Corp.’s solid-fuel power generation program in Texas. Subsequently, we received notice from TXU to suspend activity on five of the eight boilers and SCR systems. We did not include the value of these eight units in our backlog at December 31, 2006 due to their uncertainty.

The five suspended contracts were formally cancelled by execution of a termination and settlement agreement dated April 13, 2007. During the year ended December 31, 2007, we received cash payments totaling $124 million from TXU, which completed the $243 million termination settlement obligation from TXU. Of the total $243 million settlement, we recognized $178 million as revenue during the year ended December 31, 2007 and $65 million as revenue during the year ended December 31, 2006.

TXU’s payments totaling $243 million completed the obligations between our Power Generation Systems segment and TXU for the cancelled units; therefore, we do not expect the termination of the five cancelled contracts to have a material impact on our results of operations or cash flows in future periods, including related amounts accrued for costs incurred and owed to various subcontractors and vendors. Backlog in our Power Generation Systems segment at December 31, 2007 is higher compared to June 30, 2006, which was the period in which we originally recorded all eight TXU contracts in our backlog. Our liquidity position for this segment remains strong, and we expect it to remain so throughout 2008 and 2009.

Our Power Generation Systems segment continues to fulfill its contracts to supply the three units not covered by the termination and settlement agreement with TXU. The value of these units in our backlog totaled approximately $315 million at December 31, 2007, and we will continue to recognize revenue and costs on these contracts under percentage-of-completion accounting. We expect that our execution of these remaining contracts will produce positive operating margins, comparable to other projects of a similar nature in this segment, as they are completed over the next 12 to 48 months.

Our Power Generation Systems segment’s overall activity depends mainly on the capital expenditures of electric power generating companies and other steam-using industries. This segment’s products and services are capital intensive. As such, customer demand is heavily affected by the variations in customer’s business cycles and by the overall economies of the countries in which they operate.

U.S. coal-fired power plants have been scrutinized by environmental groups and government regulators over the emissions of potentially harmful pollutants. In addition, the U.S. Congress is considering legislation that would limit greenhouse gas emissions, including CO 2 . In April 2007, the U.S. Supreme Court ruled that the U.S. Environmental Protection Agency has some authority to regulate greenhouse gases under the Clean Air Act. Some plans for coal-fired power plants have recently been cancelled or suspended in several states, although more new coal-fired power plants are being planned to meet the predicted increase in electricity demand. Also, in February 2008, three of the nation’s largest investment banks announced new environmental standards to ensure lenders evaluate risks associated with investments in coal-fired power plants. Such standards could make it potentially more difficult for new U.S. coal-fired power plants to secure financing.

According to the International Energy Agency, consumption of electricity worldwide is expected nearly to double in the next quarter century. While we cannot predict what impact potential future legislation and regulations concerning CO 2 and other emissions will have on our results of operations, it is possible such legislation could favorably impact the environmental retrofit and service businesses of our Power Generation Systems segment.

Other

At December 31, 2007, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” and SFAS No. 87, “Employers’ Accounting for Pensions,” the underfunded status of our defined benefit plans improved by approximately $146.0 million from 2006. This improvement was primarily due to increasing our discount rate in 2007 to 6.25% from 6.0% for three of our major qualified plans, additional contributions of $132.2 million in 2007 and return on plan assets.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We believe the following are our most critical accounting policies that we apply in the preparation of our financial statements. These policies require our most difficult, subjective and complex judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

Contracts and Revenue Recognition. We determine the appropriate accounting method for each of our long-term contracts before work on the project begins. We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts under the guidelines of the Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), issued by the American Institute of Certified Public Accountants. The use of this method is based on our experience and history of being able to prepare reasonably dependable estimates of the cost to complete our projects. Under this method, we recognize estimated contract revenue and resulting income based on costs incurred to date as a percentage of total estimated costs. Total estimated costs, and resulting contract income, are affected by changes in the expected cost of materials and labor, productivity, scheduling and other factors. Additionally, external factors such as weather, customer requirements and other factors outside of our control, may affect the progress and estimated cost of a project’s completion and, therefore, the timing of revenue and income recognition. We routinely review estimates related to our contracts, and revisions to profitability are reflected in the quarterly and annual earnings we report. SOP 81-1 provides that the use of percentage-of-completion accounting requires the ability to make reasonably dependable estimates.

For contracts as to which we are unable to estimate the final profitability except to assure that no loss will ultimately be incurred, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For these deferred profit recognition contracts, we recognize revenue and cost equally and only recognize gross margin when probable and reasonably estimable, which we generally determine to be when the contract is approximately 70% complete. We treat long-term construction contracts that contain such a level of risk and uncertainty that estimation of the final outcome is impractical except to assure that no loss will be incurred as deferred profit recognition contracts.

Fixed-price contracts are required to be accounted for under the completed-contract method if we are unable to reasonably forecast cost to complete at start-up. For example, if we have no experience in performing the type of work on a particular project and were unable to develop reasonably dependable estimates of total costs to complete, we would follow the completed-contract method of accounting for such projects. Our management’s policy is not to enter into fixed-price contracts without an accurate estimate of cost to complete. However, it is possible that in the time between contract execution and the start of work on a project, we could lose confidence in our ability to forecast cost to complete based on intervening events, including, but not limited to, experience on similar projects, civil unrest, strikes and volatility in our expected costs. In such a situation, we would use the completed-contract method of accounting for that project. No such contracts were executed during the years ended December 31, 2007 and 2006.

For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.

Although we continually strive to improve our ability to estimate our contract costs and profitability, adjustments to overall contract costs due to unforeseen events could be significant in future periods. We recognize claims for extra work or for changes in scope of work in contract revenues, to the extent of costs incurred, when we believe collection is probable and can be reasonably estimated. We recognize income from contract change orders or claims when formally agreed with the customer. We reflect any amounts not collected as an adjustment to earnings. We regularly assess the collectibility of contract revenues and receivables from customers.

Property, Plant and Equipment. We carry our property, plant and equipment at depreciated cost, reduced by provisions to recognize economic impairment when we determine impairment has occurred. Factors that impact our determination of impairment include forecasted utilization of equipment and estimates of cash flow from projects to be performed in future periods. Our estimates of cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes in operating performance. Any changes in such factors may negatively affect our business segments and result in future asset impairments.

Except for major marine vessels, we depreciate our property, plant and equipment using the straight-line method, over estimated economic useful lives of eight to 40 years for buildings and two to 28 years for machinery and equipment. We depreciate major marine vessels using the units-of-production method based on the utilization of each vessel. Our depreciation expense calculated under the units-of-production method may be less than, equal to or greater than depreciation expense calculated under the straight-line method in any period. The annual depreciation based on utilization of each vessel will not be less than the greater of 25% of annual straight-line depreciation and 50% of cumulative straight-line depreciation.

We expense the costs of maintenance, repairs and renewals, which do not materially prolong the useful life of an asset, as we incur them, except for drydocking costs. We recognize drydocking costs for our marine fleet as a prepaid asset when incurred and amortize the expense over the period of time between drydockings, generally three to five years. We adopted this accounting policy for our drydocking costs, commonly referred to as the deferral method, effective January 1, 2007, as more fully discussed in Note 1 to our consolidated financial statements included in this report.

Self-Insurance. We have several wholly owned insurance subsidiaries that provide workers compensation, employer’s liability, general and automotive liability and workers’ compensation insurance and, from time to time, builder’s risk within certain limits and marine hull to our companies. We may also have business reasons in the future to have these insurance subsidiaries accept other risks which we cannot or do not wish to transfer to outside insurance companies. Reserves related to these insurance programs are based on the facts and circumstances specific to the insurance claims, our past experience with similar claims, loss factors and the performance of the outside insurance market for the type of risk at issue. The actual outcome of insured claims could differ significantly from estimated amounts. We maintain actuarially determined accruals in our consolidated balance sheets to cover self-insurance retentions for the coverage discussed above. These accruals are based on certain assumptions developed utilizing historical data to project future losses. Loss estimates in the calculation of these accruals are adjusted as required based upon actual claim settlements and reported claims. These loss estimates and accruals recorded in our financial statements for claims have historically been reasonable in light of the actual amount of claims paid.

Pension Plans and Postretirement Benefits. We estimate income or expense related to our pension and postretirement benefit plans based on actuarial assumptions, including assumptions regarding discount rates and expected returns on plan assets. We determine our discount rate based on a review of published financial data and discussions with our actuary regarding rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of our pension obligations. Based on historical data and discussions with our actuary, we determine our expected return on plan assets based on the expected long-term rate of return on our plan assets and the market-related value of our plan assets. Changes in these assumptions can result in significant changes in our estimated pension income or expense and our consolidated financial position. We revise our assumptions on an annual basis based upon changes in current interest rates, return on plan assets and the underlying demographics of our workforce. These assumptions are reasonably likely to change in future periods and may have a material impact on future earnings. Effective December 31, 2006, we adopted SFAS No. 158, “Employers’

YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006

McDermott International, Inc. (Consolidated)

Consolidated revenues increased approximately 37%, or $1.5 billion, to $5.6 billion for year ended December 31, 2007, compared to $4.1 billion for the year ended December 31, 2006. Our Offshore Oil and Gas Construction segment generated a 52% increase in its revenues in the year ended December 31, 2007 compared to the year ended December 31, 2006, primarily attributable to its Middle East and Asia Pacific regions. In addition, our Power Generation Systems segment revenues increased approximately 33% in the year ended December 31, 2007, as compared to the year ended December 31, 2006, primarily attributable to 2006 including approximately ten months of revenues from B&W PGG and its subsidiaries, compared to 12 months for 2007, and the recognition of revenues of approximately $178 million during 2007 from our termination and settlement agreement executed with TXU on the cancellation of five contracts to supply TXU supercritical, coal-fired boilers and SCR’s, as described above. Our Government Operations segment revenues increased approximately 10% in the year ended December 31, 2007, as compared to the year ended December 31, 2006.

Consolidated segment operating income, which, for purposes of this discussion and the segment discussions that follow, is before equity in income (losses) of investees and gains (losses) on asset disposals and impairments – net, increased $308.5 million from $398.8 million in the year ended December 31, 2006 to $707.3 million in the year ended December 31, 2007. The segment operating income of each of our Offshore Oil and Gas Construction and Power Generation Systems segments improved substantially in the year ended December 31, 2007, as compared to the year ended December 31, 2006. Our Government Operations segment operating income increased slightly in the year ended December 31, 2007, as compared to the year ended December 31, 2006.

Offshore Oil and Gas Construction

Revenues increased approximately 52%, or $835.4 million, to $2.4 billion for the year ended December 31, 2007, compared to $1.6 billion for the year ended December 31, 2006, primarily due to increased activities in our Middle East ($393.6 million) and Asia Pacific ($226.0 million) regions. Our revenues are principally derived from capital expenditures of major offshore oil and gas construction projects for oil and gas companies and foreign governments in the regions in which we operate and the successful execution of engineering, construction and installation projects. We experienced increases in our fabrication man-hours and our major marine barge days of 37% and 50%, respectively, in the year ended December 31, 2007, as compared to 2006. In addition, we experienced an increase in revenues totaling approximately $34.7 million attributable to the assets we acquired from Secunda International Limited in July 2007.

Segment operating income increased $183.5 million from $214.1 million in the year ended December 31, 2006 to $397.6 million in the year ended December 31, 2007. This increase is primarily attributable to higher fabrication activities, productivity improvements and cost savings in projects in our Middle East and Asia Pacific regions. In addition, our Caspian region improved due to contract change orders and agreements, which were finalized as part of our contract close-out process on projects, and our Americas region improved due to increased fabrication activities. These increases were partially offset by higher general and administrative expenses, including an increase in our stock-based compensation expense attributable to the increase in our stock price, in the year ended December 31, 2007, as compared to the year ended December 31, 2006.

Gain (loss) on asset disposals and impairments – net increased $23.0 million from a loss of $16.2 million in the year ended December 31, 2006 to a gain of $6.8 million in the year ended December 31, 2007. This change was primarily attributable to a non-cash impairment of $16.4 million in the year ended December 31, 2006 associated with our former joint venture in Mexico. Also contributing to the increase was the recognition during the year ended December 31, 2007 of a deferred gain of approximately $5.4 million related to the sale of our DB17 vessel to this same joint venture in Mexico. We sold the DB17 in September 2004; however, due to this joint venture’s liquidity problems, we deferred recognition of the gain until payment was received on our accounts and notes receivable. Final settlement of the receivables occurred during the year ended December 31, 2007.

Equity in losses of investees increased $1.0 million to $3.9 million in the year ended December 31, 2007, primarily attributable to our share of expenses in a deepwater solutions joint venture.

Government Operations

Revenues increased approximately 10%, or $63.9 million, to $694.0 million in the year ended December 31, 2007, compared to $630.1 million in the year ended December 31, 2006, primarily attributable to higher volumes in the manufacture of nuclear components for certain U.S. Government programs totaling $85.7 million, including additional volume from our acquisition of Marine Mechanical Corporation in Euclid, Ohio.

Segment operating income increased $7.3 million to $90.0 million in the year ended December 31, 2007, compared to $82.7 million in the year ended December 31, 2006, primarily attributable to additional volume from the manufacturing of nuclear components due to contract productivity improvements, along with additional volume from the acquisition of Marine Mechanical Corporation.

Equity in income of investees increased $3.5 million to $31.3 million in the year ended December 31, 2007, primarily due to the termination of our joint venture research and development program and increases in fees at joint ventures in Texas and Tennessee. These increases were partially offset by decreased scope at our joint venture in Idaho.

Power Generation Systems

Revenues increased approximately 33%, or $615.6 million, to $2.5 billion in the year ended December 31, 2007, compared to $1.9 billion in the year ended December 31, 2006. Due to the Chapter 11 Bankruptcy, our results for the year ended December 31, 2006 included approximately ten months of revenues from B&W PGG and its subsidiaries, compared to 12 months for the year ended December 31, 2007. In addition, we recognized revenue totaling $178 million during the year ended December 31, 2007 from our termination and settlement agreement executed with TXU on the cancellation of five contracts to supply TXU supercritical, coal-fired boilers and SCR’s, as described above. Also, in the year ended December 31, 2007, we experienced increases in revenues from our replacement parts business ($36.3 million), our industrial boiler activity ($14.7 million) and our utility steam and system fabrication business ($222.0 million). These increases were partially offset by lower revenues from our replacement nuclear steam generator business ($10.8 million), a reduction in our field service revenues ($4.5 million) and a decrease in revenues from our fabrication, repair and retrofit of existing facilities ($8.8 million).

Segment operating income increased $117.8 million to $219.7 in the year ended December 31, 2007, compared to $101.9 million in the year ended December 31, 2006, primarily attributable to significant benefits recognized in the second and third quarter of 2007 resulting from contract terminations and a variety of settlements. In addition, we experienced increases in segment operating income attributable to higher volumes from our replacement parts business, an increase in margins from our fabrication, repair and retrofit of existing facilities and higher margins on our replacement nuclear steam generator business. We also experienced lower pension plan expense in the year ended December 31, 2007 compared to the year ended December 31, 2006, primarily attributable to the performance of our pension plan assets and a change in our discount rate during the year ended December 31, 2007. These factors were partially offset by higher selling, general and administrative expenses and higher stock-based compensation expense attributable to the increase in our stock price during the year ended December 31, 2007. Also, segment operating income from our construction business decreased during the year ended December 31, 2007 as compared to the year ended December 31, 2006, primarily attributable to losses incurred on several contracts during 2007.

The year ended December 31, 2006 also included a $27 million provision for warranty, insurance and the settlement of litigation we concluded in early 2007.

Equity in income of investees increased $1.7 million to $14.4 million in the year ended December 31, 2007, primarily attributable to our joint venture in China.

Corporate

Unallocated Corporate expenses increased $11.3 million in the year ended December 31, 2007 from $29.9 million to $41.2 million, primarily attributable to higher departmental expenses and an increase in our stock-based compensation expense due to the improvement in our stock price. These increases were partially offset by lower pension plan expense in the year ended December 31, 2007 compared to the year ended December 31, 2006, primarily attributable to the performance of our pension plan assets and a change in our discount rate during the year ended December 31, 2007.

Other Income Statement Items

Interest income increased by $8.4 million to $62.0 million in the year ended December 31, 2007, primarily due to an increase in average cash equivalents and investments and prevailing interest rates.

Interest expense decreased by $7.8 million to $22.5 million in the year ended December 31, 2007, primarily due to lower average levels of debt outstanding during the year ended December 31, 2007 as compared to the year ended December 31, 2006, partially offset by higher interest and associated amortization and costs on our credit facilities.

We recorded a reduction in interest expense during the year ended December 31, 2006 totaling approximately $13.2 million attributable to a settlement we reached with U.S. and Canadian tax authorities related to transfer pricing issues. Additionally, during the year ended December 31, 2006, we recorded an increase in interest expense totaling approximately $7.5 million for potential U.S. tax deficiencies. These activities resulted in a net U.S. tax-related interest expense adjustment of approximately $5.7 million for the year ended December 31, 2006.

On June 6, 2006, we completed a tender offer and used cash on hand to purchase $200 million in aggregate principal amount of the 11% senior secured notes due 2013 issued by JRMSA (the “Secured Notes”) for approximately $249.0 million, including accrued interest of approximately $10.9 million. As a result of this early retirement of debt, we recognized $49.0 million of expense during the year ended December 31, 2006. In addition, in December 2006, B&W PGG retired its $250 million promissory note issued in 2005, as part of the Chapter 11 Bankruptcy. As a result of this retirement, we recognized approximately $4.7 million of expense.

Other-net expense decreased by $3.6 million to $10.2 million in the year ended December 31, 2007, primarily due to higher currency exchange losses incurred during the year ended December 31, 2006 and higher bad debt expense during the year ended December 31, 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Offshore Oil and Gas Construction Segment

The demand for our Offshore Oil and Gas Construction segment’s products and services depends primarily on the capital expenditures of the world’s major oil and gas producing companies and national oil companies of foreign governments for construction of development projects in the regions in which we operate. In recent years, the worldwide demand for energy, along with high prices for oil and gas, has led to strong levels of capital expenditures by the major oil and gas producing companies and national oil companies of foreign governments.

The decision-making process for major oil and gas producing companies and national oil companies of foreign governments in making capital expenditures on offshore construction services for a development project differs depending on whether the project involves new or existing development. In the case of new development projects, the demand for offshore construction services generally follows the exploratory drilling and, in some cases, initial development drilling activities. Based on the results of these activities and evaluations of field economics, customers determine whether to install new platforms and new infrastructure, such as subsea gathering lines and pipelines. For existing development projects, demand for offshore construction services is generated by decisions to, among other things, expand development in existing fields and expand existing infrastructure.

Government Operations Segment

The revenues of our Government Operations segment are largely a function of defense spending by the U.S. Government. As a supplier of major nuclear components for certain U.S. Government programs, this segment is a significant participant in the defense industry. With its unique capability of full life-cycle management of special nuclear materials, facilities and technologies, our Government Operations segment is well positioned to continue to participate in the continuing cleanup, operation and management of the nuclear sites and weapons complexes maintained by the U.S. Department of Energy.

Power Generation Systems Segment

Our Power Generation Systems segment’s overall activity depends mainly on the capital expenditures of electric power generating companies and other steam-using industries. This segment’s products and services are capital intensive. As such, customer demand is heavily affected by the variations in each customer’s business cycles and by the overall economies of the countries in which it operates.

For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited condensed consolidated financial statements, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2007. There have been no material changes to these policies during the six months ended June 30, 2008, except as disclosed in the notes to condensed consolidated financial statements included in this report.

RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30, 2008 VS. THREE MONTHS ENDED JUNE 30, 2007

McDermott International, Inc. (Consolidated)
Revenues increased approximately 26%, or $374.5 million, to $1,792.6 million in the three months ended June 30, 2008 compared to $1,418.1 million for the corresponding period of 2007. Our Offshore Oil and Gas Construction segment generated a $292.3 million, or 50%, increase in its revenues during the second quarter of 2008 compared to the second quarter of 2007. This increase was primarily attributable to increased fabrication and marine activities in its Middle East and Asia Pacific regions, including increased procurement and subcontract revenue from our large engineering, procurement, construction and installation (“EPCI”) projects, and increased marine activities in the Gulf of Mexico. Additionally, in the second quarter of 2008, as compared to the second quarter of 2007, our Government Operations segment generated a $58.1 million, or 35%, increase in its revenues, and our Power Generation Systems segment generated a $24.5 million, or 4%, increase in its revenues.

Segment operating income increased $48.5 million to $237.2 million in the three months ended June 30, 2008 from $188.7 million for the corresponding period of 2007. The segment operating income of our Offshore Oil and Gas Construction, Government Operations and Power Generation Systems segments increased $7.0 million, $8.5 million and $33.0 million, respectively, in the second quarter of 2008, as compared to the second quarter of 2007. The segment operating income of our Power Generation Systems segment in the three months ended June 30, 2007 included approximately $50 million of one-time benefits resulting from contract terminations and a variety of settlements.

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

Offshore Oil and Gas Construction
Revenues increased 50%, or $292.3 million, to $872.3 million in the three months ended June 30, 2008 compared to $580.0 million for the corresponding period of 2007, primarily attributable to increased activities in our Asia Pacific ($135.4 million) and Middle East ($110.3 million) regions, including increased procurement and subcontract revenue resulting from large EPCI projects, and increased marine activities in the Gulf of Mexico ($28.2 million). In addition, we experienced increased revenues related to the vessels we acquired in July 2007 from Secunda International Limited ($20.1 million) and revenues from activity at our new fabrication yard in Altamira, Mexico ($15.3 million), which commenced operations during April 2008. These increases were partially offset by decreased activities in our Caspian region ($14.0 million).

Segment operating income increased $7.0 million to $99.0 million in the three months ended June 30, 2008 from $92.0 million for the corresponding period of 2007, primarily attributable to increased activities in our Middle East and Asia Pacific regions and in the Gulf of Mexico. In the second quarter of 2008, our profit margins declined, as compared to the second quarter of 2007, as the 7.6% increase in our 2008 segment operating income was less than our 50% increase in our 2008 revenues. Several factors contributed to our lower profit margins in the second quarter of 2008, including a higher percentage of volume being derived from large EPCI projects that yielded lower contract margins due to increased procurement and third-party subcontracting activities. In addition, we experienced a higher number of unproductive work days for our marine vessels, primarily in our Middle East and Asia Pacific regions, and increased costs for fuel and labor in all areas. We also experienced lower results in our Caspian region, an $8 million reduction in project close-outs, change orders and settlements and an $8.8 million increase in selling, general and administrative expenses, primarily attributable to the increased employee headcount necessary to support our operations and higher stock-based compensation expense.

Government Operations
Revenues increased approximately 35%, or $58.1 million, to $225.8 million in the three months ended June 30, 2008 compared to $167.7 million for the corresponding period of 2007, primarily attributable to higher volumes in the manufacture of nuclear components for certain U.S. Government programs ($38.1 million), including increased contract procurement activities and a full quarter of revenues from Marine Mechanical Corporation, which we acquired in May 2007. Additionally, we experienced higher volumes in the manufacture of components for the American Centrifuge Project under a contract that was awarded to us during 2007 ($20.7 million).

Segment operating income increased $8.5 million to $31.7 million in the three months ended June 30, 2008 compared to $23.2 million for the corresponding period of 2007, primarily attributable to higher volumes in the manufacture of nuclear components for certain U.S. Government programs, including increased contract procurement activities and a full quarter of results from Marine Mechanical Corporation. Additionally, we experienced higher volumes related to the American Centrifuge Project and a decrease in our pension expense. These improvements were partially offset by the completion of a subcontract at a DOE site cleanup in Ohio in 2007 and higher selling, general and administrative expenses, primarily due to increased proposal costs.

Equity in income of investees increased $4.3 million to $10.8 million in the three months ended June 30, 2008 compared to the corresponding period of 2007, primarily due to increased profitability from our joint ventures in Idaho, Tennessee and Louisiana.

Power Generation Systems
Revenues increased approximately 4%, or $24.5 million, to $698.1 million in the three months ended June 30, 2008 compared to $673.6 million for the corresponding period of 2007, primarily attributable to increases in revenues from our fabrication, repair and retrofit of existing facilities ($61.8 million), nuclear service business ($19.2 million), replacement parts ($7.9 million), replacement nuclear steam generator business ($6.7 million), boiler auxiliary equipment ($3.4 million) and industrial boilers ($3.1 million). These increases were partially offset by decreased revenues from our utility steam and system fabrication business ($82.5 million), primarily due to approximately $120 million in revenues recognized for the five terminated TXU units in the second quarter of 2007.

Segment operating income increased $33.0 million to $106.6 million in the three months ended June 30, 2008 compared to $73.6 million for the corresponding period of 2007, primarily attributable to improvements in our utility steam and system fabrication business. Major components of this increase were improvements associated with our contracts for the supply and construction of coal-fired boilers and environmental equipment in the second quarter of 2008. In the three months ended June 30, 2007, our utility steam and system fabrication business recognized approximately $50 million of one-time benefits resulting from contract terminations and settlements. In addition to the improvements in our utility steam and system fabrication business in the second quarter of 2008, we experienced improvements in our nuclear service business and improvements in our fabrication, repair and retrofit of existing facilities, replacement parts and replacement nuclear steam generator businesses, as well as operational efficiencies related to combining the fossil and nuclear operating groups under a common management team. We also experienced lower pension plan expenses in the second quarter of 2008. These improvements were partially offset by lower margins in our boiler auxiliary equipment business and higher selling, general and administrative expenses, including higher stock-based compensation expense.

Equity in income (loss) of investees decreased $2.4 million to a loss of $0.6 million in the three months ended June 30, 2008 from income of $1.8 million for the corresponding period of 2007, primarily attributable to material cost increases at our joint venture in China.

Corporate
Unallocated Corporate expenses increased approximately $1.1 million to $15.4 million in the three months ended June 30, 2008, as compared to $14.3 million for the corresponding period of 2007, primarily attributable to increased stock-based compensation expense and higher expenses associated with our development of a global human resources management system.

Other Income Statement Items
Interest income decreased $6.7 million to $9.1 million in the three months ended June 30, 2008, primarily due to lower average interest rates on our investments.

Interest expense decreased $4.4 million to $1.0 million in the three months ended June 30, 2008, primarily due to lower amortization of debt issuance costs on our credit facilities.

Other income (expense) – net improved by $2.8 million to income of $1.8 million in the three months ended June 30, 2008 from expense of $1.0 million for the corresponding period of 2007, primarily due to higher currency exchange gains in the second quarter of 2008.

Provision for Income Taxes
We are subject to U.S. federal income tax at a rate of 35% on our U.S. operations, plus the applicable state income taxes on our profitable U.S. subsidiaries. Our non-U.S. earnings are subject to tax at various tax rates and different tax regimes, such as a deemed profits tax regime. These variances, along with variances in our mix of income from these jurisdictions, contribute to shifts in our effective tax rate.

In the three months ended June 30, 2008, the provision for income taxes increased $21.7 million to $63.6 million, and income before provision for income taxes increased $49.9 million to $241.1 million. Our effective tax rate for the second quarter of 2008 was approximately 26.4%, as compared to 21.9% for the second quarter of 2007. The increase in our effective tax rate was primarily attributable to a higher mix of U.S. versus non-U.S. income and an unfavorable mix within our non-U.S. operations, resulting in a larger proportion of the total book income being taxed at higher rates in the second quarter of 2008 compared to the same period in 2007. These increases were partially offset by the benefit we recognized in the three months ended June 30, 2008 associated with our evaluation of amounts which may ultimately be payable for certain proposed tax adjustments.

RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2008 vs. SIX MONTHS ENDED JUNE 30, 2007

McDermott International, Inc. (Consolidated)
Revenues increased approximately 17%, or $461.5 million, to $3,243.1 million in the six months ended June 30, 2008 compared to $2,781.6 million for the corresponding period of 2007. Our Offshore Oil and Gas Construction segment generated a $388.0 million, or 34%, increase in its revenues in the six months ended June 30, 2008 compared to the same period in 2007, primarily attributable to increased fabrication and marine activities in its Middle East and Asia Pacific regions, including increased procurement and subcontract revenue from our large EPCI projects, and increased marine activities in the Gulf of Mexico. In addition, our Government Operations segment generated an $87.3 million, or 27%, increase in its revenues in the six months ended June 30, 2008, as compared to the same period in 2007. These increases were partially offset by a decrease in revenues for our Power Generation Systems segment of approximately $14.6 million, or 1%, in the six months ended June 30, 2008, as compared to the same period in 2007.

Segment operating income increased $3.0 million to $382.2 million in the six months ended June 30, 2008 from $379.2 million for the corresponding period of 2007. The segment operating income of our Government Operations and Power Generation Systems segments increased $11.1 million and $55.1 million, respectively, in the six months ended June 30, 2008, as compared to the same period in 2007. These increases were partially offset by a $63.2 million decrease in the segment operating income of our Offshore Oil and Gas Construction segment in the six months ended June 30, 2008, as compared to the same period in 2007. The segment operating income of our Power Generation Systems segment in the six months ended June 30, 2007 included approximately $50 million of one-time benefits resulting from contract terminations and a variety of settlements.

Offshore Oil and Gas Construction
Revenues increased 34%, or $388.0 million, to $1,518.2 million in the six months ended June 30, 2008 compared to $1,130.2 million for the corresponding period of 2007, primarily attributable to increased activities in our Asia Pacific ($198.6 million) and Middle East ($180.6 million) regions, including increased procurement and subcontract revenue resulting from large EPCI projects, and increased marine activities in the Gulf of Mexico ($25.9 million). Additionally, we experienced increased revenues related to the vessels we acquired in July 2007 from Secunda International Limited ($39.1 million) and revenues from activity at our new fabrication yard in Altamira, Mexico ($17.0 million), which commenced operations in April 2008. These increases were partially offset by decreased activities in our Caspian region ($97.4 million).

Segment operating income decreased $63.2 million to $150.8 million in the six months ended June 30, 2008 from $214.0 million for the corresponding period of 2007, primarily attributable to a $38 million reduction in project close-outs, change orders and settlements and a $24.9 million increase in selling, general and administrative expenses, primarily attributable to the increased employee headcount necessary to support our operations and higher stock-based compensation expense. We also experienced an abnormally high number of unproductive work days for our marine vessels, decreased fabrication activities in our Caspian and Asia Pacific regions, increased costs for fuel and labor in all areas and a higher percentage of our volume being derived from large EPCI projects that yielded lower contract margins due to increased procurement and third-party subcontracting activities.

Gain on asset disposals – net increased $1.7 million in the six months ended June 30, 2008 compared to the corresponding period of 2007, primarily attributable to the sale of cranes at our fabrication yard in Batam, Indonesia.

Government Operations
Revenues increased approximately 27%, or $87.3 million, to $416.4 million in the six months ended June 30, 2008 compared to $329.1 million for the corresponding period of 2007, primarily attributable to higher volumes in the manufacture of nuclear components for certain U.S. Government programs ($66.7 million), including increased contract procurement activities and additional volume from Marine Mechanical Corporation, which we acquired in May 2007. Additionally, we experienced higher volumes in the manufacture of components for the American Centrifuge Project under a contract that was awarded to us during 2007 ($37.9 million) and higher volumes in our management and operating contracts. These increases were partially offset by lower contract man-hour volumes in our commercial nuclear environmental services business and lower revenues from a terminated fuel cell development project.

Segment operating income increased $11.1 million to $60.9 million in the six months ended June 30, 2008 compared to $49.8 million for the corresponding period of 2007, primarily attributable to higher volumes in the manufacture of nuclear components for certain U.S. Government programs, including increased contract procurement activities and additional volume from our acquisition of Marine Mechanical Corporation. In addition, we experienced higher volumes related to the American Centrifuge Project and a decrease in our pension expense. These improvements were partially offset by the completion of a subcontract at a DOE site cleanup in Ohio during 2007 and higher selling, general and administrative expenses, primarily due to increased proposal costs.

Equity in income of investees increased $6.6 million to $19.5 million in the six months ended June 30, 2008, primarily due to increased profitability from our joint ventures in Idaho, Tennessee and Louisiana.

Power Generation Systems
Revenues decreased approximately 1%, or $14.6 million, to $1,314.4 million in the six months ended June 30, 2008 compared to $1,329.0 million for the corresponding period of 2007, primarily attributable to decreases in revenues from our utility steam and system fabrication business ($132.0 million) due to approximately $243 million in revenues recognized for the five terminated TXU units in 2007. This decrease was partially offset by increased revenues from our fabrication repair and retrofit of existing facilities ($46.7 million), nuclear service business ($26.9 million), replacement parts ($11.2 million), replacement nuclear steam generator business ($10.5 million), industrial boilers ($10.4 million) and boiler auxiliary equipment ($7.7 million).

CONF CALL

Jay Roueche - Vice President of Investor Relations

Thanks, Lacy, and good morning, everyone. We appreciate your participation in McDermott's second quarter 2008 earnings conference call to discuss the financial results which we reported yesterday. With me on the call this morning are Bruce Wilkinson, Chairman and CEO of McDermott and Mike Taff, Senior Vice President and Chief Financial Officer.

Before turning the call over to Mike, let me remind you that today's event has been recorded and a replay will be available for a limited time on our website. In addition, some of the comments today will include forward-looking statements and estimates. These comments are subject to various risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission, which are available on our website, including our recently filed Form 10-Q, as well as our Form 10-K for the year ended December 31, 2007 for a discussion of the factors that may cause actual results to differ from management's projections, forecasts, estimates, and expectations.

I'll now turn the call over to Mike for the financial overview.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Thanks, Jay, and good morning, everyone. In the 2008 second quarter, McDermott set an all-time record in terms of consolidated net income, operating income, and revenues for a quarter during which the company reported net income of $177.5 million or $0.77 per diluted share. This amount is almost 19% above last year's $149.4 million or $0.66 per share, which included approximately $50 million in one-time benefits from contract cancellations and settlements in our Power business.

Looking at the top line, revenues were almost $1.8 billion, approximately 26% above a year ago. This increase came predominantly from the Offshore Oil and Gas Construction segment where revenues were up 50% or almost $300 million. In addition, our other segments, Power Generation Systems and Government Operations also reported revenue growth adding a combined $82 million to a year ago levels.

McDermott's operating income was $231.1 million in the second quarter of 2008 compared to $181.8 million a year ago. Strong increases in segment income at Power Generation Systems and Government Operations led the way representing approximately 88% of the consolidated improvement while Offshore Oil and Gas Construction improved more modestly.

Our provision for income tax increased about $22 million compared to the second quarter a year ago, reflecting both the $50 million increase in pre-tax income and an unfavorable shift to higher tax jurisdictions. Anyone who follows McDermott knows that forecasting our provision for income tax is challenging because we operate in many different tax and jurisdictions, forecasting where McDermott will makes its money is just as important as how much for tax purposes. In the 2008 second quarter, since our U.S. based subsidiaries posted record results, it brought our average tax rate up to over 26.4% from 21.9% in the second quarter a year ago.

While Bruce will cover most of the business items, I will give a quick overview of the components of McDermott's $231 million of operating income. Offshore Oil and Gas Construction had segment income of $98 million or about 44... 42% of our total, well above the weather affected first quarter of 2008, an improvement to a year ago. For the second consecutive quarter, Government Operations produced its highest segment income since inception with $42.5 million in the quarter. It was another strong quarter from our site management activities, which largely comes through as equity income, as well as higher volumes in the manufacture of nuclear components, both for commercial and government use, and we had some timing benefits on procurement contracts, which brought forward about $40 million in revenues.

Power Generation Systems reported an outstanding quarter as well at approximately a $106 million in segment income, clearly, its best in history. Improved profitability on existing contracts within our boiler and environmental retrofit project portfolio coupled with the associated percentage of completion effect and combined with a high level of parts and services work drove the quarter and its 15% margins. While, we wouldn't suggest this level of operating margin every quarter, we have increased our expectations for this segment now to the 7% to 10% operating margin range as it continues to demonstrate solid performance.

Now, turning quickly to the balance sheet. We ended the quarter with over $1.3 billion in cash and investments. Changes in working capital was the primary reason, cash and investments declined about $100 million sequentially as we are working off some of the advance billings we've built up. Despite the turmoil in the overall credit market, McDermott is well positioned from a liquidity standpoint.

In addition to our solid cash and investment position, we have several years left on our exiting credit facilities and we've recently were upgraded by both of the major credit rating agencies. Together, this provides a sound foundation to pursue McDermott's growth initiatives. In that regard, we've been active recently on the acquisition front. We've recently completed our announced plans for three transactions with a combined value in the $200 million range. We closed the acquisition of the Intech group of companies in July to expand B&W's capability in servicing the U.S. commercial nuclear service market strengthening its position in the Canadian nuclear service market and enhance its position in inspection of fossil plant customers. Much like our fossil power business, we want to keep coming back to the nuclear plants beyond just a period OEM offerings and Intech helps us accomplish that goal.

The largest proposed transaction of the three is our recently announced planned acquisition of Nuclear Fuel Services or NFS. This is a business that is part of the supply chain in our government component work and is a complement to our site management and operations activity for the department of Energy and combined it strengthens our advanced nuclear efforts. Bottom line, NFS is a really good fit for us.

The last purchase, which we closed last week is Delta Power. Delta Power provides operations and maintenance services to nine different power plants and we see this business as the platform to grow our ability to serve larger plants and there are a number of these opportunities on the horizon.

In addition, Delta Power provides the opportunity for follow through with our aftermarket sales of parts and service work while strengthening our biomass and waste-to-energy offerings and diversifying us into gas. Clearly, our game plan is to grow each of these three businesses. We are excited about each of them and are pleased to have them join McDermott.

Let me now turn the call over to Bruce for his business and operational update.

Bruce Wilkinson - Chairman and Chief Executive Officer

Thanks, Mike, and good morning, all. I am very pleased with McDermott's second quarter overall, but it's fair to say it played out differently than some of you might have expected. It's somewhat the nature of the engineering and construction business coupled with the vagaries of percentage of completion accounting. The most importantly it demonstrates the benefit of McDermott's diversified energy EMC business. So, there is a lot to talk about in our segments this morning. Let me jump into this specific, so there will be plenty of time at the end for your questions.

Beginning with Offshore Oil and Gas Construction, revenues of $872 million were a quarterly record for the segment, but it was about $115 million below the amount we had expected to roll off from backlog. Operating income of $90 million in the Offshore Oil and Gas Construction segment was largely in line with what we would expect all things considered. The total amount was lower than we anticipated due to the revenue shortfall, but the margin was right in the middle of the 10% to 12% range we've consistently suggested. Since we beat this target range throughout 2007, the obvious question may be why didn't we exceed it again this quarter, and there are a number of factors contributing to this.

First, as we discussed in the last call, our 2008 backlog has more procured items and higher number of less risky cost plus and unit rate components in our contracts. Meaning that the portfolio of projects has changed. Secondly, we have been outstanding in managing material escalation like steel, but there have been inflationary effects felt elsewhere, namely fuel, labor, and subcontractors, which have eaten somewhat into our contingency that a year ago, we were consistently harvesting to profit and now more of it is becoming cost.

Third, we are positioning our offshore construction business for long-term growth, which means we are incurring cost today which are really longer-term investments, such as starting of new facilities in Mexico, China, Kazakhstan, and expanding our subsea construction business. Additionally, the benefits from change orders and other closeouts have declined thus far year-over-year and at the same time, our SG&A has increased in the higher overall workload. Project closeouts do have their regular timing.

Finally, some of the project delays we have encountered have added cost to certain projects, such as extra marine gains and also it potentially exposed us to penalties on some contracts otherwise known as liquidated damages. You probably noted we have recorded about $4 million of these penalties in the second quarter of this year. The accounting for liquidated damages often increases the already lumpy nature of the E&C business. Frequently customers tell you verbally they do not find to assess any penalty, our history will indicate they don't enforce the charge. We also may have an offset to LD claims, such as contractually excusable delays.

However, unless we get agreements in riding which customers are normally reluctant to provide until the project is complete, accounting rules usually require we record the expense once contractually incurred, often only to reverse the charge down the road. Typically though customers want an operational solution on delayed projects rather than simply charging liquidated damages. So, while there have been changes and various challenges occurring as I described, Bob Deason and his team have not been sitting idly by. The group is actively addressing current execution issues, pursuing operational improvement initiatives for some of our projects, and working with customers to limit schedule driven penalties, pursuing growth opportunities, and adding new work.

We are far from alone and dealing with cost increases in scheduled delays, but in spite of this we are still leading the margin pack. And truthfully, most companies in our peer group would relish having what I say may sound like challenging problems, if they could have our segments at 11% operating margins this quarter while continuing to position for growth. I want to assure you that eyes are clearly on the ball, the market remains strong and I believe our customers truly value our work product as evidenced by over $800 million in new awards we recorded this quarter in the Oil and Gas segment. We had just over $2 billion in bids outstanding at the end of June, and our focus list continues to grow now to over $12 billion. At the same time, the backlog in the segment remains robust at almost $5.3 billion, which is right at our all-time high and provides us good visibility for the coming periods.

We also have a number of projects we believe will be booked in the backlog soon like the second phase to Saudi Aramco's long-term agreement and there are also feed contracts in the backlog such as Barzan in Saudi that have significant future work scope opportunities, which we would hope to win. I've congratulated Bob and his team many times during these conference calls for the segment's outstanding performance. In this oil and gas environment which appears to have a long cycle ahead, I believe that future remains bright for Offshore Oil and Gas Construction business. Our praise of the results delivered by their team has been well deserved and I am confident you will hear more of it in the future. Speaking of praise, let me move on to the Power Generation Systems segment. This segment generated almost $700 million in revenues during the quarter reducing record operating income, which resulted in mere double-digit margins. They were truly hitting on all cylinders. There were a number of opportunities that we realized during the quarter including some project closeouts and settlements, improved contract performance with percentage of completion effect and timing benefits that makes this level of profitability and margin above what we believe should be annualized. Such results are very much real and part of our business.

As Mike indicated our Power segment's recent performance yet provides us the confidence to increase our expected target range for segment operating margins to the 7% to 10% range. Over this past year, you've heard me anticipate the operational efficiencies and potential for expense savings that would come from having the fossil and nuclear operating groups under a common management team. I believe this quarter we began to see the reality of my prediction. Certainly, mid-way through the year, our Power Generation's business is off to a very good start.

With bookings of over $500 million in the second quarter, backlog grew over $200 million compared to a year ago, but was down modestly on a sequential basis. However, we still have about 2.6 billion of bids outstanding in the Power segment. These bids include several boiler projects for coal, waste-to-energy, and biomass, as well as the sizable number of environmental projects plus numerous bids under the 25 million size typically in the parts and services business.

Customer decisions on some of these bids we believe were very close. We should be announcing soon at least two awards for the Canadian Tar Sands projects where we are assisting oil companies by providing steam systems that are needed for mining and oil extraction there. In addition, we expect to begin seeing an increased international award activity on the OEM retrofit and service side, which will be incremental to our strong North American market share.

Besides our segment's exceptional results, the other major news, which recently announced was that Washington D.C. federal appeals court overturned the Clean Air Interstate Rule known as CAIR. This rule has been a major driver behind our scrubber and SCR business and at first blush, it would be tempting to view the court vacating the rule as a negative. I don't really view at that way. United States has never taken a permanent step backwards in environmental regulations to my knowledge. If anything, history says we only become more stringent.

One of three events is likely now to take to occur. The EPA could appeal further to the Supreme Court, Congress could take up legislation and pass a lot of replaced care or the individual states will likely create their own rules. I believe that Congress will be the first to act considering the green move that most of the countries remains in, and I fully expect that congressional restrictions will affect more states rather than just the 28 existing ones and might include more emissions perhaps, including CO2 and mercury in addition to dealing with SO2 and NOx and will be more stringent than CAIR possibly without a cap and treat approach. And we will have a shorter implementation time lines in 2015. Between now and then it's possible that short-term uncertainties could cause some CAIR driven project delays, which is primarily from merchant plants in the deregulated states, but I don't believe there will be cancellations of projects, mid-streams since utilities also recognized that the rule was overturned primarily because it wasn't stringent enough and they recognize that a replacement law is coming. Many of our scrubber and SCR projects are driven by something other than CAIR such as the New Source Review issues or state regulation, which won't be effected by the appeals court decision. For instance in July, we received a limited notice to proceed on the scrubber and SCR project that could ultimately be a very significant award to us, which is being driven purely by state regulatory issues.

Additionally, projects in regulated markets where the owner is pretty well assured of a return on investment probably won't be impacted either. In total, I think in the not-too-distant future, we will be seeing an increase in our Power business as a result of new and more stringent environmental regulations. In the mean time, coal utilities continue running their older plants longer and harder. This is good news for our profitable parts and service offerings. Some of the plans that were previously forecast to be shut down in the near term are now likely to stay online as America needs the Power, which means additional retrofit opportunities become a future possibility for us. And I still believe that new generation utilizing our country's most abundant natural resources coal is inevitable.

Like Mike, I am excited about the two new acquisitions for this segment, Delta Power and Intech, and I welcome these employees to McDermott. Wrapping up the Power segment, I want to congratulate the leadership and employees in this business for again delivering outstanding results we achieved this quarter.

Concluding with our Government Operations segment, our revenues in this segment during the quarter were over $225 million, 34% increase above a year ago. This revenue level was elevated by about 40 million in procurement contracts executed during the quarter, which we do have time to time. Like the Power segment, I am very pleased with the quarter and year-to-date results for our Government Operations business. Although we lost a couple of high profile M&O competition this year where we held the minority interest in the bid, there is still a number of good growth opportunities on the horizon. With the high cost of petroleum fuels and the current requirement for the Navy to maintain an extensive supply chain for refueling ports, there is a lot of discussion in Washington about potentially increasing the number and types of vessels that are powered by nuclear plants.

As we previously discussed, Congress and the administration have authorized the procurement or second Virginia class submarine, which should increase our awards in 2008. The cruiser program is also receiving a lot of discussion and consideration for nuclear power. We think this makes a lot of sense and we are working with Washington to show how McDermott can support such an initiative. We remain on a number of upcoming opportunities for site management and operation offerings as well. Some of the sites are large and others are smaller but our goal remains to add to our experienced project, which make a difference. The outlook for this service offering remains strong.

Mike mentioned the planned acquisition of Nuclear Fuel Services, it's a prefect fit for our Government Operations segment. It is part of the supply chain of our nuclear component work. NFS maintains an NRC Category 1 license as do we. They have a number of Department of Energy M&O sites that don't overlap with ours. Typically, they are in especially nuclear operation support role to one of the larger players, and like us, we see increasing opportunities within the commercial nuclear market. It's a natural fit and we're looking forward to clearing the required approval processes and planning to close the transaction in late 2008. That wraps up my prepared remarks for operations.

In summary, the businesses continue to perform well. We have issues and opportunities within each of our segments, and our primary focus will continue to be on execution. A few words on the CEO search for my successor. McDermott's Board is actively engaged in this process. When I announced my intention to retire last February of this year, I stated that my expectation would be that it would be achieved before year-end. I still believe we will meet that target. Whoever my successor ultimately turns out to be, McDermott is an outstanding enterprise. Bench strength is strong and our 28,000 employees are, in my opinion, the best in the industry. Our activities with investors will get in the high gear again at the start of September. We are presenting at four conferences beginning right after Labor Day in September, running through mid-October, including twice in New York and ones each in San Francisco and New Orleans. With several geographic options to choose from, we hope to see many of you at one of these venues. I will now open the meeting up for your questions.

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