Oceaneering International, Inc. — Q2 2015 Form 10-Q
Business context and period. Global provider of engineered services and products, primarily for offshore oil and gas, with additional Advanced Technologies operations. This unaudited report covers the quarter and six months ended June 30, 2015; amounts below are in millions of dollars except per-share data.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $810.3 | $927.4 | $1,597.1 | $1,767.6 |
| Gross margin | $167.5 (21%) | $218.2 (24%) | $331.0 (21%) | $407.7 (23%) |
| Operating income | $107.9 (13%) | $161.3 (17%) | $214.6 (13%) | $294.2 (17%) |
| Net income | $65.5 | $110.3 | $135.0 | $201.5 |
| Diluted EPS | $0.66 | $1.02 | $1.36 | $1.86 |
| Operating cash flow | Not separately presented | Not separately presented | $200.5 | $274.3 |
Liquidity and debt at June 30, 2015: Cash and cash equivalents were $190.6, working capital was $857, and current assets were $1,520.0 versus current liabilities of $663.0. Long-term debt was $792.9 carrying value, comprising $500 million of senior notes and a $300 million term loan; the $500 million revolving facility was undrawn. The company reported covenant compliance and considered liquidity adequate. Cash was $430.7 at December 31, 2014.
Cash uses and capital: Six-month investing cash outflow was $322.6, including $230.0 for the C&C Technologies acquisition and $94.8 in property and equipment purchases. Financing cash outflow was $104.9, including $100.5 of treasury-stock purchases and $53.6 of dividends, partly offset by a $50.0 term-loan draw. Cash declined by $240.1 over the six months.
Changes and operating performance
- Q2 revenue fell 13% year over year and operating income fell 33%; six-month revenue declined 10% and operating income 27%. Management attributed pressure principally to lower oil prices, weaker deepwater activity, reduced demand, and customer and competitor pricing pressure.
- Oilfield revenue declined to $724.3 in Q2 from $862.0. ROV utilization was 71% versus 84% a year earlier; Subsea Products revenue was $240.1 versus $327.3, and its backlog was $703 million versus $850 million a year earlier. Asset Integrity revenue was $95.5 versus $130.2. Subsea Projects revenue rose to $172.3 from $136.2, while Advanced Technologies revenue increased to $86.0 from $65.5.
- In April, the company acquired C&C Technologies for approximately $230 million cash and included it in Subsea Projects. The company said the acquisition did not materially affect reported results, cash flows, or financial position.
- The company decided to stop manufacturing subsea BOP control systems and recorded a $9.0 inventory write-down in Q2, reducing Subsea Products gross margin and operating income.
Outlook, risks, and contingencies
- Management forecast 2015 diluted EPS of $2.70–$2.90, versus $4.00 in 2014, and Q3 diluted EPS of $0.65–$0.75. It expected lower 2015 operating income in each Oilfield segment than in 2014. For the second half, it anticipated higher Subsea Products and Advanced Technologies operating income than in the first half, but lower ROV and Subsea Projects income; Asset Integrity was expected to approximate first-half results.
- Management planned 2015 capital expenditures of $200–$250 million excluding acquisitions, including about $47 million in progress payments for the Ocean Evolution, expected to be available in 2016. It expected to retire an average 4%–5% of its ROV fleet annually; the fleet stood at 336 units after seven additions and seven retirements in the first half.
- Angola currency exposure is notable: the kwanza weakened about 14% against the U.S. dollar in Q2. The company disclosed $8.9 million of Q2 and $9.9 million of six-month foreign-exchange losses related to Angola, and approximately $53 million equivalent of cash held in kwanza. Currency conversion is controlled by the Angolan central bank, which had slowed conversions. The income statement reported net other expense of $6.5 million in Q2 and $5.8 million for six months.
- Other risks include sensitivity to offshore customer spending, demand and pricing, foreign-exchange and interest-rate movements, and seasonal activity. A derivative shareholder lawsuit concerning director compensation remained pending; the company did not expect a material adverse effect. It said other claims, mostly insured, were not expected to materially affect results, cash flows, or financial position.
- The quarterly dividend remained $0.27 per share; another $0.27 dividend was declared in July for payment in September. The board’s 10-million-share repurchase authorization had 8.0 million shares remaining at June 30.
Important facts for investors to verify
- Whether deepwater demand, utilization, and pricing continue to weaken, and how actual results compare with the EPS guidance.
- Subsea Products backlog conversion and the forecast recovery in second-half product activity following the BOP-control manufacturing exit and inventory write-down.
- Angola cash convertibility, currency exposure, and subsequent foreign-exchange impacts.
- Cash generation and liquidity after the acquisition, repurchases, dividends, and planned vessel spending; confirm ongoing covenant compliance.
- Final C&C purchase-price allocation and the Ocean Evolution’s delivery, cost, and expected utilization.