Oceaneering International, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. This is an annual report, not a quarterly filing. Oceaneering provides engineered services and products, primarily to offshore oil and gas customers, with additional defense, aerospace, renewables and commercial businesses. Approximately 79% of 2019 revenue came from energy-related activities; foreign operations generated about 55% of revenue.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $2.048 billion | $1.909 billion |
| Gross margin | $98.2 million; 4.8% | $129.2 million; 6.8% |
| Operating income (loss) | $(290.7) million; (14.2%) | $(145.5) million; (7.6%) |
| Net income (loss) | $(348.4) million; $(3.52) diluted EPS | $(212.3) million; $(2.16) diluted EPS |
| Cash from operating activities | $157.6 million | $36.6 million |
| Capital expenditures | $147.7 million | $109.5 million |
| Cash and cash equivalents at year-end | $373.7 million | $354.3 million |
| Long-term debt at year-end | $796.5 million | $786.6 million |
| Working capital | $643.5 million | $750.1 million |
Operating cash flow less capital expenditures was approximately $9.9 million in 2019, a simple calculation that excludes acquisitions and other investing items. The company reported $500 million available under its revolving credit facility and no outstanding revolver borrowings at year-end. It was in compliance with credit agreement covenants. Senior notes comprise $500 million due 2024 at 4.650% and $300 million due 2028 at 6.000%.
Material changes and unusual items
- Revenue rose 7%, but gross margin declined by about $31 million and the net loss widened by about $136 million versus 2018.
- 2019 results included approximately $252 million of pre-tax charges, versus $84 million in 2018. These included $159 million of long-lived asset impairments, $14.7 million of goodwill impairment, $21.3 million of inventory write-downs, and other write-offs and expenses.
- The largest charges were in Subsea Projects, including $132 million of vessel impairments; the Ocean Evolution and Ocean Patriot were impaired by approximately $101 million and $31 million, respectively. Asset Integrity recorded a $14.7 million goodwill impairment and other asset charges.
- A $74.6 million increase in valuation allowances on deferred tax assets contributed to tax expense despite the pre-tax loss. The company said it did not expect to realize a current-year tax benefit from its projected consolidated pre-tax loss.
- Cash from operations increased substantially from 2018, partly reflecting higher current liabilities and the timing of vendor payments. Capital spending was higher, primarily for ROVs, Subsea Products and the Ocean Evolution.
Segments, outlook and risks
- ROVs: Revenue increased to $449.8 million from $394.8 million; utilization rose to 58% from 51%. Operating income was nearly flat at $1.6 million, including $23 million of charges. Management expected 2020 utilization in the high-60% to low-70% range.
- Subsea Products: Revenue increased to $602.2 million from $515.0 million; backlog rose to $630 million from $332 million. Operating income was $9.8 million, including $25 million of charges. Management expected improved 2020 results and a mid-single-digit operating margin.
- Subsea Projects: Revenue was $327.6 million, slightly below 2018, while operating loss widened to $145.7 million, largely due to impairments and other charges. Management expected a slight 2020 improvement; this segment had the greatest share of speculative work in its guidance.
- Asset Integrity: Revenue declined to $243.0 million and the segment recorded a $53.4 million operating loss, including approximately $49 million of charges. Management expected improvement in 2020 on broadly flat revenue, while noting highly competitive pricing.
- Advanced Technologies: Revenue increased to $425.5 million, but operating income declined to $25.1 million. Entertainment-business execution problems and customer-driven delays and cancellations weighed on results. Management expected higher revenue and high-single-digit operating margins in 2020, while noting project timing variability and monitoring coronavirus-related effects on China projects.
- Management expected 2020 operating results to improve across segments, with stable pricing and margins and greater opportunities for improvement. Planned 2020 capital expenditures were $75–$105 million, and management expected reduced spending to support significant free cash flow. Forecasts were subject to market and execution uncertainty.
- Key risks include offshore oil and gas spending and commodity-price cycles, contract cancellations and backlog conversion, competition and pricing, vessel utilization, customer execution and collections, foreign currency and political exposure (including Angola), raw-material availability, environmental and operating hazards, and cybersecurity. The company noted limited steel-tube availability but said it had secured supply for existing backlog and anticipated 2020 orders.
- The company had suspended quarterly dividends after 2017 and did not expect reinstatement until market outlook and projected free cash flow improved significantly. Routine litigation was disclosed; management did not expect it to materially affect consolidated results, while acknowledging outcomes cannot be assured.
Important facts for investors to verify
- Whether the 2020 improvement and ROV utilization forecasts were achievable, and how subsequent market conditions affected them.
- Whether the $1.717 billion reported firm backlog converted to revenue and profit; backlog is subject to cancellation, scope changes and timing risk.
- Whether impairment assumptions for vessels, Subsea Projects and Asset Integrity were reasonable and whether further impairments or write-offs occurred.
- Whether operating cash flow can support debt service and investment after capital spending; also monitor the $800 million face value of senior notes and the $500 million revolver availability.
- Whether deferred tax assets and valuation allowances, foreign-currency exposures and the ability to repatriate Angolan funds changed materially.