TechnipFMC plc — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Unless stated otherwise, amounts are in U.S. dollars.
Business context and reporting period
TechnipFMC operates in Subsea, Onshore/Offshore, and Surface Technologies, serving oil and gas customers. On August 26, 2019, the board approved a planned separation of Onshore/Offshore and certain related businesses into a separate public company, Technip Energies. Completion was expected in the first half of 2020, subject to approvals and other conditions.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3,335.1m | $3,143.8m | $9,682.3m | $9,229.9m |
| Net income (loss) attributable to TechnipFMC | $(119.1)m | $136.9m | $(1.2)m | $337.7m |
| Diluted EPS | $(0.27) | $0.30 | $0.00 | $0.73 |
| Operating cash flow | Not presented quarterly | $289.4m | $(344.7)m |
Q3 revenue grew 6.1%; nine-month revenue grew 4.9%. Gross margin was 18.3% in Q3 versus 18.6% a year earlier, and 18.6% for the first nine months versus 18.7%. Nine-month GAAP operating profit was $460.0m, down from $760.7m; adjusted operating profit, a non-GAAP measure, was $772.0m versus $849.1m. Adjusted diluted EPS was $0.12 for Q3 and $0.57 for the nine-month period; these non-GAAP measures exclude specified charges and credits.
Cash and cash equivalents were $4,504.4m at September 30, 2019, down from $5,540.0m at year-end 2018. Total debt was $3,908.2m, producing reported net cash of $596.2m, compared with $1,348.3m at year-end. Nine-month capital expenditures were $368.4m; operating cash flow less capital expenditures was $(79.0)m. The company reported $860.3m of unused capacity under its $2.5bn revolving facility and said it was in compliance with its covenants. It projected 2019 capital expenditures of approximately $350m, excluding specified vessel spending and contingent spending.
Working-capital indicators included contract assets of $1,503.0m and contract liabilities of $4,122.5m. Remaining performance obligations/order backlog totaled $24,115.3m at September 30, up from $14,560.0m at December 31, 2018. Management expected to recognize 15.6% through 2019 and 84.4% thereafter.
Material changes versus prior comparable periods
- Q3 attributable net loss of $119.1m compared with income of $136.9m. Results included a $125.1m Subsea vessel impairment, $53.2m of net foreign-exchange losses, and a $99.1m charge from remeasuring a mandatorily redeemable financial liability.
- For the first nine months, net income attributable to TechnipFMC fell to a loss of $1.2m from income of $337.7m. The period included a $324.0m remeasurement charge on the redeemable liability and $91.0m recorded for the global anti-corruption resolution.
- Segment results diverged: Q3 Subsea revenue rose 11.0%, but the segment recorded a $79.6m operating loss; Onshore/Offshore operating profit rose to $284.6m; Surface Technologies operating profit fell to $6.1m amid North American volume and pricing pressure.
- Nine-month operating cash flow improved by $634.1m versus 2018, when working-capital movements included a large cash outflow for trade payables. Investing cash use was broadly unchanged; financing cash use increased to $898.9m, including $443.7m of settlements of the mandatorily redeemable liability.
- The company revised 2018 service-versus-product revenue and related cost classifications due to identified errors. It said the revisions did not affect total revenue, net income, or equity and were not material to prior periods.
Outlook, commentary, risks, and unusual items
- Management described the Subsea outlook as improving, citing increased customer engagement and tendering, while noting that investment decisions may be delayed. Onshore/Offshore prospects included LNG and other projects; five LNG projects had been sanctioned or awarded initial scope since June 2019, including Arctic LNG 2 and Rovuma LNG awarded to TechnipFMC and partners. North American Surface Technologies activity and pricing remained weak; international activity was more resilient.
- The planned Technip Energies separation is conditional and may be delayed, abandoned, or fail to deliver expected benefits. Management cited potential effects on staff retention and competing demands on management time.
- The company had resolved specified anti-corruption investigations through a $301.3m global resolution, including a three-year DOJ deferred prosecution agreement and reporting commitments. The French PNF investigation remained unresolved; a $70.0m provision was maintained, and a settlement could exceed it or fail to be reached.
- Disclosure controls were assessed as ineffective because previously reported material weaknesses in period-end financial reporting and income-tax accounting controls remained under remediation.
- Other disclosed exposures included a pending securities lawsuit with a remaining Section 11 claim, project and performance guarantees with maximum potential undiscounted payments of $5,697.3m, and the usual risks of contract execution, commodity-market volatility, currency movements, and credit-market conditions. Management said it did not expect known contingencies, including guarantees, to materially affect consolidated results, subject to the stated uncertainties.
- Subsequent events: the company agreed to obtain voting control of entities holding its Technip Odebrecht interest, expected to close by year-end 2019, and announced an intended sale of the G1201 vessel. The planned vessel sale prompted review of its similar G1200 vessel; impairment charges of $125.1m were recorded on the two vessels.
Most important facts for investors to verify
- Whether and when the Technip Energies separation receives approvals and closes, and its expected financial and operational effects.
- Underlying Subsea profitability excluding the vessel impairment, and whether the segment’s lower-priced backlog and project timing continue to pressure margins.
- Cash conversion, working-capital requirements, commercial-paper refinancing capacity, and the trend in net cash and debt.
- The final outcome and total cost of the unresolved PNF matter relative to the $70.0m provision, alongside compliance obligations under the global resolution.
- Progress in remediating material weaknesses in financial reporting and tax controls, and any subsequent changes to control-effectiveness conclusions.
- How sustainable adjusted results are relative to GAAP results, including the nature and recurrence of excluded charges and credits.