Business context and reporting period
TechnipFMC plc filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company provides products, engineering, construction and services to the oil and gas industry through Subsea, Onshore/Offshore and Surface Technologies. Unless otherwise noted, amounts are in U.S. dollars.
Comparisons require care: TechnipFMC adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method; 2017 figures were not restated. The company reported a $91.5 million reduction to opening retained earnings from adoption, and the standard also changed certain balance-sheet classifications and backlog figures.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2,960.9m | $3,845.0m | $6,086.1m | $7,233.0m |
| Net income attributable to TechnipFMC | $105.7m | $164.9m | $200.8m | $146.2m |
| Diluted EPS | $0.23 | $0.35 | $0.43 | $0.31 |
| Gross margin | 18.2% | 17.8% | 18.7% | 15.1% |
| Operating cash flow | Not separately stated for the quarter | $(485.2)m | $294.3m |
- Q2 revenue fell 23.0% year over year and attributable net income fell 35.9%. For the first half, revenue declined 15.9%, while attributable net income increased 37.3%.
- Q2 income before tax was $174.8m, net interest expense $50.9m and income tax provision $64.7m. The effective tax rate was 37.0% in Q2 and 36.1% for the first half.
- Six-month operating cash outflow reflected, among other working-capital movements, lower trade payables and increases in inventory and receivables/contract assets. Investing used $235.7m and financing used $405.9m in the period.
- Cash and equivalents were $5,555.4m at June 30, down from $6,737.4m at year-end 2017. Total debt was approximately $3,866m, including $78.5m current debt; reported net cash was $1,689.4m, versus $2,882.4m at year-end.
- Current assets were $11,841.5m and current liabilities $9,157.7m. The $2.5bn revolving credit facility had $976.8m unused capacity after $1,523.2m of commercial paper; the company said it complied with its covenants.
Segments and orders
| Segment | Q2 revenue / change | Q2 operating margin | Six-month revenue / change |
|---|---|---|---|
| Subsea | $1,217.4m / down 29.6% | 6.2% (13.6%) | $2,397.6m / down 22.8% |
| Onshore/Offshore | $1,342.4m / down 26.0% | 12.8% (11.3%) | $2,915.8m / down 18.5% |
| Surface Technologies | $401.1m / up 33.7% | 12.8% (loss-making in prior-year quarter) | $772.7m / up 40.9% |
Inbound orders were $4,231.7m in Q2 and $7,718.7m for the first half. June 30 order backlog was $14,871.8m, up from $12,982.8m at December 31, 2017; the filing attributes substantial portions of the segment backlog movements to ASC 606 adjustments. Remaining unsatisfied performance obligations were also reported at $14,871.8m, with approximately 73% expected to be recognized through 2019.
Material changes versus prior period
- Lower Subsea and Onshore/Offshore revenue reflected projects nearing completion, including Yamal LNG, and weak prior-period Subsea order intake. Higher Surface Technologies sales reflected North American land-market recovery and stronger demand for pressure-control, wellhead and related equipment.
- Gross margin improved, which management attributed to execution and a lower operating-cost structure. Subsea operating margin nevertheless contracted sharply with lower revenue; Onshore/Offshore and Surface Technologies margins improved.
- First-half operating cash flow swung from $294.3m provided to $485.2m used. The company also returned capital through $120.2m of dividends and $242.0m of share repurchases during the half.
- Foreign-currency translation reduced Q2 comprehensive income materially: other comprehensive loss was $188.8m, leaving comprehensive loss attributable to TechnipFMC of $82.5m, despite positive net income.
Outlook, risks and unusual items
- Management described a gradually improving oil-price and activity environment, while emphasizing volatility and uncertainty. It expected increased Subsea order activity as project economics improved, saw opportunities in LNG, refining and petrochemicals, and noted that North American Surface Technologies growth could slow amid Permian take-out constraints, tariffs and inflation.
- Management projected approximately $300m of 2018 capital expenditures, excluding contingent spending that could be needed for contract awards. No specific revenue or earnings guidance was provided in the supplied filing text. The company expected to complete its authorized $500m share-repurchase program in 2018; the board declared a $0.13-per-share dividend payable in September 2018.
- Changes in contract estimates increased operating profit by approximately $83.4m in Q2 and $261.4m in the first half, primarily from better-than-expected project execution in Onshore/Offshore. These estimates are judgment-sensitive and can change as projects progress.
- Guarantees had maximum potential undiscounted payments of $4,726.5m, including $3,878.3m of performance guarantees. Management did not expect known contingencies to materially affect results, but outcomes remain uncertain.
- The company continued to face DOJ and other authorities’ 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 disclosed control weakness was also pending; the company said it could not predict the outcome.
- Disclosure controls were deemed ineffective at June 30, 2018 because of previously disclosed material weaknesses involving foreign-exchange accounting, period-end journal entries and reconciliations, and certain IT systems. Remediation efforts were ongoing.
- During the quarter, management decided to wind down Iran-related business, withdraw pending bids and accept no new Iran work, while seeking collection of existing receivables. The filing reported no Q2 revenue from the disclosed Iran contracts.
Important facts for investors to verify
- Whether order intake converts into revenue and cash, particularly as major Subsea and Onshore/Offshore projects near completion.
- How sustainable the reported margin gains are, given the significant favorable contract-estimate impacts and lower Subsea utilization.
- The drivers of working-capital outflows and whether operating cash flow recovers after the first-half decline in payables.
- Progress in remediating material weaknesses and the potential financial or operational consequences of the investigations and litigation.
- Debt, commercial-paper refinancing capacity, remaining share-repurchase authorization and compliance with U.K. distributable-reserve requirements for capital returns.