OCEANEERING INTERNATIONAL INC quarterly report, Q1 FY2022

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Oceaneering International, Inc. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022. Comparisons are with Q1 2021 unless otherwise noted. Amounts are in U.S. dollars; financial statement figures below are in millions except per-share data.

Business context and results

Oceaneering provides subsea robotics, offshore project services, manufactured products, integrity and digital solutions, and aerospace and defense technologies. Revenue was $446.2 million, up 2% from $437.6 million. The company reported a net loss of $19.2 million, or $0.19 per diluted share, compared with a $9.4 million loss, or $0.09 per share.

Key financial metrics

  • Profitability: Gross margin was $45.5 million, down from $56.7 million; gross margin percentage fell to 10% from 13%. Operating loss was $1.0 million versus operating income of $13.8 million. The income tax provision was $10.3 million despite the pretax loss; management said the effective rate was affected by geographic earnings mix, valuation allowances, uncertain tax positions and discrete items.
  • Cash flow: Operating cash flow was negative $80.5 million, compared with negative $1.7 million. Capital expenditures were $19.3 million, versus $10.7 million. On the company’s definition, free cash flow was approximately negative $99.8 million. Cash declined by $100.1 million to $438.0 million.
  • Liquidity: Working capital was $677 million. Current assets were $1,142.7 million and current liabilities were $465.4 million. Cash and cash equivalents were $438.0 million, down from $538.1 million at year-end 2021.
  • Debt: Long-term debt had a carrying value of $701.8 million and principal outstanding of $700 million: $400 million of 4.65% notes due in 2024 and $300 million of 6.00% notes due in 2028. No borrowings were outstanding on the prior revolver at quarter-end. The company reported compliance with its covenants.
  • Revenue by segment: Energy Services and Products revenue was $364.6 million, up from $349.2 million; Aerospace and Defense Technologies revenue was $81.5 million, down from $88.3 million. Subsea Robotics utilization was 53%, unchanged year over year. Manufactured Products backlog was $334 million, versus $248 million a year earlier.
  • Other balance-sheet items: Accounts receivable were $303.4 million, contract assets $172.0 million, and contract liabilities $84.8 million. Equity totaled $502.1 million.

Material changes and management commentary

  • Management attributed first-quarter pressure largely to hiring and training, equipment mobilization and readiness costs ahead of expected higher activity later in 2022. OPG also incurred project cost overruns and experienced schedule changes that affected work timing. Each operating segment remained profitable, but unallocated expenses contributed to the consolidated operating loss.
  • Revenue increased in Subsea Robotics, OPG and Integrity Management & Digital Solutions, while Manufactured Products and ADTech revenue declined. OPG operating income fell to $0.7 million from $8.8 million; Subsea Robotics operating income fell to $11.6 million from $14.6 million. IMDS operating income rose to $3.5 million from $2.5 million.
  • Cash use reflected working-capital movements, including lower customer receipts tied to project milestones than in Q4 2021, increased operating costs and payment of prior-period employee incentives. Inventory also increased as backlog grew.
  • In Q4 2021, Manufactured Products recorded about $29.5 million of Evergrande-related losses. No similar charge occurred in Q1 2022. The prior-period charge included a $49 million reserve against receivables and contract assets, partly offset by reclassification of $20 million of contract assets to salable inventory.

Outlook, risks and contingencies

  • Management expected significantly higher Q2 2022 activity and improved operating results in Subsea Robotics, OPG, IMDS and ADTech, with higher activity in Manufactured Products. Unallocated expenses were expected to average in the mid-$30 million range. Management viewed market conditions as supportive of increased activity and pricing improvements from Q2 onward.
  • For 2022, organic capital expenditures were forecast at $70–$90 million, including $40–$45 million of maintenance and $30–$45 million of growth spending. Estimated income tax payments were $40–$45 million, excluding expected CARES Act refunds of approximately $23 million.
  • On April 8, 2022, after quarter-end, the company replaced its prior revolver with a senior secured revolving credit facility maturing in April 2026. It has a $215 million borrowing base and a $100 million letter-of-credit sublimit. The facility includes leverage and interest-coverage covenants and liens on specified assets.
  • Approximately $229 million of remaining performance obligations were disclosed, with $190 million expected to be recognized over the next 12 months and substantially all of the remaining $39 million within 24 months. The disclosure excludes certain short-duration and billings-based contracts.
  • A customer had suspended a substantially complete Manufactured Products contract. The company collected $18 million of receivables in Q1; at March 31, contract assets were approximately $17 million and prepaid storage contract liabilities were $5.8 million. The company believed the contract assets were realizable at book value but could not assure the timing of remaining payments.
  • Risks include volatile energy-market activity, cost inflation and vessel availability, foreign exchange exposure—particularly in Angola—customer payment timing, contract estimates and tax-audit outcomes. CARES Act refund claims were approximately $33 million, of which $10 million had been received; the balance was recorded in receivables. Worldwide unrecognized tax liabilities were $15 million.
  • The company said ordinary-course litigation and claims were not expected to materially affect consolidated results, but outcomes remain uncertain. It reported no off-balance-sheet arrangements and no material changes in critical accounting estimates.

Important facts for investors to verify

  • Whether anticipated Q2 and full-year activity growth translated into improved segment margins, particularly in Subsea Robotics and OPG, and whether OPG project overruns were contained.
  • How operating cash flow and working capital developed, including collections of contract assets and the timing of the suspended-customer contract payments.
  • Progress on the $23 million expected CARES Act refunds and the estimated 2022 cash tax payments.
  • Use and availability of the new $215 million secured revolving facility, covenant headroom, and the refinancing or repayment plan for the $400 million notes due in November 2024.
  • Whether Manufactured Products backlog converted to revenue and cash, and any further exposure to the Evergrande-related contracts.
  • Actual capital spending versus the $70–$90 million forecast and the effect of hiring, mobilization, vessel chartering and other operating costs on margins.