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McDermott Performs as Expected

MDR WPZ

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Energy-focused engineering and construction firm McDermott International (MDR - Analyst Report) reported better-than-expected second quarter 2012 earnings results, owing to strong contributions from certain regional performances.

Earnings per share from continuing operations came in at 22 cents, in-line with the Zacks Consensus Estimate.

However, the Texas-based engineering-to-project management service provider’s per share profit came lower than 28 cents earned in the second quarter of 2011. The quarter’s result was impacted by depressing marine activity in the Asia-Pacific unit.

McDermott generated revenues of $889.2 million in the quarter, up 4.6% from the second quarter of 2011 and also exceeded our expectation of $886.0 million. Better fabrication and marine operations in the Middle East and Atlantic regions boosted the company’s results.

On a reported basis, the company’s operating income was $79.4 million (down 5.2% year over year) in the quarter, hurt by the increase in total costs and expenses (up 5.6% from the corresponding period last year to $807.2 million).

Backlog

At the end of the second quarter of 2012, McDermott had a backlog of $5,746.7 million, compared with $4,715.6 million a year ago. As of March 31, 2011, backlog was $5,806.6 million.

Balance Sheet

As of June 30, 2012, McDermott had cash/cash equivalents of $644.1 million and long-term debt (including current maturities) of approximately $109.8.million (representing a debt-to-capitalization ratio of approximately 5.6%).

Contract

On the same day, one of the affiliates of McDermott won transportation and installation services contract from Williams Partners L.P. (WPZ - Snapshot Report) for the Spar Hull in the Gulf of Mexico. Although none of the companies disclosed the financial terms of the deal, McDermott has included the contract’s value in its second quarter 2012 backlog.

Rating and Recommendation

We are maintaining our Neutral recommendation on McDermott International. The company enjoys strong exposure to activities across most of the rich resource acreages and has recently entered into a number of deals that are expected to generate high returns.

However, the growth potential of McDermott will likely be restricted by the volatile nature of the energy sector, expected lower operating margin in 2012 and the clouded post-split outlook.

McDermott currently retains a Zacks #3 Rank (short-term Hold rating).

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