Oceaneering International, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. The company provides engineered services and products primarily to the offshore oil and gas industry, with a focus on deepwater operations; it also serves defense and aerospace markets.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $516.3 million | $484.0 million | $1,415.7 million | $1,369.8 million |
| Gross profit | $125.6 million | $114.0 million | $348.8 million | $330.0 million |
| Gross margin | 24% | 24% | 25% | 24% |
| Operating income | $88.1 million | $76.3 million | $235.8 million | $220.0 million |
| Operating margin | 17% | 16% | 17% | 16% |
| Net income | $59.2 million | $49.8 million | $152.7 million | $142.3 million |
| Diluted EPS | $1.09 | $0.90 | $2.77 | $2.57 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $302.0 million | $312.5 million |
- Q3 revenue increased about 7% and net income about 19% year over year. Nine-month revenue rose about 3% and net income about 7%.
- Q3 improvement was principally driven by Subsea Products: revenue was $160.2 million versus $132.7 million, and operating income was $35.2 million versus $14.1 million. Management cited stronger installation and workover control system (IWOCS) and field-development hardware demand, as well as lower manufacturing costs.
- Q3 ROV utilization was 73%, compared with 79% a year earlier. Subsea Projects nine-month revenue declined to $184.6 million from $220.9 million, and operating income to $34.5 million from $60.3 million.
Balance sheet, liquidity and cash flows
- At September 30, 2010, cash was $148.3 million; working capital was approximately $460 million. Total assets were $1.94 billion and shareholders’ equity $1.34 billion.
- No long-term debt remained at quarter-end, after repayment of the $100 million revolving-credit borrowing and $20 million of 6.72% senior notes. The $300 million revolving facility was undrawn and available; it was scheduled to expire in January 2012.
- Nine-month cash flow: $302.0 million provided by operations, $149.0 million used in investing, and $167.1 million used in financing. Capital expenditures were $164.3 million, including a $17.5 million business acquisition. Cash declined $14.1 million from year-end 2009.
- The company repurchased 1.1 million shares for $49.5 million during the first nine months, including 100,000 shares in Q3. The board plan authorized repurchases of up to 6 million shares.
Outlook, commentary and risks
- Management forecast 2010 diluted EPS of $3.57–$3.62, Q4 EPS of $0.80–$0.85, and 2011 diluted EPS of $3.45–$3.75. It expected 2010 ROV results to be relatively flat with 2009, lower Subsea Projects results, and stronger Subsea Products results. For 2011, it expected international demand to help offset weaker U.S. Gulf of Mexico activity.
- The Deepwater Horizon incident, 2010 drilling moratorium, new rules and delayed permits were expected to adversely affect Gulf of Mexico activity and earnings in late 2010 and 2011. Management said uncertainty remained over the timing and extent of permit issuance; its 2011 forecast midpoint assumed a gradual recovery and 20–25 deepwater rigs working in the U.S. Gulf of Mexico at year-end.
- One Angola customer owed $56 million at September 30, all overdue, for work completed in Q1. Management believed it would ultimately collect the receivable, citing its history with the customer.
- Unusual items included a $5.2 million Q1 impairment charge on the vessel The Performer, sold in July for approximately its reduced carrying value; a $2.9 million charge to terminate an interest-rate hedge; and a $3.5 million insurance gain on a damaged ROV reported in Q2. Q3 other income also included a $0.3 million foreign-currency transaction loss.
- The GRI Simulations dispute was resolved in August, with new five-year commercial agreements and a cash payment for a license. The litigation was dismissed or discontinued, and the company reported no material adverse effect. Other pending claims were described as largely insured and not expected to materially affect results, cash flow or financial position.
- Management considered liquidity adequate and expected operating cash flow to exceed 2010 capital expenditures. It also noted seasonality in Gulf of Mexico Subsea Projects, European Inspection and ROV activity.
Most important facts for investors to verify
- Whether Gulf of Mexico permitting and deepwater rig activity recovered as assumed in the 2011 outlook, and the resulting impact on ROV and Subsea Projects earnings.
- Collection status and credit exposure for the $56 million overdue Angola receivable.
- Whether Subsea Products demand and backlog supported management’s outlook; the reported September backlog was $308 million, and management cited a significant October umbilical contract.
- Actual capital spending, ROV fleet additions and share repurchases relative to plans, alongside operating cash generation and available credit capacity.
- Developments in offshore regulation, insurance availability and other claims or contingencies that could affect customer activity or company costs.