Business context and reporting period
Oceaneering International, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company provides engineered services and products, primarily to the offshore oil and gas industry, with additional Advanced Technologies businesses. Management said approximately 90% of revenue and substantially all operating income before unallocated expenses came from oil and gas customers, particularly deepwater operations.
Financial performance
Amounts below are in millions except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $743.6 | $973.1 | $2,340.7 | $2,740.7 |
| Gross margin | $168.3; 23% | $241.9; 25% | $499.3; 21% | $649.6; 24% |
| Operating income | $113.5; 15% | $181.9; 19% | $328.1; 14% | $476.1; 17% |
| Net income | $68.5 | $124.3 | $203.5 | $325.9 |
| Diluted EPS | $0.70 | $1.16 | $2.06 | $3.01 |
| Cash from operations | Not presented separately for the quarter | $373.1 | $385.5 |
Q3 revenue declined about 24% and net income about 45% year over year; nine-month revenue declined about 15% and net income about 38%. Nine-month operating cash flow was nearly flat year over year despite lower earnings. Capital spending and investing included $139.2 million of property and equipment purchases and $230.0 million for the C&C Technologies acquisition.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $271.2 million, down from $430.7 million at year-end 2014; working capital was $887 million.
- Long-term debt carrying value was $797.5 million, representing $800 million principal: $500 million of 4.650% senior notes due 2024 and a $300 million term loan due 2017. The $500 million revolving facility was undrawn and available. The company reported compliance with its covenants, including a maximum leverage ratio of 4.00 to 1.00.
- Nine-month financing uses included $100.5 million of share repurchases and $80.0 million of dividends; the company also borrowed the remaining $50 million under its term loan. Quarterly dividends were $0.27 per share.
Material changes and segment trends
- Oilfield revenue fell to $661.3 million in Q3 from $908.4 million; operating income fell to $135.9 million from $218.7 million. Management attributed the broad downturn to lower deepwater activity following the decline in oil prices, customer price concessions and competitive pricing pressure.
- ROV revenue and operating income declined year over year; utilization fell to 68% from 84%. The fleet totaled 337 vehicles at quarter-end.
- Subsea Products revenue and operating income declined with weaker demand across major product lines. Backlog was $736 million at September 30, versus $768 million a year earlier and $690 million at December 31, 2014.
- Subsea Projects operating income rose to $28.8 million from $27.3 million in Q3, though management expected a significant Q4 decline. Nine-month results benefited from Angola diving services, improved U.S. Gulf of Mexico diving results and acquired data-solutions operations.
- Asset Integrity revenue and operating income declined amid weaker demand and pricing. Advanced Technologies revenue increased, but Q3 operating income declined to $1.6 million from $2.9 million, reflecting poor execution on certain theme-park projects; management said it had reorganized to address execution issues.
Outlook, risks and unusual items
- Management projected 2015 diluted EPS of $2.60–$2.66, versus $4.00 in 2014, and forecast Q4 EPS of $0.54–$0.60. For Q4, it expected lower operating income in most oilfield segments, particularly Subsea Projects; Subsea Products about flat and Advanced Technologies somewhat improved.
- Management estimated 2015 capital expenditures, excluding acquisitions, at $200–$250 million. It expected the new Ocean Evolution support vessel to be delivered in late Q3 2016 and planned $33 million of milestone payments in Q4 2015.
- The company ceased manufacturing subsea BOP control systems and recorded a $9.0 million inventory write-down in Q2 2015. It completed the approximately $230 million cash acquisition of C&C Technologies in April; the purchase-price allocation remained preliminary.
- Foreign-exchange losses tied to the Angolan kwanza were $7.9 million in Q3 and $17.9 million for the nine months. Approximately $34 million of cash was held in kwanza in Angola, where central-bank controls had slowed conversion to U.S. dollars. Foreign currency translation reduced comprehensive income and accumulated equity.
- Risks include continued weakness in deepwater spending and pricing, lower vessel and ROV utilization, foreign-exchange exposure and execution challenges. A shareholder derivative suit over nonexecutive director compensation remained pending; the company said it did not expect a material adverse effect. Other claims were described as not expected to be material, with most covered by insurance.
Important facts for investors to verify
- Whether actual Q4 and full-year 2015 EPS and segment results matched management’s forecasts, particularly the expected Subsea Projects decline.
- Subsequent trends in ROV utilization, pricing, Subsea Products backlog and deepwater customer spending.
- Whether Angola’s currency-conversion restrictions, kwanza exposure and related losses changed after quarter-end.
- Final C&C purchase accounting, capital expenditure requirements and the Ocean Evolution’s cost, timing and expected utilization.
- Debt covenant headroom, liquidity, and the pace of future repurchases and dividends as operating cash flow changes.