Oceaneering International, Inc. — Q2 2017 Form 10-Q
Business context and period: The company provides engineered services and products primarily to the offshore oil and gas industry, with additional government, aerospace and commercial businesses. This unaudited filing covers the three and six months ended June 30, 2017; amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $515.0 million | $625.5 million | $961.2 million | $1,233.9 million |
| Gross margin | $53.6 million (10%) | $95.2 million (15%) | $98.4 million (10%) | $192.7 million (16%) |
| Operating income | $9.4 million (2%) | $38.4 million (6%) | $9.2 million (1%) | $86.5 million (7%) |
| Net income (loss) | $2.1 million | $22.3 million | ($5.4 million) | $47.4 million |
| Diluted EPS | $0.02 | $0.23 | ($0.06) | $0.48 |
| Operating cash flow | — | $102.6 million | $144.6 million |
Revenue declined about 18% in Q2 and 22% for the first half year over year. Six-month cash flow from investing was a $40.3 million outflow, mainly capital spending; financing was a $31.5 million outflow, primarily dividends. Cash and equivalents were $482.3 million at June 30, versus $450.2 million at year-end 2016.
At June 30, total assets were $3.09 billion, current assets $1.26 billion and current liabilities $482.9 million, yielding reported working capital of approximately $779 million. Long-term debt was $794.1 million on the balance sheet; principal debt was approximately $800 million, including $500 million of senior notes due 2024 and a $300 million term loan. The $500 million revolving facility was undrawn and available. The company reported compliance with its credit covenants, including a maximum total capitalization ratio of 55%.
Material changes and segment results
- Oilfield: Q2 revenue fell to $412.1 million from $543.1 million; operating income fell to $27.7 million from $52.6 million. Lower offshore demand and pricing affected all major Oilfield lines.
- ROVs: Q2 revenue was $103.4 million versus $139.6 million; utilization was 48% versus 55%. The fleet totaled 279 ROVs after three additions and four retirements in the first half.
- Subsea Products: Q2 revenue was $174.9 million versus $190.9 million and operating income $10.6 million versus $25.1 million. Backlog was $328 million, down from $431 million at December 31, 2016.
- Subsea Projects: Q2 revenue was $75.5 million versus $138.7 million and operating income $3.0 million versus $10.2 million, reflecting lower vessel demand and pricing.
- Asset Integrity: Q2 operating income improved to $3.8 million from a $0.8 million loss, attributed partly to prior restructuring and a prior-year bad-debt charge.
- Advanced Technologies: Q2 revenue rose to $103.0 million from $82.5 million and operating income to $7.6 million from $5.5 million, with improved project execution and commercial activity.
Q2 diluted EPS was $0.02 compared with $0.23 a year earlier. The six-month loss contrasts with prior-year six-month net income. The quarterly dividend had been reduced from $0.27 to $0.15 per share beginning in Q4 2016; Q2 2017 dividends declared were $0.15 per share. No shares were repurchased under the plan in the first half of 2017.
Outlook, risks and contingencies
- Management projected full-year 2017 diluted EPS below 2016’s $0.25 and described the full-year outlook as marginally profitable at the operating-income line. It expected lower deepwater and offshore activity amid oil-price conditions, customer spending cuts and pricing pressure.
- For Q3 2017, management expected higher operating income in Subsea Products and Subsea Projects versus Q2, with slightly lower results in the other segments. Full-year expectations included lower Oilfield results overall; Advanced Technologies revenue and operating income were expected to exceed 2016.
- Expected 2017 capital expenditures were $90–$120 million, including $25 million of progress payments for the Ocean Evolution support vessel. Delivery was expected at the end of December 2017, with service planned for Q1 2018.
- Management anticipated higher interest expense from rising rates affecting floating-rate debt and swaps on $200 million of fixed-rate notes, and a loss on its Medusa Spar LLC investment as production declines.
- Foreign-exchange exposure remains notable in Angola: approximately $34 million equivalent of kwanza cash was held there, alongside $59 million equivalent of Angolan central-bank bonds intended to mitigate currency exposure. The filing describes limits on converting kwanza to U.S. dollars.
- A shareholder derivative lawsuit concerning nonemployee director compensation remained pending; the company stated it did not expect a material adverse effect. Other personal-injury and business claims were described as primarily insured or not expected to be material.
- The company adopted ASU 2016-09, which caused share-based compensation tax effects to flow through the tax provision; it reported $1.2 million of additional first-half tax expense from discrete items. It expected the upcoming revenue-recognition standard to affect timing and period-to-period gross-margin variability, but not significantly overall in 2018.
Key facts for investors to verify
- Whether offshore demand, pricing and ROV utilization stabilize, and how those trends affect the full-year operating-income outlook.
- Whether Subsea Products backlog converts to revenue and whether the expected Q3 improvement materializes.
- Cash generation, capital expenditure needs and the ability to sustain the $0.15 quarterly dividend while carrying approximately $800 million of principal debt.
- Interest-rate sensitivity and the recoverability or liquidity of the Angolan kwanza cash and central-bank bonds.
- Progress and final cost/timing for the Ocean Evolution vessel, plus the outcome of the pending director-compensation litigation.