Oil drilling equipment maker FMC Technologies Inc. (FTI) reported second quarter earnings per share from continuing operations of 78 cents, outpacing the Zacks Consensus Estimate of 71 cents. The better-than-expected results were mainly driven by robust operating margin from its subsea oil and gas processing systems and the fluid control unit.
However, revenue of $1,012.5 million came in short of our expectations of $1,062.0 million as sales declined in the company’s Energy Production Systems segment.
Year-over-Year Results Down
Compared with the year-ago period, FMC Technologies’ earnings per share declined 7.1% (from 84 cents to 78 cents), while revenue fell 8.3% (from $1,103.8 million to $1,012.5 million). The negative comparisons can be attributed to lower revenues from its Energy Production Systems unit.
Energy Production Systems
The segment revenue for the most recent quarter was $822.9 million, a decrease of 11.9% from the second quarter of 2009, dragged down by a 13.2% fall in sales of subsea systems. Operating profit came in at $129.6 million, down 7.5% year over year. The negative comparison reflects lower volume in both the subsea systems and surface wellhead businesses, partially offset by higher operating margin in subsea systems.
Energy Processing Systems
Segment revenues were up 10.5% year-over-year to $192.4 million. The main reasons for the outperformance can be attributed to the sales ramp-up in the fluid control business, which continued to benefit from the resurgence in North American pressure pumping activity. Segment operating profit, at $33.4 million, increased 17.2% from the year-ago period, driven by higher operating margin in the fluid control unit, somewhat offset by lower profits in all other businesses within the segment.
Backlog
As of Jun 30, 2010, FMC’s total backlog was $2,851.1 million, compared to $2,679.8 million at Mar 31, 2010. Of this, backlog for Energy Production Systems was $2,595.5 million (including $2,300 million in subsea backlog), while Energy Processing Systems’ backlog finished the quarter at $255.6 million.
Balance Sheet
During the quarter, FMC spent $19.3 million on capital programs, while it repurchased 1.3 million shares at a cost of $73.0 million. As of June 30, 2010, the company had cash and cash equivalents of $403.8 million and long-term debt (including current portion) of $600.2 million, with a debt-to-capitalization ratio of 34.9%.
Guidance
Management guided towards 2010 earnings per share in the $2.70 – $2.90 range, maintaining its previous forecast.
Our Recommendation
Given its dominant market share, technology leadership and efficient execution skills, FMC Technologies is poised to benefit from the improving subsea activity levels through 2010 and beyond. We believe order flow and backlog for subsea products and services will continue to be healthy and trend higher as the year goes by. Additional positives in the FMC Technologies story include continued success on big awards, growing international operations and a solid balance sheet.
Despite this, we are compelled to maintain our Zacks #3 Rank (Hold) rating on the stock over the coming 1-3 months, mainly due to uncertain crude oil/natural gas fundamentals. Additionally, the huge oil spill in the Gulf of Mexico (GoM) and the subsequent moratorium on offshore drilling in the region is expected to hit subsea equipment suppliers like FMC Technologies. The company’s higher margin subsea support business will likely see lower revenue and backlog from the GoM market in the near-to-medium term.
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