Oceaneering International, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparison is with Q1 2016 unless stated otherwise. Oceaneering provides engineered services and products, primarily to the offshore oil and gas industry, and also serves defense, aerospace and commercial markets.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $446.2 million | $608.3 million |
| Gross margin | $44.9 million; 10% | $97.5 million; 16% |
| Operating income (loss) | $(0.2) million; approximately breakeven | $48.1 million; 8% of revenue |
| Net income (loss) | $(7.5) million | $25.1 million |
| Diluted EPS | $(0.08) | $0.26 |
| Operating cash flow | $59.0 million | $52.6 million |
| Capital expenditures | $17.8 million | $21.2 million |
| Cash dividends paid | $14.7 million | $26.5 million |
Cash and cash equivalents were $462.5 million at March 31, 2017, versus $450.2 million at year-end 2016. Working capital was $769 million. Long-term debt was $793.9 million on the balance sheet; the company also reported $800 million principal amount outstanding, consisting of $500 million of 4.65% senior notes due 2024 and a $300 million term loan. The $500 million revolving facility was undrawn, and the company reported compliance with its credit covenants. Net cash increased $12.3 million during the quarter.
Interest expense, net, was $6.3 million. The income tax line was a benefit of $1.1 million, though the company recorded $2.1 million of tax expense from discrete items, principally reflecting adoption of new share-based compensation tax accounting. Foreign currency transaction losses were $2.2 million, compared with $5.9 million a year earlier. Comprehensive loss was $14.6 million, including a $7.1 million foreign-currency translation loss.
Material changes and business trends
- Revenue fell 27% year over year, and gross margin declined six percentage points. Lower offshore activity, customer spending cuts and pricing pressure weighed on the oilfield businesses.
- Oilfield revenue decreased to $360.3 million from $541.5 million. ROV revenue fell to $94.0 million from $147.6 million; utilization declined to 46% from 56%. Subsea Products revenue was $150.6 million versus $194.8 million, and backlog fell to $407 million from $576 million a year earlier and $431 million at year-end 2016.
- Subsea Projects revenue dropped to $63.0 million from $129.4 million, reflecting lower vessel demand and pricing. Asset Integrity revenue declined to $52.7 million from $69.6 million, while operating income improved on lower costs and prior restructuring.
- Advanced Technologies was a positive offset: revenue increased to $85.9 million from $66.9 million, and operating income rose to $5.0 million from $0.6 million, attributed to improved execution and increased commercial and U.S. Navy work.
- Operating cash flow exceeded the prior-year quarter despite the net loss, supported in part by a $60.0 million reduction in accounts receivable. Investing activities used $30.7 million and financing activities used $16.6 million.
Outlook, risks and notable items
- Management projected 2017 diluted EPS below 2016 EPS of $0.25 and marginally positive consolidated operating income for 2017. It expected continued weak deepwater demand and pricing pressure.
- For Q2 2017, management expected seasonal operating-income improvement in all oilfield segments except Subsea Products, which was expected to be relatively flat. It forecast Q2 improvement in Advanced Technologies as well.
- For full-year 2017, management expected lower operating income in Subsea Products and Subsea Projects; ROV operating income slightly higher than 2016, partly because 2016 included $36 million of inventory and fixed-asset charges; and Advanced Technologies revenue and operating income higher than 2016. These are company expectations, not guarantees.
- Management expected a loss on its Medusa Spar investment as production declines and higher interest expense from rising rates affecting floating-rate debt and swaps. It estimated a 37% 2017 effective tax rate before discrete items.
- 2017 capital expenditures were forecast at $90–$120 million, including $25 million of progress payments for the Ocean Evolution subsea support vessel, expected to be delivered in late 2017. The company added two ROVs in Q1, bringing its fleet to 282.
- The quarterly dividend had been reduced from $0.27 to $0.15 per share beginning in Q4 2016; a $0.15 dividend was declared in April 2017. Management said the reduction was prudent given expected low offshore activity. No shares were repurchased under the plan in Q1.
- Angola-related exposure includes approximately $21 million of kwanza cash subject to central-bank conversion controls and $59 million equivalent of Angolan central-bank bonds, whose estimated fair value was $57 million. The filing also describes interest-rate and foreign-exchange exposures.
- A shareholder derivative lawsuit concerning nonemployee director compensation remained pending; the company did not expect a material adverse effect. Other maritime injury claims and insured or otherwise pending claims were also disclosed; management did not expect them to materially affect results or financial position.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether offshore demand, pricing, ROV utilization and Subsea Products backlog stabilize or continue to decline.
- Whether the full-year outlook for marginal operating profitability and below-2016 EPS remains achievable, given weak oilfield activity and expected interest costs.
- Cash conversion and working-capital trends, including whether operating cash flow remains adequate to fund capital spending, debt service and dividends.
- Delivery, cost and expected utilization of the Ocean Evolution, and the effect of the planned $90–$120 million capital program on liquidity.
- Developments in Angola currency conversion and the value and repayment of the central-bank bonds, along with interest-rate exposure from floating-rate debt and swaps.
- Progress on the Subsea Products backlog and the sustainability of Advanced Technologies’ improved results.