Energy-focused engineering and construction company McDermott International (MDR) reported disappointing fourth quarter and full-year 2010 earnings, bruised by lower sales and higher selling and administrative expenses.
Earnings per share (EPS) came in at 19 cents in the fourth quarter, well below the Zacks Consensus Estimate of 29 cents. Compared with the year-ago quarter, EPS plunged 40.6% from the adjusted result of 32 cents.
Full-year 2010 earnings, excluding special items, were $1.19 per share, up 35.2% year over year but 7.8% below our projection.
McDermott generated revenues of $539.6 million in the quarter, down 28.7% from the prior-year quarter and lagged our expectation of $745 million. Low revenues from the Middle East (resulting from less barge days) and Asia Pacific (as order changes delayed completion of two major projects) segments hampered the quarter’s performance.
McDermott generated total revenue of $2,403.7 million in 2010 as compared with $3,281.8 million in 2009. The full-year revenue also failed to meet our expectation of $2,632 million.
During the quarter, the company reported an operating income of $59.3 million compared with $90.9 million recorded in fourth quarter 2009. The quarter’s performance was affected by lower sales along with a slowdown in the company’s key construction activities.
Backlog
At year-end 2010, McDermott had a backlog of $5.0 billion, compared with a backlog of $3.3 billion in the prior year. As of September 30, 2010, backlog was $3.6 billion.
Balance Sheet
As of December 31, 2010, the company had $403.5 million cash on hand and long-term debt (including current maturities) of $55.3 million, representing a debt-to-capitalization ratio of 3.5%.
Our Recommendation
Houston, Texas-based McDermott exhibits a diversified product portfolio, specialty manufacturing and service capabilities as well as proprietary technological expertise. We believe that the company will reap strong benefits from its dominant position in most major offshore producing regions around the world, including the U.S., Canada, Mexico, the Middle East, India, the Caspian Sea and Asia Pacific.
However, following The Babcock & Wilcox Company (BWC) spin off, McDermott has transformed into a less diversified concern with a greater business risk profile. Moreover, the oil and gas price fundamentals remain clouded for the next few quarters. Considering these factors, we expect the company to perform at par with the industry and maintain our long-term Neutral recommendation on the stock.
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