TechnipFMC plc — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Amounts are in U.S. dollars. TechnipFMC operates through Subsea, Technip Energies, and Surface Technologies.
Financial performance and condition
- Revenue: $3.130 billion, up 7.5%. Service revenue was $2.308 billion, product revenue $771.6 million, and lease revenue $51.0 million.
- Profit and margins: GAAP net loss attributable to TechnipFMC was $3.256 billion, or $7.28 per diluted share, versus net income of $20.9 million, or $0.05 per share. The loss primarily reflects $3.188 billion of impairment charges and restructuring and other expenses; it is not representative of underlying operating performance. Gross margin declined to 13.7% from 17.2%. Adjusted operating profit, a non-GAAP measure, was $108.3 million versus $184.9 million; adjusted EBITDA was $220.2 million versus $295.8 million.
- Segments: Subsea revenue rose 5.7% to $1.253 billion; reported operating loss was $2.751 billion, largely from impairments, while adjusted operating profit was $31.4 million. Technip Energies revenue increased 15.9% to $1.548 billion and operating profit was $151.2 million, down from $155.7 million. Surface Technologies revenue fell 16.1% to $329.5 million; reported operating loss was $424.0 million, largely from impairments, while adjusted operating profit was $0.4 million.
- Cash flow: Operating cash flow was $27.9 million, down from $121.4 million. Capital expenditures were $83.5 million; investing cash outflow was $73.5 million. Cash declined by $190.8 million during the quarter to $4.999 billion, including a $146.3 million adverse foreign-exchange effect.
- Debt and liquidity: Total debt was $4.411 billion and reported net cash was $588.8 million, down from $714.8 million at year-end 2019. The company had $625.9 million of unused capacity under its $2.5 billion revolving facility, after $500 million drawn and $1.374 billion of commercial paper outstanding. It reported compliance with facility covenants.
- Backlog and orders: Order backlog was $21.962 billion at March 31, down from $24.251 billion at December 31. Q1 inbound orders fell to $2.099 billion from $6.185 billion. The filing estimates that 37.4% of backlog will be recognized in 2020.
Material changes versus Q1 2019
- Revenue increased, mainly from higher activity in Subsea and Technip Energies, but cost of sales grew faster than revenue and gross margin contracted.
- The company recorded $3.083 billion of goodwill impairment: $2.748 billion in Subsea and $335.9 million in Surface Technologies. It also recognized $104.6 million of other long-lived asset impairments. COVID-19, lower commodity prices, and reduced market valuations were cited as triggering conditions.
- Subsea and Surface Technologies shifted from reported operating profit to large reported operating losses, principally because of impairment charges. Technip Energies operating profit also declined modestly.
- Operating cash generation was substantially lower, while net cash declined. Management attributed the operating cash-flow decrease mainly to timing of project milestones and vendor payments.
- Q1 inbound orders were materially lower, and backlog declined across all three segments.
Outlook, commentary, and risks
- Management described a highly uncertain outlook amid COVID-19, lower oil prices, and reduced customer spending. Reported impacts included supply-chain disruption, lower productivity, and personnel and equipment logistics constraints; some operational disruption was expected to continue into Q2.
- Management expects positive operating cash flow for full-year 2020, but provided no guidance for all operating segments. It reduced its 2020 capital-expenditure expectation by more than 30%, to approximately $300 million, and said this excludes contingent spending for contract awards.
- The company announced initiatives targeting at least $350 million of annualized cost savings, expected to reach the targeted run-rate by year-end. It also reduced executive and board compensation. In April, the board cut the annual dividend by 75% to $0.13 per share; the company said the dividend paid earlier in 2020 fulfills the year’s distribution.
- Completion of the planned separation of Technip Energies was postponed until markets sufficiently recover. The transaction remains subject to market conditions, approvals, and other requirements; $27.1 million of separation costs were recorded in Q1.
- Management said lower oil prices may defer project sanctions. It cited nearly $15 billion of Subsea project opportunities under evaluation, with about half considered likely to proceed over the next 24 months; these are opportunities, not contracted backlog.
- Remaining contingencies include an unresolved French anti-corruption investigation concerning historical projects. The company maintained a $70 million provision, but said a settlement could exceed it and that resolution is uncertain. The filing also reports maximum potential payments under financial and performance guarantees of $5.899 billion; management does not expect these guarantees to result in a material loss.
Important facts for investors to verify
- Whether COVID-19 disruption, weaker oil-market conditions, and customer spending cuts lead to further project delays, cancellations, or lower orders.
- How much of backlog converts to revenue and cash, and whether milestone and vendor-payment timing improves operating cash flow.
- Whether management achieves the $350 million savings target and approximately $300 million capital-spending plan without impairing project execution.
- Liquidity and refinancing conditions, particularly commercial paper exposure and the remaining $625.9 million of revolver capacity.
- Potential additional impairments and the final outcome and cost of the French anti-corruption investigation; the $70 million provision may not cover a settlement.
- Progress and conditions for the postponed Technip Energies separation, and the practical effect of the revised 2020 dividend policy.