TechnipFMC plc — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. The company provides subsea, onshore/offshore, and surface technologies and services to the oil and gas industry. The 2017 comparison is not fully comparable because FMC Technologies was included only from January 17, 2017; 2018 results also reflect adoption of ASC 606, while prior-period figures were not restated.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $3,125.2 million | $3,388.0 million |
| Gross profit margin | 19.2% | 12.0% |
| Income (loss) attributable to TechnipFMC | $95.1 million | $(18.7) million |
| Diluted EPS | $0.20 | $(0.04) |
| Operating cash flow | $(201.6) million | $151.0 million |
| Capital expenditures | $53.2 million | $51.2 million |
Revenue declined 7.8%, principally as major Subsea projects in Africa and Onshore/Offshore projects, including Yamal LNG, progressed toward completion. Gross margin improved with stronger project execution and a lower operating-cost base. SG&A rose $49.0 million year over year, but the company said it fell $14.0 million on a comparable basis after accounting for FMC Technologies’ pre-merger 2017 expenses. Merger and integration costs fell to $5.6 million from $54.7 million.
Segments, orders, and backlog
- Subsea: Revenue $1,180.2 million, down 14.3%; segment operating profit $54.4 million, versus $54.2 million.
- Onshore/Offshore: Revenue $1,573.4 million, down 10.8%; segment operating profit $202.9 million, up from $142.8 million.
- Surface Technologies: Revenue $371.6 million, up 49.6%; segment operating profit was $30.6 million versus a loss of $18.6 million.
- Inbound orders were $3,487.0 million, compared with $1,589.5 million. Backlog was $14,012.0 million at March 31, up from $12,982.8 million at year-end. ASC 606 adoption affected reported backlog, including an $800.8 million increase in Onshore/Offshore.
- Remaining unsatisfied performance obligations were $14,012.0 million; the company expected to recognize approximately 81.1% through 2019.
Liquidity, debt, and capital allocation
Cash and cash equivalents were $6,220.6 million, down from $6,737.4 million at December 31, 2017. Total debt was $3,823.0 million, including $1,356.7 million of commercial paper; reported net cash was $2,397.6 million, versus $2,882.4 million at year-end. Operating cash use was attributed primarily to working-capital movements, including lower trade payables and increased receivables and contract assets. The $2.5 billion revolving facility had $1,143.3 million of unused capacity; the company reported covenant compliance. The company declared a $0.13 per-share dividend, paid April 4, and repurchased approximately $92.6 million of shares during the quarter.
Outlook, significant items, and risks
- Management described improving industry activity and customer economics but noted continued uncertainty in oil and gas prices and the risk of project sanctioning delays. It anticipated increased Subsea order activity as markets recover, while continuing cost actions and investing to retain capabilities.
- Onshore opportunities included LNG, refining, petrochemicals, and fertilizer projects. For Surface Technologies, management expected more moderate North American rig-count growth in 2018 and continued international pricing pressure into the first half, with improved pricing expected to begin in the second half.
- Planned 2018 capital expenditures were approximately $300 million, excluding possible contingent capital for contract awards. The company expected to complete its authorized $500 million share-repurchase program in 2018.
- Changes in contract estimates for projects already in progress increased Q1 operating profit by approximately $177.9 million, including $136.4 million in Onshore/Offshore and $41.5 million in Subsea.
- A $71.2 million fair-value loss on a mandatorily redeemable financial liability increased its carrying value to $383.2 million and was recorded as interest expense.
- ASC 606 adoption reduced opening retained earnings by $91.5 million and increased Q1 revenue by $36.2 million compared with the amount that would have been reported under ASC 605.
- Disclosure controls were deemed ineffective because of previously reported material weaknesses involving foreign-exchange natural hedges, period-end journal entries and reconciliations, and certain IT systems. The company reported no material control changes during the quarter.
- The company disclosed ongoing U.S. and Brazilian investigations concerning potential historical anti-corruption issues, including matters involving Unaoil and projects in Brazil, Ghana, and Equatorial Guinea. A shareholder securities class action related to the 2017 restatement and control weakness was pending; its outcome could not be predicted. Management said known contingencies were not expected to materially affect results, but government sanctions could have a material adverse impact.
- Other principal risks include project cost overruns and delivery, commodity-price and customer-spending uncertainty, foreign exchange, integration, cybersecurity, and access to credit markets. The filing reported no material changes to the risk factors in the 2017 Form 10-K.
Important facts for investors to verify
- Whether the strong segment-profit improvement and favorable contract-estimate changes are sustainable, given lower revenue and negative operating cash flow.
- How backlog converts to revenue and cash, including the effects of ASC 606 and customer milestone/payment timing.
- Progress in remediating the material weaknesses and any subsequent developments in the securities litigation and government investigations.
- Whether planned capital spending, dividends, and share repurchases remain supportable by operating cash generation and available liquidity.