Oceaneering International, Inc. — 2020 Q3 Form 10-Q
Business context and reporting period
Global provider of engineered services and products, primarily for offshore energy, with aerospace and defense operations. This unaudited filing covers the quarter and nine months ended September 30, 2020; prior segment results were recast to reflect a new five-segment structure.
Financial results and liquidity
Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
- Q3 revenue: $439.7, down 11.6% year over year. Gross margin was $29.7, or 6.7% of revenue, versus $49.1, or 9.9%, in Q3 2019.
- Q3 earnings: Operating loss of $60.6 and net loss of $79.4, or $0.80 per diluted share, compared with net loss of $25.5, or $0.26 per share, a year earlier. Q3 included $40.9 of goodwill impairment and other segment charges.
- Nine-month results: Revenue of $1,403.6, down 5.6% year over year; operating loss of $446.6 and net loss of $471.8, or $4.76 per diluted share. The operating loss included $457.6 of impairment, write-off, inventory and other charges, including $343.9 of goodwill impairment and $68.8 of long-lived asset impairments.
- Cash flow: Nine-month operating cash flow was $32.4, down from $112.2 a year earlier. Capital expenditures were $45.8, implying free cash flow of approximately negative $13.5 under the company’s definition. Cash declined $14.9 from year-end to $358.8.
- Liquidity and debt: Working capital was $694.6. Long-term debt carrying value was $805.6, representing $800 of senior notes principal; the $500 revolving facility was undrawn. The company reported compliance with credit agreement covenants and said the facility remained available.
- Other metrics: Nine-month interest expense was $33.3. The company recorded a $42 tax benefit, principally related to the CARES Act. Total assets were $2,037.7 and equity was $559.4 at quarter-end.
Material changes versus comparable periods
- Q3 revenue declined from $497.6 in 2019, while net loss widened. Nine-month revenue fell from $1,487.3, and the much larger year-to-date loss chiefly reflects substantial impairment charges.
- Energy Services and Products revenue fell to $357.2 in Q3 from $420.4 a year earlier. Aerospace and Defense Technologies revenue increased to $82.6 from $77.2.
- Q3 Subsea Robotics revenue was $119.6; ROV utilization was 59%, versus 60% a year earlier. Manufactured Products revenue was $110.4, but segment results included $40.9 of goodwill impairment. ADTech revenue was $82.6 and operating income was $13.1.
- Cash and cash equivalents increased $25.3 sequentially from June 30, which management attributed largely to operations, working capital and capital conservation. Capital expenditures fell to $45.8 for the first nine months from $128.8 in 2019.
Outlook, management commentary and risks
- Management expected Q4 results to decline sequentially because of seasonal offshore activity and customer budget exhaustion, with lower results anticipated in each segment except Manufactured Products. Unallocated expenses were expected to be approximately $30.
- For full-year 2020, the company expected capital expenditures of $50–$60, cash tax payments of $30–$35, CARES Act and other refunds of $16–$34, and positive free cash flow. It expected Q4 to benefit from tax refunds and positive working-capital changes.
- Management cited cost reductions and efficiency improvements amid COVID-19 disruption, lower oil and gas demand, price volatility and customer spending restraint. The Angola light well intervention project was delayed; management expected work to move forward in late Q4 2020 or early Q1 2021.
- Manufactured Products backlog was $318 at September 30, down from $557 at December 31, 2019. Its trailing-12-month book-to-bill ratio was 0.5; management cited delayed customer investment decisions.
- Key risks include further pandemic-related delays or contract cancellations, lower energy activity and backlog, foreign-exchange losses and restrictions on converting Angolan kwanza cash. The company disclosed ordinary-course litigation and disputes, but did not expect them to materially affect its financial position, results or cash flows. It cautioned that outcomes remain uncertain.
Important facts for investors to verify
- Whether Q4 and full-year cash-flow, free-cash-flow, tax-refund and capital-expenditure expectations were achieved.
- Backlog conversion, new order intake and book-to-bill trends, particularly in Manufactured Products and offshore energy businesses.
- Whether cost reductions can sustain operating performance as customer activity and seasonal demand change.
- Cash availability, debt maturities and covenant headroom under continued market stress.
- Realization and timing of expected tax refunds, and exposure to Angola and Brazil currency movements.
- Assumptions behind goodwill and long-lived asset valuations and the potential for further impairments.