Business context and reporting period
Oceaneering International, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2014. It provides engineered services and products primarily to the offshore oil and gas industry, with a focus on deepwater operations; it also serves defense, entertainment, and aerospace markets. Figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $973.1 | $853.3 | $2,740.7 | $2,392.2 |
| Gross margin | $241.9 (24.9%) | $205.5 (24.1%) | $649.6 (23.7%) | $567.7 (23.7%) |
| Operating income | $181.9 (18.7%) | $153.7 (18.0%) | $476.1 (17.4%) | $408.4 (17.1%) |
| Net income | $124.3 | $104.4 | $325.9 | $278.1 |
| Diluted EPS | $1.16 | $0.96 | $3.01 | $2.56 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $384.1 | $364.9 |
For the quarter, revenue rose about 14% and net income about 19% year over year. Nine-month revenue increased about 15% and net income about 17%. Nine-month operating cash flow rose about 5%, while accounts receivable growth used $152.5 million of cash.
At September 30, cash was $74.6 million; working capital was $833 million. Long-term debt was $250 million, drawn on the then-existing revolver, with $150 million of remaining availability. Total assets were $3,391.5 million. Nine-month property and equipment purchases were $301.5 million and business acquisitions used $39.8 million. Dividends paid were $81.8 million and share repurchases were $236.7 million. The quarterly dividend was increased from $0.22 to $0.27 per share in 2014.
Material changes and operating trends
- Oilfield revenue rose to $908.4 million in Q3 from $780.4 million a year earlier. ROV revenue increased to $285.4 million; utilization was 84%, versus 86% a year earlier, while operating margin improved to 31% from 29%.
- Subsea Products revenue grew to $336.7 million and operating income to $83.4 million, a record quarterly operating income. Its backlog was $768 million, down from $906 million at December 31, 2013.
- Subsea Projects revenue increased, but operating income fell to $27.3 million from $30.7 million; management cited weaker U.S. Gulf of Mexico intervention and diving demand and Loop Current-related delays.
- Advanced Technologies revenue and operating income declined year over year to $64.7 million and $2.9 million, respectively, reflecting lower theme park and U.S. Navy activity and weaker theme-park margins.
- Q3 Asset Integrity results included a $2.5 million gain on the sale of a non-core operation.
- Nine-month foreign currency translation adjustments reduced comprehensive income by $43.3 million. Accumulated other comprehensive loss increased to $95.9 million.
Outlook, risks, and contingencies
Management forecast 2014 diluted EPS of $3.95–$4.00, Q4 diluted EPS of $0.94–$0.99, and 2015 diluted EPS of $4.10–$4.50 with a 16%–17% operating margin. It expected Q4 operating income to decline from Q3 across Oilfield segments because of seasonality and project timing. The 2015 outlook included modest ROV growth, higher Subsea Products and Subsea Projects operating income, improvement in Advanced Technologies, and higher unallocated expenses from IT investment. Management estimated 2014 capital expenditures, including acquisitions through September, at approximately $450 million; its preliminary 2015 estimate, excluding acquisitions, was $300–$400 million.
Management considered liquidity adequate for operations, capital commitments, and anticipated dividends. In October 2014, after quarter-end, the company replaced its credit facility with a $300 million three-year delayed-draw term loan and a $500 million five-year revolver, subject to covenants including a maximum debt-to-EBITDA ratio. The company was building a new subsea support vessel for expected delivery by the end of Q1 2016.
Risks include dependence on deepwater customer spending, seasonal demand, foreign exchange exposure, and cybersecurity or IT-system disruption. A Brazilian customer, OGX, owed approximately $3.2 million at September 30; the amount was fully reserved, and collection remained uncertain. A shareholder derivative suit concerning non-executive director compensation sought unspecified damages and other relief; the company did not expect a material adverse effect. Management also noted other claims, mostly covered by insurance, and did not expect them to be material.
Important facts for investors to verify
- Whether the stated 2014 and 2015 EPS and margin forecasts were achieved, and how seasonality affected Q4 results.
- Subsea Products backlog conversion and the demand trends behind the decline from year-end 2013.
- Cash generation and working-capital collection, particularly receivables from foreign oilfield operations and the fully reserved OGX balance.
- Debt usage, covenant headroom, and the effect of the October 2014 credit agreement on liquidity and borrowing costs.
- Capital spending, vessel construction progress, and the returns from ROV fleet additions and share repurchases.
- Exposure to currency movements, cybersecurity incidents, and the outcome of the director-compensation litigation.