Oceaneering International, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. Oceaneering provides engineered services and products mainly to the offshore oil and gas industry, with additional defense, aerospace and other advanced technology operations.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $2.193 billion | $1.917 billion |
| Gross margin | $508.8 million; 23% | $466.3 million; 24% |
| Operating income | $334.8 million; 15% | $309.5 million; 16% |
| Net income | $235.7 million | $200.5 million |
| Diluted EPS | $2.16 | $1.82 |
| Cash from operating activities | $288.6 million | $441.9 million |
| Capital expenditures, including acquisitions | $526.6 million | $207.2 million |
| Cash and cash equivalents at year-end | $106.1 million | $245.2 million |
| Working capital | $482.7 million | $543.6 million |
| Long-term debt at year-end | $120 million | None |
Revenue increased 14% and net income reached a company record. Gross and operating margins declined by about one percentage point. Operating cash flow fell substantially, principally reflecting a $99.5 million increase in receivables; management also cited higher fourth-quarter revenue and a greater international revenue mix. Year-end working capital ratio was 1.96, versus 2.24 in 2010.
Fourth-quarter 2011 revenue was $574.2 million, compared with $501.3 million in fourth-quarter 2010. Net income was $58.3 million versus $47.8 million, and diluted EPS was $0.54 versus $0.44.
Segments and material changes
- Subsea Products: Revenue rose 40% to $770.2 million and operating income increased to $142.2 million, supported by stronger umbilical throughput, specialty products and services, and acquisitions. Lower margin mix partially offset the improvement.
- ROVs: Revenue increased 14% to $755.0 million. Operating income rose to $224.7 million, while operating margin declined to 30% from 32%, partly due to a greater share of lower-margin international work. Fleet utilization improved to 77% from 75%.
- Subsea Projects: Revenue fell to $167.5 million from $247.5 million, reflecting weaker U.S. Gulf of Mexico diving and vessel demand. Operating income included a $19.6 million gain on the sale of the Ocean Legend.
- Asset Integrity: Revenue increased to $266.6 million, with higher demand in Europe and Central Asia and the December acquisition of AGR Field Operations Holdings (AGR FO). AGR FO contributed only immaterial 2011 results because it was acquired late in the year.
- Advanced Technologies: Revenue was broadly flat at $233.4 million and operating income was $16.7 million.
International operations generated about 60% of revenue. The top five customers represented 30% of revenue; no single customer exceeded 10% in 2011. Firm backlog was $2.675 billion at year-end, up from $1.875 billion, but the filing cautions that backlog may be delayed, cancelled or unprofitable.
Liquidity, investment and unusual items
- Investing activities used $482.8 million, including $291.6 million for acquisitions and $235.0 million for property and equipment; asset sales provided $43.9 million.
- Major 2011 acquisitions included AGR FO for approximately $220 million, Norse Cutting and Abandonment for approximately $50 million, and Mechanica for approximately $17 million. The AGR FO purchase price allocation was preliminary and included $165.2 million of goodwill.
- At December 31, $120 million was drawn under the then-current $300 million revolving facility, leaving $180 million available. In January 2012, the company replaced it with a five-year $300 million revolver expiring in January 2017, with potential commitments of up to an additional $200 million subject to conditions.
- The company declared $0.45 per share in 2011 dividends and repurchased 500,000 shares for $17.5 million during the year. It had repurchased 2.7 million shares for $67 million under its current buyback plan through year-end.
- A $40 million receivable from one Angolan customer was overdue at year-end. The company reduced its carrying value by $3 million and classified $22 million as non-current, while stating it expected eventual collection.
- Other commitments included $137.5 million of operating lease payments and $208.9 million of purchase obligations at year-end. Outstanding letters of credit were $38 million.
Outlook, commentary and risks
Management forecast 2012 diluted EPS of $2.45–$2.65. It expected higher ROV and Subsea Products operating income, increased Asset Integrity results following the AGR FO acquisition, improved Subsea Projects results from Angola and a gradual U.S. Gulf of Mexico recovery, and higher Advanced Technologies income. It anticipated ROV utilization of 80% or more and planned to add 20–25 ROVs while retiring four to six. Management forecast an approximately 31.5% effective tax rate for 2012.
Key risks include cyclical offshore spending and oil and gas prices; the effects of post-Macondo U.S. drilling rules and permit timing; foreign political and currency exposure, including West Africa; contract cancellation and backlog realization; customer collection risk; competition and umbilical manufacturing overcapacity; acquisition integration; offshore operating, environmental and safety hazards; and dependence on skilled personnel. Management reported effective disclosure controls and internal control over financial reporting; the audit opinion on the financial statements was unqualified. The AGR FO controls were excluded from management’s year-end controls assessment.
Investor verification priorities
- Assess whether the $99.5 million receivables-related operating cash outflow reverses, and monitor collection of the overdue Angolan balance.
- Verify execution and integration of AGR FO and the other acquisitions, including final purchase price allocations and goodwill performance.
- Track achievement of 2012 EPS, segment outlook and ROV utilization targets against offshore activity and customer demand.
- Review margin trends, particularly lower ROV margins, Subsea Products mix, and the decline in Subsea Projects activity.
- Monitor capital spending, liquidity, revolver covenants and the sizable lease, purchase and Angola vessel-charter commitments.