Oceaneering International, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Oceaneering provides engineered services and products, primarily to the offshore oil and gas industry, alongside its Advanced Technologies business. Approximately 90% of revenue was generated from oil and gas customers.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $602.2 | $516.3 | $1,618.5 | $1,415.7 |
| Gross profit / margin | $153.1 / 25% | $125.6 / 24% | $378.0 / 23% | $348.8 / 25% |
| Operating income / margin | $109.6 / 18% | $88.1 / 17% | $252.4 / 16% | $235.8 / 17% |
| Net income | $78.6 | $59.2 | $177.3 | $152.7 |
| Diluted EPS | $0.72 | $0.54 | $1.63 | $1.39 |
| Cash from operating activities | Not separately stated | Not separately stated | $146.2 | $302.0 |
- Balance sheet and liquidity: At September 30, cash was $166.1 million, working capital was $578 million, and the company had no long-term debt. It reported $300 million of available capacity on its revolving credit facility, scheduled to expire in January 2012; management planned to renew or replace it in Q4 2011. Current assets were $999.8 million and current liabilities $421.6 million.
- Cash use and investment: Investing activities used $175.6 million net during the first nine months, including $163.4 million of property and equipment purchases and $54.2 million for acquisitions, net of cash acquired. Financing activities used $49.7 million, including $32.5 million of dividends and $17.5 million of treasury-stock purchases. Cash decreased by $79.1 million from year-end 2010.
- Dividends and repurchases: The company paid two quarterly dividends of $0.15 per share in 2011 and announced another $0.15 dividend for December. It repurchased 500,000 shares for $17.5 million during the nine months; 9.3 million shares remained authorized for repurchase at quarter-end.
Material changes and segment performance
- Q3 revenue increased 17% year over year and net income rose 33%. For the nine months, revenue increased 14% and net income increased 16%. Despite higher nine-month gross profit, gross and operating margins declined versus 2010.
- ROVs: Q3 revenue was $200.9 million, up from $164.7 million; utilization rose to 80% from 73%. Nine-month operating income was $165.6 million versus $162.8 million, with lower operating margin (30% versus 33%).
- Subsea Products: Q3 revenue was $220.1 million versus $160.2 million; nine-month operating income rose to $105.4 million from $76.7 million. Backlog was $403 million, compared with $384 million at December 31, 2010. Results included NCA, acquired March 31, 2011.
- Subsea Projects: Nine-month revenue fell to $122.2 million from $184.6 million and operating income to $25.9 million from $34.5 million, reflecting weaker U.S. Gulf of Mexico activity and completion of Macondo work in 2010. Q3 results included an $18.3 million gain on the sale of the Ocean Legend, recorded as a reduction of costs.
- Inspection: Nine-month revenue increased to $199.8 million from $166.0 million and operating income to $24.1 million from $20.1 million.
- Advanced Technologies: Nine-month revenue declined to $168.9 million from $178.3 million and operating income to $11.4 million from $14.5 million, reflecting lower profitability in U.S. Navy and Department of Defense work and less other contract activity.
Outlook, risks and unusual items
- Management raised its 2011 diluted EPS estimate to $2.11–$2.15 from $1.90–$1.98; it forecast Q4 diluted EPS of $0.48–$0.52. The estimated 2011 annual effective tax rate was 31.5% before specific adjustments; the nine-month reported effective rate was 29.8%.
- For 2012, management estimated diluted EPS of $2.35–$2.55, citing international demand growth and a moderate increase in overall U.S. Gulf of Mexico activity. It expected Subsea Projects to recover gradually in the Gulf and expand substantially with anticipated international vessel-project work.
- Management expected 2011 ROV and Subsea Products operating income to exceed 2010 levels, while Subsea Projects and Advanced Technologies operating income would be lower. It planned total 2011 capital expenditures, including acquisitions, of approximately $280 million, and expected to add four to six ROVs in Q4.
- Key operating risks include the pace of offshore customer spending, seasonality, and U.S. Gulf of Mexico regulatory requirements and permitting delays following the Deepwater Horizon incident. Management said recent deepwater permitting activity was encouraging, but cautioned that forecasts were subject to uncertainty.
- A single Angola customer’s receivable was $42 million at quarter-end and wholly overdue. The company collected $14 million during the nine months, reduced the receivable’s carrying value by $3 million in Q3, and reclassified $22 million to other assets as expected collection was more than one year away. Management believed the amount would ultimately be collected.
- Other notable items: a $4.9 million discrete tax benefit contributed to the lower reported tax rate; foreign currency translation reduced nine-month comprehensive income by $12.9 million; litigation was described as not expected to materially affect results, cash flow, or financial position. The filing reported no outstanding hedges and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the Angola customer pays the overdue balance on the timing and terms assumed, and whether further valuation adjustments are needed.
- Whether Oceaneering renews or replaces its $300 million revolving credit facility before its January 2012 expiration.
- Whether U.S. Gulf of Mexico permitting and activity recover as management expects, and the resulting effect on Subsea Projects and ROV utilization.
- Whether the $18.3 million Ocean Legend gain and discrete tax benefits affect comparisons of recurring earnings, and whether the raised 2011 and 2012 EPS outlook is achieved.
- How acquisition integration, planned capital spending, and ROV fleet additions affect cash generation and margins.