McDermott Tops EPS, Fails Revenue - Analyst Blog

Energy-focused engineering and construction company McDermott International (MDR) reported a mixed third quarter 2010 earnings, based on project developments. However, the results were hurt by lower sales and increased foreign currency translation expenses.

Earnings per share (EPS), excluding the effects of special items, came in at 44 cents, exceeding the Zacks Consensus Estimate of 28 cents. Compared with the year-ago quarter, adjusted EPS jumped 37.5%.

Including the non-cash impairment and related expenses, earnings dipped 18.8% year over year to 26 cents per share.

McDermott generated revenues of $732.1 million in the quarter, down 27.7% from the prior-year quarter and lagged behind our expectation of $889 million. Low revenues from the Middle East segment as a result of reduced fabrication activity and construction vessel utilization hampered the quarter's performance.

During the quarter, the company reported an operating income of $84.3 million (including a $43.9 million of non-cash impairment and related charges) compared with $97.6 million recorded in third quarter 2009.

The quarter results were influenced by the write-down of certain multi-service vessels to market value and termination of a contract related to the development of a new fabrication facility in Kazakhstan, partially offset by project improvements in the Middle East segment, including contract change orders and close-outs.

Backlog

McDermott ended the quarter with a backlog of $3.6 billion, compared with a backlog of $3.8 billion in the previous-year quarter. On a sequential basis, backlog was down 14.3%.  

Balance Sheet

As of September 30, 2010, the company had cash on hand of $424.8 million and long-term debt (including current maturities) of $54.0 million, representing a debt-to-capitalization ratio of 3.5%.

Our Recommendation

With The Babcock & Wilcox Company (BWC) spin off, McDermott operates as a stand-alone engineering, construction and installation company, focused on the offshore oil and gas business.

We believe that separation of the power generation and government operations (post-split) has transformed McDermott into a less diversified concern with a greater business risk profile. Moreover, the oil and gas price outlook remains disappointing over the next few quarters.  

We are maintaining our long-term Underperform recommendation on the stock.