Oceaneering International, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Amounts below are in U.S. dollars; financial figures are stated in millions unless noted.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $464.3 | $450.7 | $899.5 | $885.8 |
| Gross profit | $123.5 | $110.1 | $223.2 | $215.9 |
| Gross margin | 27% | 24% | 25% | 24% |
| Operating income | $85.4 | $74.3 | $147.7 | $143.7 |
| Operating margin | 18% | 16% | 16% | 16% |
| Net income | $54.3 | $48.1 | $93.6 | $92.5 |
| Diluted EPS | $0.98 | $0.87 | $1.69 | $1.67 |
- Q2 revenue rose about 3%, operating income about 15%, and net income about 13% year over year. For the first half, revenue rose about 2%, operating income about 3%, and net income about 1%.
- Operating cash flow was $195.2 million for the first half, versus $207.5 million a year earlier. Capital expenditures were $94.9 million, leaving approximately $100.3 million after capital spending. Investing activities used $90.0 million; financing activities used $122.8 million. Cash declined $17.7 million to $144.7 million.
- At June 30, working capital was approximately $417.6 million (reported as $418 million); current assets were $888.0 million and current liabilities $470.4 million. The company had $300 million available under its revolving facility, with no revolver borrowings outstanding.
- Total debt was $20 million, consisting of 6.72% Senior Notes due September 2010; the $100 million revolver balance was repaid during Q2. Total assets were $1.876 billion and shareholders’ equity $1.253 billion.
Business and material changes
- Oceaneering provides engineered services and products, primarily for offshore oil and gas and deepwater markets, through ROVs, Subsea Products, Subsea Projects, Inspection, and Advanced Technologies.
- Q2 results benefited primarily from work awarded by BP affiliates in connection with the Deepwater Horizon incident at the Macondo well. The work supported Subsea Projects, ROV, and Subsea Products; the filing does not quantify the total earnings contribution.
- Oil and Gas revenue was $401.5 million in Q2, down from $404.7 million, while operating income increased to $101.6 million from $93.6 million. Advanced Technologies revenue increased to $62.8 million from $46.0 million, and operating income to $7.3 million from $4.0 million.
- Subsea Products operating income rose to $25.8 million from $15.6 million in Q2, attributed to higher plant throughput, improved efficiency, and Macondo-related tooling and services. Backlog was $347 million, versus $321 million at year-end 2009.
- Subsea Projects operating income fell to $10.3 million from $21.3 million, reflecting the absence of prior-year vessel contract income, lower Gulf of Mexico vessel demand, and the Ocean Intervention II being out of service for repairs. Its 2010 outlook also reflects the first-quarter $5.2 million impairment on The Performer, which was sold in July for approximately its reduced carrying value.
- ROV Q2 operating income rose to $57.5 million from $49.7 million, despite utilization declining to 78% from 80%. Results included a $3.5 million insurance recovery for an ROV lost on the Deepwater Horizon.
Outlook, risks and unusual items
- Management forecast 2010 diluted EPS of $3.20–$3.40, compared with $3.40 in 2009, and Q3 diluted EPS of $0.90–$1.00. It expected higher second-half Subsea Products earnings, relatively flat full-year ROV results, and lower full-year Subsea Projects operating income.
- The deepwater drilling moratorium, issued in May and revised in July 2010, began adversely affecting Gulf of Mexico operations in June. Management expected it to weigh on earnings during the remainder of 2010. BP-related work was expected to benefit Q3 results.
- Management considered liquidity adequate, expected operating cash flow to exceed 2010 capital expenditures, and planned at least 10 additional ROVs in the second half. First-half capital expenditures were $94.9 million; no material capital expenditure commitments were reported.
- Interest expense included a $2.9 million charge to terminate the interest-rate hedge on the repaid revolver borrowing. Q2 other income included a $2.1 million fee for serving as stalking-horse bidder in an asset auction.
- A customer in Angola owed $58 million at quarter-end, almost all overdue; the related contract work ended in Q1. Management believed the receivable would ultimately be collected based on past experience.
- GRI Simulations litigation included a counterclaim with an expert estimate of $29–$81 million in alleged profits or damages. Oceaneering disputed the claims and stated it believed resolution would not have a material adverse effect. Trial was scheduled to begin in August 2010. Other pending claims were described as primarily insured and not expected to materially affect results, cash flow, or financial position.
- Foreign currency translation reduced equity by $27.8 million in the first half. The company reported no material market-risk exposure and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the drilling moratorium and changes in deepwater project approvals materially affect Gulf of Mexico activity, ROV utilization, and the full-year EPS outlook.
- Collection timing and recoverability of the $58 million overdue Angola receivable.
- Developments and eventual resolution of the GRI litigation, including the asserted $29–$81 million range.
- Repayment of the $20 million Senior Notes due September 2010 and the pace and cost of planned capital spending and ROV additions.
- How much BP-related Macondo work contributed to Q2 and Q3 results, and whether that activity is temporary or recurring.