TechnipFMC plc — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The FMC Technologies–Technip merger closed January 16, 2017; Q1 2017 includes FMC Technologies’ results only from January 17. Comparisons with reported Q1 2016 are therefore not like-for-like. Management’s MD&A primarily compares Q1 2017 with pro forma Q1 2016 results that assume both the merger and Yamal consolidation from January 1, 2016.
Key financial metrics
| Metric | Q1 2017 | Comparable information |
|---|---|---|
| Revenue | $3.388 billion | Down 30.9% versus MD&A pro forma Q1 2016 revenue of $4.905 billion. Separately, the merger note presents merger-only pro forma revenue of $3.501 billion for Q1 2017 versus $3.614 billion for Q1 2016. |
| Net income attributable to TechnipFMC | $190.8 million; diluted EPS $0.41 | MD&A pro forma Q1 2016 net income attributable was $123.3 million. Reported Q1 2016 EPS of $1.21 diluted is not directly comparable given the merger-related share-count change. |
| Cash from operating activities | $151.0 million | $160.4 million in reported Q1 2016; periods are not merger-comparable. |
| Cash and cash equivalents | $7.042 billion | $6.269 billion at December 31, 2016. |
| Total debt | $3.582 billion | $2.553 billion at December 31, 2016. |
| Net cash (company-defined, non-GAAP) | $3.460 billion | $3.716 billion at December 31, 2016. |
| Current assets / current liabilities | $13.735 billion / $11.497 billion | At March 31, 2017. |
| Backlog / inbound orders | $16.056 billion / $1.590 billion | Backlog was $16.744 billion at December 31, 2016; Q1 2016 backlog was $16.381 billion. |
Gross margin was 11.9%, compared with 12.2% on management’s pro forma Q1 2016 basis. Segment operating margins were 3.9% for Subsea, 7.9% for Onshore/Offshore, and negative 7.5% for Surface Technologies.
Material changes and operating performance
- Against the MD&A pro forma comparator, revenue fell $1.517 billion, mainly from lower Subsea activity and lower Onshore/Offshore project activity. Subsea revenue decreased 42.1% and operating profit decreased 75.0%; Onshore/Offshore revenue declined 19.2%, while operating profit increased to $139.9 million, helped by project mix and the absence of a prior-year impairment/restructuring charge. Surface Technologies revenue declined 28.9%; its operating loss narrowed to $18.6 million.
- Net income included $327.4 million of other income, principally $306.9 million of net foreign-exchange gains, largely related to an unhedged Russian-ruble position. Merger transaction and integration costs were $54.7 million. These items make reported earnings less indicative of recurring operating performance.
- Operating cash flow was $151.0 million. The company cited payments of accounts payable and decreases in advance payments and billings in excess of costs as factors affecting cash flow and working capital.
- Q1 investing cash flow included $1.479 billion of cash acquired in the merger. Financing activities used $865.5 million, including $534.1 million of long-term debt repayments and a decrease in commercial paper.
- Backlog increased in Subsea versus year-end, while Onshore/Offshore backlog decreased primarily due to foreign-exchange adjustments related to Yamal. Total backlog declined to $16.056 billion.
Outlook, risks and contingencies
- Management expects consolidated operating cash flow to decrease slightly in 2017. It forecast approximately $300 million of capital expenditures, mainly subsea-service maintenance, excluding possible contingent spending tied to contract awards.
- Management expects Subsea revenue to decline for a third consecutive year but targets double-digit full-year 2017 Subsea operating margins, citing cost reductions and operational improvements. Onshore opportunities include LNG, refining and petrochemicals; Surface Technologies remains exposed to weak activity and competitive pricing.
- The oil-and-gas downturn, uncertain commodity prices, customer spending and project awards remain important risks. Customers have sought payment deferrals, and Petrobras requested rescheduling of backlog deliveries; any agreed deferrals, price discounts or delivery delays could adversely affect results and cash flows.
- The company had $1.630 billion of unused capacity under its $2.5 billion revolving facility at March 31 and reported compliance with its covenants. Commercial paper outstanding was $870.3 million. Debt and liquidity remain subject to market access, covenant and credit-rating risks.
- Guarantees had maximum potential undiscounted payments of $4.780 billion, including $3.952 billion of performance guarantees. Management did not expect these guarantees to cause a material loss. The Dong Energy Hejre contract dispute is in arbitration; management could not predict the outcome but did not expect pending matters to materially harm the company.
- The company is cooperating with DOJ and SEC inquiries concerning Unaoil-related matters involving legacy FMC Technologies and Technip, and with a DOJ inquiry into legacy Technip Brazil platform projects. Outcomes are uncertain.
- On April 26, 2017, the board authorized up to $500 million of share repurchases by the end of 2018 and planned quarterly dividends after Q3 2017. Both depend, among other conditions, on U.K. court approval of a capital reduction and sufficient distributable reserves.
- Other material risks include integration and realization of merger synergies, fixed-price contract execution and cost overruns, foreign-exchange volatility, political and regulatory conditions, and the U.K.’s withdrawal from the EU. The preliminary merger purchase-price allocation included $5.292 billion of goodwill and remains subject to revision.
Most important facts for investors to verify
- Assess underlying operating earnings separately from the $306.9 million foreign-exchange gain and merger-related costs; confirm how the different pro forma comparison bases affect reported growth conclusions.
- Track Subsea margins, backlog conversion, customer payment or delivery changes, and working-capital movements against management’s 2017 outlook.
- Monitor merger integration costs, realized synergies, and final purchase-price allocation, including goodwill and acquired intangibles.
- Follow the DOJ/SEC inquiries and Dong arbitration, as well as the company’s guarantee exposure and any changes in expected loss assessments.
- Confirm completion of the U.K. capital reduction and availability of distributable reserves before relying on the announced dividend and repurchase plans.