Oceaneering International, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Oceaneering provides engineered services and products mainly to the offshore oil and gas industry, particularly deepwater markets; approximately 90% of revenue comes from oil and gas customers.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $608.3 million | $786.8 million | Down 23% |
| Gross margin | $97.5 million; 16% | $163.4 million; 21% | Down $65.9 million; 5 percentage points |
| Operating income | $48.1 million; 8% | $106.7 million; 14% | Down 55% |
| Net income | $25.1 million | $69.5 million | Down 64% |
| Diluted EPS | $0.26 | $0.70 | Down $0.44 |
| Operating cash flow | $53.6 million | $8.1 million | Up $45.5 million |
| Capital expenditures | $21.2 million | $49.4 million | Down $28.2 million |
Operating cash flow benefited from reductions in receivables and other operating assets, partly offset by a $95.6 million cash outflow from current liabilities. Investing activities used $37.5 million, including $21.2 million of property and equipment purchases and $20.0 million of other investments. Financing activities used $29.5 million, primarily for $26.5 million in dividends. Cash declined $14.4 million to $370.9 million.
At March 31, 2016, working capital was $903 million. Long-term debt was $800.6 million, including $500 million principal of 4.650% senior notes due 2024 and a $300 million term loan; $500 million remained available on the revolving facility. The company reported compliance with its credit covenants, including a maximum total capitalization ratio of 55%. Quarterly dividends declared were $0.27 per share.
Business performance and changes
- Oilfield: Revenue fell to $541.5 million from $712.2 million; operating income declined to $74.9 million from $139.5 million. Management attributed the deterioration to weaker deepwater demand and pricing amid low oil prices and customer spending cuts.
- ROVs: Revenue was $147.6 million versus $219.4 million. Utilization fell to 56% from 73%, and operating income to $27.0 million from $62.2 million, reflecting fewer days on hire and lower revenue per day. The fleet totaled 318 ROVs.
- Subsea Products: Revenue was $194.8 million versus $240.7 million; operating income was $40.6 million versus $50.0 million. Backlog declined to $576 million from $788 million a year earlier and $652 million at year-end, principally in umbilicals and tooling.
- Subsea Projects: Revenue declined to $129.4 million from $153.6 million and operating income to $6.8 million from $22.3 million, due to lower vessel demand and pricing, Ocean Alliance drydocking, and weak survey demand.
- Asset Integrity: Revenue fell to $69.6 million from $98.5 million and operating income to $0.4 million from $5.0 million, mainly on weaker demand and pricing in the U.K. and Norway.
- Advanced Technologies: Revenue was $66.9 million versus $74.5 million; operating income fell to $0.6 million from $5.0 million, reflecting low margins on commercial and theme-park projects and execution and contracting issues.
Sequentially, consolidated operating income rose to $48.1 million from $45.8 million in Q4 2015. Management cautioned that the comparison was affected by Q4 charges, including $22 million in ROV inventory write-downs, restructuring and fixed-asset write-offs, and $18 million in Subsea Products charges for asset reserves, restructuring, bad debts and inventory write-downs.
Outlook, risks and unusual items
- Management expects 2016 diluted EPS to be significantly below 2015’s $2.34, but provided no specific Q2 or full-year EPS guidance because market visibility is limited. Q2 operating income was forecast to be relatively flat to down from Q1.
- For 2016, management expects lower operating income in each oilfield segment, particularly ROVs, Subsea Products and Subsea Projects. It also expects lower Asset Integrity income; Advanced Technologies income is expected to improve year over year.
- Planned 2016 capital expenditures, excluding acquisitions, were approximately $125 million to $175 million, including about $41 million in progress payments for the Ocean Evolution, expected to be delivered late in 2016.
- The customer for the Bourbon Oceanteam 101 exercised its right to terminate use of the vessel at the end of May 2016. The company expects reimbursement of costs associated with early release and demobilization. Charters for the Olympic Intervention IV and other vessels also expire or may terminate during 2016.
- Foreign currency losses were $5.9 million in Q1, primarily related to Angola; the filing separately identifies $7.0 million of kwanza-related transaction losses. About $22 million equivalent of cash was held in kwanza in Angola, where conversion is controlled and has slowed. The company had also used kwanza to purchase $40 million equivalent of Angolan central bank bonds maturing in November 2018.
- Key risks include continued low oil prices, reduced deepwater activity, customer spending cuts, pricing pressure, vessel utilization and contract changes, foreign-exchange restrictions and currency movements. A shareholder derivative suit concerning director compensation remained pending; the company did not expect a material adverse effect. Other disclosed claims were generally insured or not expected to be material.
Important facts for investors to verify
- Whether deepwater demand, pricing and ROV utilization stabilize or weaken further, and how these trends affect 2016 earnings.
- Subsea Products backlog conversion, order intake and pricing, and the effect of the backlog decline on future revenue.
- Angola cash convertibility, kwanza exposure and the value and recovery terms of the central bank bonds.
- Actual capital spending and delivery, cost and deployment plans for the Ocean Evolution.
- Vessel charter termination, reimbursement and expiration outcomes, including their effects on Subsea Projects results and cash flows.
- Liquidity, debt covenant headroom and the sustainability of dividends under prolonged market weakness.