Oceaneering International, Inc. — Q2 2011 Form 10-Q
Business context and period: Global provider of engineered services and products, primarily to the offshore oil and gas industry, with additional defense and aerospace operations. This unaudited report covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $545.8 | $464.3 | $1,016.3 | $899.5 |
| Gross profit / margin | $126.1 / 23% | $123.5 / 27% | $224.9 / 22% | $223.2 / 25% |
| Operating income / margin | $81.7 / 15% | $85.4 / 18% | $142.7 / 14% | $147.7 / 16% |
| Net income | $56.7 | $54.3 | $98.8 | $93.6 |
| Diluted EPS | $0.52 | $0.49 | $0.91 | $0.84 |
- Q2 revenue increased about 18%, while net income rose about 4%; gross and operating margins declined. Six-month revenue grew about 13%, but operating income was lower year over year.
- Six-month operating cash flow was $85.5 versus $195.2 in 2010. Working-capital movements included a $64.5 increase in receivables, a $23.2 increase in inventory, and a $10.4 decrease in operating liabilities.
- Investing cash outflow was $163.8, including $108.2 of property and equipment purchases and $59.6 for acquisitions, net of cash acquired. Financing cash outflow was $16.0, including $16.3 of dividends. Cash declined $94.3 to $150.9.
- At June 30, assets were $2.16 billion, current assets $994.9, and current liabilities $438.6; reported working capital was $556 million. There was no long-term debt outstanding, and $300 million remained available under the revolving facility, scheduled to expire in January 2012. Management planned to renew or replace it in 2011.
Segments and material changes
- Subsea Products: Q2 revenue rose to $195.8 from $124.9 and operating income to $36.3 from $25.8. Higher umbilical throughput and specialty-product sales contributed; Q2 also included NCA, acquired March 31. Backlog was $405 million, versus $384 million at year-end 2010.
- ROVs: Q2 revenue increased to $189.1 from $166.7 and operating income to $58.1 from $57.5. Utilization was 76%, versus 78%; the first-half operating-income decline reflected lower utilization and geographic mix. The 2010 comparisons benefited from a $3.5 million insurance gain.
- Subsea Projects: Q2 revenue fell to $34.7 from $51.8 and operating income to $1.9 from $10.3, reflecting lower demand for Gulf of Mexico diving and deepwater vessel services.
- Inspection: Q2 revenue increased to $69.8 from $58.2 and operating income to $9.3 from $7.9, on stronger service sales across geographies.
- Advanced Technologies: Q2 revenue declined to $56.4 from $62.8 and operating income to $3.2 from $7.3, amid lower profitability on Navy work, reduced defense manufacturing, and less theme-park and NASA contract work.
Outlook, risks, and unusual items
- Management raised 2011 diluted EPS guidance to $1.90–$1.98 from $1.83–$1.95, compared with $1.82 in 2010. Q3 EPS guidance was $0.54–$0.58. The estimated 2011 effective tax rate was lowered to 31.5% from 34.3% in 2010; management cited indefinite reinvestment of certain foreign earnings.
- Management expected 2011 operating income to improve year over year in ROVs, Subsea Products, and Inspection, but decline in Subsea Projects and Advanced Technologies. Full-year capital expenditures were estimated at $250–$275 million; the company planned 7–12 additional ROVs in the second half, following eight additions in the first half.
- The company said U.S. Gulf of Mexico drilling-permit delays and regulatory changes following the Deepwater Horizon incident were adversely affecting activity; it expected a gradual recovery in deepwater exploration and development. Gulf of Mexico and European activity is seasonal.
- A customer in Angola owed $51 million at June 30, all overdue, for work completed in Q1 2010. The company collected $5 million during the first half and another $5 million after quarter-end; management believed the balance would ultimately be collected. This is a material collection risk to monitor.
- The NCA acquisition cost $56 million net of cash acquired; purchase-price allocation remained preliminary. The company also initiated a regular $0.15 quarterly dividend after a two-for-one stock split; historical share and per-share amounts were adjusted for the split.
- Management said pending claims were mostly insured and not expected to materially affect results, cash flow, or financial position. It reported no material off-balance-sheet arrangements and considered interest-rate and foreign-exchange risks not material.
Important facts for investors to verify
- Collection progress and credit exposure for the $51 million overdue Angola receivable.
- Whether Gulf of Mexico permitting and regulatory conditions improve, and the resulting effect on Subsea Projects and ROV utilization.
- Execution of EPS guidance, segment outlook, and the $250–$275 million capital-spending plan.
- Renewal or replacement of the $300 million revolving facility before its January 2012 expiration.
- Whether Subsea Products backlog converts to revenue and earnings, and whether the preliminary NCA purchase accounting changes materially.