TechnipFMC plc — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial figures are in millions except per-share data. The company operates through Subsea, Onshore/Offshore and Surface Technologies. Comparisons reflect 2017 results; revenue recognition changed with adoption of ASC 606 in 2018, and prior periods were not restated.
Financial performance and liquidity
- Q3 revenue: $3,143.8, down 24.1% year over year. Q3 gross profit margin rose to 18.6% from 16.2%.
- Q3 earnings: Operating income before net interest and taxes was $306.9, versus $315.9; net income attributable to TechnipFMC was $136.9, up 13.1%. Diluted EPS was $0.30, versus $0.26.
- Nine-month results: Revenue was $9,229.9, down 18.9%; gross margin improved to 18.7% from 15.5%. Net income attributable to TechnipFMC was $337.7, up 26.4%, and diluted EPS was $0.73 versus $0.57.
- Cash flow: Operating activities used $344.7 in the first nine months, compared with $279.0 provided in 2017. Investing activities used $358.2; financing activities used $403.0. Cash declined to $5,553.3 from $6,737.4 at year-end 2017.
- Debt and liquidity: Total debt was approximately $4,095.5, including $1,755.8 of commercial paper. Cash less debt yielded reported net cash of $1,457.8, down from $2,882.4 at year-end. The $2.5 billion revolving facility had $744.2 of unused capacity; the company reported covenant compliance.
- Balance sheet: Total assets were $26,660.0 and total equity was $12,824.3. Current assets were $11,563.2 against current liabilities of $8,702.8.
- Orders: Nine-month inbound orders were $11,365.9, versus $7,204.4. Backlog was $15,178.0 at September 30, up from $12,982.8 at December 31, 2017; approximately 66.9% of remaining performance obligations were expected to be recognized through 2019.
Material changes and segment trends
- Subsea: Q3 revenue fell 18.2% to $1,209.1 and operating profit fell 22.5% to $79.7; operating margin declined to 6.6% from 7.0%. Lower activity as projects neared completion and competitively priced backlog weighed on results.
- Onshore/Offshore: Q3 revenue fell 33.6% to $1,532.5, primarily as Yamal LNG and other major projects progressed toward completion. Operating profit rose to $243.4 from $206.4, with margin increasing to 15.9% from 8.9%. Results included a Yamal Train 2 provisional-acceptance bonus, a gain on an offshore-yard sale, and stronger execution.
- Surface Technologies: Q3 revenue increased 13.6% to $402.2 and operating profit increased to $51.9 from $49.0; margin eased to 12.9% from 13.8%. North American wellhead and measurement demand supported growth, partly offset by lower flowline sales.
- Q3 consolidated revenue declined mainly because Subsea and Onshore/Offshore projects were winding down. Lower costs and stronger project execution helped lift gross margin. Nine-month net income also benefited from a lower effective tax rate: 35.0% versus 48.8%.
Outlook, risks and unusual items
- Management described a gradually improving oil-and-gas investment backdrop, while noting crude-price volatility, geopolitical conditions, OPEC decisions, demand, sanctions and tariffs as uncertainties. Subsea pricing pressure may persist because of underused manufacturing and vessel capacity.
- Management expected LNG investment opportunities to improve. In Surface Technologies, North American completions and hydraulic-fracturing activity were expected to weaken further during the remainder of 2018 due to pipeline constraints and operator budget limits; management viewed these as potentially temporary.
- Management projected approximately $300 million of 2018 capital expenditures, excluding contingent spending that might be required for contract awards. It remained committed to completing its $500 million share-repurchase authorization by year-end 2018. A quarterly dividend of $0.13 per share was declared for payment in December 2018.
- Operating profit benefited from favorable contract-estimate changes of approximately $75.8 in Q3 and $337.2 for the first nine months, primarily in Onshore/Offshore; management attributed these changes to better-than-expected project execution. Long-term contract estimates remain sensitive to costs, labor, materials, productivity and other execution factors.
- The fair value of a mandatorily redeemable financial liability generated a $213.5 nine-month loss recorded in net interest expense. Foreign-exchange losses were $77.7 for the first nine months, compared with gains of $0.3 in 2017.
- Disclosure controls were deemed ineffective at September 30 because of previously disclosed material weaknesses involving natural-hedge foreign-exchange calculations, period-end reporting controls and certain IT systems. Remediation efforts continued.
- The company was cooperating with U.S., Brazilian and French authorities in investigations concerning potential historical anti-corruption violations, including FCPA matters. It warned that potential sanctions or customer reaction could materially affect the business. A shareholder securities class action relating to a 2017 restatement and control weakness was also pending; outcome and duration could not be predicted.
- Performance and financial guarantees had maximum potential undiscounted payments of $4,932.0; management did not expect them to cause a material adverse effect. The company said it had ended Iran-related business, withdrawn pending bids and would accept no new Iran work.
Most important facts for investors to verify
- Whether operating cash flow recovers from the nine-month outflow and working-capital demands, particularly receivables, inventory and payables.
- Whether backlog converts into revenue and profit as expected, and how much reported backlog growth reflects ASC 606 presentation changes rather than new orders.
- Whether project-estimate benefits, including the substantial nine-month favorable adjustments, are repeatable and supported by execution.
- Progress in remediating the material weaknesses and any further developments in the anti-corruption investigations and shareholder litigation.
- Commercial-paper refinancing capacity, covenant compliance, and the effects of the redeemable-liability valuation and foreign-exchange movements on earnings.