Business context and reporting period
TechnipFMC plc filed this unaudited Form 10-Q for the quarter ended June 30, 2019. The company operates through Subsea, Onshore/Offshore, and Surface Technologies segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Revenue: Second-quarter revenue was $3.434 billion, up 16.0% year over year. First-half revenue was $6.347 billion, up 4.3%.
- Profit: Q2 net income attributable to TechnipFMC was $97.0 million, or $0.21 diluted EPS, versus $105.7 million and $0.23 a year earlier. First-half attributable net income was $117.9 million, or $0.26 diluted EPS, versus $200.8 million and $0.43. Adjusted diluted EPS, a non-GAAP measure, was $0.39 for Q2 (versus $0.28) and $0.45 for the first half (versus $0.57).
- Margins: Gross margin was 20.1% in Q2 versus 18.2%; for the first half it was 18.8% versus 18.7%. Q2 segment operating margins were 6.3% Subsea, 18.2% Onshore/Offshore, and 6.1% Surface Technologies. Surface Technologies’ margin fell from 12.8%.
- Cash flow: First-half operating cash flow was positive $195.5 million, compared with cash used of $485.2 million in 2018. Investing used $287.5 million, including $270.5 million of capital expenditures; financing used $828.5 million. Cash declined $918.7 million to $4.621 billion.
- Debt and liquidity: Total debt was $3.782 billion and net cash (company-defined, non-GAAP) was $839.5 million at June 30, down from $1.348 billion of net cash at year-end 2018. Current assets were $11.304 billion and current liabilities $9.577 billion. The company reported $1.069 billion of unused revolving-credit capacity and compliance with its credit-facility covenants.
- Orders: First-half inbound orders were $17.364 billion, versus $7.719 billion. Backlog stood at $25.782 billion, up from $14.560 billion at December 31, 2018; 23.8% was expected to be recognized through 2019 and 76.2% thereafter.
Material changes versus the prior comparable period
- Q2 revenue growth reflected increased Subsea project and service activity, Onshore/Offshore awards, and stronger international Surface Technologies activity. First-half Onshore/Offshore revenue declined 2.6% as Yamal LNG progressed toward completion.
- Segment operating profit improved in Subsea and Onshore/Offshore, but fell in Surface Technologies: Q2 Surface Technologies operating profit was $25.5 million versus $51.5 million, amid weaker North American completions activity and unfavorable product mix.
- Reported earnings were pressured by a $140.2 million Q2 charge, and $224.9 million for the first half, from remeasurement of a mandatorily redeemable financial liability. This was the principal driver of higher net interest expense.
- Corporate expense increased, including $55.2 million of net legal provisions in Q2 and the first half, and merger integration costs. The company also reported a prior-period revenue and cost-of-sales classification correction for 2018; it did not change total revenue, net income, or equity.
Outlook, commentary, risks and unusual items
- Management described improving Subsea prospects and increased tendering, and cited natural-gas/LNG opportunities in Onshore/Offshore. It cautioned that project investment decisions may be delayed. North American Surface Technologies activity and pricing remained under pressure; international activity was more resilient.
- Management projected approximately $350 million of 2019 capital expenditures, excluding $80 million spent in Q1 on the Deep Discoverer vessel and funded through a sale-leaseback. The board declared a $0.13-per-share quarterly dividend payable on or shortly after September 4, 2019.
- The company announced a $301.3 million global resolution of anti-corruption investigations. It entered a three-year DOJ deferred prosecution agreement; a U.S. subsidiary pleaded guilty, and the company agreed to compliance reporting. Approximately $160 million was paid in July. The French PNF investigation remained unresolved; a $70 million provision was maintained, and a settlement could exceed it.
- Disclosure controls were deemed ineffective because of previously identified material weaknesses in period-end financial reporting and income-tax accounting. Remediation efforts were ongoing.
- Key risks include oil and gas market volatility, project cost overruns or delays, backlog execution, competitive pricing, foreign-exchange movements, legal and regulatory matters, and the possibility that the PNF resolution exceeds the recorded provision. A shareholder lawsuit retained a pending claim; the company said it could not predict the outcome.
Important facts for investors to verify
- Whether the large backlog converts to revenue and cash on schedule, including progress on Arctic LNG 2 and Yamal LNG.
- The sustainability of segment margins, particularly Surface Technologies’ performance and North American activity.
- The cash, earnings, and covenant implications of debt levels, commercial paper, working-capital movements, and the redeemable-liability remeasurement.
- The final cost and terms of the unresolved French anti-corruption matter, including whether it exceeds the $70 million provision.
- Progress in remediating the disclosed internal-control weaknesses and any related reporting effects.
- The company’s non-GAAP reconciliations and the 2018 revenue/cost classification revision when comparing reported and adjusted results.