UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the transition period from ______________to______________

Commission File No. 001-08430

McDERMOTT INTERNATIONAL, INC.

Registrant’s Telephone Number, Including Area Code (504) 587-5400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.       Yes þ       No o

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

The number of shares of the registrant’s common stock outstanding at April 29, 2005 was 68,249,515.

M c D E R M O T T   I N T E R N A T I O N A L ,   I N C.

I N D E X  -  F O R M   1 0 - Q

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PART I

McDERMOTT INTERNATIONAL, INC.

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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McDERMOTT INTERNATIONAL, INC.

ASSETS

See accompanying notes to condensed consolidated financial statements.

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LIABILITIES AND STOCKHOLDERS’ DEFICIT

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McDERMOTT INTERNATIONAL, INC.

See accompanying notes to condensed consolidated financial statements.

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McDERMOTT INTERNATIONAL, INC.

See accompanying notes to condensed consolidated financial statements.

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McDERMOTT INTERNATIONAL, INC.

See accompanying notes to condensed consolidated financial statements.

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McDERMOTT INTERNATIONAL, INC.

NOTE 1 – BASIS OF PRESENTATION

     We have presented our condensed consolidated financial statements in U.S. Dollars in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and GAAP footnotes required for complete financial statements. We have included all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. These condensed consolidated financial statements include the accounts of McDermott International, Inc. and its subsidiaries and controlled joint ventures consistent with the Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities.” We use the equity method to account for investments in joint ventures and other entities we do not control, but over which we have significant influence. We have eliminated all significant intercompany transactions and accounts. We have reclassified certain amounts previously reported to conform with the presentation at and for the three-month period ended March 31, 2005. We present the notes to our condensed consolidated financial statements on the basis of continuing operations, unless otherwise stated.

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

	•	J. Ray McDermott, S.A., a Panamanian subsidiary of MII (“JRM”), and its consolidated subsidiaries;
	•	McDermott Incorporated, a Delaware subsidiary of MII (“MI”), and its consolidated subsidiaries;
	•	Babcock & Wilcox Investment Company, a Delaware subsidiary of MI (“BWICO”);
	•	BWX Technologies, Inc., a Delaware subsidiary of BWICO (“BWXT”), and its consolidated subsidiaries; and
	•	The Babcock & Wilcox Company, an unconsolidated Delaware subsidiary of BWICO (“B&W”), and its consolidated subsidiaries.

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

     Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2004.

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

     Due to the Chapter 11 filing, we stopped consolidating the results of operations of B&W and its subsidiaries in our condensed consolidated financial statements, and we began presenting our investment in B&W on the cost method. During the year ended December 31, 2002, due to increased uncertainty with respect to the amounts, means and timing of the ultimate settlement of asbestos claims and the recovery of our investment in B&W, we wrote off our net investment in B&W. On December 19, 2002, drafts of a joint plan of reorganization and settlement agreement, together with a draft of a related disclosure statement, were

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filed in the Chapter 11 proceedings, and we determined that a liability related to the proposed settlement was probable and that the value was reasonably estimable. Accordingly, we established an estimate for the cost of the settlement of the B&W Chapter 11 proceedings. We revalue this estimate on a quarterly basis to reflect current conditions. For the quarters ended March 31, 2005 and 2004, the revaluation of the estimated cost of the settlement resulted in an aggregate reduction in the provision of $0.6 million and $2.7 million, respectively, primarily due to changes in interest rates and our stock price. The reduction in the provision includes tax benefits of $0.1 million and $0.3 million for the quarters ended March 31, 2005 and 2004, respectively. As of March 31, 2005, our estimate for the cost of the settlement is $139.3 million.

     At a special meeting of our shareholders on December 17, 2003, our shareholders voted on and approved a resolution relating to the proposed settlement that would resolve the B&W Chapter 11 proceedings. The shareholders’ approval of the resolution is conditioned on the subsequent approval of the proposed settlement by MII’s Board of Directors (the “Board”). We would become bound to the settlement only when the plan of reorganization becomes effective, and the plan of reorganization cannot become effective without the approval of the Board within 30 days prior to the effective time of the plan. The Board’s decision will be made after consideration of any developments that might occur prior to the proposed effective date, including any changes in the status of any potential federal legislation concerning asbestos liabilities, including “The Fairness in Asbestos Injury Resolution (FAIR) Act of 2005.” The asbestos personal injury claimants have voted in favor of the proposed B&W plan of reorganization. See Note 8 for information regarding developments in the B&W Chapter 11 proceedings and a summary of the components of the proposed settlement.

     In December 2004, the FASB issued revised SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No.123R”). The revised statement establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. It eliminates the alternative to use APB 25’s intrinsic value method of accounting, which was permitted in SFAS 123 as originally issued. Under APB 25, issuing stock options to employees generally did not result in recognition of compensation cost. SFAS No. 123R requires entities to recognize the cost of employee services for these purposes based on the grant-date fair value of those awards (with limited exceptions). The revised statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is to be recognized over the period during which the employee is required to provide service in exchange for the award. Changes in fair value during that service period are to be recognized as compensation cost over that period. In addition, SFAS No. 123R amends SFAS No. 95, “Statement of Cash Flows,” to require reporting of excess tax benefits to be reported as a financing cash flow, rather than as a reduction of taxes paid. The provisions of the revised statement will become effective for financial statements issued for the first annual reporting period beginning after June 15, 2005. See the Stock-Based Compensation section for the impact of this statement on our consolidated results.

     In December 2004, the FASB issued SFAS No. 153, “Exchange of Non-Monetary Assets – An Amendment of APB Opinion No. 29.” SFAS No 153 amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges on nonmonetary assets whose results are not expected to significantly change the future cash flows of the entity. The statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect adoption of SFAS No. 153 to have a significant impact on our financial condition, results of operation or cash flow.

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NOTE 2 – STOCK-BASED COMPENSATION

     At March 31, 2005, we have several stock-based employee compensation plans. We account for those plans using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. Under APB 25, if the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the measurement date, no compensation expense is recognized. If the measurement date is later than the date of grant, compensation expense is recorded to the measurement date based on the quoted market price of the underlying stock at the end of each reporting period.

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

NOTE 3 – PENSION PLANS AND POSTRETIREMENT BENEFITS

     Components of net periodic benefit cost are as follows:

     Effective January 31, 2005, MI spun-off to B&W the assets and liabilities associated with B&W’s portion of MI’s pension plan to a plan sponsored by B&W. Approximately 46% of the participants in the MI pension plan at January 30, 2005 transferred to the new B&W sponsored plan. As of March 31, 2005, we have recorded our best estimate of this transaction based on data received from our actuary and we reduced our Pension Liability by approximately $117.1 million and recorded a long term liability - Deferred Liability Associated with Babcock &

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Wilcox Company Pension Plan Spin-Off -. Under this new plan B&W becomes the primary obligor, however, under the Internal Revenue Code and ERISA guidelines B&W remains a member of MI’s controlled group. We currently expect this deferred liability to remain pending final resolution of the B&W Chapter 11 proceedings. We will update the estimated transfer quarterly until the actual transfer amount is settled between all parties.

NOTE 4 – ACCUMULATED OTHER COMPREHENSIVE LOSS

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

NOTE 5 – COMMITMENTS AND CONTINGENCIES

Investigations and Litigation

     The injunction preventing asbestos suits from being brought against nonfiling affiliates of B&W, including MI, JRM and MII, and B&W subsidiaries not involved in the Chapter 11 currently extends through July 11, 2005. We intend to seek extensions of the preliminary injunction periodically through the pendancy of the B&W Chapter 11 proceeding and believe that extensions will continue to be granted by the Bankruptcy Court while the confirmation and settlement process continues. See Note 8 to the condensed consolidated financial statements for information regarding B&W’s potential liability for nonemployee asbestos claims and the settlement negotiations and other activities related to the B&W Chapter 11 reorganization proceedings commenced by B&W and certain of its subsidiaries on February 22, 2000.

     On August 13, 2003, a proceeding entitled Citgo Petroleum Corporation and PDV Midwest Refinery L.L.C. v. McDermott International, Inc, et al, was filed in the Circuit Court of Cook County, Illinois, alleging claims against B&W, MII, JRM, JRMI and MI, for damages in connection with the manufacture and sale by a former B&W division of a pipe fitting that allegedly caused an August 14, 2001 fire at a refinery in the Chicago, Illinois area, which refinery is owned and operated by the plaintiffs. Plaintiffs seek damages in excess of $100 million, including claims for damage to property and consequential damages. On October 22, 2004, the claims against MII, JRM, JRMI and MI were dismissed by the court without prejudice to the ability of plaintiff to refile such claims against those entities upon the showing of appropriate evidence. On March 2, 2005, B&W filed a third party claim against the former owner of the refinery, Unocal Corporation, seeking contribution and indemnity. Citgo’s insurers, Certain Underwriters at Lloyd’s, London (“Lloyd’s”), have intervened in this action for recovery of amounts paid to Citgo under business interruption policies. On March 10, 2005, B&W filed a motion with the bankruptcy court in the B&W Chapter 11 proceedings to stay the Citgo litigation until the completion of the B&W Chapter 11 proceedings, which motion has been scheduled for hearing on June 27, 2005. Lloyd’s has asserted that the automatic stay does not apply to this lawsuit. No trial date has been set and all parties have agreed that discovery and pleading deadlines in the Citgo lawsuit are stayed while B&W’s motion is pending before the bankruptcy court. In the event the stay is not granted, or at such time as the stay may be lifted, we intend to vigorously defend the claims against B&W and pursue the claims against Unocal Corporation. Additionally, we believe that we have insurance coverage for these claims and do not believe any material loss with respect to this matter is likely. However, the ultimate outcome of the proceedings is uncertain, and an adverse ruling, should insurance not be

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available, could have a material adverse impact on our consolidated financial position, results of operations and cash flow.

     On July 8, 2003, Bay Ltd. (“Bay”), a subcontractor for two of J. Ray McDermott, Inc.’s (“JRMI’s”) Spar projects, the Medusa and Devils Tower projects, filed a demand for arbitration in Houston, Texas seeking approximately $32.2 million in damages and asserting various liens against the Medusa and Devils Tower facilities. Bay subsequently dismissed this arbitration demand for procedural reasons. JRMI filed its own demand for arbitration in Houston, Texas, seeking damages against Bay arising from Bay’s performance of work on the Devils Tower project. Bay filed counterclaims in that action, including claims for fraud, and seeking in excess of $8.7 million and punitive damages for the Devils Tower project The claims between JRMI and Bay concerning the Devils Tower Spar have been set for arbitration on June 23, 2005.

     On July 17, 2003, JRMI filed a Complaint for Injunctive Relief and Damages in the U.S. District Court for the Eastern District of Louisiana with regard to claims against Bay arising from Bay’s performance of work on the Medusa project. In that complaint, JRMI seeks in excess of $10 million as a result of Bay’s various breaches of contract. Bay has asserted counterclaims in the proceedings seeking damages of approximately $24 million, enforcement of its alleged lien rights, and claims for fraud and punitive damages. This matter is set for trial on September 6, 2005. Discovery is ongoing.

     We plan to vigorously prosecute our claims in the arbitration and litigation proceedings with Bay and defend the counterclaims. We have provided for our estimated losses in these matters as part of related contract costs, and we do not believe any additional material loss with respect to these matters is likely. However, the ultimate outcome of these proceedings is uncertain and an adverse ruling, either in the arbitration or the court proceedings, could have a material adverse impact on our consolidated financial position, results of operations and cash flow.

     In June 1998, Shell Offshore, Inc. and several related entities filed a lawsuit in the U.S. District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., various JRM subsidiaries (collectively “MII defendants”), HeereMac, Heerema and others, alleging that the defendants engaged in anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act with regard to certain heavy-lift marine construction activities in the U.S. and foreign markets (the “Shell Litigation”). Subsequently, various parties intervened as plaintiffs in the Shell Litigation, including Chevron Texaco and Marathon Oil Company (“Marathon”); and other parties filed similar lawsuits which were consolidated with the Shell Litigation. All plaintiffs except Chevron Texaco and Marathon have dismissed their claims against all defendants pursuant to settlement agreements. Chevron Texaco and Marathon seek injunctive relief, actual damages, attorneys’ fees, and treble damages for the alleged anti-competitive activities from the MII defendants, HeereMac and Heerema; all other defendants have been dismissed. In February 1999, we filed a motion to dismiss the Chevron Texaco and Marathon claims arising from heavy lift activities in foreign markets, based on the Texas district court’s lack of subject matter jurisdiction. Subsequently, Chevron Texaco and Marathon were allowed to amend their complaint to include claims for non heavy-lift marine construction activities in the U.S. and foreign markets, which we have also sought to have dismissed. Currently, we are awaiting the court’s decision on our motions to dismiss the claims relating to heavy lift marine construction activities in foreign markets and non-heavy lift marine construction activities in the U.S. and foreign markets. In December 2003, Chevron Texaco filed suit in the High Court of London alleging antitrust injury regarding seven named foreign projects occurring in the period from 1993 to 1997, and our defense to these claims was filed on February 25, 2005. A mediation held in late March 2005 with Chevron Texaco, Marathon, Heerema and the MII defendants with regard to the antitrust claims and the arbitration award in the Petronius litigation discussed below did not resolve these matters. We do not believe that a material loss, above amounts already provided for, with respect to the antitrust matters is likely.

     In December 1998, a subsidiary of JRM (the “Operator Subsidiary”) was in the process of installing a module on the Petronius platform in the Gulf of Mexico for Texaco Exploration and Production, Inc. (“Texaco”) when the main hoist load line failed, resulting in the loss of the module. In December 1999, Texaco filed a lawsuit in federal district court in Louisiana seeking consequential damages for delays resulting from the incident, as well as costs incurred to complete the project with another contractor and uninsured losses. Both

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the Operator Subsidiary and another subsidiary of JRM, the owner of the vessel that attempted the lift of the deck module (the “Owner Subsidiary”), are defendants in this litigation. In addition to Texaco’s claims in the federal court proceeding, damages for the loss of the module have been sought by Texaco’s builder’s risk insurers in claims against the Owner Subsidiary and several other defendants, but excluding the Operator Subsidiary, which was an additional insured under the policy. Total damages sought by Texaco and its builder’s risk insurers in the federal court proceeding approximated $280 million. Texaco’s federal court claims against the Operator Subsidiary were stayed in favor of a binding arbitration proceeding between them required by contract, which the Operator Subsidiary initiated to collect $23 million due for work performed under the contract, and in which Texaco also sought the same consequential damages and uninsured losses as it seeks in the federal court action.

     After trial on the issue of liability only, the federal district court orally found, on March 27, 2002, that the Owner Subsidiary was liable to Texaco, specifically finding that Texaco had failed to sustain its burden of proof against all named defendants except the Owner Subsidiary relative to liability issues, and, alternatively, that the Operator Subsidiary’s highly extraordinary negligence served as a superceding cause of the loss. The finding was subsequently set forth in a written order dated April 5, 2002, which found against the Owner Subsidiary on the claims of Texaco’s builder’s risk insurers in addition to the claims of Texaco. On January 13, 2003, the district court granted the Owner Subsidiary’s motions for summary judgment with respect to Texaco’s claims against the Owner Subsidiary, and vacated its previous findings to the contrary. On March 31, 2003, the district court granted the Owner Subsidiary’s similar motion for dismissal against Texaco’s builder’s risk underwriters. A final judgment was entered by the district court on October 30, 2003, from which an appeal was taken by Texaco’s builder’s risk insurers. Oral argument has been scheduled in May 2005 before the U.S. Fifth Circuit Court of Appeal. In the fourth quarter of 2003, Texaco, Operator Subsidiary, Owner Subsidiary and JRM’s underwriters settled the claims of Texaco for consequential damages. A subsidiary of JRM has an agreement with our insurers under which, based on this settlement, it is obligated to pay $1.25 million per year through 2008 as an adjustment to premiums of prior years. This agreement resulted in a charge of approximately $5.4 million for the year ended December 31, 2003. A decision in the arbitration proceeding with regard to the Operator Subsidiary’s claims was rendered in April 2004, and an amount totaling approximately $6.0 million in excess of JRM’s net receivable was awarded to the Operator Subsidiary. Under the terms of the agreements that provided for the arbitration, the amount of the award is confidential. In a filing made in federal court in the Southern District of Texas, which presides over the Texaco antitrust claims relating to this project among others, Texaco has moved to vacate or modify the award. The Operator Subsidiary has filed an opposition to Texaco’s motion and has filed its own motion to confirm the award. The court has scheduled a hearing on May 11, 2005 to consider these motions. A mediation held in late March 2005 with Chevron Texaco, Marathon, Heerema and the JRM affiliates with regard to the Petronius arbitration award and antitrust claims discussed above did not resolve this matter

     We plan to vigorously defend the appeal of Texaco’s builder’s risk insurers of the Louisiana district court’s dismissal of the claims against the Owner Subsidiary and the appeal of Texaco of the award in favor of the Operator Subsidiary in the arbitration proceeding. We do not believe that a reduction in the award in favor of the Operator Subsidiary in the arbitration proceeding is likely. Additionally, we do not believe that a material loss, above amounts already provided for, with respect to the claims of Texaco’s builder’s risk insurers, is likely, but in that event, we believe our insurance will provide coverage for these claims. However, the ultimate outcomes of the pending proceedings are uncertain, and an adverse ruling in either proceeding could have a material adverse impact on our consolidated financial position, results of operations and cash flow.

     On or about May 29, 2003, a proceeding entitled Jose Fragoso, et al v. American Optical Corp., et al was filed in the 404th Judicial District Court of Cameron County, Texas, by approximately 160 plaintiffs who alleged negligence and claimed unspecified damages for exposure to silica while working at an unspecified location. Nine similar lawsuits were filed on behalf of approximately 568 additional plaintiffs in the same county by the same law firm, including Arturo Acevedo, et al v. American Optical Corp., et al. As a result of voluntarily dismissals of the claims filed by approximately 485 plaintiffs, there are currently approximately 270 plaintiffs remaining. In addition to JRMI, the suits name six other premises defendants and allege additional claims against more than 70 product defendants. MII, which was also named a defendant, has been dismissed from all of the cases without prejudice to the ability of the plaintiffs to refile the claims upon the showing of

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appropri