TechnipFMC plc — Form 10-Q summary
Reporting period: Three and nine months ended September 30, 2017. The January 16, 2017 merger of Technip and FMC Technologies makes reported 2017 results not directly comparable with 2016. Where available, management’s pro forma 2016 figures—assuming the merger and Yamal consolidation from January 1, 2016—are used below.
Financial performance
| Metric | Q3 2017 | Q3 2016 pro forma | Nine months 2017 | Nine months 2016 pro forma |
|---|---|---|---|---|
| Revenue | $4.141 billion | $5.038 billion | $11.374 billion | $14.689 billion |
| Revenue change | Down 17.8% | Down 22.6% | ||
| Net income attributable to TechnipFMC | $121.0 million | $327.0 million | $267.2 million | $478.8 million |
| Gross margin | 16.2% | 14.8% | 15.5% | 13.9% |
Reported GAAP revenue was $4.141 billion in Q3 2017 versus $2.376 billion in Q3 2016, and $11.374 billion for the first nine months versus $7.152 billion. Those reported comparisons include only Technip’s results in the 2016 periods and therefore do not measure like-for-like performance. Reported diluted EPS was $0.26 for Q3 and $0.57 for the nine-month period; pro forma 2016 diluted EPS was $0.65 and $0.93, respectively.
- Segment trends: Q3 Subsea revenue was $1.478 billion, down 37.0% against pro forma 2016, and operating margin was 7.0% versus 15.2%. Onshore/Offshore revenue fell 3.8% to $2.308 billion, while operating margin rose to 8.9% from 4.9%. Surface Technologies revenue increased 19.9% to $353.9 million; operating margin was 13.8%, compared with a pro forma loss margin of 5.9%.
- Cash flow: Nine-month operating cash flow was $279.0 million, compared with $268.4 million in 2016. Investing activities provided $1.334 billion, mainly reflecting $1.479 billion of cash acquired in the merger; capital expenditures were $170.4 million. Financing activities used $1.056 billion. Cash increased to $6.896 billion from $6.269 billion at year-end 2016.
- Debt and liquidity: Debt was $3.641 billion, including $473.2 million current debt; cash less debt was $3.256 billion, versus $3.716 billion at year-end. The $2.5 billion revolving facility had no direct borrowings and $1.660 billion of unused capacity after $839.8 million of commercial paper. The company reported covenant compliance.
- Balance sheet: Current assets were $14.135 billion and current liabilities $11.581 billion at quarter-end. Goodwill was $8.896 billion, including preliminary merger-related goodwill.
Changes, outlook and notable items
- Management attributed lower revenue primarily to weaker Subsea activity and reduced backlog following slower awards in 2015–16, project completions and lower vessel utilization. Onshore/Offshore was also affected by lower activity and completed projects. Cost reductions and project execution improved consolidated gross margin.
- Q3 impairment, restructuring and other expense was $59.4 million, including $8.2 million of impairment and $10.9 million of lost productivity costs related to Hurricane Harvey. Nine-month merger transaction and integration costs were $87.2 million.
- Net interest expense was $86.3 million in Q3 and $240.5 million for nine months. A principal driver was remeasurement of a Yamal-related mandatorily redeemable financial liability, producing losses of $73.3 million in Q3 and $202.9 million for nine months.
- The effective tax rate was 48.6% for Q3 and 48.8% for nine months, versus 25.4% and 22.6% in the comparable historical periods. Management cited earnings mix, valuation allowances on losses without expected tax benefits, and individual tax items.
- Inbound orders were $2.462 billion in Q3 and $7.204 billion year to date. Backlog was $13.902 billion at September 30, down from $16.744 billion at year-end 2016; Subsea backlog increased to $5.949 billion while Onshore/Offshore fell to $7.559 billion.
- Management expected 2017 consolidated operating cash flow to decrease amid industry weakness, fewer new awards and customer requests for deferred payments or delivery rescheduling. It projected approximately $250 million of 2017 capital expenditures. Subsea revenue was expected to decline for a third consecutive year; further near-term project sanction delays could prompt additional cost actions. Management saw LNG, refining and petrochemical opportunities in Onshore/Offshore, and expected international Surface Technologies pricing pressure to weigh on margins into the first half of 2018.
- The board authorized a $500 million share repurchase program; the company repurchased $3.6 million through September 30. A quarterly dividend of $0.13 per share was declared October 25, payable in early December, subject to the stated record and ex-dividend dates.
- Disclosure controls and internal control over financial reporting were ineffective due to a material weakness involving foreign-currency calculations on certain projects. Remediation steps had been implemented, but management had not completed testing to determine full remediation. The weakness had previously resulted in a restatement of Q1 2017 interim financial statements.
- The company disclosed DOJ and SEC inquiries concerning potential FCPA issues related to Unaoil and specified legacy Technip projects; it said it was cooperating. The filing does not state an outcome. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain. Guarantees had maximum potential undiscounted payments of $4.573 billion; management did not expect them to cause a material adverse effect.
- Two non-U.S. subsidiaries disclosed Iran-related engineering/design contracts; no revenue was received in the first nine months of 2017. Expected gross revenue was stated as €250,000 and €8 million; net profit was not known.
Key facts investors should verify
- Use merger- and Yamal-adjusted pro forma comparisons when assessing year-over-year operating performance; confirm the underlying assumptions and comparability.
- Track Subsea awards, backlog conversion, vessel utilization and margins, as well as the sharp reduction in Onshore/Offshore backlog.
- Assess the Yamal redeemable-liability remeasurement and its continuing effect on interest expense and earnings.
- Monitor operating cash conversion, customer payment deferrals, debt and commercial-paper levels, and available revolving-facility capacity.
- Follow remediation and independent testing of the foreign-currency control weakness, and any further restatement or regulatory developments.
- Follow the DOJ/SEC inquiries, merger integration costs and realization of expected synergies; the filing provides no resolution or quantified synergy target.