Foster Wheeler Slips - Analyst Blog

Foster Wheeler AG (FWLT) reported third-quarter earnings from continuing operations of 40 cents, below the Zacks Consensus Estimate of 51 cents. Earnings declined sharply from continuing operations of 71 cents in the prior-year quarter. It is primarily due to market-related declines from the volume of work executed in both business groups, coupled with lower realized EBITDA margin in Engineering and Construction Group.

Consolidated revenue was $904.7 million compared with $1,216 million in the prior-year quarter.

EBITDA/scope margin in Engineering and Construction was 17.4% for the quarter. This compares to 22% for the average quarter of 2009. For the first nine months of 2010, margin in the group was 20.1%. EBITDA  in the Global Power Group was equal to $40.4 million, which is below the average quarter of 2009, primarily due to lower volume of work executed, which was partially offset by the recognition of business interruption insurance for the company's equity interest in a power plant project in Chile.

E&C Group's new orders were worth $472 million, modestly above $355 million in the prior-year quarter. The new orders in Global Power Group were $151 million, below $209 million in the prior-year period. New orders booked in Foster Wheeler in E&C Group were below the average quarter of 2009 and comprised numerous mid-sized and smaller contract awards. New orders in Global Power Group were comparable to the average quarter of 2009. The market trend improved considerably since 2009, but the timing of new orders remains uncertain.

Consolidated EBITDA in the quarter was $87 million compared with $128 million year over year, and net income was $52 million compared with $90 million.

Balance Sheet

Cash and cash equivalents were $1 billion with long-term debt of $159 million and shareowners' equity of $898 million.

In the reported quarter, the company repurchased 4.3 million shares for approximately $99.2 million under the existing share repurchase program. At the end of the quarter, the company had approximately $165 million remaining under the existing authorization.

Outlook

The EBITDA margin for each business group, in Global E&C Group for the year 2010 is expected to be in the range of 18% to 20%. In addition, the company expects to end the year with scope backlog in E&C that is materially above the level of the third quarter.

In the Global Power Group, the 2010 EBITDA margin is estimated in the range of 19% to 21%. In terms of scope backlog in the Power Group, the company expects to end the fourth quarter at a higher level than that reported in the third quarter.

We believe that the global demand for energy will continue to grow over the long term and the clients will continue to invest in new and upgraded capacity to meet the demand. In this regard, Foster Wheeler has been successful in booking contracts for front-end engineering work, which is frequently the precursor to significant work for engineering, procurement and construction. However, competition in Foster's end market is very high, and its major competitors include Fluor Corporation (FLR) and Jacobs Engineering Group Inc. (JEC).

Foster Wheeler AG is based in Zug Switzerland, but its operational headquarters are in Clinton NJ USA. The majority of Foster's revenues and new businesses originate from outside the United States. The company serves the following industries: Oil and Gas; Oil Refining; Chemical & Petrochemical; Pharmaceutical; Environmental; Power Generation; and Power Plant Operation and Maintenance.

We currently have an Underperform recommendation on Foster Wheeler, which holds a Zacks #4 Rank over the next one-to-three months.