Oceaneering International, Inc. — Q2 2014 Form 10-Q
Business and period: Global provider of engineered services and products, primarily to the offshore oil and gas industry, with a focus on deepwater applications. This filing covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless noted. Oilfield generated about 93% of Q2 revenue. Figures below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $927.4 | $820.4 | $1,767.6 | $1,538.9 |
| Gross margin | $218.2; 24% | $201.9; 25% | $407.7; 23% | $362.2; 24% |
| Operating income | $161.3; 17% | $146.3; 18% | $294.2; 17% | $254.6; 17% |
| Net income | $110.3 | $98.8 | $201.5 | $173.7 |
| Diluted EPS | $1.02 | $0.91 | $1.86 | $1.60 |
- Q2 revenue rose about 13% and net income about 12%; first-half revenue rose about 15% and net income about 16%.
- First-half operating cash flow was $274.5, versus $230.4. Property and equipment purchases were $221.7 and acquisitions used $39.8; investing cash outflow totaled $257.4. Cash increased $11.9 to $103.3.
- At June 30, working capital was $764.0. Debt was $80.0, drawn on a $300 million revolving facility, leaving $220.0 available. Cash exceeded reported debt by $23.3.
- Property and equipment purchases plus acquisitions totaled about $261 million in the first half. Dividends paid were $53.0; the company repurchased 500,000 shares for $35.3.
Segment trends and material changes
- ROVs: Q2 revenue was $268.3, up from $242.2; operating income was $75.8, up from $69.2. Utilization was 84%, versus 83%. Management cited higher demand, offset sequentially by repair costs, lower utilization and costs of placing new systems into service.
- Subsea Products: Q2 revenue rose to $327.3 from $258.0 and operating income to $79.5 from $62.1, a record quarterly operating-income result. Backlog was $850 million, down from $902 million a year earlier and $906 million at December 31, 2013.
- Subsea Projects: Q2 revenue increased to $136.2 from $118.2 and operating income to $25.9 from $24.0, helped by vessel additions and deepwater activity in the Gulf of Mexico and offshore Angola.
- Asset Integrity: Q2 revenue increased to $130.2 from $124.7, while operating income declined to $15.9 from $16.6, reflecting lower African activity.
- Advanced Technologies: Q2 revenue fell to $65.5 from $77.3 and operating income to $0.2 from $10.2. Management cited execution problems, rework and schedule delays on U.S. Navy and industrial projects, as well as reduced theme-park and Navy work. The prior-year quarter included a theme-park schedule-completion incentive bonus.
Consolidated gross and operating margins declined year over year in Q2 despite higher revenue. First-half margins also eased at the gross level, while the operating margin was unchanged.
Outlook, risks and contingencies
- Management forecast 2014 diluted EPS of $3.95–$4.05, compared with 2013 EPS of $3.42, and Q3 2014 diluted EPS of $1.10–$1.15. It expected Q3 operating income to increase sequentially across operating segments, particularly ROV and Subsea Projects.
- For 2014, management expected higher operating income in each Oilfield segment than in 2013, but lower Advanced Technologies operating income. Forecasts included ROV utilization of about 84% and a 29% operating margin; Subsea Products operating margin of about 21%; and approximately $450 million of capital expenditures.
- The company added 27 ROVs and retired eight in the first half, ending with 323; it planned to add at least 13 more in the rest of 2014. A new subsea support vessel was under construction for expected delivery by the end of Q1 2016.
- Demand depends substantially on customers’ deepwater oil-and-gas spending. The filing notes seasonal variation in several businesses and exposure to foreign exchange and interest-rate movements; the company reported no outstanding hedges and said these market risks were not material.
- OGX-related receivables in Brazil were approximately $3.3 million and remained unpaid as of July 30, 2014. The full amount was reserved; collection remained uncertain.
- A shareholder derivative suit filed in Delaware alleges breach of fiduciary duty and unjust enrichment concerning non-executive director compensation. The company intended to seek dismissal and did not expect a material adverse effect. Management also considered other claims not expected to be material.
- The company was evaluating the impact of the new revenue-recognition standard, ASU 2014-09, effective for it beginning in 2017. Management said liquidity was adequate for operations, commitments and anticipated dividends.
Important facts for investors to verify
- Whether Subsea Products backlog conversion and demand support the outlook, given the decline in reported backlog.
- Whether Advanced Technologies project execution improves and its weak Q2 performance remains contained.
- ROV utilization, new-system deployment costs and achievement of the planned fleet additions and 2014 EPS guidance.
- Actual capital spending, vessel-construction commitments, revolving-credit usage and cash generation as investment continues.
- Recovery, if any, of the fully reserved OGX receivable and any developments in the director-compensation litigation.