OCEANEERING INTERNATIONAL INC quarterly report, Q1 FY2019

Oceaneering International, Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Oceaneering provides engineered services and products, primarily to the offshore energy industry, as well as defense, aerospace and commercial services through Advanced Technologies. Amounts below are in U.S. dollars.

Financial performance and liquidity

Metric	Q1 2019	Q1 2018
Revenue	$493.9 million	$416.4 million
Gross margin	$27.6 million (5.6%)	$18.8 million (4.5%)
Operating loss	$21.7 million	$27.1 million
Net loss	$24.8 million; $0.25 per diluted share	$49.1 million; $0.50 per diluted share
Cash from operations	$19.1 million	$5.6 million
Capital expenditures	$30.0 million	$25.7 million

Revenue increased 18.6% year over year. Cash from operations less capital expenditures was approximately negative $10.8 million. Cash and cash equivalents were $341.8 million at quarter-end, down from $354.3 million at year-end 2018. Working capital was $720 million. Long-term debt had a carrying value of $791.0 million and principal outstanding of $800 million; $500 million was available under the revolving facility. The company reported compliance with its debt covenants.

Gross margin improved year over year, but the company remained loss-making at both the operating and net income levels. Interest expense was $9.4 million. The tax benefit was $3.2 million; the filing says geographic earnings mix, valuation allowances and discrete items affect the tax provision, and provides no 2019 annual effective-tax-rate guidance.

Material changes and operating trends

• Energy Services and Products revenue rose to $379.6 million from $330.4 million. Advanced Technologies revenue increased to $114.3 million from $86.0 million.
• ROV revenue was $100.3 million; utilization increased to 53% from 44%, and the segment returned to operating income of $1.4 million from a $2.4 million loss.
• Subsea Products revenue was broadly flat at $128.8 million, while operating results declined to a $0.5 million loss from $1.8 million income. Backlog increased to $464 million from $240 million a year earlier and $332 million at December 31, 2018.
• Subsea Projects revenue rose to $89.7 million from $56.9 million and operating income was $2.9 million versus a $2.4 million loss. The prior-quarter comparison is affected by a $76 million goodwill impairment recorded in Q4 2018.
• Asset Integrity revenue was slightly lower and the segment recorded a $0.7 million operating loss, compared with $1.7 million operating income.
• Advanced Technologies revenue increased to $114.3 million and operating income to $9.6 million, from $86.0 million and $1.7 million, respectively, largely reflecting higher government-related work and improved execution in automated guided vehicles.

Outlook, risks and unusual items

• Management said Q1 operating results exceeded expectations, citing higher-than-expected activity and execution in energy-focused businesses. For Q2, it expected improved operating profitability in ROV, Subsea Projects and Advanced Technologies, with Subsea Products and Asset Integrity relatively flat; quarterly unallocated expenses were expected in the mid-$30 million range.
• For 2019, management projected ROV fleet utilization in the upper-50% range, Subsea Products book-to-bill of 1.25–1.4 and mid-single-digit operating margins, and low-double-digit margins for Subsea Projects and Advanced Technologies. Asset Integrity was expected to have low-single-digit margins. These are forward-looking expectations, not guarantees.
• Management forecast 2019 capital expenditures of $105–$125 million, excluding acquisitions, including $40–$50 million for maintenance and $65–$75 million for growth. The new Ocean Evolution vessel was expected to enter service in Q2; management anticipated increased interest expense after it entered service and from floating-rate exposure.
• The company expected each operating segment to contribute positive EBITDA in 2019 and consolidated cash flow to cover debt service and planned maintenance and organic-growth spending. It also anticipated approximately $25 million of net income-tax payments for 2019.
• On January 1, 2019, adoption of the new lease standard added a $182.3 million operating-lease right-of-use asset and $186.5 million of lease liabilities at March 31. The adoption included a $5.9 million retained-earnings reduction and, according to the filing, did not materially affect earnings or cash flows.
• Subsea Products reported two unannounced binding letters related to significant pending contract awards, used to procure long-lead items; the filing does not identify the awards or confirm final contracts. A tax-audit settlement process entered negotiations in April 2019, with a potential effect on Q2 uncertain tax positions; final settlement was not complete.
• Risks include volatile offshore activity and pricing, execution and cost estimates on contracts, foreign-exchange exposure—particularly Angola—and interest-rate exposure. The company reported $7.7 million of kwanza cash in Angola and $10 million of Angolan bonds. It noted that repatriation is subject to central-bank processes. Ordinary-course litigation and claims were not expected by management to have a material effect, though outcomes are uncertain.

Important facts for investors to verify

• Whether offshore activity, pricing and ROV utilization improve enough to support management’s 2019 operating and cash-flow expectations.
• Whether the $464 million Subsea Products backlog converts to revenue and margin, including whether the pending awards behind the binding letters become contracts.
• Ocean Evolution’s actual in-service timing, utilization and contribution, alongside capital spending against the $105–$125 million forecast.
• Cash generation, liquidity and covenant headroom relative to $800 million of debt principal and planned investment.
• Outcomes and timing of the foreign tax-audit settlement, and developments affecting Angola currency exposure and cash repatriation.