TechnipFMC plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Amounts are in U.S. dollars. The company provides subsea, onshore/offshore and surface technologies to the oil and gas industry.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $2.913 billion | $3.125 billion |
| Gross margin | 17.2% | 19.2% |
| Income before income taxes | $34.3 million | $140.7 million |
| Net income attributable to TechnipFMC | $20.9 million; $0.05 per diluted share | $95.1 million; $0.20 per diluted share |
| Adjusted diluted EPS (non-GAAP) | $0.06 | $0.28 |
| Operating cash flow | $121.4 million provided | $201.6 million used |
| Capital expenditures | $178.2 million | $53.2 million |
| Cash and cash equivalents, March 31 | $4.965 billion | — |
| Total debt, March 31 | $3.934 billion | — |
| Net cash, March 31 (non-GAAP) | $1.031 billion | $1.348 billion at December 31, 2018 |
Cash declined $574.7 million during the quarter. Financing activities used $447.6 million, including commercial-paper repayments and a $174.9 million settlement of a mandatorily redeemable financial liability. The company reported $1.043 billion of unused capacity under its $2.5 billion revolving credit facility and said it complied with its covenants. Adoption of the new lease standard added $1.134 billion of operating lease liabilities and $1.064 billion of right-of-use assets to the March 31 balance sheet.
Material changes and segment results
- Revenue fell 6.8% and attributable net income fell 78.0%. Management cited lower project activity, lower gross margin, and a less favorable business mix. Gross margin declined primarily on competitively priced Subsea backlog and lower vessel utilization, Onshore/Offshore project mix, and Surface Technologies mix and timing.
- Subsea: Revenue was essentially flat at $1.185 billion; operating profit declined to $49.9 million from $54.4 million, and margin fell to 4.2% from 4.6%.
- Onshore/Offshore: Revenue declined 15.1% to $1.335 billion as major projects, primarily Yamal LNG, advanced toward completion. Operating profit was $155.7 million versus $202.9 million; margin was 11.7% versus 12.9%.
- Surface Technologies: Revenue rose 5.7% to $392.6 million, but operating profit fell to $10.5 million from $30.6 million; margin declined to 2.7% from 8.2%. The filing cites weaker North American activity, pricing pressure, product-line mix and shipment delays.
- Inbound orders increased to $6.185 billion from $3.487 billion. Order backlog rose to $17.778 billion from $14.560 billion at year-end; the company expects to recognize approximately 45.6% through 2019. Surface Technologies backlog declined to $437.6 million.
Outlook, risks and unusual items
- No consolidated earnings or revenue guidance is stated in the supplied filing text. The company projected approximately $350 million of 2019 capital expenditures, excluding $80 million spent in Q1 on a vessel subsequently financed through a sale-leaseback.
- Management described improving subsea prospects and LNG opportunities, while noting oil-price volatility and potential delays to customer investment decisions. It expected North American Surface Technologies activity for the rest of 2019 to remain near current levels, and high-single-digit to low-double-digit activity growth outside the Americas, with limited pricing benefit.
- Net interest expense was $88.2 million and included an $84.7 million loss from revaluing the mandatorily redeemable financial liability. The company also reported $12.1 million of merger transaction and integration costs and $16.5 million of impairment, restructuring and other expenses. Favorable revisions to estimates on projects already underway contributed approximately $157.2 million to operating profit in Q1, versus $190.3 million in Q1 2018.
- The company has a $280 million provision for investigations concerning potential anti-corruption law violations involving legacy business matters in the U.S., Brazil and France. It cautioned that a settlement could exceed the provision and that sanctions or business consequences could be material.
- Management concluded disclosure controls were ineffective as of March 31 because of previously reported material weaknesses in period-end financial reporting and income-tax accounting controls. Remediation efforts are continuing through 2019.
- Other disclosed exposures include performance and financial guarantees with maximum potential undiscounted payments of $4.905 billion, and a pending securities-law claim seeking unspecified damages. The company said it could not predict the outcome of that remaining claim.
Key facts for investors to verify
- Progress and final cost of resolving the multi-jurisdiction anti-corruption investigations relative to the $280 million provision.
- Remediation of material weaknesses and whether subsequent filings report effective disclosure and financial-reporting controls.
- Whether strong order intake converts to revenue and cash flow without further margin deterioration, particularly as large projects near completion.
- North American Surface Technologies demand, pricing and backlog conversion, alongside the expected growth outside the Americas.
- Commercial-paper refinancing, net cash and cash generation after elevated Q1 capital spending and financing outflows.
Comparability note: TechnipFMC revised Q1 2018 classifications between service and product revenue and related costs. The revision did not change total revenue, net income or equity for that period.