Oceaneering International, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Oceaneering provides engineered services and products, primarily to the offshore oil and gas industry, with deepwater exposure; it also serves defense and aerospace markets. About 90% of revenue and substantially all segment operating income before unallocated expenses came from oil and gas.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $853.3 million | $734.2 million | $2,392.2 million | $2,001.7 million |
| Gross profit / margin | $205.5 million / 24% | $170.9 million / 23% | $567.7 million / 24% | $455.3 million / 23% |
| Operating income / margin | $153.7 million / 18% | $123.8 million / 17% | $408.4 million / 17% | $309.8 million / 15% |
| Net income | $104.4 million | $84.4 million | $278.1 million | $208.4 million |
| Diluted EPS | $0.96 | $0.78 | $2.56 | $1.92 |
Q3 revenue increased about 16% and net income about 24% year over year. For the first nine months, revenue rose about 20% and net income about 33%. The quarterly dividend declared was $0.22 per share, up from $0.18 in the year-earlier quarter.
Cash flow and investment: Nine-month operating cash flow was $364.9 million, versus $290.5 million. Investing activities used $265.4 million, including $268.6 million of property and equipment purchases. Financing activities used $117.8 million, including $67.1 million of dividends and $53.8 million of net revolving-credit repayments. Cash declined by $18.2 million to $102.3 million.
Liquidity and debt: Working capital was $688 million. Debt was $40 million at September 30, down from $94 million at year-end 2012; $260 million remained available under the $300 million revolving facility. Total assets were $3.03 billion and shareholders’ equity was $1.98 billion. Management considered liquidity adequate and expected 2013 operating cash flow to exceed capital expenditures and dividends.
Business performance and changes
- Oil and Gas: Revenue was $780.4 million in Q3, up from $655.6 million; segment operating income rose to $183.5 million from $149.9 million. Nine-month operating income increased to $488.0 million from $383.8 million.
- ROVs: Q3 revenue increased to $255.0 million and operating income to $74.7 million. Utilization was 86%, compared with 81% a year earlier. The fleet numbered 302 at quarter-end.
- Subsea Products: Q3 revenue was $263.7 million and operating income $61.7 million. Backlog was $857 million, up from $619 million a year earlier and $681 million at December 2012; management cited demand across major product lines, including umbilicals.
- Subsea Projects: Q3 revenue rose to $143.1 million and operating income to $30.7 million, supported by stronger U.S. Gulf of Mexico activity and vessel work offshore Angola.
- Asset Integrity: Q3 revenue was $118.7 million and operating income $16.4 million; nine-month results improved year over year.
- Advanced Technologies: Q3 revenue declined to $72.9 million from $78.6 million, while operating income increased to $6.4 million from $5.4 million. Nine-month operating income rose to $25.2 million from $15.5 million.
Capital expenditures were $280 million in the first nine months, versus $226 million a year earlier. The company added 17 ROVs and planned about 13 more in 2013. It forecast full-year 2013 capital expenditures of $400 million to $425 million, including approximately $225 million for ROVs and $125 million for Subsea Products.
Outlook, risks, and unusual items
Management forecast 2013 diluted EPS of $3.35–$3.40 and Q4 diluted EPS of $0.80–$0.85. For 2014, it forecast diluted EPS of $3.90–$4.10 and higher operating income than 2013 in each Oil and Gas segment. The 2014 ROV outlook included 30–35 additional vehicles, fleet utilization of approximately 85%, and a 29%–30% operating margin; the Subsea Products margin outlook was 19%–21%. Management expected a steep Q4 decline in Advanced Technologies operating income because theme-park work had been accelerated and U.S. Navy funding was uncertain.
The company signed an agreement to build a subsea support vessel, expected for delivery by the end of Q1 2016, to support ultra-deepwater intervention in the U.S. Gulf of Mexico. It also noted seasonal patterns in certain Gulf of Mexico, European Asset Integrity, and ROV activities. Forecasts are subject to industry demand, customer spending, seasonality, execution, and government funding risks.
Customer credit exposure: OGX Petróleo e Gás owed approximately $4.5 million at September 30 that remained unpaid by October 30, 2013. OGX and its parent filed for restructuring in Brazil on October 30; the company said collection was uncertain. Foreign currency translation reduced equity by $60.7 million in the first nine months, compared with a $27.0 million increase in the prior-year period. The company reported no outstanding hedges and said it did not consider market risks material.
Various legal claims were pending, most covered by insurance; management did not expect them to materially affect results, cash flow, or financial position. The filing reported no off-balance-sheet arrangements or guarantees of debt not reflected on the balance sheet. Disclosure controls were assessed as effective.
Investor verification points
- Track delivery, utilization, and returns from planned ROV additions, and execution of the $400–$425 million 2013 capital program.
- Monitor Subsea Products backlog conversion and margins, and whether the projected 2014 segment growth is realized.
- Verify collection and any subsequent accounting impact of the $4.5 million OGX receivable following restructuring.
- Assess the effect of foreign exchange movements and the material negative translation adjustment on equity.
- Compare actual Q4 and 2014 results with management’s EPS, segment, margin, and U.S. Navy funding outlooks.