After delivering a string of earnings beat in the trailing four quarters, McDermott International, Inc.MDR reported earnings miss in its latest report, dampening investors' confidence. The engineering and fabrication giant unveiled third-quarter 2018 results on Oct 30 after the closing bell and posted earnings of 20 cents per share, lagging the Zacks Consensus Estimate of 29 cents. The weaker-than-expected earnings can be attributed to higher tax expenses, amortization costs, along with transactional and integrational spending associated with the buyout of Chicago Bridge and Iron.
Moreover, the bottom line also deteriorated sharply from the prior-year earnings of $1.00 per share. Post the weak performance in the third quarter along with softer guidance for the remainder of 2018, shares of this Zacks Rank #5 (Strong Sell) company dipped 40% to close the session at $7.73 on Oct 31.
Notably, it recorded $744 million of charges on three of its major liquefied natural gas projects versus previous estimation of $221 million. The massive discrepancy in cost estimates reflects badly on management's due diligence. Precisely, the hefty charges include $482 million on Cameron LNG, $194 million on Freeport LNG and $68 million on the Calpine gas power project.
Further, McDermott missed revenue estimates in the quarter under review. The company generated revenues of $2,289 million in the quarter, lagging the Zacks Consensus Estimate of $2,504 million. Nonetheless, the top line witnessed year-over-year growth of 138%.
McDermott International, Inc. Price, Consensus and EPS Surprise
McDermott International, Inc. Price, Consensus and EPS Surprise | McDermott International, Inc. Quote
Costs and Expenses
Cost of operations increased from $774 million in the year-ago quarter to about $2,016 million in the quarter under review. While expenses in research and development increased to $8 million in the third quarter of 2018 from $2 million in the year-ago period, that of selling, general and administrative rose to $64 million from the prior-year quarter's $55 million. All these, combined with restructuring and integration costs, transaction expenses and other intangibles amortization, resulted in a total expense of $2,150 million compared with the year-ago figure of $831 million.
The Revenue Pipeline of the company includes Backlog, Bids & Change Orders Outstanding and Target Projects. As of Sep 30, McDermott had a backlog of $11.5 billion compared with $3.4 billion a year ago. It had $20.7 billion in Bids & Change Orders Outstanding and $80.3 billion in Revenue Pipeline at the end of the third quarter compared with $25 billion in the year-ago quarter. Revenue opportunity pipeline of $80.3 billion was mainly driven by North, Central & South America, as well as Middle East & North Africa segments.
Balance Sheet and Capital Expenditure
Capital expenditure of McDermott was about $19 million during the quarter compared with almost $16 million in the year-ago quarter. The company generated a negative free cash flow (FCF) of $240 million. As of Sep 30, 2018, it had cash and cash equivalents of $580 million, and long-term debt of approximately $3,397 million. Its debt-to-capitalization ratio was about 48.9%.
Second-Half 2018 View Trimmed
The company updated its guidance for the second half of the year. McDermott expects revenues in the $4.8-$5.1 billion range, unchanged from the prior guidance. However, it revised its EBITDA guidance from prior expectation of $350-$390 million to $375-$415 million. Capital expenditure is now anticipated to be around $60 million compared with the prior guidance of $80 million. However, adjusted net income is now anticipated in the band of $150-$160 million compared with the previous guidance range of $200-$210 million. Also, McDermott now expects its negative FCF between $580 million and $600 million versus prior guidance of $430-$450 million. Adjusted EPS is now estimated between 31 cents and 36 cents, down from the prior guidance of 74-80 cents.
Investor Day Brings Some Welcome News
Post the lackluster third-quarter results, McDermott hosted Investor Day on Nov 5, bringing in some encouraging news for the investors. As such, shares of the company have rallied 12.14% yesterday to close the session at $9.79. Mentioned below are some highlights from the Investor Day.
McDermott made efforts to bolster its balance sheet by obtaining a credit facility extension of $230 million along with the sale of $300 million worth preferred stock via private placement.
In an attempt to focus on its core priorities, the company plans to jettison storage tank and pipe fabrication business. McDermott anticipates garnering proceeds of more than $1 billion from the divestiture deal, which is expected to close next year.
Moreover, McDermott booked $1.6 billion in revenue synergies from the combination with Chicago Bridge and Iron.
While discrepancies in the estimated charges on three of its legacy-focused LNG projects did disappoint analysts and shareholders alike, McDermott highlighted that these projects were the only outliers and the other projects were progressing well. In fact, the company stated that each of these projects are at least 80% completed, with the company having a thorough knowledge of the schedule and cost position of each. As such, there is no scope of any further surprise cost related to these projects.
Some better-ranked players in the energy space are Bonanza Creek Energy Inc. BCEI , Parsley Energy PE , Enbridge Inc. ENB . While Bonanza Creek sports a Zacks Rank #1 (Strong Buy), Parsley and Enbridge both carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Bonanza Creek delivered an average positive earnings surprise of 74.88% in the last four reported quarters.
Parsley Energy pulled off average positive earnings surprise of 26.24% in the trailing four reported quarters.
Enbridge came up with average positive earnings surprise of 33.19% in the preceding four reported quarters.
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