Text

Annual Rept for Fiscal Yr Ended 850331
	ML20137Y850
Person / Time
Site:	07000824
Issue date:	03/31/1985
From:	; MCDERMOTT, INC.
To:	;
Shared Package
ML20137Y745	List: ML20137Y740; ML20137Y800; ML20137Y835; ML20137Y850;
References
	NUDOCS 8512110161
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Results at a Glance f ~ McDermott International, Inc. for the Fiscal Years ended March 31.1985 and 1934 - in thousands of dollars except per share amounts and number of employees 1985 1984 ~ Revenues S 3,233,871 5 3.088.583 Operating income (hss) (108,779) 120,883 Net income 30,667 120.856 ( . Net earnings per common and l-common equivalent share : 0.83 3.06 Stockholders' equity per common share 32.57-33.92 Cash dividends-common - 66,473 66.379 Cash d'vidends per common share 1.80 1.60 Working capital 117,966 167,293 [ . Capital expenditures 172,349 147,875 L I-Backlog 4,003,556 4,164,759 Number of employees'- .including subcontract labor. 40,000 39.000 a l I-l l I 5 f l I' 4 B i l i l The operations described in tms publication include those of certs', sobtidsdry and af flitalett Companies. - -2 m

i l I To Our Stockholders [ Results for fiscal 1985 reflect the lingering effects of depressed business conditions that have dominated most of the company's markats j for the last three years. A low level of demand for virtually all of our goods and services, /v j coupled with worldwide industry overcapacity, p} a l has generated intense price competition, and M.J i we expect these same conditions to prevail throughout fiscal 1986. 1 While revenues in fiscal 1985 increased The past fiscal year also saw the successful l slightly to $3.2 biHion from $3.1 billion last year, net completion of the two-year Stateil pipelaying project income declined to $30.7 mJlion, or $0.83 per share, across the Norwegian trench in waters as deep as i l from $120.9 million, or $3.06 per share, a year ago. 1,000 feet. And our Ardersier, Scotland, fabrication yard Three of four business segments reported operating completed and loaded out the 17,700-ton deck section l losses. However, these losses and expenses for the for the world's first tension leg platform, the heaviest settlement of certain antitrust civi litigation, which deck ever completed onshore. 4 reduced net income for the year by $28.6 million, or We have entered into a 50/50 joint venture with $0.77 per share, were more than offset by higher non-Kongsberg Vaopenfabrik A.S. of Norway. The new operating ir.come, a significant tax benefit, and company will engineer traditional offshore platforms and extraordinary items. facilities 'or the Norwegian sector of the North Sea, and Adapting to adverse market forces, which show httle provide engineering services for subsea production sign of abating, requires that we continue to search for systems, a technology that we believe will become an opportunities to improve productivity and operating important part of the marine construction industry. efficiency. Accordingly, much of our capital spending is The outlook for fiscal 1986 suggests another difficult aimed at trademizing and automating engineering and year for marine construction. The oversupply of oil and manufacturing facihties. This spending. however, is gas will continue to depress new development activity. l undertaken in a context that preserves our traditionally in addition, mergers and financial restructuring in the I strong, balanced, and flex:bie financial position. energy industry are diverting financial resources away Marine Construction Services Our Marine Construction Services business incurred an Power Generation Systems and Equipment operating loss of $8.3 milhon in fiscal 1985 on revenues Revenues decreased to $1.4 billion in fiscal 1985 from of $1.0 billion. These results compare with revenues of $1.6 bilhon a year earlier. Operating income dechned to $1.2 billion and cperating income of $91.1 milhon last $15.3 million from $135.5 milhon last year. Both volume year. The dechne in operating income was due, and proht margins for fossil steam system fabncation I primarily, to lower profit margins and was aggravated by and erection activity, and for nuclear steam system I adverse weather conditions, unfavorable contract terms, services, dechned. This segment also incurred and unsatisfactory cost erformance on certain increased expenditures related to automation projects. fatrication projects. Improved results from nuclear fuel assembhes, and Our Morgan Ci'y fabrication yard is being expanded utility and industnal boiler replacement parts, as well as to accommodate add;tional deepwater platforms and to a higher level of business for the United States improve upon cost performance. Similar steps are being Government, were not sufficient to offset these l undertaken to upgrade fabrication facihties in the North dechnes. l Sea, M ddle East, and Southeast Asia consistent with The market for utikty boilers is undergoing a major rrarket conditions in those areas. restructuring. Industry expectations put the growth in I l We continue to upgrade our marine construction electricity demand in the United States at 2.5 percent vessels with a view toward greater flexibility. The annually through the end of the century. Faced with majority of our vessels can now perform pipelaying and only modest increases in demand, the power generation structural installation work. Derrick Barge 102, which is market is moving toward smaller units, life extension scheduled to join the fleet in December of this year, will programs at existing plants, and cogenerahon facihties. have a lif t capacity in excess of 13.000 tons, far Accordingly, we are emphasizing improved service exceeding the hft capacity of any other vessel in the capabikties and increasing market share in the industry. maintenance and replacement parts business. This is Fiscal 1985 showed signs of improved market being done without compromising our abihty to design, conditions in the Gulf of Mexico. We were awarded the engineer, and fabricate large utikty boilers. fabrication and installation contract for Shell's Boxer We are actively pursuing the emerging power market platform, which wm be installed in 750 feet of water, for cogeneration units that burn nontraditional fuels. We and SOHIO's dnlling and production platform for 860 are also researching and developing fluidized bed feet of water. combusbon technology for use in cogeneration systems 1

as well as in other utility and industrial markets. This costs will be reduced as we gain additional experience emphasis on R&D has enabled our Bailey Controls in the trading area. We are also broadening our trading Company to participate in the rapidly growing capabilities to include petrochemicals, fertihzers, and instrumentation market through the development of other commodities. Network 90', a microprocessor-based process control A significant amount of business has been done with system. the People's Republic of China. This developing An indication of our renewed competitive capability in economy has enormous potential for trade relationships, foreign markets is our participation in a major fossil as well as for our other business segments. steam system project in Indonesia. B&W Canada has supplied Indonesia with its two largest coal-fired boilers, Outlook installed at the Suralaya Steam Power Plant, and will U.S. industrial producers continue to face a competitive provide two additional units for startup in 1988 and challenge of historical proportions. Global competition is 1989 at the facility. intense, and, in many instances, foreign manufacturers Business for the United States Navy's nuclear ship-are rapidly gaining market share at the expense of their building program has become an increasingly important American competitors. part of this segment's activities. We remain the number These competitive pressures are fueled by two one suppher of missile tubes for the Trident submannes. developments, one permanent and the other temporary. Additionally, our recently formed Defense Group will in the first instance, foreign manufacturers continue to concentrate our expenence and reputation toward fur-reduce operating costs which are already lower than ther participation in the growing defense market. those prevailing in the United States. In addition, the l Our Power Generation Systems and Equipment seg-current strength of the U.S. dollar translates into a very ment is operating in a very competitive environment. Substantial price advantage for foreign firms competing However, we continue to benefit from consohdation and in the American economy. automation, and we have broadened our objectives to Given these cost advantages, foreign producers have include logical extensions of traditional markets. demonstrated growing success in capturing an increasing share of the U.S. market. Rather than face Engineered Materials formidable competition in their own home markets, i Ravenues increased in fiscal 1985 to $385 6 milhon overseas producers have simply chosen the course of from $373.8 million in the previous fiscal year. An least resistance and have flooded tne United States, the operating loss of $39.8 milhon compares with an largest market in the world, with bargain priced goods operating loss of $19.2 milhon a year ago. While the and services. market for seamless oilfield tubing and mechanical tub. As a defensive measure, U S producers have ing increased, demand for pressure, stainless, and heat. reduced prices, and, as a result, profit margins have resistant tubing dechned This dechne in demand, virtually disappeared While this response has partially combined with highly competitive pricing pohcies, was reduced the erosion -f market share, the cost to the responsible for the continuing operating losses. industnal sector has been enormous-selhng onces are Revenues from insulating products were moderately simply in-sufficient for American manufacturers to higher primarily due to increased ceramic fiber sa'es achieve a reasonable return on assets employed and the expansion of our refractory product knes Exchange rate distortions should subside over the Investments have been made to mocc'nize and next several years as the dollar dechnes from its streamhne our Koppel, Pennsylvania, steel mill and our current lofty levels Although this dechne will help the welded-tube facihty in A1 hance, Ohio. These investments competitive position of Amencan manufacturers, it will enhance our position in the specialty tubular definitely will not offset the basic cost advantage i markets and will establisn us as the low cost producer currently enjoyed by foreign producers. Therefore, it is of welded tubing in the United States. imperative that U.S manufacturers continue their We remain convinced that the tubular products efforts to reduce costs and increase productivity business is viable and consider our current moderni. McDermott will meet the heightened challenge brought zation and automation programs to be prudent about by these competitive pressures As previously investments in an industry with a future, indicated, management's focus will be directed toward capitalizing on cost effectiveness through improvements Trad,ng in productivity and overati operating etficiencies. i Fiscal 1985 results from this business segment consist of revenues from McDermott International Trading Co, 1 I inc. and, for nine months, Coutinho, Ca o & Co. AG We are pleased that Thomas D. Barrow,.etired Vice which was acquired in fiscal 1985 Revenues totalled Chairman of The Standard Oil Company (Ohio), has $435.9 milhon from this segment's first year of joined our Board of Directors Mr. Barrow was with l I cperations and an operating loss of $5 3 milhon was SOHIO since 1981 and had served, since 1978, as ] recorded. The operating loss was 11tobutable to losses Chairman and Chief Executive Officer of the Kenn9cott on certain tumkey engineenng contracts, partially offset Corporation, which was acquired by SOHIO in 1981. by operating income from trading activities, primarily in T e acqu t$on of Coutinho, Caro will enhance our [ expertise in trading activities and enable us to corrpete / more effectively in the g!obal marketplace, in add: tion, J E. Cunningnam our other business segments will benefit and overall Chairman of the Board and Chief Executive Officer 2

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n x. McDermott international Trading Co., segment will serve McDermott's access to raw materials, particularly Inc. conducts worldwide trading other operating units by arranging for steel This segment also arranges activity primarily through its the purchasing and shipping of financing to facihtate the conduct of Hamburg. West Germany based materials. Through its more than 30 its business Additionally. subsidiary. Coutinho. Caro & Co. AG. offices. Trading enables the McDermott's role in the construction which was acquired in fiscal 1985. company's other operating units to and engineering field has broadened The trading business includes several effectively compete in most world as a result of the Coutinho. Caro product lines. Additiona ly, the markets by providing improved acquisition. l l l } ahm e: Wato r%rne e cm rna rnv. cet eru d out by re ue 4 ch.srtwrvi 19 helow: one t; ire t of t <m tu r,ho. Gr ru & t 'u.tG an nts u nridwnde ) Melk rrnott Jr.! +rnatwroul Trads rus Ca. Inc. b nu ulthe bu <r u ~ s constructu.s capah htro. Th u indun* *m n p.de t ud tpe r* I.n nt u'cs s I d condur*rd by th u n pnent. Th evmpan te spermlun an f ra is ru) stool. dregne d, 4,u dt, a nd nu ff tte d 19 CtlC i i l eiwrnneal produta. and other ewe en dstres. } .I 3 w] , -. ~.... e 1 w w 6 .. lx g,,q e r L. y / lp%~ Q't a c,;' ~ %..q,y' w L ws. m. n;,,;on % J. .c* l'v i N ~_ l fi l

a Directors and Management Officer. Directors Directors Staff Organization J.E. Cunningham2 Thomas D. Barrow K.J. Gilly Chairman of the Board and Retired Vier Chairman of the Bonni. Vice Pnn<d*nt and tienenal Coun>rl. and Chief Executier oprer The Standant Od Coms sny takin) - Car >nr str 3.rn rary e entsgratr4 p.tnJeum eompany Robert E. Howson C.F. Kraus Prradent and ChielOpensting) James L. Duttt Vire Presednt. .ucDermott.varine Contructw,,triere, Chairman of the n. nni and Tax Admen aratwn Chi </Eircutere Or)icer, John A. Lynott seatnu rood, ca. J.H. MacMillan Encutive Ya Prnidat, pnnlunt ifji-L themind, and S,nior Vin Pen.dnt and t;niup Ezerutur. ChiefFinanenal and Administraria ofinr ina n u.t setu red pnelucts Adntnerd Trekn d.gv i:n>up Calter M. Vannoy James A. Hunt 8.8.8,4 R.E. Kosiba President a nd Ch nef Op.nts ng ofne, Pa rtner. y;, p,n,gn e Baker ek & IVdev.r Kath.1 nark s,a & C,a.. dsty & Tuhovdog.1 secuntwe bn.kers John A. Morgani 8.5 W. Markert, Jr. Pa rtner. Vwe Prvandent. .tforgsn. Leu is, Githna & A hn. Rnearch & Darlgment and investment harders Contnset Research lheiniunn John D. Ritchie8,$ E.A. Robidoux Consultant and ihrector str rarinu.e Vsn Pnesdent and Contndler corpora toma R.A. Jolliff William T. Seawell*,8.* Tna,u n r Hutsrrd Chairman of the Hmsni and Chirf Eseru.srs t>Tierr. N.E. Mezey Pa n A menean \\Vorld Airu ay, ine.. Prn aden t. enu merreal anr tninportarwn \\I'lkrmo!!l*ternalv>"al f anstme nta ca. Inc Walter B. Shawt.* 0..Tusa Chaorman of tha n~>rd an.l \\ '<* P '"d" '. ch,rr ernu tur Orrwer, I * '""" * ' * " Sn"

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Walter O. Spencer Vo r P,r. dent. Ysnanci.d Ratativu r,.,,,e yo, n, The Gnsduate shmd.f uussnnn. Tula n, en o rr,it y..r Lou i,ia n., R.E. Woolbert Vw Pruidnt. John B. Tweedy *** Emsd"v r u+d Pu dw krlatwn-r rormer Ein., tore V,rr Pnaidat and pir rrnr. To.rn cvep.,no tw,, - g:p gg,y, .*N ?r***k'n$ 015 refintht) and marketing tivreen mea t ispo ratinu Russell L. Wagner'.8.8 Rat,rrd cha,rman a the umani and l'h ar{ Nitfurt if Il0Yrvr, ~ ,\\LT l'urpuralnon. insuraner haddung rumpusny < 4 a s -.u .lo.rseture %e.snetseg e om eatre .'s nr,.m %>ry en.e p enw nes val l n pr.o .a f '.e awe r 9.orwer k rern ow S* nt l%e s t 'uom an dt.r r 7

i Management (c.uai-a; Operating Organization McDermott Marine Babcock & Wilcox Construction D.R. Brown M.A. Keyes O.L. Higgins Senior Yser President and Group Executner, Vice Prvudent and Gnrup Erreuher, po,,,. u,,,,n,no,, n n,,,y 1,,d,,,n,y en.3,,,,, a,,a 3,rnc,, Vnce Prrandent and Gnoup Executier. Marth and South Amenns openntsuns C.J. Baroch D. Cannon p? g00 y;SU*l Vsn Preside nt and Ge nend Sla nagrr, l'rvn eden t. Adnnnend Enerrgy Systems liouley t%ntnds Cornpany 1ter President. Systems and A utomation R.E. Donovan J.S. Dziewisz R* Vin Pnsident and Genend Slanapr, Frendrnt.

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l we Pnnda t. I Norf4 und SoutA,t menca C,W, pryor J,3, Glygn l Ufshere t operahon e ya, pn.,,4,,q,,4 an,ng 3ga,,,,,, y,,, p,,,;g,, g,,4 y,,,ng 3fa,a y,, l .Lelaa r Pau er in nsnnn in nulah ng Products Ihnsion a nd Gn,up Er.vutuv. D.H. Hoy J.A. Pittman we I rn Kunire and \\ Vast Afnea operntwns t en Pn sedent and Garnd Slanapr. Ysa l'rru; dent and tienend Slanarr, i unsd Openntwns ihnsion lludern Pnnlurts Corporatwn M.H.l.am E.A. Womack R.C. Scamehorn Veer Pundar and General 51 snap r, Vvr Pn udent. Pru sde n t Kun>pe and \\ Vest Afrera Sain and Serner flinnan fluvnond Pourr 6 penalty t%mpany Ala n ne Hyrahann B.J. Mcdonald H.R. Reeves A. Salem Vve Prouse.t and t;rneral al,nayr. S.'" '" V'" P " * '.d'" ' " "d G """ P E!" h . V'" Pr'"d" t. ' ""' '"'h"n a nd l ubula r l'nnlurts torn up Starketsng j Stelbermott Sa,tla nd I l R.J. Machen E.O. Hooker McDermott International Vna Prend..t and Gn,p tlacurur. I'#.Pr'"d"' ""d ';"'nd Ala "a'Fr. TradinS L'" '""""'"'"'"*I"'"M 31nddle Elast and S.,uthran, Ann Orrratwas J.R. Hill K.C.M. Thyssen L.E. Walker V're Pre"da t a ad '!ra'"d Afa" aver. \\ nre Prendent and Genrod Slinarv. Tubula r Prodnets Persidr it and en.,f operan,,,, ofic,r als,m,ri,to r*"" r R.C. Angell H. Sternberg E.S. Daffney V'" Pr'*"t"' ""d G"'"d Sa !" \\f""r'. II"a rd Sla "a r~"' Vier President and Gnaril Sim sager. Tubula r l'n=iutte t uute nka. Can* & Vo Ali so,stArast,t eia Operahnns J.E. McCann J. J. Schutt \\ Yue l'rrnde nt and turnand Alanager, Ilmed orSlanagement i A.H. Cortese,111 Synal Pnyts. cou h nnn, r n, & ca A G Vim Pyrndent, 1 mboda r l'n=luta a \\Vortduade katomahng and H. Brandes Kngsarrring Stresers J.P. Eckert ^J ""h nhod d A'?,e"r"n"& I."' A t. t om ,t o t \\'ste Prendent and firnup l struhrt. R.E. Curtis lulaarGn~n l Vser Pruident. l.nndon t;n<rmanos R.D. Miller Van l'rnident, Comstruetwn Senven t l S.P. Victory tw Prrudent, livuston and lafayette llngineersnq l \\ l l

SECURITIES AND EXCIIANGE COMMISSION Washington, D. C. 20519 Form 10-K ANNUAL. REl' ORT l'URSUANT TO SECTION 13 OR 15 (d) OF Tile SECURITIES EXCllANGE ACT OF 1938 For the fiscal year ended Starch 31,1985 Commission file number 14130 McDermott International, inc. (Exact name of Registrant as s;weified in its Charter) Republic of l'anama 72-0593131 (State or other Jurisdiction of (l.R.S. Emplo.Scr Incorporation or Organization) Identification No.) 1010 Common Street. New Orleans,1,ouisiana 70112 (Address of l'rincipal Executige Offices) (Zip Code) Registrant's Telephone Number, including area code (508) 587 5100 Securities Registered l'ursuant to Section 12(b) of the Act: Mme of Each f:schante Title of Each Class un Which Hegistered Common Stock New York Stock Exchange $1 l'ar Value Warrants to purchase Common Stock New York Stock Exchange $1 l'ar Value Securities Registered l'ursuant to Section 12 (g) of the Act: None (Title of Class) Indicate by check mark whether the !!cgistrant (1) has filed all rep >rts required to be fik,1 by Section 13 or IT4diof the Securities Exchange Act of 1938 during the preceding 12 months, and(2) has leen sub-ject to such filing requirements for the past 90 days. Yes X No_ The aggregate market value of voting stock held by nonaffiliates of the registrant is $999,280/mo na ofSlay 13,1985. The number of shares outstanding of the Company's common stock at Alay 13,1985 was 37,0 lo,T> l l. The l'roxy Statement for the 1985 Annual Sleeting of Shareholders is incoriorated by reference into l' art 111 of this relort. 1 l

McDERMOTT INTERNATIONAL, INC. INDEX - FORM 1&K PAGE PARTI i Items 1. & 2. Business and Properties A. General 5 B. StarineConstructionServices 7 i General 7 i Foreign Operations 8 i Raw Staterials 8 Customers and Competition 8 9 Backlog Factors Affecting Demand 9 C. Power Generation Systems and Equipnient 9 General 9 Raw 51aterials 10 i Customers and Competition 10 llacklog 10 Factors Affecting Ikmand 11 D. Engineered alaterials 11 General 11 Raw Statcrials 11 Customers and Competition 12 Ilackh>g 12 I Factors Affect:ng Ikmand 12 E. Trading 12 General 12 13 Customers amlCompetition Backlog 13 Factors Affecting Demand 13 F. Patents and Licenses 13 G. Research and Development Activities 14 H. Insurance 14 i I. Employees 14 J. Government Regulations 15 r l K. Intercompany Agreement 15 t item 3. Legal Proceedings and Proposed Tax Deficiency 15 Item 4. Subminnion of Matters to a Vote of Security Holders 10, 1 1 l

1

PAGE PART 11 Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters 16 i Item 6. Selected Financial Data 17 l Item 7. Management's Discussion and Analysis of Financial l Conditions and Results of Operations 1 ' Results of Operations 1985 VS 1984 18 1984 VS 1983 19 Impact of Changing Prices On Revenues and Net income 20 Liquidity and Capital Resources 21 l Item 8. Consolidated Financial Statements and i l Supplementary Data Company Report on Consolidated Financial Statements 22 Report of Certified Public Accountants 23 Consolidated Balance Sheet March 31,1985 and 1984 24 Consolidated Statement of Income and Retained Earnings For the Three Fiscal Years ended March 31,1985 2ti Consolidated Statement of Changes in Financial Position For the Three Fiscal Years ended March 31,1985 27 Notes to Consolidated Financial Statements 28 l Item 9. Disagreements with Accountants on Accounting and Financial Discionure 45 i PART III item 10. Directors and Executive Officers of the Regintrant 45 l Item 11. Executive Compensation 45 l l Item 12. Security Ownernhlp of Certain Heneficial Ow ners and Management 45 i i Item 13. Certain Helationships and H(lated Transactions 45 1 PART IV i i t l Item 11. Exhibits, Financial Statement Schedules aml l Heportn on Form 8 K 4ei i 1 [ Exhibit 11 Statement ite Computation of l l'er Share Earnings 47 Exhibit 22 Significant Subsidiaries of the Registrant 19 i Consent of Certifint Public Accountants 50 l Signaturen ofIhe Registrant 51 Signaturen of Ilirectors 52 I i l 4

A PARTI Items 1. & 2. HUSINESS AND PitOPEltTIES l A. GENEllAL 31cDermott International, Inc. (" International") was incorporated under the laws of the Itepublic of Panama in 1959. Under a reorganization during the fiscal year ended $ larch 31,1983. International became the parent company of the McDermott group of companies which includes McDermott incorlorated (the " Delaware Com-pany") which prior to the reorganization was the parent company. International's common shares and the Delaware Company's Series A $2.20 Cumulative Convertible Preferred Stock and Series B $2.m Cumulative Preferred Stock are publicly heki. l Unless the context otherwise requires, hereinafter " International" will be used to mean MeDermott Interna-tional, Inc., a Panama corporation, the " Delaware Company" will be used to mean McDermott incorgmrated, a Delaware corporation, and "McDermott International" will be used to mean the consolidated enterprise. l On April 10.1984, International acquired, subject to certain conditions, the international trading business of l Coutinho, Caro & Co. KGaA ("Coutinho"), w hich is headquartered in llamburg, West Germany. International completed this acquisition on Novemlwr 7,19M. McDermoa International operates in four business segments: Marine Construction Ser ices to the oil and gas industry on a worhlwide basis for offshore development drilling and for production and translurtation of oil and gas; Power Generation Systems and Equipment principally to the eketric utility industry and the U.S. Government: Engineered Materials, pnxiucing metal tubular pnxiucts for mechanical and pressure applications in a variety of industries including the petroleum and petrochemical industries, and insulating pnxiucts for a variety of industries; and Tr:uling which comprises the world wide trading, engineering and I cor.struction operations of Coutinho as well as other trading services of International. The businesses of the Power Generation Systems and Equipment and Engineered Materials segments are conducted primarily through a subsidiary of the Delaware Company, The liabcock & Wilcox Company ("H&W"), which was ac-quired in 1978. McDermott International has a continuing program of reviewing acquisition opportunit,es. The following tables show revenues, operating income and their respective percentage contributions for the business segments of MeDermott International for the three fiscal years ended March 31,1985. See Note 10 of notes to consolidated financial statements for additional information with respect to McDermott Interna-tional's bu3iness segments and operations in different geographic areas. l l l l

REVENUES AND PERCENT OF REVENUES (Ikttare in Millions) For Fiscal Years Ended March 31, 1985 1981 1983 Marine Construction Services $ 1,045.9 32 % $ 1,191.3 39 % $ 1,605.2 43 % Power Generation Systems and Equipment 1,413.5 44 % 1,579.3 51% 1,738.7 47 % Engineered Materials 385.6 12 % 373.8 12 % 437.2 12 % Trading 435.9 13 % Intersegment Transfer Eliminations (47.0) (1%) (55.8) (2%) (73.3) (2%) Total $ 3,233.9 100 % $3,088.6 100 % $ 3,707.8 100 % l l OPERATING INCOME (1.0SS)(I) AND PERCENT OF OPERATING INCOME i (Ikitars in Millions) For Fiscal Years Ended March 31, 1985 1981 1983 l Marine Construction Services (8.3) 22 % 91.1 44 % $ 125.0 49 % l Power Generation Systems and Equipment 15.3 (40%) 135.5 65 % 126.2 50 % Engineered Materials (39.8) 105% (19.2) (9%) 2.0 1% Trading (5.2) 13 % Total (38.0) 100 % $ 207.4 100 % $ 253.2 100 % (1) Reconciling items tetween O erating Income (Ins) and income (Ims) twfore l'rovision for income i i Taxes, Minority Interest and Extrannlinary items are General Coriwirate Expenses and Other income (Expense). l l l l l t l ) i t J l I 6 I

H, SIAltlNE CONSTitUCTION SEltVICES General The marine construction services segment consists of the design, construction and installation of specialized offshore fixed platforms and marine pipelines used for development drilling, production and transiertation of oil and gas. 31arine construction services also includes engineering and const ruction servic es for oil pro luction in shoreline and marshland areas (principally in leuisiana and Texas); oimration of a shipyant for the construc-tion, repair and maintenance of tugboats, barges and other small vessels; and the engineering and construc-tion of processing plants for the oil, gas and petrochemical and mineral industries, primarily for offshore in-stallation. Fixed platforms, which are fastened to the seafloor by pilings driven through their structural legs, have been installed by 31eDermott International in water depths of more than 1,000 feet. These platforms have been engineered to withstand increasingly greater weights and stresses as the search for oil and gas has expanded into deeper water and into areas subject to severe weather conditions. 31cDermott International, a world leader in the fabrication of offshore structures, has a principal fabrication yard located on approximately 1,500 acres ofland, a majority of which is leased, near 31 organ City, leuisiana. This segment also operates fabrication yards on leased property in Indonesia at llatam Island; in the Sliddle East at Dubai, Abu Dhabi, and Itas Al Khaimah, United Arab Emiretes and Ain %ukhna, Egypt and has fabrication capabilities on leased property in South East Asia at Singapore and m West Africa a' Warri, Nigerie. 31cDermott International also operates fabrication yards on company owned property in Scotland, near Inverness and in the United States at New Iberia, louisiana and Gulfport,31iuissippi. The two U.S. loca-tions were previously operated as shipyant facilities. The ciptipment used at these yards, w hich is capable of fabricating a full range of offshore structures, consists principally of cranes, welding equipment, machine too s and other fabrication equipment, most of w hich is mm able. This segment also operates a shipyant on ap-i proximately 58 acres of leased land in 31 organ City, louisiana. Expiration dates, including renewal options, of leases covering land for fabrication yank are as follows: Storgan City, louisiana Years 19s20:12 Itatam bland, Indonesia Year 2008 Dubai, U, A. E. Year 1%5 Abu Dhabi, U, A. E. Year 1995 Itas Al Khaimah, U, A. C. Year 1985 Ain Soukhna, Egypt Year 2001 Singapore Year 1999 Warri Nigeria Year 2065 Underwater pipelaying operations conducted by this segment base abo required the development of new techniques and equipment as water depths have increased,51cDermott International has the capability of in-stalling pipelines with an outside diam"ter (including concrete coating) of up to 72 inches. The Starine Pipeline Division has installed one of the worh!'s deepest marine pigelines from a platform that stands in over 1,000 feet of water in the Gulf of Slexico, in connection with its construction and pipelaying activities, thia segment conducts diving olerations which, because of the water depths involved, require sophisticated equipment, including dising bells and an under. water habitat. This segment oimrates one of the largest fleets of marine npiipment uwd in offshore construction. The numeus of a " construction spread" is a large derrick barge, pipelaying barge or combination derrick-pipelaying barge capable of offshore operations for an extended mrpt of time in remote hecations. The hfting I capacities of alcDermott Interna ional's derrick and combination derrick pi claving barges range from 500 l tons to 2,T00 tons. Thew barges, which range in length from :100 (cet to 6x9 feet, are fully opiipled with revolving cranes, auxiliary crancs, wehling equipment, pile driving hammers, anchor winches and a variety of mblitional gear. The largest of the existing vcwls provides quarters for npproximately 550 workers. 7

This segment owns and operates 4 derrick barges,2 pipelaying barges,11 combination derrick pi elaying t barges and 2 pipeburying barges. These include three semisubmersible vessels presently assigned to the North Sea, of which two are derrick barges eacl capable of lifting 2,000 to 2,400 tons, one of which is self propelled. The other semisubmersible vessel is a la3 barge capable of laying 72 inch diameter pipe and is operative in water depths up to 2,000 feet. 51cDermott International also owns or leases a substantial number of other i vessels such as tugs, utility boats and cargo barges to suplmrt the major marine vessels. Slajor spreads of equipment are in the Gulf of Mexico, tha Sliddle East, South East Asia, the North Sea, and West Africa. This segment is strengthening its competitive position through an aggressive program for automation and modernization of engineering, welding equipment, pipemill facilities and pipelaying operations and increased lifting capacity of its derrick barges. This segment also has under construction a semisubmersible derrick barge which will have a lifting capacity of approximately 13,000 tons. McDermott International owns a 49% interest in a Slexican joint venture that operates 3 delf propelled com-bination barges and one pi mlaying barge. Two of these barges are capable of lifting 2,000 tons. i i This segment's shipyard facility supplies complete maintenance and construction facilities and is a buihler of large tugs, p tekaged rigs, dredges, and oceanographic research and ocean-going work vessels. Foreign Operations The amounts of narine construction's revenues and operating income derived from operations outside of the United States (" foreign"), and approximate percentages of those revenues and operating income to McDer-mott Internatiomd's total revenues and operating income (loss) wore as follows: OPERATING l(EVENUES INCOME Fiscal Year Amount l'ercent Amount l'ercent tin thousands of dollari) 19M 7T 8,1119 23 73,029 1984 947,819 31 IG,rMi 80 l 1983 1,li>2,131 31 98,3414 39 The decline in operating income was a result of lower utilization of the marine construction equipment and t n-favorable cost [wrformance on certain fabrication contracts. Although profitable, results of foreign operatioas continue to be unfavorably impacted by continued competitive pressures brought on by the lower demand for l oil and uncertainties concerning oil prices. Haw Materials I The raw materials used by this wgment in its marine construction services, such as carbon and alloy 8 teel in l various forms, webling gases, concrete, fuel oil and gasoline, are avaihble from many murces and this seg-i ment is not de[endent ulon any single supplier or murce. Although shortages in certain raw materials and l fuels required to le purchased by this segment have existed from time to time, no serious shortage exists at l the present time. l I Customern and Competition This wgment's principal customers are the larger oil and gas companies and foreign governments. Customers generally contract with this wgment for the design, construction and installation of specific platforms, pumjo l ing stations, marine pipelines, and productbin networks. Contracts are usually awarded on a competitive bid basis. $1cDermott International's main comlwtitor in offshore construction has olcrations comparable in alye to those of McDermott International but is a subsidiary of a major company that also provides other wrvices to l the oil and gas industry. A number of small companies also compete effectively with Melh rmott international In varion.4 parta of the worbi, but none has the geographical distribution or Ihe extent of capabilitics of Melh r-l mott international and its main competitor. l 8 i

llacklog As of Starch 31,1985 and 1984 the marine construction services' backlog amounted to $662,927,000 and $675,697,000, respectively, a decrease of approximately 2% Of the March 31,1985 backlog, $508,333,000 is expected to be recognimi in fiscal 1986, and $154,594,000 in fiscal 1987-1990. Work is performed on a fixed price, cost plus or day rate basis. Almost all contracts call for progress payments and McDermott International attempts to coser increased costs of anticipated changes in general labor rates and material costs on long-term contracts, either through an estimation of such changes, which is reDected in the original fixed price, or through price escalation clauses. This segment's contracts for work in foreign areas generally provide for payment in United States Dollars, with exceptions for payments in foreign currencies in amounts approximately equal to expenses to be incurred by this segment in those currencies. Factors Affecting Demand Marine construction services activity has traditionally been a cyclical industry depending mainly im the capital expenditure outlay of major oil and gas companies and foreign governments for developmental construction. These expenditures are influenced by the sale and expiration dates of offshore leases in the United States and abroad, the discovery rates of new oil and gas reserves in offshore areas, local and international political and economic conditions, the price of oil, and the ability of the oil and gas industry to generate capital. Oil prices have a strong effect on exploration and production which ultimately affects the demand for marine construction services activity. The oil surplus which the world has been experiencing has a depressing impact on oil prices, which will continue until consumption exceeds available pnuluction. MeDermott International ex-pects over the long term an end to the current oil surplus and an improved level of demand for its marine con-struction services. C. POWEll GENEllATION SYSTEMS AND EQUll' MENT General i ) The power generation systems and equipment segrent, w hich businen is primarily performed through Il&W, encompaues individually engineered complete lovil fuel boiler < (including fluid tied combusters), rmelear steam systems, and nuclear fuel and nuclear fuel anemblien for the electrie utility industry, as well as fossil fuel boilers for industrial processes and p>wer generation. Power generation systems and equipment also in-cludes replacement parts, customer services and engineered mentifications of existing fossil and nuclear stcam systems, and specially engineered accesories and compments, such as air heaters and pn cipitators, cleaning systems for heat transfer surfaces, nuclear reactor compments, control and performance computers, automatic controls and instruments and nuclear control rod drives, in addition, it in-ludes pnicess recovery !=>ilers and pillution control systems for the pnwess and utility industries, heavy prenure venels and air and water-cooled heat exchangers, hollow forgings for steam piping and other uses and reflective metallic thermal i insulation. This segment also includes nuclear reactor and fuel compments and other components for the U.S. Department of Energy and the U.S. Department of Defense it&W, through a separate construction unit, is engaged in the erection of utility plants and industrial facilities and the repair and alteration of such existing equipment. In regard to cammercial nuclear power genention, utilities have delayni certain construction programs and in many cases have cancelled onlers for nuclear steam generating sptems. As a consequence, customer ser-vices and fuel anemblies for refueling existing nuclear reactors have become the major part of this segment's commercial nuclear activity. No contracts for domestic nuclear steam systems base been awanled in several years. Ilusinen with the U.S. Government related to the U.S. Navy's nuclear shipbuibling operations has become an increasingly important part of the segment's results, f(evenues from the l'.S. Goverment related to this actisi-ty in fiscal 198a,1941 and 1983 were approximately 12%,12% and 9%, respectisely, of McDermott Interna-tional's total revenues. This activity has made a significant cont ribution of operating income to McDermott In-ternational in all three fiscal years and this segment would have been in a loss position in this fiscal year without the contribution from this program. A decline in this business could have a significant impact on this segment's profitability, i p

The principal plants of B&W manufacturing lower generation systems and equipment are situated at Barber-ton, L.ancaster and Wickliffe, Ohio; Lynchburg, Virginia; Paris and Beasley, Texas; West Point, Alississippi; and Cambridge, Ontario. These plants and properties are owned by B&W and are well maintained, have suitable equipment, and are of adequate size, in response to the reduction in orders for power stations by electric utilities, B&W closed certain of its manufacturing plants and facilities to balance its capacity with current market ex[vetations. Provisions were made in the accounts in fiscal years 1984 and 1983 to cover the costs of these closings. B&W has an ongoing program for automating and modernizing this segment's engineering and manufacturing facilities. In addition, B&W is actively pursuing the emerging power market for cogeneration units with non traditional fuel burning capability. It mtends to participate in this market area both as an equipment supplier, and in buihl-own-operate projects as an equity participant. Raw 3faterials The principal raw materials used by B&W to construct power generation systems and equipment consist of carbon and alloy steels in various forms, such as plate, structurals, bars, sheet, strip, heavy wall pipe and tubes. Significant amounts of components are also purchased for assembly into the equipment. These raw materials and comptments generally are purchased by B&W as needed for individual contracts except that requirements for tubes are supplied mainly from within B&W. Significant amounts of natural gas are used in the manufacture of power generation systems and equipment, l l The principal raw materials used by B&W in the manufacture of nuclear fuel components and assemblies con-sist of uranium (customer furnished), zirealloy and nickel. Although shortages in certain raw materials and fuels required to be purchased by B&W have existed from time to time, no serious shortage exists at the present time. Customers and Competition The principal customers of this business segment are the eh>etric utility industry (including government-owned utihties), the U.S. Government, and the pulp and paper, and other process industries. The eh etrie utili-tv industry (including government-owned utilities) accounted for 21%,29% and 27% of SicDermott interna-tIonal's total revenues for Gscal years 1985,1984 and 1983, respectively. The U.S. Government accounted for 13%,13~ and 9% of $1cDermott International's total revenues for the same periods, respectively. I Power generation systems and equipment onlers are customarily awarded in response to competitive bids sub. mitted pursuant to proposals based on the estimated cost of each job. Domestically, a relatively small number of companies specializing in large steam generating equipment compete wi:h Il&W in the fossil fuel steam system field. In international markets, these companies plus several foreign based companies compete with B&W. In the sale of nuclear steam systems, il&W competes with a small numler of companies including two major mar.ufacturers whose reported sales of these systems significantly exceed those of 11&W, but which do not compete with it in the sale of fossil fuel boilers. In the sale of nuclear fuel, ll&W competes with each of the other manufacturers of nuclear steam systems, as well as with one petroleum company which is a supplier of nuclear fuel. A number of companies are in competition with Il&W in small industrial and cogeneration l l loilers. Other suppliers of fossil and nuclear fuel steam systems, as well as many other businesses in the case of fossil fuel systems, compete in repair and alterations and other ser ices required for backfitting and main. l taining existing systems. i Backlog Hacklog as of Starch 31,1985 was $3,089,000,000 or approximately 77% of SicDermott International's backlog. Backlog at Starch 31,1984 was $3,421,000,000 Of the Alarch 31,1985 backlog, it is expected that approximately $376,000,000 will be reconled in revenues in fiscal 1936, $1,581,(Km,000 in fiscal 1987 1990, and $632.000,000 thereafter, if in management's judgment it becomes doubtful whether contracts will pro-cred, the backlog is adjusted accontingly. Reduced chetric demand growth, excess generating capacity, environmental restraints and financial pressures on the utility industry have resulted in continued delays, su pensions and cancellations of steam systems and environmental control systems, in fiscal 1985 one fossil fuel steam system was cancelled. At 10

Harch 31,1985 delayed and suspended fossil fuel utility boiler and environmental control system contracts in-ciudalin the backlog constituted 19% of 31cDermott International's total backlog.11&W, at the present time, believes that these fossil fuel utility boiler and environmental control system contracts will pnicent after the period of delay or suspension. If contracts are delayed, suspended or cancelleii, ll&W is entitled to a financial settlement related to the individual circumstances of the contract. This segment's backlog with the U.S. Governme-t, primarily for the U.S. Navy's nuclear shipbuilding operations, was approximately 2ti% of 31cDermott International's total backlog at 3! arch 31,1985. B&W attempts to cover increased costs of anticipated changes in labor, material and service costs of long-term contracts either through an estimation of such changes which is reflected in the original price or thniugh price escalation clauses. 31ost long term contracts have provisions for progress payments. Factors Affecting Demand New orders by the U. S. electric utility industry have been at ext remely low levels during recent years because of the decline in electrical demand growth and resultant increased reserve margins, primarily due to cost in-duced conservation, and a decreased dependence on energy by U.S. industry. Fiscal 1985 and 198 8 saw a moderate resumption in electrical demand growth due primarily to the economic recovery. Ilowever, existing capacity continues to be adequate to meet demand and only two domestic oniers for new ch etric utility lmwer plants were placed in fiscal 1985. Accontingly, il&W has continued its efforts to obtain onlers outside the United States and expand its business in backfitting of existing power plants requiring replacement parts, repair and alteration, and other services. In fiscal 198511&W received an order for two utility boilers outside of the United States. D. ENGINEEltED SIATEltI ALS General Engineered materials consists of tubular and insulating products ilesigned and manufactural by ll&W. Tubular pnxiucts include stainless, alloy and carixm steel, seamless and weldal tubes and tubular and solid shapes, extrusions, special metal t ubes and seamless rolled rings. These are principally " specialty" pn alucts of high quality and enginevral for special mechanical and pressure tubing applications, including high quality tubing for petniteum pnwluction operations. Insulating products include kaolin clays, specially engineered and vacuum formed ceramic Gbers, insulating and specialty firebrick, fire protection insulation, phistics, mortars, castables and special oxide refractories. These insulating products are uml in high temperature furnaces for various heating and heat treating pur-goes and in other applications where the temperatures and rates of combustion or chemical reactions are unusually demanding. l ll&W's principal plants manufacturing tubular pnalucts are h>cated at IIcaver Falls and Ambridge, Penn-i sylvania; Alliance, Ohio; and liryan, Texas. Il&W manufactures insulating pnalucts principally at Augusta, Georgia; Emporia, Kansas; and llurlington, Ontario. All of these plants and properties are owned by 114W, are well maintainni, have suitabic equipment, and are of adequate size. In resp mse to relucol demand for mechanical and pressure tubing, ll&W permanently closed its 3!ilwaukee, Wisconsin plant in fiscal 1981. Pro-visions were made in the accounts in fiscal 1985 and 198 8 to cover the costs a.weiatel with this closing.114 W has an aggressive ongoing pn gram to automate and mulernize this segment's facihties. In fiscal 1981, ll&W commissioned a new steel making facility, which includes a continuous caster, at its llcaver Falls location and, in fiscal 1985, began an extensive mmlernization of its welded tube facility in Alliance, Ohio. Haw Staterials The principal raw materials used by ll&W in the manufacture of tubular pnulucts consist of steel, steel scrap, special metals and alloying materials. 3!ost of the steel and special metals used for seamless tubemaking pur-goes are pn luen! by ll&W's ow n electric furnace facihties, except that 114W purchases its ropiirements for strip steel in the open market. Stost of the steel scrap and all alloying materials utiliznlin the manufacturing pn> cess are also purchased in the open market. The principal raw material u3ni to pnuluce this segment's insulating pnulocts is kaolin clay which it obtains under a long term supply contract. Also used are hauxite, alumina, sibcon carbide, gypsum, plaster and wmnl chips, all of which are purchased on the open market. 11

Significant amounts of natund gas and oil are used in the manufacture of tubular and insulating pnxlucts. Although shortages in certain raw materials and fuels required to be purchased by this H&W segment have existed from time to time, no serious shortage exists at the present time. Customers and Competition The principal customers of the tubular pnxlucts portion of this business segment are the bearing, automotive, agricultural and construction machinery, petroleum and petrochemical, primary metal, fabricated metal, pro-cess and power generation industries. In addition, material quantities of tubes are manufactured by this seg-ment for B&W's own requirements for power generation systems and equipment. The principal customers of the insulating pnxlucts portion of this business segment are the iron and steel, chemical process, ceramie and foundry and furnace builders industries. Alany companies, both domestic and foreign, are in competition with H&W with respect to tubular and in. sulating pnxiucts. i Backlog As of Starch 31,1985 the engineered materials' backlog was $58,000,000 compared with $65,000,000 as of Starch 31,1984. Subst:mtially all of this segment's backlog is expected to be reconfed in revenues in fiscal 1986. Factors Affecting Demand Purchases of tubular prtulucts by industries served by this segment fell to severely depressed levels in fiscal i 1983. This condition continued throughout fiscal 1984 and 1985 in all user industries except automotive where demand has recovered. This segment also supplies other pressure tubing to makers of steam generating equip-ment for use in power plants, refmeries, chemical and petnichemical plants and pulp and paper and other pro-cess industries. Demand for such tubing is closely tied to capital spending of these industries or their ultimate customers, and such spending levels are depressed, in addition to the reduced demand for tubular pnnlucts in general, tFis segment has experienced significant foreign competition in many of its tubular product lines. De-mand for insulating pnulucts is dependent upon capit:d spending for maternization and expansion, pnxtuction l levela and energy conservation in user industries. Such demand continued the moderate turn around which be gan in fiscal 1984. I:. TRADING General i This segment conducts its operatians through a network of offices l<x ated throughout the world. The majority of this business is provided through Coutinho which is headquartered in llamburg, West Germany. Other prin-cipal offices are maintained in the United States, continental Europe, the United Kingdom, West Africa. j l South America and South East Asia. l This segment buys and sells primarily iron and steel pnulucts, wire and wire pnulacts, non ferrous materials, chemical pnxtucts, paper pn aluets, cables and equipment for electric power distribution, tools, machinery and utility s chicles. The operations of this segment also include warehousing and inland and ocean trans; ort. This segment also assists customers in arranging insurance and financing. While this segment onlinarily functions l as a principal in its tntding activities, it also acts as agent under certain circumstances. In addition, this seg-l ment regularly enters into substantial forwant purchases and sales of all materials handled. These are not nor-mally maintained over perimis longer than three months, i Thk segment's network of offices also provides certain engineering and construction services consisting of the I design, construction and erection of industrial plants, primarily for the cement, glass, pulp and paper, and 1 l for 1 industries as well as hotels, hospitals, office buildings, business centers and other large building com. plexes. This segment does not pnxiuce any of the materials in which it traden, but purchases them from others in the open market. No long term contractual supply arrangements are in place. This regment has access to an i pur. chases these materials on a worldwide hans. 12

Cust:mers cnd Ccmpetition i The principal customers of this segment are warehousing and stockhokling companies, steel pnulucers and end-users of steel products such as construction companies, as well as a number of other industrial consumera. These customers are mainly commercial organizations although some are partially or wholly government owned or controlled. No one customer has accounted for 10% or more of the consolidated revenues of 31cDer-mott International. However, a significant amount of business has I een done with import agencies of the Peo-ple's Republic of China. i This segment's competitors in international trade include trading organizations and pniducers or end-users of the products in which the segment tra les. No one competitor is dominant. Of the factors affecting competition in this business, the most significant are expertise, service and reliability. Afanagement telieves that it possesses adequate resources in these areas to enable it to compete effectively in this marketp!r.ce. This segment's customers for engineering arni construction services include various pn> cess industries and development companies, some of which are owned or partly controlled by governments of the countries in which contracts are performed. Customers generally contract with this segment for the design and construc-tion of specific industrial plants or high rise buildings. Contracts are normally awanled on a competitive bid basis and, particularly at the present time, are heavily dependent upon the conclusion of related project fm' anc-ing arrangements. Competition in the engineering and construction business is present on a worldwide basis, from companies based in all major developed countries, none of which are dominant. Hacklog Backlog at Starch 31,1985 was $192,1G0,000, of which approximately $170,MI,txW)is expectol to be recog-nized in fiscal year 1986. In the international tr:uling business, the majority of trades are completed within three months. Payment is usually losed on normal commercial terms and is normally settled using letters of crolit arrangel thniugh various banks. Payment terms may be extended under certain circumstances. Credit insurance is purefu; sed for the majority of trade accounts receivable. Engineering and construction work is principally performed on a fixed price or cost plus basis. Almost all con-tracts call for progress payments and the segment attempts to cover increased costs on long term contracts either through an estimation of such charges which is reflected in the agreed fixed price or through price escalation clauses. Trades are primarily settled and major contracts normally call for payment in U.S. Dollars or Deutschmarks. The segment enters into substantici forwant currency exchange contracts as a means of hedging its com-mitments in various currencies. Factors Affecting Demand Demand for this segment's services is influenced by a variety of constantly changing market factors which affect supply and demand for the materials in which the segment trades. In addition, bral and international political and economic conditions influence the capital and industrial development budgets of developing nations and their ability to obtain financing for pn>jects or trading. Due to the present uncertainty in the funding of industrial expansion programs of developing nations and delays in completing pnsject financing arrangements, few contracts are being awarded at the present time. These factors are considered likely to affect the segment's engineering and construction activities until worl 1 demand and credit conditions become more favorab!c. F. PATENTS AND I,1 CENSES Alany U. S. and foreign patents have been issued to SicDermott International and it has many pending patent apphcations. Patents and licenses have been acquired and licenses have tren granted to others when advan-tageous to 31cDermott International. While AlcDermott International reganis its patents and licenses to be of value, no single patent or license or group of related patents or licenses is believed to be material in relation to its business as a whole. 13

G. RESEARCll AND DEVELOP 5 TENT ACTIVITIES licDermott International maintains research and development activities in Alliance, Ohio; Lynchburg, Virginia; and flouston, Texas; and also conducts development activities at its various manufacturing plants and engineering and design offices. During the fiscal years ended 31 arch 31,1985,1984 and 1983, approx-imately $S2,700,000, $61,600,000 and $74,000,000, respectively, was spent by AlcDermott International on research and development activities, of which approximately $41,600,000, $27,000,000 aml $36,400,mo, respectively, was paid for by customers of SicDermott International. Research and development activities were related to development and improvement of new and existing products and equipment and conceptual and engineering evaluation for translation into practical applications. Approximately 410 employees were engaged full time in this activity. 11.15'SURANCE 31cDermott International maintains liability and property insurance that it considers normal in the indust ry. It dou not maintain insurance covering certain risks for which insurance is not available or is only available at rates which 5tcDermott International considers uneconomical. Among such risks are war and confiscation in certain areas of the world at certain times, and pollution liability in excess of relatively low limits. Depending on competitive conditions and other factors, SicDermott International endeavors to obtain contractual protec-tion against uninsured risks from its customers. In addition to coverage under nuclear liability and proivrty insurance for its five nuclear facilities, two of these are covered by the limitations of liability and indemnity provisions of the Price-Anderson Act which, among other things, limit the public liability of manufacturers of licensed nuclear facilities and other indem-nified parties to an aggregate of $560,000,000 per nuclear incident and indemnify such persons in an aggregate amount which when added to amounts available under commercially available liability insurance policies will total $560,000,000. 5!cDermott International's insurance policies do not cover liability and pnyerty damage losses resulting from nuclear incidents at facilities of its utility customers. To protect against such losses 51cDermott International has obtained contractual indemnification from such customers and waivers of their insurers' rights of subro-gation and generally has been named as an additional insured under its customers' nuclear property insurance policies. In addition, 5fcDermott International's thini party nuclear liability is an insured rbk under such customers' nuclear liability policies and the Price-Anderson Act indemnity discussed abwe. 51cDermott International's offshore construction business is subject to the usual risks of olerations at sea, with additional exposure due to the utilization of expensive and technical construction equipment under sometimes extreme weather conditions, often in remote areas of the world. In addition,51cDermott Interna. tional operates in many cases on or in proximity to existing offshore facilities which are subject to damage by 51cDermott hcernational and such damage could result in the escalm of oil and gas into the sea. 1 SicDermott International has two wholly-owned insurance subsidiaries. To date, these subsidiaries have written policies concerning general liability, buihlers' risk within certain limits, marine hull, and workmen's compensation for 5tcDermott international. No significant amounts of insurance have been written for unrelated parties. I. ESIPLOYEES At $1 arch 31,1985, SicDermott International employed, under its direct supervision, approximately 40,000 persons compared with 39.000 at Starch 31,1984. Approximately 9,000 employees were members of labor i unions at 5tarch 31,1985 and $1 arch 31,1981. SicDermott International considers its relations with its employees to be satisfactory. 14

J. GOVERN 3 TENT llEGULATIONS ^ 3!cDermott International's compliance with U.S. federal, state and local environmental protection regulations necessitated capital expenditures of $18,989,000 in 1985, and it expects to spend another $40,314,000 over the next five years. However,3!cDermott International cannot predict all the environmental reguirements or cir-cumstances which will exist in the future. The recurring costs of complying with envinmmental regidations was a charge against income betor e taxes of approximately $9,756,000 in 1985. K. INTERCO31PANY AGitEE3 TENT In November 1982, International rnd the Delaware Company entered into a Stock Pt,rchase and Sale Agree-ment (the " Intercompany Agreement"), pursuant to which the Delaware Company has the right to sell to in-ternational and International has the right to buy from the Delaware Company units of stock, each unit con-sisting of one share of International common stock and one share of International Series A Preferred Stock. If a unit is purchasol by International upon the Delaware Company's exercise of its right to sell under the Inter-company Agreement, the purchase price of such unit will be 90% of the then current value of the unit, as de-fined in the agreement (the " unit value"). If a unit is purchased by International pursuant to an exercise of iis right to purchase under the Intercompany Agreement, the purchase price of such unit will be 110% of the unit value. As of Starch 31,-1985 the unit value was $7,324 and the aggregate unit value of the Delaware Company's 100,000 units was $732,382,000. Item 3. LEGAL PROCEEDINGS AND PitOPOSED TAX DEFICIENCY On December 14,1978, a United States Federal grand jury in New Orleans, Louisiana indicted the Delaware Company, Brown & Root, Inc. (" Brown & Itoot") and certain of their officers on charges of conspiring to alk>cate contracts and to fix prices and contract terms for marine construction projects in violation of Section 1 of the Sherman Act and other U.S. Federal statutes. On the same day the Delaware Company and Brown & Root each pleaded noto contendere to the Sherman Act charges and were each fined $1,M),tHH). In Starch and April 1979, four officers, including a former chief operating officer and a former chief executive officer of the Delaare Company (all but one of whom were directors of the Delaware Company), pleaded noto contendere to the Sherman Act charges and certain related charges of mail fraud and wire fraud. The Delaware Company and Brown & Root (and in some cases, International and certain former officers of the Delaware Company and International) have been named as defendants in 79 actions which have been filel in or (unless earlier terminatal) transferrol to the United States District Court for the Eastern District of 1,ouisiana, instituted by or on behalf of purchasers and alleged purchasers of marine construction services in the Unital States and abroad alleging a combination and conspiracy to restrain or eliminate competition in marine construction in violation of Sections 1 and 2 of the Sherman Act and various state laws through a conspiracy to alh>cate con-tracts, fix prices and contract terms and other means. Plaintiffs seek treble damages and other relief for injuries allegedly sustained, in some cases dating back to the mid 1950's. Other private parties have receivel waivers of the statute of limitations, and these parties may assert additional treble damage claims against the Delaware Company and International. To date, all but two of these actions have been settlel in principle or dismissed pursuant to settlement or otherwise; the Delaware Company and International have paid or agreed to pay a total of approximately $65,000,000 in settlement of purchaser's claims. The Delaware Company and International have filed answers denying the material allegations of wrongdoing and counterciaims in the re-maining two actions. Discovery is pr iceeding in these cases and the plaintiffs have reiluested a trial late this year or early next year. It is not inssible at this time to predict the outcome of the remaining claims, or to estimate the amount or range of any potentialloss, except to state that the outcome of such claims could have a material adverse effect on International and the Delaware Company. The Intermd Revenue Service (the "lRS") has examined the U.S. federal income tax returns of the Delaware Company for its fiscal years ended Starch 31,197fi through 5tarch 31,1981, and those of International for its fiscal years ended November 30,19711 through November 30,1980; and those of B&W for its fiscal years ended December 31,1977 and Starch 31,1978, the latter being the year ended on the day H&W was anguired by the Delaware Company. The IRS has issued notices which pro [ose additions to the U.S. federal income tax liabil. ity of the Delaware Company and International in respect of each of these years. Such notices assert among other things that the Delaware Company is subject to U.S. federal income tax on unremitted earnings of International on the ground that the portion thereof which constituted "Subpart F" income under Sections 951 through 964 of the Internal Revenue Code substantially exceeded the portion so classified by the Delaware Company in its U.S. federalincome tax returns. Additional U.S. federal income taxes asserted by the notices in <;uestion which are allocah!e to Subpart l' income items from International are approximately $210,000,0no. 15

In the notices issued by it, the IRS does not state specifically the grounds upon which additional taxes under Subpart F are asserted. Revenue Agents' reports delivered in connection with such notices assert that the in-come of International constituted Subpart F income because it was realized from the performance of services on behalf of the Delaware Company. These reports assert,in the alternative, that International was engaged in the business of manufacturing rather than in the construction business, with consequential effects on the calculation of Subpart F income. The Delaware Company is contesting the additional U.S. federal income taxes with respect to Subpart F income items proposed in the notices and believes it will succeed with respect thereto. { The notices to International essentially represent alternative grounds for asserting a deficiency with respect i to a portion of the aforesaid Subpart F mcome. International believes it will succeed in contesting these deficiencies. The notices also propose additional U.S. federal income taxes for the years in question on grounds other than the Subpart P rules, including additional taxes arising out of transactions done and contracts entered into by B&W before its acquisition by the Delaware Company and the consequential effects thereof on the Delaware Company for its fiscal years ended March 31,1979,1980 and 1981. The additional U.S. federal income taxes which the IRS has asserted on these grounds are substantial. The Delaware Company, however, believes that j any U.S. federal income taxes ultimately assessed on the basis of such notices will not exceed reserves estah-l lished with respect thereto. Item 4. SUHMISSION OF MATTERS TO A VOTE OF SECURITY 110LDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of secu-rity holders, through the solicitation of proxies or otherwise. i PART 11 Item 5. M ARKET FOR TIIE REGISTRANT *S COMMON STOCK AND RELATED SECURITY llOLDER MNITERS t Internatior:al's Common Stock is traded on the New York Stock Exchange. Iligh and low stock prices and i dividends declared for the years ended March 31,1985 and 1984 were as follows: l l FISCAL 1985 SALES l'HICE CASil DIVIDENDS l QUARTER ENDED llIGil LOW DECLARED l l June 30,1984 31 5/. 25 $0.15 Septemler 30,1984 31 233/. $o.45 December 31,1984 30>/. 233/. $0.45 March 31,1985 308/. 23'/. $0.15 FISCAL 1981 S ALES l' RICE CASil DIVIDENDS QUARTER ENDED lilGli LOW DECLARED June 30,1983 238/. 174/. $0.15 September 30,1983 268/. 205/. $0.45 December 31,1983 25>/. 23 $0.45 l March 31,1981 31 >/. 218/. $0.45 l As of March 31,1985, the approximate number of record holders of common stock was 9,816. l 16

Item 6. SELECTED FINANCIAL DATA l For The Fiscal Years Ended 31 arch 31, 1985 1984 1983 1982 1981 (in thousands except for per share amounts) Revenues $ 3,233,871 $ 3,088,583 $ 3,70i,767 $ 4.843,186 $ 3,839,698 Income Before Extraordinary Items 18,980 120,856 50,522 183,569 69,271 Net Income 30,667 120,856 55,664 183,539 69,271 Earnings Per Share: Primary - Before Extra-ordinary items 0.51 3.06 1.37 4.98 1.89 Net Earnings 0.83 3.06 1.51 4.98 1.89 Fully Dilated - Before Extra-ordinary items 0.51 2.95 1.37 4.56 1.88 Net Earnings 0.83 2.95 1.51 4.56 1.88 Total Assets S 4,180,684 $ 3,981,114 $ 3,820,689 $ 4,063,484 $ 3,906,261 Long-Term Obligations $ 732,218 $ 621,045 $ 525,086 419,259 436,397 Subsidiary's Redeemable Preferred Stocks 201,693 201,709 204,783 393,763 391,192 Total $ 936,911 $ 825,754 $ 729,869 $ 813,022 830,589 Cash Dividends per common share 1.80 1.80 1.80 1.65 1.45 As discussed in Note 2 of notes to consolidated financial statements the aciguisition of Coutinho was accounted for as a purchase and the results of Coutinho's operations for the perhi April 1,1984 through Decemler 31, 1984 have been inclubl in 31cDermott International's Consolidated Statement of Ir.come and itetained Earn. ings for the fiscal year ended alarch 31,1985. As discussed in Note 7 of notes to consolidated financial sta,ements, International and the Delaware Company have been named as defendants in pending actions alleging violations of Section I and 2 of the Sherman Act and various state laws. The ultimate amount of any liability that might result from such actions is not present. ly determinable. 17

lt;m 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND - RESULTS OF OPERATIONS 4 Results of Operations 1985 VS 1984 Marine construction services' revenues declined by $145,411,000 to $1,045,938,000 and operating income declined $99,414,000 to a loss of $8,293,000. These declines were principally in the foreign operations and ' resulted from lower utilization of marine construction equipment. In addition, domestic operating income for I fiscal 1985 was affected by sgnificantly lower depreciation expenses due to the accelerated depreciation of certain construction equipment m the prior period due to its technical obsolescence and diminished cost effec-tiveness. This was offset by unfavorable offshore working conditions and terms of cenain contracts, lower profit mvgins on certain other contracts, and high mobilization costs. Operating income was also adversely affected by unfavorable cost performance on certain fabrication contracts in both domestic and foreign opera-tions. Power generation systems and equipment revenues of $1,413,481,000 were $165,846,000 lower than a year ago. This was principally due to reduced activity on fossil systems fabrication and erection, and lower service activity related to nuclear systems partially offset by higher revenues from nuclear fuel assemblies and fossil service and replacement parts business. Operating income of $15,345,000 was $120,132,000 lower than the same period a year ago. The lower operatmg results were primarily due to the lower volume with reduced operating margins particularly on fossil system fabrication and erection contracts, lower nuclear services volume, increased expenditures related to development and marketing of coal water fuel and microprocessor-based control systems, higher expenses related to automation projects, and increased provisions requimi for worker's compensation benefits. These we e partially offset by the higher utility and industrial parts business and improved margins from nuclear and other components for the U.S. Government. Engineered materials revenue of $385,592,000 increased $11,814,000 compared to last year primarily due to higher revenues for seamless oil country tubular products and mechanical tubing partially offset by a decrease in pressure tubing. Revenues from insulating products were modestly higher primarily due to increased ceramic fiber sales. An operating loss of $39,843,000 was incurred in fiscal year 1985 compami to a loss of $19?99 000 last year. A cost-price squeeze induced by competitive pricing policies in the steel markets that this segment serves and the lack of demand for pressure, stainless and heat resistant tubing were responsible for the continuation of loss operations in tubular products. In addition, in fiscal 1985 tubular products ex-perienced higher claims expense and additional provisions for worker's compensation benefits. These un-favorable factors were partially offset by a reduction in steel production costs and an improvement in in-sulating products margins. In addition, in fiscal 1984 certain expenses were incurred related to streamlining and modernization of certain tube making facilities and McDermott International obtained a favorable settle-ment of $5,750,000 for a business interruption insurance claim. Trading revenues were $435,924,000, primarily attributable to Coutinho whose results of operations for the period April 1,1984 through December 31,1984 have been included in the results of McDerr.htt international for fiscal 1985. Revenues from trading activities reflected a strong demand for commercial sted, non precious metals, paper, and chemical products. However, competition in the market for construction and engineering projects, and difficulties in arranging financing for available projects in certain developing countries, have resulted in a low volume of orders booked. The operating loss of $5,252,000 was primarily attributable to losses on certain turnkey engineering contracts partialif offset by positive operating income from trading activities primarily in steel products. Interest income for fiscal year 1985 increased by $31,315,000 over fiscal year 1984 and interest expense for the fiscal year 19S5 increased by $ 15,028,000 during the'same period. The increase in interest income was con-sistent with changes in McDermott International's investment portfolio and the '.nterest rates prevailing themm as well as recognition in the current fiscal year of $10,160,000 for interest income on a note from a joint venture company and $6,198,000 interest income this fiscal y' ear on investments acquimi in the Coutinho acquisition. The increase in interest expense was consistent with McDehnott International's debt and the . interest rates prevailing there(m in the respective periods. In'additior$ th'ere was $8,990,000 interest experne on debt incurred due to the acquisition of Coutinho. / f 4' h AT # 4[ r k. T y r .t 18 Y /c

E, )

i Equity in earnings of joint venture companies in fiscal year 1985 increased by $ 1,270,000 over fiscal year 1984. j Other-net expense decreased by $16,156,000 in fiscal year 1985 over fiscal year 1984. This was primarily due to a decrease between periods of $37,591,000 in provisions for facility closi'.cs and & position of product lines, most of which related to facilities in power generation systems and equipent any engineered materials. In addition, there was income of $25,570,000 related to the net gain on dis %d of assets in the current fiscal year, the realization in fiscal 1985 of $9,825,000 from receivables previc.My deemed restricted because of foreign exchange controls, and a decrease in expense in fiscal 1985 related to Oreign exchange transactions of $9,688,000. These increases were partly offset by a net decrease between the perimis of $40,198,000 in net gain on the sale of securities, a net increase in expense in fiscal ear 1985 of $14,710,000 for the settlement of 3 certain anti-tmst civil litigation and a decrease between the two periods of $9,813,000 due to income which was recorded in fiscal year 1984 for the settlement of pending litigation and claims involving a certain nuclear fuel contract. In addition there was a decrease of $4,724.000 in royalty income in fiscal year 1985 and other-net expense for fiscal year 1985 included $5,450,000 for fees relating to the termination of an agency agree-ment. In fiscal 19S5, benefit from income taxes was $89,613,000 compared with a provision for income taxes of $4,542,000 in the previous year. The increased tax benefit arises lecause International is experiencing antici-pated tax benefits in jurisdictions where pre-tax los.,es occur, and decreased profits which were dispersed among jurisdictions with varying rates of taxation. Net income during the period was increased by $11,6S7.73 for extraordinary items due primarily to a gain on extinguishment of certain debt and utilization tertain operating loss carryforwards. 1984 VS 1983 Marine construction services' revenues declined by $413,845,000 because of decreased activity in most of the major operations. Depreciation of certain construction equipment was accelerated reflecting its technical ob-so!escence and diminished cost effectiveness. No further depreciation expense will be incurred on this equip-ment. This additional depreciation expense of $27,996,000 as well as lower utilization of fabrication facilities and marine construction equipment more than offset improved profit margins on certain foreign operations and significant reductions in expenses in all arear, resulting in a decline in operating income of $33,874,000. A suchs of natural gas in the United States and uncertainty regarding the future of oil prices in fiscal 1984 resulted in a continued softening in the demand for marine construction services in certain areas of this business segment, particularly in domestic operations. Power generation systems and equipment revenues of $1,579,327,000 were $159,420,000 lower than fiscal 1983 principally due to lower activity on fossil and nuclear steam systems, environmental control equipment, and construction repair and alteration for the utility industry. In addition, lower revenues were reported this year from air and water cooled heat exchangers and process recovery and other industrial boilers. Lower revenues from these sources were partially offset by higher revenues from nuclear fuel components and other components for the U.S. Government, and construction erection activity. Operating income of $135,477,000 for fiscal 1984, however, was $9,325,000 higher than fiscal 1983. Principal factors contributing to this increase were improved costs on construction erection contracts, increased shipments of nuclear fuel comp (ments and other components to the U.S. Government, and a claim settlement which recouped costs incurred in prior years. Partially offsetting these increases were lower operating income due to the reduced volume from utility and industrial fossil steam systems, nuclear fuel assemblies, repair and alterations, and air and water cooled heat exchangers. ii 19

Engineered material's revenues of $373,778,000 decreased $63,401,000 compared to fiscal 1983 due to lower revenues from pressure tubing and particularly from petroleum production tubing. Petroleum production tub-ing revenues decreased 91 percent from fiscal year 1983. Partially offsetting the lower demand for pressure and petroleum production tubing were increased mechanical tubing revenues which resulted primarily from the upturn in the automotive industry. In addition, revenues from insulating products increased due to im-proved economic conditions and increased capital spending in user industries of insulating pnxtucts. The operating loss of $19,222,000 compared with earnings of $2,009,000 in fiscal year 1983 reflected the lower revenues from petroleum production and pressure tubing, competitive pressures on prices and costs related to certain facilities which were taken out of service. These decreases were partially offset by earnings from the higher volume of mechanical tubing and insulating pnxiucts and cost cutting measures. Interest income for fiscal year 1984 increased by $16,745,000 over fiscal year 1983 due primarily to an in-crease by McDermott International's portfolio of government obligations. Interest expense for fiscal year 1984 was consistent with changes in McDermott International's debt and the interest rates prevailing thereon in the respective periods, together with an increased amount being provided in fiscal year 1984 for interest on estimated income taxes. Equity in earnings of joint venture companies increased by $5,129,000 over the prior fiscal year due principal-ly to the Mexican joint venture company. Other-net increased by $30,878,000 in fiscal 1984 over fiscal 1983. This was principally due to realized gains of $40,216,000 on the sale of certain government obligations. In addition other-net in fiscal 1984 included income of $9,813,000 which was attributable to an agreement to settle in?ng litiganon and claims involving a cer-tain nuclear fuel contract. The above increases were partially offs by decreased income in fiscal 1984 related to foreign exchange transactions and translations of $6,048,000. In fiscal 1983, other-net included the receipt of an insurance settlement on the loss of certain marine vessels amounting to $17,100,000. Other-net included provisions for facility closings and disposition of product lines of $41,398,000 in fiscal 1984 and $42,300,000 in fiscal 1983, most of which related to facilities in power generation systems and equipment and engineered materials. Other-net also included provisions for the settlement of certain antitrust civil litigation of approx-imately $16,500,000 in each of fiscal years 1984 and 1983. There was a decrease for the period in pretax income of $31,658,000 and the effective tax rate was 52% in fiscal 1983 and 3% in fiscal 1984, resulting in a decrease in the provision for income taxes of $85,910,000. The decrease in the effective tax rate was due to higher operating losses in taxingjurisdictions where tax benefits were derived, primarily U.S. operations, reduced operating losses in areas where little or no tax benefits were derived and increased profits which were dispersed among jurisdictions with varying rates of taxation. Impact of Changing Prices on Revenues aad Net Income As a result cf continued inflation, historical dollar accounting (as reflected in the f'mancial statements) does not reflect the cumulative effect of increasing costs and changes in the purchasing power of the dollar. The effects of changing prices and their impact upon McDermott International and its reported results are shown pursuant to FASB Statement No. 33 (as amended by FASB Statement No. 82)in Note 12 of notes to the consolidated financial statements. McDermott International attempts to cover increased costs of anticipated changes in labor, material and service costs on long-term contracts either through an estimation of such changes which is reflected in the original contract price or through price escalation clauses. However, increased competition in some areas has prevented the full recovery of increasing costs, and, consequently, profit margins are under pressure. i 20

Liquidity e.nd Capitzt Resources At March 31, 1985, McDermott International's working capital was $117,966,000, a net decrease of $49,327,000 from March 31,1984. Principal movements in components of working capital were an increase of $73,914,000 in accounts and notes receivable due primarily to the consolidation of Coutinho, partially offset by the liquidation of receivables from the sale of certain of International's overseas investments and a net in-crease of $63,966,000 in contracts in progress and advance billings on contracts. These positive movements in working capital were more than offset by an increase in accounts payable of $88,284,000 and an increase of $89,661,000 in notes payable to banks and current maturities oflong-term debt due primarily to the consolida-tion and financing of Coutinho. McDermott International has committed to make capital expenditures of $257,548,000 during fiscal 1986. These proposed expenditures are principally to increase capacity and upgrade and modernize McDermott International's marine fleet and its support facilities. McIkrmott International expects to obtain funds for these expenditures from its operations and through borrowings. International has available to it a short term line of credit with various banks totalling $90,000,000. As of March 31,1985 there were no borrowings against this line of credit. Also in fiscal 1985, McDermott Interna-tional arranged a shert tenu line of credit facility totalling $75,772,000 with a foreign bank in connection with the acquisition of Coutinho. Borrowings against this line of credit at March 31,1985 were $68,868,000. In ad-dition, Coutinho has available to it various short-term lines of credit from various banks totalling approximate-ly $121,000,000. At March 31,1985 the amounts outstanding on these facilities totalled $31,494,000. In addition, the Delaware Company has available to it from various banks a short-term line of credit which was increased from $68,000,000 to $93,000,000 during fiscal 1985 and a revohing credit agreement totalling $200,000,000 (see Note 6 of the notes to the consolidated financial statements). As of March 31,1985 borrow-ings totalled $22,600,000 against the short-term line of credit, an increase of $22,600,000 from March 31,1984 and borrowings against the revohing credit agreement totalled $124,000,000, a decrease of $16,000,000 from March 31,1984. Such funds are available to the Delaware Company and its subsidiaries, but the Delaware Company and its subsidiaries are limited, principally as a result of credit agreement covenants, in their ability to transfer funds to International in intercompany loans, advances or cash dividends. At March 31,1985 ap-proximately $905,105,000 of the net assets of such subsidiaries were subject to such restrictions. It is not ex-pected that these restrictions will have any significant effect on International's liquidity. During the fisent year ended March 31,1985 McDermott International's outstanding borrowings under its short-term lines of credit and revolving credit agreements avewged $282,989,000. During fiscal 1985, McDermott International arranged a $157,000,000 fourteen and one half year term loan facility at an interest rate of 10.375% which will be used to finance certain capital expenditures and will be drawn down over a one and a half year period. The loan is secured by a portion of McDermott International's portfolio of government obligations which must amount to a fair market value of at least $108,645,000. Bor-rowings against this facility at March 31,1985 were $17,995,000. Also during fiscal 1985, the Delaware Company issued $150,000,000 aggregate principal amount of floating rate notes due 1992. Interest on these notes is at a rate of % of 1% per annum above the London Interbank Of-fered Rate. Net proceeds from this issue were $148,538,000 of which $77,925,000 was used by the Delaware Company to purchase at a discount $96,585,000 principal amount of the Delaware Company's 9-%% Sinking Fund Debentures due March 15,2004. The balance of the proceeds was used primarily to repay outstanding in-l debtedness to banks. For the fiscal year ended March 31,1985, working capital provided from operations, excluding an extraor-dinary gain on extinguishment of debt, was $203,357,000. During this same period, McDermott International expended $172,349,000 for additions to property plant and equipment and $66,473,000 for cash dividends on common stock. McDermott International maintains an investment portfolio of primarily government obligations which is held for long-term investment purposes. During the year, McDermott International increased this portfolio (net) by $80,744,000 to an amortized cost at March 31,1985 of $977,206,000 and a market value of $965,361,000. At March 31,1985 the ratio oflong-term debt to total common stock and other stockholders' equity was.61 as compared with.50 at March 31,1984 and.43 at March 31,1983. 21 a----. - - a.-- L

Itsm 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Company Report on Consolidated Financial Statements McDermott International has prepared the consolidated f~mancial statements and related financial informa-tion-included in this report. McDermott International has the primary responsibility for the financial statements and other financial information and for ascertaining that the data fairly reflect the financial posi-tion and results of operations of McDermott International. The financial statements were prepared in accor-dance with generally accepted accounting principles appropriate in the circumstances, and necessarily reflect estimates and judgments by appropriate officers of McDermott International with appropriate consideration j given to materiality. McDermott International believes that it maintains a system of internal accounting controls designed to pro-vide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to pnxiuce financial statements in accordance with generally ac-cepted accounting principles. The concept of reasonable assurance is based on the recognition that the cost of a system ofinternal control must not exceed the related benefits. Although accounting control procedures are designed to achieve these objectives, it must be recognized that errors or irregularities may nevertheless oc-cur. McDermott International seeks to assure the objectivity and integrity of its accounts by its selection of qualified personnel, by organizational arrangements that provide an appropriate division of responsibility and by the establishment and communication of sound business policies and procedures throughout the organiza-tion. McDermott International believes that its accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected. McDermott International's accompanying consolidated financial statements have been examined by its cer-tified public accountants, who provide McDermott International with expert advice on the application of U.S. generally accepted accounting principles to McDermott International's business and also provide an objective i assessment of the degree to which McDermott International meets its reponsibility for the fairness of financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures as they deem necessary to reach and express an opinion on the fairness of the financial statements. The report of the certified public accountants appears elsewhere herein. The Board of Directors pursues its responsibility for McDermott International's consolidated financial statements through its Audit Committee which is composed solely of directors who are not officers or employees of McDermott International. The Audit Committee meets periodically with the certified public ac-countants, management and the internal auditors to review matters relating to the quality of financial report-ing and internal accounting control and the nature, extent and results of the audit effort. In addition, the Audit Committee is responsible for recommending to the Board of Directors the engagement of certified public accountants for McDermott International, who in turn submit the engagement to the stockholders for i their approval. The certified public accountants, as well as the internal auditors, have free access to the Audit Committee. I May 28,1985 22 1

I R: port of C:rtified Public Account nts The Board of Direc ors and Stockholders 31cDermott International, Inc. We have examined the accompanying consolidated balance sheet of McDermott International, Inc. at 31 arch 31,1985 and 1984, and the related consolidated statements of income and retained earnings and changes in financial position for each of the three years in the period ended March 31,1985. Our examinations were made in accordance with generally accepted auditing standards and, accontingly, included such tests of the account-ing records and such other auditing procedures as we considered necessary in the circumstances. As discussed in Note 7 *o the financial statements, McDermott International, Inc. and 31cDermott Incorporated have been named as defendants in pending actions alleging violations of Sections 1 and 2 of the Sherman Act and various state laws. Additional similar claims may also be asserted. The ultimate amount of any liability that might result from such actions is not presently determinable. In our opinion, the financial statements mentioned above present fairly the consolidated results of operations and changes in fimancial position of McDermott International, Inc. for each of the three years in the period ended March 31,1985, and, subject to the effects of such adjustments, if any, as might have been required had the outcome of the uncertainty referred to in the preceding paragraph been known, the consolidated financial position at March 31,1985 and 1984, in conformity with generrdly accepted accounting principles applied on a consistent basis during the period. ARTilUR YOUNG & COMPANY New Orleans, Louisiana May 2S,1985 i 23

McDEIDIOTT INTEltNATIONAL, INC. CONSOLIDATED llALANCE SIIEET 31AllCII 31,1985 and 1984 ASSETS 1985 1984 On thousands) Current Assets: Cash 20,341 12,453 Short-term investments, principally time deposits at cost which approximates market 91,752 158,347 Accounts and notes rceeivable 852,372 778,458 Income taxes refundable 94,644 120,508 Contracts in progress 268,692 240,034 Inventories 253,303 234,160 Prepaid expenses 22,034 17,406 Total Current Assets 1,603,138 1,561,366 Property, Plant and Equipment, at Cost: Land 30,037 35,542 Buildings 247,545 249,057 31achinery and equipment 1,771,250 1,681,565 Property under construction 91,451 94,845 2,140,283 2,061,009 Less accumulated depreciation and amortization 986,625 933,499 Net Property, Plant and Equipment 1,153,658 1,127,510 Investments in Government Obligations, at Amortized Cost 977,206 896,462 Excess of Cost Over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization of $69,315,000 at 31 arch 31,1985 and $58,670,000 at March 31,1984 345,590 320,310 Other Assets 101,092 75,466 TOTAL $ 4,180,684 $ 3,981,114 See accompmying notes to consolidated financial statements. 24

LIABILITIES AND STOCKIl01.1) Ells' EQUITY 1985 1981 (In thousands) Current Liabilities: Notes payable to banks and current maturities of long-term debt 145,821 56,160 Accounts payable 286,967 198,683 Accrued employee benefits 127,840 125,988 Accrued interest payable 98,395 80,150 Accrued liabilities - other 350,859 322,914 Advance billings on contracts 189,614 224,922 Provision for warranty expense 78,027 100,919 U. S. and foreign income taxes 191,027 267,703 Dividends payable 16,622 16,604 Total Current Liabilities 1,485,172 1,391,073 Deferred and Non-Current Income Taxes 414,252 366,756 1smg-Term Debt 732,248 621,045 Other Liabilities 135.970 135,778 Contingencies 31inority Interest: Subsidiary's Redeemable Preferred Stocks: Series A $2.20 Cumulative Convertible, $1.00 par value; at redemption value 88,300 88,316 Series B $2.60 Cumulative, $1.00 par value; at redemption value 116.393 116,393 Other minority interest ' 5,440 7,010 Total 31inority Interest 210,133 211,719 Preferred Stock Common Stock and Other Stockholders

Equity:

Common stock, par value $1.00 per share, authorized 150,000,000 shares; outstanding 36,936,524 at 31 arch 31,1985 and 36,903,571 at 31 arch 31,1984 36,936 36,903 Capital in excess of par value 313,223 311,875 Retained earnings 892,880 928,686 Cumulative foreign exchange translation adjustments (40,130) (25,721) Total Common Stock and Other Stockholders' Equity 1,202,909 1,251,743 TOTAL $ 4,180f>84 $ 3,981,114 25

g McDERMOTT INTERNATIONAL, INC. ) CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS FOR Tile THREE FISCAL YEARS ENDED MARCll 31,1985 1985 1984 1983 On thousands) Revenues $ 3,233.871 $ 3,088,583 $ 3,707,767 Costs and Expenses: Cost of operations 2,892,930 2,488,718 3,096,375 1 Depreciation and amortization 148,946 180,985 141,380 Selling, general and j administrative expenses 300,774 297,997 290,935 3,342,650 2.967,700 3,528,690 Operating Income (Loss) (108,779) 120,883 179,077 Other Income (Expense): Interest income 145,661 114,346 97,601 . Interest expense (95,769) (80,741) (54,525) Equity in earnings of joint venture companies 4,488 3,218 (1,911) Other-net (894) (17.050) (47,928) 53,486 19,773 (6,763) Income (Loss) Before Provision For Income Taxes, Slinority Interest and Extraonlinary items (55,293) 140,656 172,314 Provision for(Benefit from) Income Taxes: Current (80,372) (87,044) 50,960 Deferred (9,241) 91,586 39,492 (89,613) 4,542 90,452 Income Before Minority Interest and Extraordinary Items 34,320 136.114 81,862 Minority Interest: Dividends on preferred stock of subsidiary 15,901 15,905 30,242 Other minority interest (561) (647) 1,098 Income Before Extraordinary items 18,980 120,856 50.522 Extraordinary items, net of income taxes 11,687 5,142 Net income 30,667 120,856 55,664 Retained Earnings Beginning of Year 928,686 874,209-881,760 Deduct: l Cash dividends - common (per share, $1.80 in 1985,1984 and 1983) 66,473 .66,379 63,215 l Retained Earnings, End of Year S 892,880 $ 928,686 $ 874,209 Earnings Per Common and Common Equivalent Share: Primary - Before Extraordinary Items 0.51 3.06 1,37 Extraordinary items 0.3* 0.14 Net Earnings 0.83 3.06 1.51 Fully Diluted - Before Extraordinary Items - 0.51 2.95 1.37 Extraordinary items 0.32 _ 0.14 Net Earnings 0.83 2.95 1.51 j 1 See accompanying notes to. consolidated financial statements.- 2fs I

o McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CIIANGES IN FINANCIAL POSITION 3 FOR THE TIIREE FISCAL YEARS ENDED MARCil 31,1985 t 1985 1981 1983 SOURCE OF FUNDS: Un thousands) Operations: Income before extraordinary items 18,980 120,856 50,522 Charges (credits) not affecting working capital: Depreciation and amortization 148,946 180,985 141,380 Deferred income taxes 70,823 26,908 20,832 Equity in earnings of joint venture companies, net of dividends received of $5,835,000 in 1985, $4,260,000 in 1984, and $399,000 in 1983 1,347 1,042 2,310 Tax benefit of operating loss carryforwards 1,725 5,142 Other - net (38,464) (3,634) 8,593 Working capital provided from operations excluding extraordinary gain 203,357 326,157 228,779 Extraonlinary gain 9,962 Issuance of common stock 798 916 644 Proceeds from sale and exchange of property, plant and equipment 39,428 16,863 32,671 Issuance of common stock warrants 25,100 Debentures issued in retirement of preferred stock 124,125 Gain on exchange by subsidiary of debentures for preferred stock 38,538 Long-term borrowing (including fluctuations under the revolving credit agreement) 431,183 175,506 162,528 Reduction in non-current assets and liabilities resulting from exchange rate changes 16,035 21/43 Other - net 13,695 36,967 41,261 -714,458 578,052 653,646 APPLICATION OF FUNDS: Purchase of government obligations - net 80,727 167,661 688,585 Additions to property, plant and equipment 172,349 147,875 190,177 Exchange by subsidiary of debentures for preferred stock 188,814 11,186 Premium on exchange of common stock in reorganization Reduction of long-term debt (including fluctuations under the revolving credit agreement) 212,585 30,137 180,826 Reduction of non-current income taxes 23,327 2,268 52,045 Cash dividends - 66,473 66,379 63,215 Foreign currency translation adjustments 14,409 25,721 Acquisition.of Coutinho: Non-current assets, principally property, plant and equipment and goodwill 99,690 Non-current liabilities, p-incipally long-term debt and pension liability (36,775) 763,785 490,091_ 1,374,848 NET INCREASE (DECREASE)IN WORKING CAPITAL $ (49.327) 87,961 $ (721,202) CHANGES IN COMPONENTS OF WORKING CAPITAL: Increase (decrease)in current assets: Cash and short-term investments (58,707) 27,242 $ (390,901) Accounts, notes and income tax refund receivable 48,050 123,153 (377,534) Contracts in progress 28,658 (19,928) (37,829) Inventories 19,143 (33,108) (100,529) Prepaid expenses 4,628 2,109 3,304 41,772 99,468 (903,489) Increase (decrease) in current liabilities: Notes and accounts payable and accrued liabilities 225,957 36,417 (78,696) Advance billings on contracts (35,308) (97,243) (76,249) Provision for warranty expense (22,892) 4,556 (1,296) U.S. and foreign income taxes (76,676) 67,761 (25,496) Dividends payable 18 16 (550) 91,099 11,507 (182,287) NET INCREASE (DECREASE) IN WORKING CAPITAL $ -(49,327) 87,961 $ (721,202) 27 See accompanying notes to consolidated financial statements.

alcDER3tOTT INTERNATIONAL. INC. NOTES TO CONSOLIDATED FINANCIAL STATE 3 TENTS FOR THE TilREE FISCAL YE 4 RS ENDED SIARCil 31,1985 NOTE 1 SU3131ARY OF SIGNIFICANT ACCOUNTING POLICIES i Principles of Consolidation The consolidated financial statements are presented in U.S. Dollars in accordance with accounting principles generally accepted in the United States and include the accounts of SicDermott International, Inc. and all significant subsidiaries. Investments in joint-venture companies (20% to 50% owned) are accounted for on the equity method. All significant intercompany transactions and accounts have been eliminated. Under a reorganization during the fiscal year ended 3tarch 31,1983, McDermott International, Inc. tweame the parent comp;my of the McDermott Group of companies which includes McDermott Incorporated which prior to the reorganization was the parent company. Unless the context otherwise requires, hereinafter " International" will be used to mean McDermott Interna-tional, Inc., a Panama corporation, the " Delaware Company" will be used to mean McDermott Incorporated, a Delaware corporation, and "McDermott international" will be used to mean the consolidated enterprise. Certain amounts previously reported have been reclassified to conform with the presentation at March 31, 1985. t Contracts and Revenue Recognition Contract revenues and related costs for marine construction services, power generation systems and equip-ment, and the engineering and construction services of the trading segment of McDermott International are principally recognized on a percentage of completion method for individual contracts or components thereof-based upon work performed or the ratio of costs incurred to total estimated costs, as applicable to the pnxluct or activity involved. Revenues and re!ated costs so reconfed, plus accumulated contract cost that exceeds amounts invoiced to customers under the terms of the contract are included in contracts in progress. Billings that exceed accumulated contract costs and revenues and costs recognized under percentage of completion are included in advance billings. Most long-term contracts have provisions for progress payments. Contract price and cost estimates are reviewed periodically as the work progresses and adjustments proportionate to the percentage of completion are reflected in income in the perial when such estimates are revised. Provisions are made currently for all known or anticipated losses. Claims for extra work or changes in scope of work are included in contract revenues when collection is probable. International and certain of its subsidiaries keep books and file tax returns on the completed contract method of accounting. l McDermott International is usually entitled to financial settlements relative to the individual circumstances of deferrals or cancellations of power generation systems and equipment contracts. McDermott International does not recognize such settlements or claims for additional compensation until final settlement is reached. ) Included in accounts and notes receivable are amounts representing retainages on contracts as follows: 1985 1981 (In thousands) t Retainages 8 172.093 $ 189.950 Retainages expected to be collected after one year 8 72,859 $ 74.244 Revenues for trading are recognized as individual trades are completed. For trades-in-progress, provisional billings to customers net of costs incurred are carried in the current liabilities section of the balance sheet as advance billings on contracts. 28 ww+, -en v, .-v -~c n~~ ~, - --

' Depreci: tion,31:intsnince cnd R:p irs and Drydocking Expenses Property, plant and equipment is depreciated on the straight-line method, using estimated economie useful lives of 8 to 40 years for buildings and 2 to 28 years for machinery and equipment. 3 aintenance, repairs and renewals which do not materially prolong the useful life of an asset are expensed as incurred except for drydocking costs for the marine fleet, which are estimated and accrued pro rata over the period of time between drydockings, and such accruals are charged to o[wrations currently. Investments in Government Obligations At 5tarch 31,1985 31cDermott International held $977,206.000 (amortized cost) of primarily government securities as a long-term investment, as compared to $896,462,000 (amortized cost) at Starch 31,1984. These securities are carried at amortized cost, as in management's opinion there is no permanent loss in value of the portfolio, and there is no present intention to liquidate the securities at less than cost. The market value of these securities was $965,361,000 and $S46,799,000 at Starch 31,1985 and Alarch 31,1984, respectively. The face amount at 3Iarch 31,1985 was $959,140,000. Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased Businesses The excess of the cost of AlcDermott International's investments in The Babcock & Wilcox Company (B&W) and Coutinho, Caro and Co. KGaA ("Coutinho") over the fair value of net assets acquired is being amortized l on a straight-line basis over forty years and twenty years, respectively. Excess cost arising from business com-binations prior to 1971 which amounts to $6,264,000 is not being amortized because, in the opinion of manage-ment, there has been no diminution in value. Warranty Expense 31cDermott International provides for estimated future warranty expense which may be required to satisfy contractual requirements, primarily of the power generation systems and equipment segment. Such provi-sions are accrued relative to revenue recogmtion on the respective contracts. In addition specific provisions are made where the costs of warranty are expected to significantly exceed such accruals. Research and Development The cost of research and development which is not performed on specific contracts is charged to operations as incurred. Such expense was $41,100,000, $34,600,000 and $37,600,000 in fiscal 1985,1984 and 1983, respec-tively. In addition, expenditures on research and development activities of approximately $41,600,000, $27,000,000 and $36,400,000 in fiscal 1985,1984 and 1983, respectively, were paid for by customers of McDer-mott International. Capitalization of Interest Cost In fiscal 1985,1984 and 1983 total interest cost incurred was $100,036,000, $88,159,000 and $61,671,000, respectively, of which $4.267,000,87,418.000 and $7,146,000 was capitalized. Foreign Currency Translation Effective April 1,1983, 31cDermott International adopted FASB Statement No. 52, on Foreign Currency Translation. Under that Statement, for certain foreign operations, all balance sheet accounts other than stockholders' equity are translated into U.S. Dollars at current exchange rates, and income statement items are translated at average exchange rates for the year;resulting translation adjustments are recorded in a separate component of stockholders' equity. Certain other foreign currency transaction adjustments continue to be reported in income. The financial statements prior to April 1,1983 have not been restated and were translated in accordance with FASB Statement No 8. The impact of adopting FASB Statement No. 52 in fiscal 1984 was not material. Included in other income (expense) are transaction losses of $5,645,000 and $15,334,000 for fiscal 1985 and 1984, respectively, and transaction / translation losses of $9,286,000 for fiscal 1983. 29

Adoption of the Statement resulted in establishing a cumulative foreign exchange translation adjustments ac-count as part of stockholders' equity. The analysis of changes in this account is as follows: tin thousands) Balance 51 arch 31,1983 Adjustments to opening balance at April 1,1983 (17,885) Translation adjustments for fiscal 1984 (7,836) Balance 51 arch 31,1984 (25,721) Translation adjustments for fiscal 1985 (14,409) Balance 5! arch 31,1985 (40,130) Earnings Per Share Primary earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the year. Fully diluted earnings per share include the dilutive effect of convertible preferred stock, debentures and warrants. NOTE 2 - ACQUISITION On April 10,1984, International acquired Coutinho in a business combination accounted for as a purchase. The total cost of acquisition was $80,798,000, which exceeded the fair value of the net assets of Coutinho by $42,646,000, based on exchange rates in effect at 5! arch 31,1984, in onfer to provide for a timely consolida-tion, Coutinho's assets and liabilities at December 31,1984 have been included in SicDermott International's Consolidated Balance Sheet at 51 arch 31,1985. The operations of Coutinho for the period April 1,1984 through December 31,1984 have been included in SicDermott international's Consolidated Statement of In-come and Retained Earnings for the fiscal year 1985. Assuming that Coutinho had been acquired at the beginning of fiscal 1984.unaudited proforma combined revenues would have been $3,348,189,000 and $3,669,124,000 in fiscal 1985 a6d 1984, respectively. Combined proforma earnings and earnings per share would not have beer materially different from the reported amounts. NOTE 3 - INVENTORIES Inventories are carried at the lower of cost or market. Cost is dett rmined on an average cost basis except for certain construction materials inventories, for which the last in first-out (LIFO) method is used. The cost of approximately 6% of totJL1 inventories was determined using the LIFO method at Alarch 31,1985 and Starch 31,1984. Consolidated mventories at Starch 31,1985 and 1984 are summarized below: 1985 1984 (In thousands) Raw 51aterials and Supplies $ 94,140 $ 82,981 Work in Progress 112,192 111,560 Finished Goods 46,971 39,619 $ 253,503 $ 234,160 NOTE 4 - PFNSION PLANS AND POSTRETIRE31ENT BENEFITS Pe tsion Phns 31cDermott International provides retirement benefits, primarily through non-contributory pension rians, for substantially all of its regular full time employees, except certain non resident alien employees of foreign subsidiaries who are not citizens of a European Common Starket country or w ho do not earn 5come in the United States, Canada, or the United Kingdom. McDermott International's policy is to fund the amounts expensed. Total pension expense was $68,657,000, $72,194,000, and $84,557,000 in fiscal 30

1985,1984 and 1983, respetively, which includes amortization of prior service costs over pericxis of 30 and 40 years. The following table presents information regarding the financial condition of McDermott International's pension plans as defined in FASB No. 36 and estimated by McDermott International and its consulting actuaries on that basis: January 1, 1984 1983 (in thousands) Actuarial present value of accumulated plan benefits: Vested $ 618,132 $ 515,148 Nonvested 76,182 70,757 Total $ 694,314 $ 585,905 Net assets available for benefits $ 944,724 $ 857,690 The assumed rate of return used in determining the actuarial present value of accumulated plan benefits was 9% and 9W% at January 1,1984 and January 1,1983, respectively. Postretirement Health Care and Lsfe Insurance Benefits McDermott International offers postretirement health care and life insurance benefits to substantially all of its retired regular full time employees, except cer-tain non-resident alien retired employees who are not citizens of a European Common Market country or who, while employed, did not earn income in the United States, Canada or the United Eingdom. McDermott Inter-national shares the cost of providing these benefits with nll affected retirees. McDemott International's cost of providing such benefits is recognized by expensing the insurance programs' pre:niums and the self-insured programs' claims as paid. The aggregate amount so expensed totaled $8,503,000,46,754,000 and $5,056,000 m fiscal years 1985,1984 and 1983, respectively. McDermott International har made no provision for recognizing the cost of postretirement benefits which may eventually be paid to er: ployeer who have not yet retired. NOTE 5 INCOME TAXES Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted. All ineome has been earned outside of Panama and McDermott International is not subject to in-come tax in Panama on income earned outside of the country Therefore, there is no expected relationship be-tween the provision for, or benefit from, income taxes and income or less before income taxes. Income is earned within and subject to the taxation laws of various countries, each of which has a regime of taxation which varies from that of any other country (not only with respect to nominal rate but also with respect to the allowability of deductions, credits and other benefits) and the proportional extent to which income is earned in, and subject to tax by, any particular country or countries varies from year to year. The provision for (benefit from) income taxes consists of: 1985 1984 1983 Current Deferred Current Deferred Current Deferred (In thousands) U.S. Federal $ (108,851) 9,133 $ (131,657) $ 69,199 $ 13,774 15,884 U.S. - State & Local 2,239 (3,926) (6,815) 10,589 642 3,973 Other than U.S. 26,240 (14.448) 51,428 11,798 36,544 19,635 8 (80,372) (9,241) $ (87,044) $ 91,586 $ 50,960 $ 39,492 31 4

The provision for (benefit from) U.S. federal income taxes in 1984 and 1983 includes taxes on income from government obligations, such income of which is included below in Other than U.S. The provision for (benefit from) income taxes is based on income before provision for income taxes as follows: 1985 1981 1983 (In thousands) U.S. $ (224,916) $ (128,431) 11,850 Other than U.S. 169,623 2ti9,087 160,464 $ (55,293) $ 140,656 $ 172,314 investment tax credits, accounted for on the flow-through method, utilized in fiscal 1985,1984 nnd 1983, were $6,445,000, $12,609,000 and $7,293,000, respectively. Extraordinary items in 1985 and 1983 include. tax benefits of $1,725,000 and $5,142,000. respectively, arising from the utilization of operating loss carryforwards. See Note 6 reganling income taxes provided on extraor-dinary gains arising from extinguishment of debt. Deferred income taxes are provided in the financial statements due to timing differences between financial and taxable income. The principal timing differences in recognizing certain revenues and expenses for tax return and financial statement purposes and their effect on the provision for deferred income taxes were: 1985 1981 1983 On thousands) Long term contracts, primarily on the completed contract method for tax purposes $ (22,061) $ 71,482 18,148 Excess tax over financial depreciation 33,612 21,615 25,696 Warranty expense 8,903 (7,650) 209 Reserve for loss on facility closings and dispositions 5,600 (8.647) (10,774) Purchased tax benefits 6,520 10,856 14.050 Interest on proposed tax deficiencies (6,990) (10,831) (7,842) Deferred gain (loss) on casualty (8,015) 7,644 Supplemental coupensation 552 (1,721) 4,493 Antitrust settlement 4,074 (4,074) Pension expense (25,574) 11,471 Interest capitalized on assets constructed 1,408 3,517 1,327 Reserve for self insura' ice (9,295) (840) 2,101 State tax loss carryforwards net of federal tax (3,207) Other 1,291 6.275 (11,486) (9,241) $ 91,586 $ 39,492 Undistributed income of consolidated subsidiaries included in retained earnings at 31 arch 31,1985 amounted to approximately $98,214,000, No provision for taxes on such income has been made in the consolidated financial statements as it is International's intention to indefinitely reinvest said undistributed income in the subsidiaries. The Internal Revenue Service has proposed substantial additional taxes relating to years prior to Starch 31, '1982 which 31cDermott International is contesting. 31cDermott International believes that the outcome of any income taxes ultimately assessed on the basis of such notices will not have a material mlverse effect on its con-solidated financial statements. 32

NOTE 6 - LONG-TERM DEBT Long-term debt consists of: 1985 198i__ On thousands) Unsecured Debt: 8.27% Note due 19111 $ 45,000 $ 45,000 10.20% Sinking fund debentures due 1999 with annual sinking fund installments of $2,500,000 37,550 39,450 9.40% Notes due 1984 35,000 10% Subordinated debentures ($149,923,000 face amount in 1985) due 2003 with annual sinking fund installments of $15,000,000 beginning 1994 125,426 124,748 95/ % Sinking fund debentures due 2004 with annual sinking fund installments of $9,850,000 beginning 1990 53,415 150,000 6.80% Pollution control revenue bonds due 2009 with annual sinking fund installments of . $4,250,000 beginning 2006 17,000 17,000 8%% Note payable $3,960,000 annually to 1997 48,120 52,0S0 l 9% Not< payable $3,300,000 annually to 1991 23,600 26,900 9% No; t nyable $1,650,000 annually to 1996 20,050 21,700 Floating rate note, due four hundred calendar days after demand, interest at daily federal funds rate plus 1.10% (9 68% inclusive at March 31, li)S5) 35,000 Floating cate i,otes due 1992 ($150,000,000 face value) 149,438 Line of emlit revolver loans 124,000 140,000 Other notes payable through 2009 17,017 1,563 Secured Debt: 10.375% Note payable (3157,000,000 fourteen and one half year term loan facility) 17,995 Capitalized lease obligations 18,496 1,315 Other notes payable through 1996 14.192 12,165 746,299 666,921 Less due within one year 14,051 45,876 $ 732,248 $ 621,045 I

l l' At 51 arch 31,1985,51cDermott International had available a $200,000,000 line of credit under a Revolving Credit and Term Loan Agreement (the Credit Agreement dated June 15,1981). 31cDermott International may elect to borrow at the prime rate,1/2 of 1% plus the mean of certain London Interbank Offered Rates for three month Eurodollar deposits (LIBOR), or 1/2 of 1% plus the certificate of deposit rate. Preliminary agreement has been reached with the Agent Bank whereby all outstanding borrowings under the Credit Agreement dated June 15,1981 will be converted to a successor Credit Agreement dated June 1,1985. Terms, conditions, and covenants of the auccessor agreement are anticipated to be similar to the agreement in effect at March 31, 1985. Pursuant to the successor Credit Agreement on June 15,1989, all outstanding borrowings will convert to a term loan, payable in sixteen equal quarterly installments and bearing interest at the applicable rate of 1/4 of 1% plus the prime rate,3/4 of 1% plus LIBOR, or 3/4 of 1% plus the certificate of deposit rate, to maturity at June 30,1993. SicDermott International pays a commitment fee at the rate of 3/8 of 1% and a fee of 5% of the prime p r annum on the unused portion. As of Starch 31,1985, $124,000,000 wa, outstanding under the facil-ity at the following respective rates: $45,000,000 borrowing at 9.7%, $31,000,000 borrowing at 942%, and $45,000,000 borrowing at 9.53%. l During fiscal 1985, SicDermott International arranged a $157,000,000 fourteen and one half year term loan facility at an interest rate of 10.375% which will be used to finance certain capital expenditures and will be drawn down over a one and a half year period. The loan is secured by a portion of SIcDermott Internathnal's portfolio of government obligations which must amount to a fair market value of at least $108,645,000. Bor-rowings against this facility at Starch 31,1985 were $17,995,000. The principal is repayable in twenty ascend-ing payments commencing after expiration of a three year grace period. Also during fiscal 1985, the Delaware Company issued $150,000,000 aggregate principal amount of floating rate notes due 1992. Interest on these notes is at a rate of 1/8 of 1% per annum above LIBOR (9.4375% at 51 arch 31,1985). Net proceeds from this issue were $148,538,000 of which $77,925,000 was used by the Delaware Company to purchase at a discount $96,585,000 principal amount of the Delaware Company's 9 5/8% Sinking Fund Debentures due Alarch 15,2004. This purchase, together with a minor debt extinguish-ment, resulted in an extraordinary gain of $9.962,000 net of current income taxes of $8,486,000. The balance of the proceals was used primarily to repay outstanding indebtedness to banks. Staturities of long-term debt during the five fiscal years subsequent to Starch 31,1985 are as follows: 1986 l -$14,051,000; 1987 $20,667,000; 1988 - $17,617,000; 1989 - $16,904,000; 1990 - $39,102,000. Certain consolidated subsidiaries and affiliated companies are restricted, principally as a result of credit i agreement covenants, in their ability to transfer funds to International through intercompany loans, advances or cash dividends. At Starch 31,1985, approximately $905,105,000 of the net assets of such subsidiaries and af-filiated companies were subject to such restrictions. It is not expected that these restrictions will have any significant practical effect on SicDermott International's liquidity. 1 A certain debt agreement contains among other things, requirements as to maintenance of net worth and limitations on the incurrence of future borrowings. Under the most restrictive of these requirements at 31 arch 31,1985, future borrowingr were restricted in an amount equal to $413,072,000. i' international and certain of its subsidiaries at 31 arch 31,1985 had available unused short term lines of credit from various banks totalling approximately $273,523,000. NOTE 7 CONTINGENCIES AND C051511T51ENTS I Litigation - On December 14,1978, a United States Federal grand jury in New Orleans, Louisiana indicted the Delaware Company, Brown & Root, Inc. (" Brown & Root") and certain of their officers on charges of conspir-ing to allocate contracts and to fix prices and contract terms for marine construction projects in violation of Section 1 of the Sherman Act and other U.S. Federal statutes. On the same day the Delaware Company and Brown & Root each pleaded nolo contendere to the Sherman Act charges and were each fined $1,000,000. In Starch and April 1979, four officers, including a former chief operating officer and a former chief executive of-ficer of the Delaware Company (all but one of whom were directors of the Delaware Company), pleaded nolo d contendere to the Sherman Act charges and certain related charges of mail fraud and wire fraud. The Delaware Company and Brown & Root (and in some cases, International and certain former officers of the l Delaware Company and International) have been named as defendants in 79 actions which have been filed in l or(unless earlier terminated) transferred to the United States District Court for the Eastern District of Loui-siana instituted by or on behalf of purchasers and alleged purchasers of marine construction services in the United States and abroad alleging a combination and conspiracy to restrain or eliminate competition in marine construction in violation of Sections 1 and 2 of the Sherman Act and various state laws through a conspiracy to allocate contracts, fix prices and contract terms and other means. Plaintiffs seek treble damages and other relief for injuries allegedly sustained, in some cases dating back to the mid-1950's. Other private parties have received waivers of the statute of limitations, and these parties may assert additional treble damage claims 34

1 l against the Delaware Company and International. To date, all but two of these actions have teen settled in i principle or dismissed pursuant to settlement or otherwise; the Delaware Company and International have paid or agreed to pay a total of approximately $65,000,000 in settlemeat of purchasers' claims. The Delaware Company and International have filed answers denying the material allegations of wrongdoing, and counterclaims in the remaining two actions. Discovery is proceeding in these cases and the plaintiffs have requested a triallate this year or early next year. It is not possible at this time to predict the outcome of the re-I maining claims, or to estimate the amount or range of any potential loss, execpt to state that the outoome ef such claims could have a material adverse effect on International and the Delaware Company. International and certain of its officers, directors and subsidiaries are defendants in numerous other legal pro-ceedings. 31anagement and general counsel believe that the outcome of these proceedings will not have a material adverse effect upon the consolidated financial statements. Operating Leases Future minimum payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at Starch 31,1985 are as follows: 1986 - $19,278,000; 1987 -$15,588,000; 1988 $11,727,000; 1989 - $8,845,000; 1990 $5,850,000; and thereafter - $39,436,000. Future minimum lease payments and leased property under capital leases are not material. Total rental expense for fiscal 1985,1984 and 1983 was $116,644,000, $105,939,000 and $131,851,000, respectively. These expense figures include contingent rentals and are net of sublease income, both of which are not material. Other - SIcDermott International performs significant amounts of work for the U.S. Government under both prime contracts and subcontracts and thus is subject to continuing reviews by governmental agencies. Firm and contemplated commitments for capital expenditures amounted to approximately $290,000,000 at Starch 31,1985. 31cDermott International is also considering a number of alternative capital improvements to existing facilities w hich may cause certain other facilities to become obsolete. SicDermott International is contingently liable under standby letters of credit totalling $253,666,000 issued in the normal course of business. NOTE 8 - SUBSIDIAltY'S IIEDEE31AHLE PitEFEltitED STOCKS At 3farch 31,1985 and 1984,13,000,000 shares of Delaware Company preferred stock, with a par value of $1 per share, were authorized. Of the authorized shares,2,825.556 and 3,721,629 shares of Series A and Series B Preferred Stock, respectively, were outstanding et 31 arch 31,1985 and 2,826,165 and 3,724,629 shares, respectively, were outstanding at Starch 31,1984. The outstanding shares are entitled to $31.25 per share in liquidation. The outstanding shares were issued in connection with the acquisition of H& W and are stated at the mandatory redemption value which approximated market value at the time the shares were issued. Both series of preferred stock are entitled to general voting rights of one-half vote for each share. The Board of Directors of the Delaware Company may authorize additional series of preferred stock and may set terms of each new series except that the Delaware Company cannot create any series of stock senior to the existing Series A and Series H Preferred Stock without the consent of the holders of at least 50% of the shares of such preferred stock. Each share of the outstanding Series A Preferred Stock is convertible into one share of common stock of International plus $0.10 cash. The shares are redeemable at the option of the Delaware Company on or after 3tarch 31 of each of the following years, at the following prices, plus accruni dividends: 1985 - $32.72; 1986 - $32.35; 1987 - $31.97; 1988 $31.62; and 1989 through 2008 $31.25. On Starch 31,1989 and each subsequent year through Slarch 31,2008, the Delaware Company is obligated to redeem, at a redemption price of $31.25 plus accrued dividends,5% of the number of shares which are issued at December 31,1988. Based on the number of shares issued at 3farch 31,1985, the obligation to redeem Series A Preferred Stock is $9,804,000 for each of the fiscal years 1989 and 1990. Series B Preferred Stock is redeemable at the option of the Delaware Company on or after 31 arch 31 of each of the following years, at the following prices plus accrued dividends: 1985 $31.75; 1986 - $31.50; and 1987 through 2008 - $31.25. For the periods Starch 31,198G through Slarch 31,1995, Starch 31, 1996 through 3farch 31,2006, and Starch 31,2007 through Starch 31,2008, the Delaware Company is obligated to redeem during each year shares of Series B Preferred Stock equal to 5%,4% and 3%, respectively, of the number of shares which are issued at December 31,1985. Based on the number of shares issued at Starch 31,1985, the obligation to redeem Series B Preferred Stock is $9,871,000 for each of the fiscal years 1986,1987,1988,1969 and 1990. Additional shares of Series A or Series B Preferred Stock, equal to the number of shares the Delaware Com-pany is obligated to redeem, may be redeemed on each mandatory redemption date by the Delaware Company, on a non-cumulative basis, The Delaware Company may apply to the mandatory sinking fund obligations any 35

1 1 Series A or B Preferred Stock owned, previously redeemed or surrendered for conversion which have not been previously credited against the mandatory sinkmg fund obligations. At Starch 31,1985 2,869 shares of Series A Preferred Stock have been converted and tne Delaware Company owned 3,449,128 and 2,592,916 shares of Series A and Series B Preferral Stock, respectively. NOTE 9 - CAPITAL STOCK Common Stock Changes in common stock during the three years ended Starch 31,1985 are summarized as follows: Capital in Par Excess of Shares Value Par Value (In thousands escept for share data) Balance,3Iarch 31,1982 36,799,839 36,800 $ 255,998 Issuance of Warrants 25,100 Conversion of 4-3/4% convertible subordinated debentures 36,830 37 183 Shares issued upon conversion of Series A $2.20 cumulative convertible preferred stock 5,322 5 161 Shares issued upon exercise of stock options 19,502 19 239 Premiu'n on exchange of common stock in reorganization (11,186) Gain on exchange of preferred stock for debentures 38,538 Deferred career executive stock plan expense 1,209 Balance 3Iarch 31,1933 36,861,493 36,861 $ 310,242 Shares issued upon eenversion of Series A $2.20 cumulative convertible preferred stock 2.260 2 72 Shares issued upon exercise of stock options 39,368 40 796 Shares issued upon exercise of warrants 1,330 1 29 Deferred career executive stock plan expense (net of forfeitures) (850) (1) 736 Balance,3! arch 31,1984 36,903.571 36.903 $ 311.875 Shares issued upon conversion,f Series A 92.20 cumulative convertible preferred stock 609 1 18 Shares issued upon exercise of stock options 31,284 31 739 Shares issued upon exercise of warrants 2,600 2 53 Deferred career executive stock plan expense (net of forfeitures) (1,540) (1) 538 i Balance, Starch 31,1985 36,936,524 36,936 $ 313,223 36

At March 31,1985 and 1984,10,773,021 and 10,921,991 shares of common stock, respectively, were reserved for issuance in connection with exercise of warrants, the 1974 Career Executive Stock Plan, exercise of stock options, the 1983 Long-Term Performance incentive Compensation Program and conversion of Series A Preferred Stock. International Warrants - At March 31,1985 International had outstanding warr mts to purchase 5,996,070 shares of its common stock exercisable by the payment per share of $25 cash or $25 principal amount of the Delaware Company's 10% Subordinated debentures due 2003. The International warrants expire on April 1, 1990 oras early as April 1,1988 if the International common stock trades at not less than 125% of the warrant exercise price for a specified period of time. Stock Options - In connection with the acquisition of B&W, options granted under a lhW stock option plan became options to purchase two shares of the Delaware Company's common stock. This plan was adopted as a plan of International effective March 15,1983. All options outstanding under this plan are non-qualified stock options and no additional options will be granted under the plan. Options were granted at an option price equal to at least 100% of the fair market value on the date of grant (adjusted to October 31,1974 closing price for op-tions issued prior to that date). Changes in the number of shares covered by the stock option plan during the three years ended March 31,1985 are as follows: Outstanding and Number of Option Price Exercisable Shares Per Share Total Balance March 31,1982 91,992 84b 00Kn Exercised 19,502 $6.813 - $9.688 176,009 Expired 1,450 $6.813 - $9.688 14,000 Balance, March 31,1983 71,040 658.000 Exercised 23,755 $6.813 - $9.688 214,000 Expired 200 $6.813 1,000 Balance. March 31,1984 47.085 413,000 Exercised 11,460 $6.813 S9.688 98,000 Balance, March 31,1985 35,625 345,000 Long-Term Perthemance incentire Congwnsation Pn> grams Under the 1983 program which was adopted February 8,1983, the Career Executive Stock Plan Committee (the " Committee") may grant to the officers and key employees options to purchase in the aggregate up to 2,000,000 shares of common stock at 100% of the fair market value on the date of grant. Effective March 15,1983, the 1980 program which was substan-tially the same as the 1983 program was terminated and all outstanding stock options and stock appreciation rights were cancelled. Under the 1983 program, options are exercisable not less than one year and not more than ten years after the date of grant. The Committee may grant stock appreciation rights in connection with the granting of options under the program. Such stock appreciation rights permit the holders thereof to sur-render exercisable options in exchange for shares of common stock having a fair market value on the date of such surrender equal to the excess (up to, but not greater than, the fair market value of the underlying shares on the date of grant) of the fair market value on such date of the shares to which such surrendered option relates over the aggregate option price under the related options. The Committee may, at its discretion, grant holders of stock appreciation rights the right to receive up to 50% of such excess in cash in lieu of shares of common stock. The program also authorizes the Committee to grant performance umt awants which are earned by the achievement of performance standards established by the Committee. Performance units are paid in cash or shares of common stock or both at the discretion of the Committee. At March 31,1985 and 1984 stock option and stock appreciation rights awards of 309,590 and 362,165 shares, respectively, were outstand-ing at an average price of $18.125 per share under the 1983 program. During 1985 and 1984, no stock options or stock appreciation rights were awarded under the 1983 program. Awards relating to 2,030 and 15,935 shares were forfeited during 1985 and 1984, respectively. Charges (credits) to income with respect to stock ap-preciation rights and performance units were $(1,891,000), $5,030,000 and $0 during fiscal 1985,1984 and 1983, respectively. 37 . =

Career Executive Stock Plan - This plan, which was adopted as a plan of International effective Starch 15, 1983, originally authorized 600,000 shares of common stock to be issued to eligible employees in consideration of their services. Employees granted stock under the plan pay $1.00 per share as the option purchase price. Restrictions with respect to issued shares lapse in approximately equal amounts on the second through tenth anniversary dates of the date of issuance. The cost of the plan, based on fair market value on the date of is-suance of common stock, is amortized over a ten year period following the date of issuance. Unamortized career executive stock plan expense included in capital in excess of par value at Starch 31,1985,1984 and 1983 amounted to $965,000, $1,548,000 and $2,307,000, respectively. Upon forfeiture of stock by employees, previous expense attributable to unrested stock is emlited to income. During 1985 and 1984,1,540 and 880 shares, respectively, were forfeited under the plan. As of June 30,1984, no further awanis could be made under the plan. Charges to income under the plan were $538,000, $736,000 and $1,209,000 during fiscal 1985, 1984 and 1983, respectively. International Preferred Stock - At Starch 31,1985 and 1984, 35,000,000 shares of preferred stock were authorized and International had issued 100,000 shares of Series A participating prefermi stock (the " Par-ticipating Prefermt Stock") and 100,000 shares of Series B non voting prefermi stock (the "Non-Voting Preferred Stock"), all of which are owned by the Delaware Company. The annual per share dividend rates for the Participating Prefermi Stock and the Non-Voting Preferred Stock are $10 (but no more than ten times the amount of the per share dividend on International common shares) and $20, respectively, payable quarter-ly, and dividends on such shares are cumulative to the extent not paid. In addition, shares of Participating Pre-ferred Stock are entitled to receive additional dividends whenever dividends in excess of $3.00 per Interna-tional Share are declaml(or deemed to have been declami) in any fiscal year. The Participating Prefermi Stock, as a class, shall be entitled to an aggregate number of votes equal to 10% of the total number of votes entitled to be cast on any matter by the stockholders of International. The issuance of additional International preferred stock in the future and the specific terms thereof, such as the dividend rights, conversion rights, voting rights, redemption prices and similar matters, may be autho-rized by the Board of Directors of International without stockholder approval, except to the extent such ap-proval may be miuimi by applicable rules of the New York Stock Exchange or applicable law. If additional prefermi stock is issued, such additional shares will rank senior to International common stock as to dividends and upon liquidation. NOTE 10 - SEG11ENT REPORTING SIcDermott International operates primarily in four industry segments marine construction services; power generation systems and equipment; engineemt materials; and trading. 31arine construction services principally involve construction of specialimi offshore platforms and marine pipelnes used for development drilling, production and transportation of oil and gas. Power generation systems and equipment include individually engineem! complete fossil fuel boilers, nuclear steam systems, nuclear fuel and nuclear fuel assemblies, replacement parts and customer services and associated equipment for electric utility applications as well as fossil fuel boilers for industrial processes and power generation. Engineered materials consist of tubular and insulating products designed and manufactured from basic and raw materials. Tubular products indude stainless, alloy and carbon steel, seamless and welded tubes and tubular and solid shapes, extrusions, special metal tubes, and seamless rolled rings. Insulating products in-clude kaolin clays, specially engineeml and vacuum formed ceramic fibers, insulating and specialty firebrick, fire protection insulation, plastics, mortars, castables and special oxide refractories. Trading consists primarily of buying and selling iron and steel products, chemical products, paper products, cables and equipment for electric power distribution, tools, machinery and utility vehicles, as well as the engineering and construction operations of Coutinho. Identifiable assets by industry segment are those assets that are used in operations in each segment. Cor-porate assets are principally cash, short-term investments and marketable securities. Intersegment sales are accounted for at prices which are generally established by reference to similar transac-tions with unaffiliated customers. Revenues attributable to transactions with unconsolidated joint venture companies were $22,327,000, $20,172,000 and $25,960,000 in fiscal 1985,1984 and 1983, respectively. In addition, interest income of $10,160,000 or, a note from a joint venture company and a gain of approximately $5,100,000 on the sale of cer-tain fixed assets to joint venture companies were recognimi in fiscal year 1985. 38 f

In fiscal 1985 and 1984, the U.S. Government accounted for approximately 13% of total revenues. These revenues are included in the Power Generation Systems and Equipment segment. Operating income (loss) does not reflect provisions of $3,807,000, $41,398,000 and $42,300,000 made by McDermott International in fiscal 1985,1984 and 1983, respectively, to cover the closing of certain of its marine, power generation systems and equipment and engineered materials facilities and the disposition of its automated machine and machine tools proluct lines. Such provisions are included in the other income (ex-pense) section of the income statement as other-net. Operating income (loss) in fiscal 1984 includes amounts of $27,996,000 in marine construction services and $3,560,000 in engineered materials, for accelerated depreciation on equipment which was considered to be obsolete and have diminished cost ef fectiveness. Segment Information For the Three Fiscal Years Ended March 31,1985. 1. Information about McDermott international's Operations in Different Industry Segments. (In thousands) 1985 1984 1983 Hevenues(l) Marine Construction Services $ 1,045,938 $ 1,191,349 $ 1,605,194 Power Generation Systems & Equipment 1,413,481 1,579,327 1,738,747 Engineered Materials 385,592 373,778 437,179 Trading 435,924 Intersegment Transfer Eliminations (47,064) (55,871) (73,353) Total Revenues $ 3,233,871 $ 3,088,583 $ 3.707,767 Operating Income (Loss)(3) Marine Construction Services (8.293) 91,121 124,995 Power Generation Systems & Equipment 15,345 135,477 126,152 Engineered Materials (39,843) (19,222) 2,009 Trading (5,252) Total Operating Income (Loss) (38,043) 207,376 253,156 (1) Total revenues include intersegment transfers as follows: Power Generation Systems & Equipment 607 334 427 Engineered Materials 41,961 55,53, 42,926 Trading 4,490 Total 47,064 55,871 73,353 (2) Reconciling items betwetn Operating Income (Loss) and Income (Loss) Before Provision for Ineome Taxes, Minority Interest and Extraordinary items are General Corporate Expenses and Other Income (Expense). 39

l l (In thousands) 1985 1984 1983 - Capital Expenditures l Marine Construction Services 107,514 54,158 113,966 Power Generation Systems & Equipment 39,212 28,049 24,523 Engineered Materials 21,693 62,436 41,932 Trading 550 r Corporate 3,380 3,232 9,756 Total Capital Expenditures 172,349 147,875 190,177 Depreciation and Amortization f Marine Construction Services 83,184 116,288 82,356 Power Generation Systems & Equipment 32,678 35,709 33,465 Engineered Materials 22,928 21,616 17,953 Trading 2,656 ) Corporate 7,500 7,372 7,606 Total Depre ciation and Amortization S 148,946 180,985 141,380 Identifiable Assets Marine Construction Services $ 1,039,835 $ 1,015,057 $ 1,157,966 Power Generation Systems & Equipment 1,177,221 1,174,994 1,182,533 Engineered Materials 525,682 535,703 534,629 l Trading 229,780 Corporate 1,208,166 1,255,360 945,561 TotalIdentifiable Assets S 4,180,684 $ 3,981,114 $ 3,820,689 L

2. Information about McDermott International's Operations in Different Geographic Areas.

(In thousands) 1985 1984 1983 Revenues (1) - United States $ 1,983,465 $ 1,975,232 $ 2,347,153 - Europe and West Africa 437,833 419,413 554,253 Other Foreign 812,573 693,938 806,361 - Total $ 3,233,871 $ 3,088,583 $ 3,707,767 Operating Income (Loss) by i Geographic Area (2) - United States (108,569) 37,263 145,705 - Europe and West Africa 31,649 63,943 38,204 - Other Foreign - 38,877 106.170 69,247 l . - Total (38,043) 207,376 253,156 Identifiable Assets - United States $ 1,894,195 $ 1,853,895 $ 1,912,085 - Europe and West Africa 643,189 471,835 512,843 1 - Other Foreign 435,134 400,024 450,200 - Corporate 1,208,166 1,255,360 945,561 Total $ 4,180,684 $ 3,981.114 $ 3,820,689 (1) Transfers between geographic areas are i.mmaterial and not separately stated. - (2) Reconciling items between Operating Income by Geographic Areas anil Income (Loss) Before Provision i for Income Taxes, Minority Interest and Extraordinary items are General Corporate Expenses and Other -. l. Income (Expense). 40~

NOTE 11 - QUARTERLY FINANCIAL DATA The following tables set forth selected unaudited quarterly financial information for the years ended 31 arch 31, 1985 and 1984: 1985 Quarter Ended June 30, Sept.30 Dec.31, Starch 31, 1984 1984 1984 1985 On thousands euept for per share amounts) Revenues $ 707,319 $ 812,823 $ 823,855 $ 889,874 Operating income (loss) 2,813 (29,529) (14,664) (67,399) Income (loss) before . extraordinary items 22,952 2,094 48,544 (54,610) Net income (loss) 22,952 2,094 48,544 (42,923) Earnings (loss) par share: Primary Before extraordinary items 0.58 0.06 1.18 (1.48) Net income (loss) 0.58 0.06 1.18 (1.16) Fully diluted Before extraordinary items 0.58 0.06 1.14 (1.48) Net income (loss) 0.58 0.06 1.14 (1.16) For the quarter ended 31 arch 31,1985, net loss includes charges of $22,289,000 relating to the settlement of certain antitrust civil litigation, $6,102,000 for unfavorable performance on a major contract in domestic marine operations and $3,815,000 for increased workers compensation benefits due primarily to increased liabilities in certain self insured programs. Net loss also reflects higher than anticipated operating costs in most areas of 31cDermott International's business. Net loss also reflects an extraonlinary gain of $11,687,000 resulting primarily from the extinguishment of certain debt (see Note 6). 1984 Quarter Ended June 30. Sept.30, Dec.31, Starch 31, 1983 1983 1983 1984 On thousands except for per share amounts) Revenues S 783,576 8 836,824 $ 747,489 $ 720,694-Operating income 9,660 22,872 49,277 39,074 Net income (loss) 44,294 62,359 24,481 (10,278) Earnings (loss) per common and common equivalent share: Primary 1.20 1.50 .62 - (.28) Fully diluted 1.15 1.44 .61 (.28) During the quarter ended 31 arch 31,1984, net income was reduced by $21,537,000 for costs provided for the closing and disposal of certain of AlcDermott International's facilities, and $9,399,000 relating to the settle-ment of certain antitrust civil litigation, and increased by $14,151,000 due to reversal of a provision for losses no longer deemed necessary, on certain contracts. In addition, net income was reduced by $5,513,000 for the compounding of interest on estimated additional income taxes on a daily basis as required by changes in the U.S. Internal Revenue Code. 41

NOTE 12 - EFFECTS OF CIIANGING PRICES (Unaudited) In compliance with FASB Statement No. 33, " Financial Reporting and Changing Prices" (as amended by FASB Statement No. 82), certain supplementary information relating to the effects of changing prices is presented below. The information adjusted for changes in specific prices is calculated by adjusting cost of sales and depreciation expense for changes in those prices that relate to property, plant and equipment, and inven-tory being used in the activities of the business. No other items of revenue or expense in the Condensed Consolidated Statement of Income are adjusted. Depreciation expense included in income adjusted for changes in specific prices is computed using the same depreciation methods and depreciable lives as are used for conventional financial statements. Any comparison between the conventional financial statements and the required supplemental disclosures must be viewed with caution. The amounts shown adjusted for changes in specific prices include the use of estimates and assumptions. Changes in individual prices are caused in part by changes in the general purchas-ing power of the dollar and in part by other supply and demand factors including technological change. The benefit from income taxes remains unchanged lecause tax laws do not allow McDermott International to claim tax deductions related to these adjustments. The gain from the decline in purchasing power of net amounts owed reflects the fact that total liabilities hav-ing a fature fixed cash settlement exceeded total assets with similar characteristics. This unrealized gain theoretically represents the fact that net liabilities can be repaid with dollars having a lesser value than at the beginning of the year due to intiation. The increase (decrease)in specifie prices of inventories and property, plant and equipment represents the dif-j ference between the current cost amounts at the beginning of the year and the end of the year. Part of the difference is attributable to inflation in general and part is attributable to economic factors affecting the individual prices of the particular assets owned. To the extent that the difference has been realized by a sale during the year, it is included in income from operations on a current cost basis. The unrealized portion does not represent receipt (disbursement) of cash and should not he considered as providing (reducing) funds for reinvestment or dividend distribution in the current period. The net assets shown under changes in specific prices are adjusted only for changes in inventory and property, plant and equipment. i i ) I l 42

CONDENSED CONSOLIDATED STATE 31ENT OF INCO31E ADJUSTED FOR EFFECTS OF CilANGING PRICES FISCAL YEAR ENDED SIARCil 31.1985 (In thousands except for per share amounts) As Reported Adjusted for in the Changes in Conventional Specific Financial Prices Statements (Current Costs) Revenues $ 3.233,871 $ 3,233,871 Cost and Expenses Cost of operations 2,892,930 2,898,588 Depreciation and amortization 148,946 193,952 Selling, general and administrative expenses 300,774 300,774 Other Income 53.486 53,486 Income (Loss) Before Provision for Income Taxes, Slinority Interest and Extraordinary Items (55,293) (105,957) Benefit from Income Taxes 89,613 89,613 3finority Interest (15,340) (15,340) Extraordinary Gain 11,687 11,687 Net Income (Loss) 30,667 (19,997) Income (Loss) per common and common equivalent share (Primary) 0.83 (0.54) Gain from decline in purchasing power of net amounts owed 15,861 Increase in current cost of inventory and property, plant and equipment held during the year (based on specific price changes)* 147,028 Effects of increase in general price level (63,962) Increase in current cost of inventory and property, plant and equipment held during the year (based on specific price changes) net of changes in the general price level 83,066 Net assets at year end $ 1,202,909 $ 1,537,865

At 31 arch 31,1985, current cost of Inventory was $265,067 and current cost of Property, Plant and Equipment, net of accumulated depreciation was $1,476,850, 43

FIVE-YEAR COMPARISON OF SELECTED SUPPLEMENTARY FINANCIAL DATA ADJUSTED FOR EFFECTS OF CHANGING l' RICES On thousands except for indices and per share amounts) On aserage for the year dollars) For Fiscal Year Ended March 31, 1985 1984 1983 1982 1981 Adjusted for Changes in Specific Prices (Current Costs) Net income (loss) (19,997) 32,588 (9,157) 97.756 (21,551) Net income (loss) per common and common equivalent . share (0.54) ,95 (0.25) 2.64 (0.58) Net assets at l year end 1,537,865 1,675,363 1,792,880 1,929,862 1,881,891 l Increase (Decrease)in current cost of inventory and property, plant and equipment held during the year,(based on specific price changes) net of changes in the general price level 83,066 (1,136) (29,055) 30,427 17,705 Other information: Gain from decline in purchasing power of net amounts owed 15,861 23,282 25,290 52,313 83,977 Cash dividends per l common share 1.80 1.87 1.94 1.85 1.78 Market price per common share at l year end 25-3/4 32-3/4 20 25 44 7/8 ) l - Average consumer. ) price index 313.9 301,7 291.7 277.4 253.4 i l l l 1 44 ~ v

'l Item 9. DISAGREE >lENTS WITII ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None i PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF TIIE REGISTRANT l There are no family relationships between any of the executive officers, directors or persons nominated to be such, and no executive officer was elected to his position pursuant to any arrangement or underst:mding be-tween himself and any other person. Information required by this item with respect to directors and executive officers is incorporated by reference to the material appearing under the heading " Election of Directors" in the Proxy Statement for the 1985 Annual 31eeting of Shareholders. Item 11. EXECUTIVE CO31PENSATION Information required by this item is incorporated by reference to the material appearing under the heading " Cash Compensation of Executive Officers and Certain Relationships and Related Transactions" in the Proxy Statement for the 1985 Annual 3Ieeting of Shareholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 31ANAGE31ENT Information required by this item is incorporated by reference to the material appearing under the heading " Election of Directors" in the Proxy Statement for the 1985 Annual 5fecting of Shareholders. Item 13. CERTAIN RELATIONS 111PS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference to the material appearing under the heading " Cash Compensation of Executive Officers and Certain Relationships and Related Transactions" in the Proxy Statement for the 1985 Annual 31eeting of Shareholders. l l 45 l J t

/ PART IV Item 14. EXHIRITS, FINANCIAL STATE) LENT SCllEDULES AND REPORTS ON FOR318.K 1 PAGE Consolidated Financial Statements Report of Certified Public Accountants $23 Consolidated Galance Sheet 51 arch 31,1985 and 1984 y 24 Consolidated Statement of Income and Retained Earnings 26 For The Three Fiscal Years Ended 31 arch 31,1985 Consolidated Statement of Changes in Financial Position For The Three Fiscal Y, ears Ended 5tarch 31,1985 27 i. Notes to Consolidated Financial Statements 28 Consolidated Financial Schedules All required schedules will be filed by amendment to this Form 10-K on Form 8. s Exhibit Index 3 Articles of incorporation and By-Laws (Items 3(a) and 3(b) are incorporated by reference to Exhibit 3 to the Company's annual report on Form 10-K, as amended, for the fiscal year ended Starch 31,1983). ) 4 (a) The Company's Restated Certificate of Incorporatiorg s (b) The Company's By Laws } 4 Warrants Agreement (incorporated by reference to Exhibit 4 to the Company's annual report on Form 10-K, as amended, for the fiscal year ended Starch 31,1983). i 10 31aterial Contracts (Exhibits 10(a) through 10(b) and 10(d) through 10(g) are incorporated by reference to Exhibit 10 to the Cornpany's annual report on Form 10-K, as amended, for the f. seal year ended Starch 31,1983 and Exhibit 10(c) is incorporated by reference to Exhibit 10 to the Company's annual report on Form 10 K, as amended, for the fiscal year ended 31 arch 31,1984). (a) Supplemental Exihutive Retirement Plan (b) 1983 Long-Term Performance Incentive Compensation Program 7 3 (c) Suppkmental Compensation Plan Y (d) Restoration of Retirement Income Plar0 for Certain Participants in the Retirement Plan for Employees of 31cDermott Intcenational, Inc. (e) Career Er.ecutive Stock Plan-1974 N (f) 1972 Sto$k Option Plan I s (g) Intercompany Agreement i 11 Statement Re Computation of Per Share Earnings 47 . 22 Significant Subgidiariesof the Registrant 49 /, FOR318 K REPORTS ) No reports on Form 8-K have been filed for the quarter ended Alarch 31,1985. 'A ll y .p 46 i \\ 1 ) t

EXIIIBIT 11 - McDERMOTT INTERNATIONAL. INC, STATEMENT RE COMPUTATION OF PER SHARE EARNINGS t-FOR THE THitEE FISCAL YEARS ENDED MARCH 31,1985 i3 (In thousands, except shares and per share amounts) Primary 1985 1984 1983 - Net Income 30,667 120,856 55,664 Interest and amortization of debt expense on 10% Subordinated debentures due 2003 (net of taxes) 6,337 Net income for primary computation 30,667 127,193 55,664 Weighted average number of common shares outstanding during the year 36,926,227 36,902,499 36,824 S45 Common stock equivalents of stock options, 3 stock appreciation rights and performance S units based on " treasury stock" method 137,262 111,855 42,198 - I Shares applicable to warrants 4,507,515 Weighted average number of common and ? common equivalent shares outstanding ,,y during the year 37,063,489 41,521,869 36,866,243 Earnings per common and common equivalent share 0.83 3.06 1.51 i l' t l'I - 47

EXHIBIT 11 CONTINUED Fully Diluted 1985 1984 1983 ' Net income 30,667 120,856 8' 55,664 Interest and amortization of debt ' expense on 10% Subordinated debentures due 2003 (net of taxes) 8,445 Dividends on Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock-assuming conversion to Common Stock 6.221 Other - 14 . Net income for fully diluted computation 30,667 135,522 55,678 Weighted average number of common j shares outstanding during the year 36,926,227 ~ 36,902,499 36,824,045 Common stock equivalents of stock options, stock appreciation rights and performance units based on ] " treasury stock" method 143,310 191,458 42,198 j Shares applicable to warrants 5,998,670 j Shares applicable to Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock 2,827,995 Other 28,717 - Weighted average number of common and ' common equivalent shares outstanding during the year, assuming full dilution 37,069,537 45,920,622 36,894,960 i Earnings per common and common equivalent l shares assuming full dilution 0.83 2.95 1.51 Fully diluted earnings per share includes only computations which cause dilution. 7 I-i = j. 4 l

48 '

t

EXIIIBIT 22 SicDER3IOTT INTERNATIONAL, INC. SIGNIFICANT SUBSIDIARIES OF TILE REGISTRANT FISCAL YEAR ENDED SIARCil 31,1985 Percentage Organized of Voting l Under the Shares Name of Company Laws of Owned SicDermott International Investments Co., Inc. Panama 100 j AlcDermott Incorporated Delaware 92 The Babcock & Wilcox Company Delaware 100 i The subsidiaries omitted from the foregoing list do not, considered in the aggregate, constitute a significant subsidiary. 49 O

CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 2-83692) of 31cDer-mott International, Inc. of our report dated 3tay 28,1985 with respect to the consolidated financial statements of 31cDermott International, Inc. included in this Form 10-K. ARTHUR YOUNG & C031PANY New Orleans, Louisiana 3!ay 28,1985 50

SIGNATUllES OF Tile REGISTilANT Pursuant to the requirements of Sections 13 or 15(d) 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. 31cDElt310TT INTEltNATION AL, INC. (llegistrant) 31ay 28,1985 By: s/J. E. Cunningham J. E. Cunningham Chairman of the Boani and i Chief Executive Officer l 31ay 28,1985 By: s/ John A. Lycott John A. Lynott Executive Vice President, Chief Financial and Administrative Officer 31ay 28,1985 By: s/E. A. Itobidoux E. A. Itobidoux Vice President and Controller 51 L

SIGNATURES OF DIItECTORS Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. s/J. E. Cunningham s/ John A. Lynott J. E. Cunningham John A. Lynott Chairman of the Board and Executive Vice President. Chief Executive Officer, Chief Financial and and Director Administrative Offic. r, and Director May 28,1985 May 28,1985 s/R. E. Howson s/ Walter M. Vannoy R. E. Howson Walter M. Vannoy President and Chief Operating President and Officer, McDermott Marine Chief Operating Officer, Construction, and Director Babcock & Wilcox, and Director May 28,1985 May 28,1985 s/ James L. Dutt s/ William T. Seawell James L. Dutt William T. Seawell Dirtetor Director May 28,1985 May 28,1985 s/ James A. Hunt s/ Walter B. Shaw James A. Hunt Walter B. Shaw Director Director 4 May 28,1985 May 28,1985 1 s/ John A. Morgan s/ Walter O. Spencer John A. Morgan Walter O. Spencer Director Director May 28,1985 May 28,19L-s/ John D. Ritchie s/ John B. Tweedy John D. Ritchie John B. Tweedy Director Director May 28,1985 May 28,1985 s/ Russell L. Wagner Russell L. Wagner Director 52 May 28,1985

n Transfer Agents and Certified Public Accountants Registrars Arthur Young & Company Morgan Guaranty Trust Company 1340 Poydras Street of New York New Orleans, Louisiana 70112 30 West Broadway (504) 581-3131 New York, New York 10015 i First City National Bank Annual Meeting of Houston The Annual Meeting of the l Post Office Box 809 Stockholders of McDermott i I Houson, Texas 77002 International, Inc. for the fiscal j . Common Stock of year ended March 31,1985 will l McDermott International, Inc. be held at the Royal Orleans Series A $2.20 Cumulative Hotel, New Orleans, Louisiana on i e l Convertible Preferred Stock of Tuesday, August 13,1985 at. McDermott incorporated 9:30 a.m. local time.

Series B $2.60 Cumulative i

. Preferred Stock of ' McDermott incorporated information i Additional information about the } . Trustees and company, including financial . statement schedules and exhibits Paying Agents to the Annual Report to share-i Morgan Guaranty Trust Company holders on Form 10-K for the of New York fiscal year ended March 31,1985,

30 West Broadway may be obtained, without New York, New York 10015 charge, by writing:

.

95/,% Sinking Fund Debentures Corporate Secretary Due March 15,2004 McDermott International, Inc.

1 10.20% Sinking Fund Debentures 1010 Common Street Due December 1,1999 New Orleans, Louisiana 70112

Floating Rate Notes -

(504) 587-5400-Due March 1992 Pittsburgh National Bank . Inquiries regarding stockholder Post Office Box 340747. account matters should be ' Pittsburgh, Pennsylvania 15230 addressed to: . 6.80% Pollution Control Morgan Guaranty Trust Company Revenue Bonds, Series A of New York Due February 1,2009 ' 30 West Broadway New York, New York 10015 Trustee, Paying Agent, Warrant Agent, and Exchange Agent Bankers Trust Company Post Office Box 318 Church Street Station New York, New York 10015. = 10% Subordinated Debentures Due April 1,2003 '

Warrants to_ purchase Common Stock of

- McDermott International, Inc. l

t -~ McDermott' international, Inc. l 1010 Common Street 1 New Orleans, LA 70112 -(504) 587-5400 i t i f r \\ l 0 Y .}}

ML20137Y850

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