Oceaneering International, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Oceaneering provides engineered services and products primarily to offshore energy customers, with additional defense, aerospace, and commercial businesses.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $497.6 million | $519.3 million | $1,487.3 million | $1,414.4 million |
| Gross margin | $49.1 million (10%) | $47.6 million (9%) | $118.6 million (8%) | $96.2 million (7%) |
| Operating loss | $5.2 million | $1.6 million | $36.5 million | $48.3 million |
| Net loss | $25.5 million | $66.0 million | $85.5 million | $148.2 million |
| Diluted loss per share | $0.26 | $0.67 | $0.87 | $1.50 |
- Q3 revenue declined about 4% year over year, while nine-month revenue increased about 5%. Gross margin improved in both comparisons, and operating and net losses narrowed year to date.
- Q3 operating results improved $4.4 million sequentially, mainly on stronger Subsea Products and ROV contributions and lower unallocated expenses.
- Nine-month operating cash flow was $112.2 million, versus $35.7 million in 2018. Capital expenditures were $128.8 million, so operating cash flow less capex was negative $16.7 million for the period.
- Cash was $340.3 million at September 30, 2019; working capital was $657 million. The company had $800 million principal amount of senior notes outstanding and no revolver borrowings, leaving $500 million available under its revolving facility. It reported compliance with debt covenants.
- Operating lease liabilities totaled $182.5 million following adoption of the lease accounting standard in 2019. The adoption added lease assets and liabilities and had no cash-flow impact.
Business and segment developments
- ROV: Q3 revenue was $113.1 million and operating income was $10.1 million. Utilization was 60%, down from 62% in Q2 but up from 56% a year earlier. Results included a $2.8 million gain on sale of ROV accessory equipment.
- Subsea Products: Q3 revenue was $150.8 million and operating income was $13.2 million. Backlog was $609 million, up from $333 million a year earlier, largely due to umbilical orders; trailing-12-month book-to-bill was 1.5.
- Subsea Projects: Q3 revenue was $76.0 million and operating loss was $0.6 million. Year-to-date operating income improved from the prior year, partly because 2018 included asset write-offs tied to exiting land survey.
- Asset Integrity: Q3 revenue was $59.3 million and operating loss was $2.5 million; management cited reduced inspection revenue and competitive pricing.
- Advanced Technologies: Q3 revenue was $98.4 million and operating income was $3.0 million, down year over year due to lower activity and higher costs in the theme-park-related commercial business; project delays also affected sequential results.
Outlook, risks, and unusual items
- For Q4 2019, management expected EBITDA to be slightly lower sequentially as seasonal declines in offshore activity were expected to outweigh improvement in Advanced Technologies. It projected lower results in ROV, Subsea Products, and Subsea Projects; slight improvement in Asset Integrity; and Advanced Technologies operating margin in the low double digits. Unallocated expenses were forecast at low-to-mid $30 million.
- 2019 capital expenditure guidance increased to approximately $150 million, including about $75 million maintenance and $75 million growth spending, primarily to support expected higher ROV activity in 2020. Management continued to expect positive full-year free cash flow after debt service and capital spending, including anticipated Q4 working-capital cash generation.
- For 2020, management anticipated increased activity and improved operating performance across all segments, with positive operating income in each. It projected capex of $70–$100 million and unallocated expenses of approximately $140 million; these were preliminary expectations subject to revision.
- The company did not provide a 2019 effective tax-rate forecast because of changing geographic earnings mix. Q3 and year-to-date results include tax effects and discrete items; the 2018 comparison was particularly affected by $60 million of nine-month discrete tax expense, including valuation allowances and Tax Act items.
- Foreign-currency exposure, particularly in Angola, remains a risk. Nine-month 2019 foreign-currency transaction losses were $2.8 million, and foreign-currency translation reduced equity by approximately $27 million. Angolan cash repatriation is subject to central-bank controls.
- Other risks include volatile offshore-energy demand and pricing, seasonal activity, project execution and cost-estimate changes, customer and contract concentration in energy markets, and litigation or claims. Management said ordinary-course claims were not expected to materially affect results, but outcomes remain uncertain.
- Management reported no material contract-estimate adjustments during the nine months, but stated that future changes in facts and circumstances could produce significant adjustments. It also cited the 2018 $9.3 million pretax gain on the sale of the ASV Global investment as a prior-year comparison item.
Most important facts for investors to verify
- Whether Subsea Products’ $609 million backlog converts to revenue and margins as expected, and whether its book-to-bill remains within management’s forecast range.
- Whether Q4 seasonality and working-capital movements support the company’s full-year positive free-cash-flow expectation, given negative operating cash flow less capex through September.
- Whether anticipated 2020 offshore activity, ROV utilization, and segment profitability improve as projected.
- How foreign-exchange movements, tax positions and audits, and any contract-cost revisions affect reported earnings and cash.
- Debt maturities, interest costs, revolver availability, and continued compliance with credit-facility covenants.