Oceaneering International, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Oceaneering provides engineered services and products, primarily to offshore energy markets, with additional Advanced Technologies businesses serving non-energy markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $416.4 | $446.2 |
| Gross margin | $18.8 (4.5%) | $44.9 (10.1%) |
| Operating income (loss) | $(27.1) (-6.5%) | $(0.2) |
| Net income (loss) | $(49.1) | $(7.5) |
| Diluted EPS | $(0.50) | $(0.08) |
| Operating cash flow | $5.6 | $59.0 |
| Capital expenditures | $25.7 | $17.8 |
Revenue declined 6.7% year over year. The filing says adoption of ASC 606 increased reported revenue by $6.1 million and reduced reported net loss by $2.4 million; without that change, revenue would have been $422.5 million and net loss $51.5 million. Prior-period results were not restated.
At March 31, cash was $334.9 million, working capital was $733 million, and total assets were $2.93 billion. Long-term debt was $785.1 million carrying value, representing $800 million principal outstanding. The company had no revolver borrowings and $500 million available under its revolving facility. Cash declined $95.4 million during the quarter.
Material changes and segment results
- Energy Services and Products revenue fell to $330.4 million from $360.3 million; segment operating loss was $1.3 million versus income of $19.9 million.
- ROV revenue was $85.6 million; utilization fell to 44% from 46%, and the segment posted a $2.4 million operating loss versus $5.9 million income.
- Subsea Products revenue declined to $126.7 million from $150.6 million; operating income fell to $1.8 million from $11.5 million. Backlog was $240 million, down from $407 million a year earlier and $276 million at year-end 2017.
- Subsea Projects recorded a $2.4 million operating loss, compared with $0.2 million income. Asset Integrity revenue rose to $61.3 million, while operating income was $1.7 million versus $2.3 million.
- Advanced Technologies revenue was broadly flat at $86.0 million, but operating income fell to $1.7 million from $5.0 million, reflecting automated guided vehicle execution issues and costs.
- In February, Oceaneering issued $300 million of 6.0% senior notes due 2028 and used the proceeds, together with cash, to repay its $300 million term loan. The revolver maturity was extended for participating lenders.
- In March, the company acquired Ecosse Subsea Limited for approximately $68 million cash; its results are included in Subsea Projects from closing.
Cash flow, risks and unusual items
Operating cash flow fell to $5.6 million, principally reflecting the quarterly loss and a $41.2 million cash outflow from current liabilities. Investing activities used $92.3 million, including the Ecosse acquisition and capital spending; financing activities used $5.8 million after note proceeds largely offset the term-loan repayment.
Other expense included $8.3 million of foreign currency transaction losses, principally related to Angola; $7.7 million was attributed to the Angolan kwanza. The company held approximately $22 million equivalent of kwanza cash and $68 million equivalent of Angolan central-bank bonds, including $58 million due in 2018. Angola’s currency had devalued almost 30% since year-end 2017, and further devaluation could cause additional losses. Interest expense rose to $9.4 million from $6.3 million. Income tax expense was $5.9 million despite the pretax loss, reflecting geographic mix, valuation allowances and discrete items.
Management reported compliance with debt covenants and considered liquidity adequate. It identified offshore market weakness, project timing, reduced Subsea Products backlog, foreign-exchange exposure, interest rates and execution risks as relevant uncertainties. Ordinary-course maritime personal-injury claims and other litigation were described as not expected to materially affect the company; most other claims are insured. No off-balance-sheet arrangements were reported.
Guidance and management outlook
- Management expected Q2 operating profitability and improvement across segments except Subsea Products, where reduced backlog and award timing were expected to weigh on results. Quarterly unallocated expenses were expected in the upper-$20 million range.
- Management projected increased offshore activity and contract awards in the second half of 2018 and expected Ecosse to contribute positively to cash flow and earnings. Nevertheless, it forecast an operating loss and net loss for full-year 2018.
- The company expected each operating segment to generate positive EBITDA in 2018 and consolidated cash flow to cover debt service and anticipated maintenance and organic-growth capital expenditures.
- 2018 capital expenditures, excluding acquisitions, were estimated at $80 million to $120 million, including completion of the Ocean Evolution vessel, expected for delivery in late Q2.
- Management no longer provided a 2018 annual effective tax-rate forecast. It did not anticipate dividend reinstatement until market outlook and projected free cash flow improved significantly.
Important facts for investors to verify
- Whether offshore activity and contract awards improved as management expected, and whether the company achieved its full-year loss and cash-flow outlook.
- Subsea Products backlog, order intake and book-to-bill performance, along with ROV utilization and pricing.
- Ecosse’s realized contribution to earnings and cash flow, and delivery, cost and utilization of the Ocean Evolution.
- Liquidity, debt-service capacity and covenant compliance, particularly if operating losses continue or interest costs rise.
- Angolan currency convertibility, kwanza exposure and collection of maturing bonds, as well as the final effects of tax-law implementation and ASC 606 estimates.