Oceaneering International, Inc. — Q2 2013 Form 10-Q
Business context and period. The company provides engineered services and products primarily to the offshore oil and gas industry, with a focus on deepwater markets, through ROVs, Subsea Products, Subsea Projects, Asset Integrity and Advanced Technologies. This unaudited quarterly report covers the three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $820.4m | $672.5m | $1,538.9m | $1,267.4m |
| Gross profit | $201.9m | $161.2m | $362.2m | $284.5m |
| Gross margin | 25% | 24% | 24% | 22% |
| Operating income | $146.3m | $110.0m | $254.6m | $186.0m |
| Operating margin | 18% | 16% | 17% | 15% |
| Net income | $98.8m | $72.6m | $173.7m | $124.0m |
| Diluted EPS | $0.91 | $0.67 | $1.60 | $1.14 |
Q2 revenue grew about 22%, operating income 33% and net income 36%. First-half revenue grew about 21%, operating income 37% and net income 40%. Q2 diluted EPS was $0.91; first-half diluted EPS was $1.60. Dividends declared were $0.22 per share in Q2 and $0.40 for the first half.
Segments and operating drivers
- Oil and Gas: Q2 revenue was $743.1m and operating income $171.9m, compared with $604.7m and $133.3m in Q2 2012. Higher demand supported results across the business.
- ROVs: Q2 revenue was $242.2m and operating income $69.2m. Utilization was 83%, versus 81% a year earlier. The fleet totaled 296 vehicles at June 30.
- Subsea Products: Q2 revenue was $258.0m and operating income $62.1m, benefiting from increased demand, particularly subsea hardware. Backlog was $902m, versus $621m a year earlier and $681m at December 31, 2012.
- Subsea Projects: Q2 revenue was $118.2m and operating income $24.0m. Growth reflected seasonal Gulf of Mexico activity and expanded work offshore Angola.
- Asset Integrity: Q2 revenue was $124.7m and operating income $16.6m; results improved year over year for the first half.
- Advanced Technologies: Q2 revenue was $77.3m and operating income $10.2m, supported by theme-park project work and incentive fees.
Cash, liquidity and debt
First-half operating cash flow was $230.4m, up from $186.4m. Capital expenditures were $175.3m, versus $151.6m; operating cash flow less capital expenditures was approximately $55.1m. Investing activities used $172.5m, while financing activities used $59.2m, including $43.3m of dividends and $19m of net revolving-credit repayments.
At June 30, 2013, cash was $119.3m, working capital was $689m, and the company reported $225m of available capacity under its $300m revolving credit facility. Debt was $75m, down from $94m at December 31, 2012. Total assets were $2.86bn. Inventory increased to $394.9m from $331.3m, primarily as the company prepared for higher Subsea Products backlog.
Outlook, risks and notable items
- Management forecast 2013 diluted EPS of $3.20–$3.35, compared with $2.66 in 2012, and Q3 diluted EPS of $0.90–$0.95.
- Management expected 2013 capital expenditures, excluding acquisitions, of $325m–$350m, including about $200m for ROVs and $100m for Subsea Products capabilities. It planned approximately 30 ROV additions for the year; 10 had entered service by June 30.
- Management expected operating income in 2013 to exceed 2012 in each operating business segment. It anticipated ROV and Subsea Projects improvement in Q3, but lower Subsea Products and Advanced Technologies operating income than in Q2, principally due to project timing. Second-half Subsea Products margins were expected to be lower than first-half margins because of a greater weighting of lower-margin umbilical sales.
- Demand is materially tied to customers’ deepwater exploration and development spending; management said approximately 90% of revenue and substantially all operating income before unallocated expenses came from oil and gas activities. The filing also describes seasonal activity in ROVs, Subsea Projects and Asset Integrity.
- Foreign-exchange exposure is a risk. First-half foreign-currency translation adjustments reduced equity by $78.2m, and accumulated other comprehensive income moved from $17.8m at year-end to a loss of $60.3m. Q2 other income/expense included foreign-currency transaction losses, principally related to Brazil. Management stated that market risks were not believed to be material.
- Various claims and legal actions were pending, most covered by insurance; management did not expect any resulting liability to materially affect results, cash flow or financial position. The company also reported $6.3m of accrued net unrecognized tax benefits.
- Management considered liquidity adequate and expected operating cash flow to exceed 2013 capital expenditures. There were no material contractual commitments for capital expenditures at June 30 and no disclosed off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the $902m Subsea Products backlog converts to revenue and earnings on the expected schedule and margin profile.
- Whether ROV utilization, planned fleet additions and the forecast 2013 EPS range are achieved.
- Whether planned capital spending is funded by operating cash flow while maintaining liquidity and managing revolving-credit debt.
- The effects of deepwater customer spending, seasonality, project timing and foreign-exchange movements on results and equity.
- Developments in pending claims, tax audits and the accrued unrecognized tax benefits.