TechnipFMC plc — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Results include FMC Technologies only from the January 16, 2017 merger date. Comparisons with 2016 are therefore not directly comparable; management uses unaudited pro forma comparisons that also reflect Yamal consolidation as if completed January 1, 2016.
Financial results
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Revenue | $3.845 billion; down 22.5% from management’s 2016 pro forma comparison | $7.233 billion; down 25.1% from management’s 2016 pro forma comparison |
| Gross margin | 17.8%, versus 14.1% pro forma | 15.1%, versus 13.4% pro forma |
| Net income attributable to TechnipFMC | $164.9 million; $0.35 diluted EPS | $146.2 million; $0.31 diluted EPS |
| Operating cash flow | Six-month cash provided was $294.3 million, versus $426.2 million in 2016 | |
| Cash and debt at June 30 | $7.179 billion cash; $3.773 billion total debt; $3.407 billion net cash |
On management’s pro forma basis, Q2 attributable net income was $164.9 million versus $55.2 million; six-month attributable net income was $146.2 million versus $151.8 million. The company cited improved project execution and cost reductions, but lower activity and backlog weighed on revenue. Higher interest expense and effective tax rates also affected results. Q2 and six-month effective tax rates were 35.1% and 48.9%, respectively.
Segments, orders and backlog
- Subsea: Q2 revenue was $1.730 billion, down 28.0% pro forma; operating margin improved to 13.6% from 10.9%. Six-month revenue fell 35.0% pro forma and margin was 9.3%, versus 10.0%.
- Onshore/Offshore: Q2 revenue was $1.813 billion, down 19.8% pro forma; margin rose to 11.3% from 2.8%, helped by favorable project mix and contract-dispute resolutions. Six-month margin was 9.7%, versus 2.9%.
- Surface Technologies: Q2 revenue was $300.0 million and operating loss was $1.0 million. Six-month revenue was $548.4 million and operating loss was $19.6 million; results improved from pro forma prior-period losses, but competitive pricing and weaker international activity remained challenges.
- Q2 inbound orders totaled $3.153 billion; six-month orders were $4.743 billion. Backlog was $15.183 billion at June 30, down from $16.744 billion at year-end 2016. Subsea backlog increased during the first half, while Onshore/Offshore backlog declined, primarily due to foreign-exchange adjustments related to Yamal revenue.
Liquidity, outlook and notable matters
- Operating cash flow declined year over year, which management attributed largely to payments of accounts payable and lower advance payments and billings in excess of costs. Working capital can fluctuate significantly with contract terms and milestones.
- The $2.5 billion revolving facility had $1.425 billion of unused capacity at June 30; $1.075 billion of commercial paper reduced available capacity. The company reported compliance with facility covenants.
- Management expected 2017 operating cash flow to decrease slightly and forecast approximately $300 million of capital expenditures. It expected Subsea revenue to decline for a third consecutive year, while targeting full-year Subsea operating margins in the double digits. It also authorized up to $500 million of share repurchases over the remainder of 2017 and 2018 and intended to begin quarterly dividends after Q3, subject to applicable requirements.
- Oil-price uncertainty, customer requests for deferred payments, and possible rescheduling of Brazilian backlog deliveries could adversely affect cash flow and results. Management also highlighted risks from fixed-price project execution, cost overruns, backlog delays, foreign exchange, and merger integration.
- Disclosure controls and internal control over financial reporting were deemed ineffective at June 30 due to a material weakness in foreign-currency calculations on certain projects. The weakness had contributed to a restatement of Q1 2017 interim financial statements. Remediation measures were implemented, but management had not yet completed testing to establish full remediation.
- The company reported DOJ inquiries concerning Unaoil-related matters and legacy projects in Brazil, Ghana and Equatorial Guinea, and stated that it was cooperating. The filing does not quantify any potential outcome. The Hejre contract dispute was settled, with TechnipFMC reporting no further platform responsibilities or liabilities.
- Guarantees had maximum potential undiscounted payments of $4.699 billion, including $3.883 billion of performance guarantees; management did not expect these instruments to cause a material loss. Two non-U.S. subsidiaries disclosed Iranian contracts; no revenue was received in the quarter or first half.
Important facts for investors to verify
- Whether the foreign-currency control weakness is fully remediated and whether further restatements or related investigations arise.
- Underlying operating cash generation, working-capital movements, and the effect of customer payment deferrals or delivery rescheduling.
- Order conversion, backlog quality and timing, and whether Subsea margins meet management’s full-year target amid lower revenue.
- Progress on merger integration, anticipated savings, and the final purchase-price allocation, which remained preliminary.
- Potential outcomes of DOJ inquiries and other contingencies, and the capacity to fund debt obligations, planned repurchases and dividends.