The accompanying Condensed Consolidated Financial Statements (the “Financial Statements”) are unaudited and have been prepared in accordance with Rule 10-1 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements and are not necessarily indicative of results of operations for a full year. Therefore, they should be read in conjunction with the Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). The Financial Statements reflect all wholly owned subsidiaries and those entities we are required to consolidate. See the “Joint Venture and Consortium Arrangements” section of Note 2, Basis of Presentation and Significant Accounting Policies, in the 2019 Form 10-K for further discussion of our consolidation policy for those entities that are not wholly owned. In the opinion of our management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. Intercompany balances and transactions are eliminated in consolidation. Values presented within tables (excluding per share data) are in millions and may not sum due to rounding.

On January 21, 2020 (the “Petition Date”), McDermott and certain of its subsidiaries (collectively, the “Debtors”): (1) entered into a Restructuring Support Agreement (together with all exhibits and schedules thereto, the “RSA”) with certain of their lenders, letter of credit issuers and holders of the 10.625% senior notes due 2024 (the “Senior Notes”) issued by certain of the Debtors and guaranteed by McDermott and certain of the other Debtors (such lenders, letter of credit issuers and holders of the Senior Notes are referred to as the “Consenting Parties”); and (2) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) to pursue a joint prepackaged Chapter 11 Plan of Reorganization of the Debtors (the “Plan of Reorganization”). The Chapter 11 cases are being jointly administered under the caption In re McDermott International, Inc., Case No. 20-30336 (the “Chapter 11 Cases”). On March 14, 2020, the Bankruptcy Court issued an amended order (the “Confirmation Order”) approving the Debtor’s disclosure statement and confirming the second amended Plan of Reorganization. As of March 31, 2020, certain conditions precedent to consummation of the Plan of Reorganization and emergence from the Chapter 11 proceedings had not yet been met, and, as a result, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Therefore, the Financial Statements included herein have been prepared as if we were a going concern and in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 852, Reorganizations (“ASC 852”).

ASC 852 requires that the financial statements for periods subsequent to the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in “Reorganization items, net” on our Condensed Consolidated Statement of Operations (“Statement of Operations”) for the quarter ended March 31, 2020. In addition, prepetition unsecured or undersecured obligations that may be impacted by the bankruptcy reorganization process have been classified as “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet (“Balance Sheet”) as of March 31, 2020. These liabilities are reported at the amounts allowed or expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.

In accordance with ASC 852, we anticipate we will be required to adopt fresh-start accounting upon our emergence from the Chapter 11 proceedings, becoming a new entity for financial reporting purposes (“successor”). In order to adopt fresh-start accounting, we will have to meet the following conditions: (1) holders of existing shares of the predecessor entity immediately before the effective date of the consummation of the Plan of Reorganization (the “Effective Date”) received, collectively, less than 50 percent of the voting shares of the successor entity and (2) the reorganization value of the successor is less than its postpetition liabilities and estimated allowed claims immediately before the Effective Date. As of March 31, 2020, we expect that these conditions will be met.

See Note 3, Reorganization, for additional information regarding our bankruptcy proceedings under Chapter 11.

The Financial Statements have been prepared assuming that we will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the Financial Statements. Further, the Plan of Reorganization and the adoption of the fresh-start accounting could materially change the amounts and classifications of assets and liabilities reported in these Financial Statements. The accompanying Financial Statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern.

As a result of our financial condition, the defaults under our debt agreements and the risks and uncertainties surrounding the Chapter 11 Cases, substantial doubt exists regarding our ability to continue as a going concern. We believe that, once we complete the Lummus Technology sale and successfully implement the Plan of Reorganization, among other factors, the currently existing substantial doubt regarding our ability to continue as a going concern would be alleviated.

The Plan of Reorganization requires that, on or prior to the Effective Date, the Debtors will complete the Lummus Technology sale (primarily represented by our Technology reporting segment). Under the terms of the Share and Asset Purchase Agreement for the sale transaction (the “SAPA”), the buyer party thereto agreed, subject to certain conditions, to acquire the Lummus Technology business for a purchase price of $2.725 billion, subject to certain adjustments. On February 24, 2020, the Bankruptcy Court approved the selection of the buyer and the contractual protections provided to the buyer under the SAPA, as well as the bidding procedures for the ultimate sale process. In connection with the entry of the Confirmation Order, the Bankruptcy Court approved the Lummus Technology sale. The sale is expected to be completed on or prior to the Effective Date. As of March 31, 2020, pursuant to the SAPA, the buyer has deposited $200 million in a third-party escrow account.

We considered the operations of the Technology segment to be a discontinued operation in the first quarter of 2020, as the anticipated sale represents a strategic shift and will have a material effect on our operations and financial results. Operating results of the Technology reporting segment have been classified as a discontinued operation within the Statements of Operations for the three months ended March 31, 2020 and 2019. Further, the assets and liabilities of the Technology segment have been classified as assets and liabilities of discontinued operations within our March 31, 2020 and December 31, 2019 Balance Sheets, with all balances reported as current on our March 31, 2020 Balance Sheet. Cash flows of the Technology segment are not reported separately within our Condensed Consolidated Statement of Cash Flows (“Statement of Cash Flows”). Unless otherwise noted, the footnotes to the Financial Statements relate to our continuing operations. See Note 4, Discontinued Operations, for additional discussion of our discontinued operations and the impact of the Lummus Technology sale.

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We believe the most significant estimates and judgments are associated with:

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revenue recognition for our contracts, including estimating costs to complete each contract and the recognition of incentive fees and unapproved change orders and claims;

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assessment of our ability to continue as a going concern;

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estimation of the allowed claims associated with liabilities subject to compromise;

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classification of all of our long-term debt obligations, including finance lease obligations, as current;

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fair value and recoverability assessments that must be periodically performed with respect to long-lived tangible assets, goodwill and other intangible assets;

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valuation of deferred tax assets and financial instruments;

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the determination of liabilities related to loss contingencies, self-insurance programs and income taxes;

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the determination of pension-related obligations; and

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consolidation determinations with respect to our joint venture and consortium arrangements.

Actual amounts may differ from those included in the Financial Statements if the underlying estimates and assumptions change in the future.

See Note 2, Basis of Presentation and Significant Accounting Policies, in the 2019 Form 10-K for a discussion of our significant accounting policies.

Certain prior-year balances have been reclassified to conform to the current year’s presentation.

Financial Instruments—In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Effective January 1, 2020, we adopted ASU 2016-13, which amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial assets and off-balance-sheet credit exposures. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. Under the modified retrospective transition method, we recorded a cumulative effect adjustment of $7 million to opening Accumulated Deficit, primarily related to our Accounts receivable – trade and Contracts in Progress assets. The associated income tax impact was not material. The adoption of this ASU did not have a material impact on our Statement of Operations or Statement of Cash Flows for the three months ended March 31, 2020. See Note 7, Accounts Receivable—Trade, Net, for more information on our presentation of credit losses.

Consolidation—In October 2018, the FASB issued ASU No. 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities (“VIE”). This ASU amends the guidance for determining whether a decision-making fee is a variable interest, which requires companies to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The ASU is effective for annual and interim periods beginning after December 15, 2019. We adopted the new standard effective January 1, 2020. The adoption of this ASU did not have a material impact on the Financial Statements and related disclosures.

Collaborative Arrangements—In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606. This ASU clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In addition, unit-of-account guidance in Topic 808 was aligned with the guidance in Topic 606 (that is, a distinct good or service) when assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606. This ASU is effective for interim and annual periods beginning after December 15, 2019. We adopted the new standard effective January 1, 2020. The adoption of this ASU did not have a material impact on the Financial Statements and related disclosures.

Income Taxes—In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This ASU simplifies the accounting for income taxes by removing exceptions:

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to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income);

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to the requirement to recognize a deferred tax liability for equity-method investments when a foreign subsidiary becomes an equity-method investment;

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to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity-method investment becomes a subsidiary; and

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to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

In addition, ASU 2019-12 does not require that an entity allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; however, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the applicable taxing authority. The standard does require that an entity:

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recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax;

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evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; and

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reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

ASU 2019-12 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. We are evaluating the impact of the new guidance on our future disclosures.

Defined Benefit Pension Plans—In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20). This ASU eliminates, modifies and adds disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This ASU is effective for fiscal years ending after December 15, 2020, with early adoption permitted. We are evaluating the impact of the new guidance on our future disclosures.