Oceaneering International, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Oceaneering provides engineered services and products, primarily to the offshore oil and gas industry, with additional Advanced Technologies operations. Approximately 90% of revenue came from oil and gas customers.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $786.8 million | $840.2 million | Down 6.4% |
| Gross margin | $163.4 million; 21% | $189.5 million; 23% | Down 13.8% |
| Operating income | $106.7 million; 14% of revenue | $132.9 million; 16% | Down 19.7% |
| Net income | $69.5 million | $91.2 million | Down 23.8% |
| Diluted EPS | $0.70 | $0.84 | Down 16.7% |
| Operating cash flow | $8.1 million | $82.2 million | Down $74.1 million |
| Capital expenditures | $49.4 million | $104.0 million | Down $54.6 million |
Cash and cash equivalents were $304.5 million at quarter-end, down from $430.7 million at December 31, 2014. Working capital was approximately $1.0 billion. Long-term debt was $750 million: $500 million of 4.65% senior notes due 2024 and a $250 million term loan. The company reported covenant compliance. The quarterly dividend declared was $0.27 per share.
Segment performance and notable changes
- ROVs: Revenue fell to $219.4 million from $255.8 million; operating income declined to $62.2 million from $76.7 million. Utilization fell to 73% from 86%, reflecting weaker drilling-support demand, fewer days on hire, and lower average revenue per day.
- Subsea Products: Revenue declined to $240.7 million from $260.0 million, and operating income to $50.0 million from $54.5 million, amid lower demand for subsea hardware. Backlog increased to $788 million from $690 million at year-end 2014.
- Subsea Projects: Revenue rose to $153.6 million from $138.2 million and operating income to $22.3 million from $20.5 million, including seasonal diving work in Angola. Sequentially, results were lower due to weaker U.S. Gulf of Mexico demand and pricing and vessel inspection costs.
- Asset Integrity: Revenue decreased to $98.5 million from $124.2 million and operating income to $5.0 million from $14.1 million, as demand weakened across service lines and geographies.
- Advanced Technologies: Revenue increased to $74.5 million from $62.0 million and operating income to $5.0 million from $3.0 million, helped by improved theme-park project profitability.
Cash, capital, and significant events
Operating cash flow was pressured by outflows from current liabilities, including employee bonuses and compensation-plan vesting, higher U.S. tax payments, and a larger decline in customer prepayments. The company also prepaid a steel-tube vendor for favorable pricing. Investing activities used $48.2 million; financing activities used $83.5 million, including $55.8 million for repurchases of approximately 1.1 million shares and $27.0 million in dividends.
In April 2015, after quarter-end, Oceaneering completed its acquisition of C&C Technologies for approximately $230 million in cash. It also drew the remaining $50 million under its delayed-draw term loan after quarter-end. The company estimated 2015 capital expenditures, excluding acquisitions, at $200–$250 million.
Outlook, commentary, and risks
- Management forecast 2015 diluted EPS of $2.80–$3.20, versus $4.00 in 2014, citing lower deepwater activity following the decline in oil prices, customer requests for price concessions, and competitor pricing pressure.
- Q2 2015 diluted EPS guidance was $0.64–$0.70. Management expected lower Q2 operating income year over year in each Oilfield segment.
- Management expected lower 2015 operating income in each Oilfield segment. Advanced Technologies was expected to improve, with operating margin returning to a historical 8%–9% range.
- Planned 2015 capital expenditures included approximately $35 million of progress payments for the Ocean Evolution subsea support vessel, scheduled for delivery by the end of Q1 2016. ROV fleet count was 336; management expected annual retirements averaging 4%–5% of the fleet.
- Foreign currency translation reduced other comprehensive income by $60.6 million, primarily due to U.S. dollar strength. A stronger dollar may reduce operating income; management cited exposure to currencies including the Norwegian krone, U.K. pound, and Brazilian real.
- A derivative shareholder suit concerning nonexecutive director compensation was awaiting a motion-to-dismiss ruling; the company did not expect a material adverse effect. Other claims were also not expected to materially affect results, cash flows, or financial position.
Important facts for investors to verify
- Whether the oil-price-driven decline in demand, utilization, and pricing develops in line with management’s 2015 EPS and segment outlook.
- Whether Subsea Products’ $788 million backlog converts to revenue and cash flow on expected timing and margins.
- The funding and balance-sheet impact of the $230 million C&C acquisition and the post-quarter $50 million term-loan draw.
- Whether operating cash flow recovers after Q1 working-capital outflows, while supporting planned capital spending, dividends, and discretionary repurchases.
- Progress, costs, and timing of the Ocean Evolution vessel, and the performance improvement anticipated in Advanced Technologies.