Oceaneering International, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Oceaneering provides engineered services and products, primarily to the offshore oil and gas industry, alongside defense, aerospace and theme-park businesses. Oilfield generated 86% of revenue; foreign operations generated approximately 57%.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $2.272 billion | $3.063 billion |
| Gross margin | $279.2 million (12%) | $605.4 million (20%) |
| Operating income | $70.8 million (3%) | $373.8 million (12%) |
| Net income | $24.6 million | $231.0 million |
| Diluted EPS | $0.25 | $2.34 |
| Operating cash flow | $340.5 million | $560.4 million |
| Capital expenditures, including acquisitions | $142.5 million | $424.0 million |
Revenue fell about 26%, operating income about 81%, and net income about 89% year over year, reflecting depressed offshore activity and pricing. Cash and cash equivalents were $450.2 million; working capital was $754.2 million and the working-capital ratio was 2.48. Long-term debt was $793.1 million on the balance sheet, representing $800 million principal debt: $500 million of 4.65% notes due 2024 and a $300 million term loan. No revolving-credit borrowings were outstanding; $500 million was available under the revolving facility. The company reported compliance with its 55% maximum capitalization-ratio covenant.
Material changes and segment performance
- All four Oilfield segments reported lower revenue in 2016. ROV revenue declined to $522.1 million from $807.7 million; utilization fell to 53% from 69%. The fleet was reduced to 280 work-class ROVs.
- Subsea Products revenue declined to $692.0 million from $959.7 million, and year-end backlog fell to $431 million from $652 million.
- Subsea Projects revenue was $473.0 million, down from $604.5 million. Asset Integrity revenue was $275.4 million, down from $373.0 million.
- Advanced Technologies revenue was $309.1 million versus $317.9 million; operating income improved to $11.8 million from $9.7 million.
- Total firm backlog decreased to $1.553 billion from $2.515 billion. Fourth-quarter revenue was $488.4 million; operating loss was $3.9 million and net loss was $11.0 million, versus positive operating and net income in fourth-quarter 2015.
Outlook, unusual items and risks
- Management expected 2017 diluted EPS to be below 2016’s $0.25 and forecast only marginal operating-income profitability; it did not provide EPS guidance because market visibility was limited. It anticipated continued lower deepwater demand and pricing pressure.
- Management projected 2017 Subsea Products operating income below 2016, with margins in the mid- to high-single digits; lower Asset Integrity and ROV operating income; and improved Advanced Technologies operating income. Planned 2017 capital expenditures were $90–$120 million, including $25 million to complete the Ocean Evolution vessel.
- 2016 included $30.5 million of inventory write-downs, $10.8 million of ROV retirement charges, and $11.6 million of restructuring costs. Additional ROV fixed-asset write-offs contributed to $36.0 million of ROV inventory and asset charges. A $4.2 million deferred-tax valuation allowance was recorded.
- The effective tax rate rose to 43.3% from 31.3%, partly due to the geographic mix of income and losses. Angola currency devaluation contributed to foreign-exchange losses; the company held $32.0 million equivalent in kwanza cash and $59.1 million of Angolan central-bank bonds denominated in U.S.-dollar equivalents but payable in kwanza.
- Customer concentration is significant: BP and subsidiaries accounted for 18% of annual revenue in each of 2014–2016, and the five largest customers represented 43% of 2016 revenue. Other key risks include oil-price and offshore-spending cycles, backlog cancellations, foreign political and currency exposure, competition, and offshore operating and environmental hazards.
- A shareholder derivative suit concerning director compensation remained pending; the company stated it did not expect a material adverse effect. Other reported claims were generally insured, and management did not expect them to materially affect results or financial position.
Investor verification priorities
- Review the pace of offshore rig activity, customer spending and pricing, and whether backlog converts to profitable work.
- Track ROV utilization, fleet reductions, Subsea Products margins and backlog, and performance of the new Ocean Evolution vessel.
- Assess liquidity and covenant headroom against debt service, planned capital spending, and the reduced dividend: 2016 declared dividends were $0.96 per share, including $0.15 in the fourth quarter versus $0.27 in each of the first three quarters.
- Monitor Angola’s currency-conversion constraints and the recoverability and payment terms of the central-bank bonds.
- Check the effect of the new share-based compensation tax accounting standard and the timing and magnitude of any further restructuring, impairment or contract-estimate charges.