Oceaneering International, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Oceaneering provides engineered services and products, primarily to offshore oil and gas customers, through Oilfield segments (ROVs, Subsea Products, Subsea Projects and Asset Integrity) and Advanced Technologies. Oilfield generated about 81% of revenue; foreign operations generated about 51%.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $1.922 billion | $2.272 billion |
| Gross margin | $194.6 million; 10% of revenue | $279.2 million; 12% |
| Operating income | $10.7 million; 1% | $70.8 million; 3% |
| Net income | $166.4 million | $24.6 million |
| Diluted EPS | $1.68 | $0.25 |
| Cash from operating activities | $136.5 million | $339.4 million |
| Capital expenditures, including acquisitions | $105.0 million | $142.5 million |
- Revenue fell about 15%; operating income fell about 85%. Oilfield operating income declined to $89.4 million from $143.2 million. Advanced Technologies operating income rose to $22.0 million from $11.8 million.
- Net income included a $189.1 million noncash tax benefit from the 2017 Tax Act. Before tax, the company reported a $17.8 million loss, compared with $43.3 million of income in 2016. The tax benefit, not improved operations, primarily explains the increase in reported net income.
- Year-end cash was $430.3 million; working capital was $751.6 million and the working-capital ratio was 2.72. The $500 million revolving credit facility was undrawn at year-end. Long-term debt was $792.3 million, including a $300 million term loan and $500 million principal of 2024 notes; the company reported compliance with debt covenants.
- After year-end, Oceaneering issued $300 million of 6.000% notes due 2028 and used the proceeds to repay the term loan. It also amended and extended its revolving facility. These transactions were subsequent events, not year-end balances.
- ROV utilization declined to 46% from 53%; ROV revenue fell 25%. Subsea Products revenue declined 10%, and its backlog fell to $276 million from $431 million. Subsea Projects revenue declined 38%. Asset Integrity revenue declined 14%, although operating income improved.
Outlook, management commentary and risks
- Management expected a net loss and lower operating income in 2018 and did not provide EPS guidance, citing limited visibility and uncertainty around energy markets and tax accounting. It forecast capital expenditures of $80–$120 million, including $22 million to complete the Ocean Evolution, scheduled for delivery in the second quarter of 2018.
- Management anticipated lower demand for deepwater drilling, field development and offshore inspection, maintenance and repair, with continued customer spending cuts and pricing pressure. It expected lower Subsea Products earnings and margins, a challenging Subsea Projects year, and modest improvement in Asset Integrity and Advanced Technologies.
- Oilfield demand remains sensitive to oil and gas prices, offshore customer budgets, rig activity and subsea installations. Backlog was $1.38 billion at year-end, down from $1.55 billion; it is subject to delays, scope changes and cancellation and is not a guarantee of revenue or profit.
- Other notable exposures include foreign exchange risk—particularly Angola, where the company held about $27 million equivalent in kwanza cash and reported an estimated $6 million loss from a January 2018 devaluation—customer concentration (BP represented 12% of 2017 revenue), environmental and offshore operating hazards, and risks from international operations.
- The fourth-quarter dividend was not declared; the company said it did not anticipate reinstating a quarterly cash dividend until market outlook and projected free cash flow improved significantly. The 2017 annual dividend declared was $0.45 per share, versus $0.96 in 2016.
- The 2017 Tax Act accounting was provisional. Goodwill testing found no impairment, but Subsea Projects goodwill had about 20% fair-value headroom and could be at risk if offshore activity deteriorates materially. The 2018 revenue-recognition standard was expected to affect the timing of product revenue and profit recognition; management expected no significant opening retained-earnings adjustment based on its assessment to date.
Important facts for investors to verify
- Separate operating performance from the one-time $189.1 million tax benefit, and monitor the final Tax Act accounting and future effective tax rate.
- Track operating cash flow, liquidity, debt costs and covenant headroom, including the effects of the 2028 notes and amended revolver.
- Check recovery in ROV utilization and dayrates, Subsea Products backlog and margins, and Subsea Projects vessel demand and pricing.
- Assess whether the $1.38 billion backlog converts to profitable work and whether cancellations, delays or scope changes occur.
- Monitor the dividend decision, 2018 capital spending and Ocean Evolution delivery, along with Angola currency exposure and Subsea Projects goodwill impairment headroom.