Oceaneering International, Inc. — Q1 2011 Form 10-Q
Business context and period: Global provider of engineered services and products, primarily for offshore oil and gas, with defense and aerospace activities through Advanced Technologies. Results cover the three months ended March 31, 2011, compared with Q1 2010; balance-sheet amounts are compared with December 31, 2010.
Financial performance and position
- Revenue: $470.4 million, up 8% from $435.2 million. Gross profit was $98.8 million, down from $99.7 million; gross margin declined to 21% from 23%.
- Profit: Operating income was $61.1 million, down from $62.3 million; operating margin fell to 13% from 14%. Net income increased to $42.1 million from $39.2 million. Diluted EPS was $0.77 versus $0.71.
- Cash flow: Operating cash flow was $48.9 million versus $92.2 million. Investing activities used $107.5 million, including $53.9 million of property and equipment purchases and $55.6 million for the acquisition. Cash declined by $58.4 million during the quarter to $186.9 million.
- Liquidity and debt: Working capital was $527 million. The company had no long-term debt and reported $300 million of available revolving-credit capacity; the facility was scheduled to expire in January 2012. Total assets were $2.09 billion and shareholders’ equity $1.46 billion.
- Receivables: Accounts receivable were $456.0 million. A customer in Angola owed $51 million, all overdue; the company said it believed the amount would ultimately be collected.
Material changes and segment results
- ROVs: Revenue rose to $164.3 million from $158.9 million, but operating income fell to $47.4 million from $53.7 million. Utilization declined to 71% from 75%.
- Subsea Products: Revenue increased to $157.3 million from $111.4 million and operating income to $27.7 million from $15.7 million, driven in part by umbilical and tooling/IWOCS activity. Backlog was $382 million, versus $338 million a year earlier and $384 million at year-end.
- Subsea Projects: Revenue fell to $37.6 million from $57.8 million and operating income to $3.0 million from $7.1 million, reflecting lower U.S. Gulf of Mexico diving and vessel-services demand.
- Inspection: Revenue increased to $58.4 million from $50.5 million; operating income rose to $5.9 million from $4.7 million, mainly on higher international service sales.
- Advanced Technologies: Revenue declined to $52.9 million from $56.5 million and operating income to $2.5 million from $4.3 million. Q1 2011 results included a $2 million additional cost estimate on a U.S. Navy landing-craft overhaul contract.
Outlook, risks and unusual items
- Management raised 2011 diluted EPS guidance to $3.65–$3.90 from $3.45–$3.75, citing Q1 results, a lower estimated tax rate, and improved Subsea Products expectations. It forecast Q2 diluted EPS of $0.90–$1.00. The estimated 2011 effective tax rate was reduced to 31.5% from 34.3% in 2010.
- Management expected Subsea Products operating income to exceed 2010 levels, while projecting lower-than-previously-expected Subsea Projects income due to weaker U.S. Gulf demand and pricing. ROV outlook was unchanged; international demand was expected to offset weaker U.S. Gulf construction activity.
- The U.S. drilling moratorium had been lifted, but permitting delays and subsequent regulation were expected to adversely affect earnings during Q2 and the remainder of 2011. Management estimated 20–25 deepwater rigs would be working in the Gulf by year-end, compared with 14 at April 30, 2011.
- Planned 2011 capital expenditures were $220–$250 million, including $100 million for ROV fleet upgrades and additions. Management expected operating cash flow to exceed capital expenditures. It planned to renew or replace the revolving credit facility in 2011.
- On March 31, 2011, the company acquired Norwegian oilfield technology provider Norse Cutting & Abandonment AS for approximately $56 million. Purchase-price allocation was preliminary. The company added four ROVs and retired four in Q1, ending with 260; it planned 11–16 additional ROVs for the rest of 2011.
- Legal claims were described as largely insured, with no expected material effect. The company reported no material market-risk exposure and no off-balance-sheet arrangements. A 2010 vessel impairment charge of $5.2 million was recorded in the prior-year quarter and was not a Q1 2011 charge.
Important facts for investors to verify
- Whether the $51 million overdue Angola receivable is collected and whether its recoverability assumptions change.
- Whether Gulf of Mexico permitting and rig activity develop as management expects, and the resulting effect on ROV and Subsea Projects results.
- Whether the higher Subsea Products forecast and lower Subsea Projects outlook are reflected in subsequent results and backlog.
- Whether planned capital spending, cash generation and ROV additions remain consistent with the company’s liquidity expectations.
- Whether the revolving credit facility is renewed or replaced before its January 2012 expiration, and whether the preliminary NCA purchase-price allocation changes materially.