Oceaneering International, Inc. — Q2 2019 Form 10-Q
Business context and period: Global provider of engineered services and products, primarily to the offshore energy industry, with additional defense, aerospace, and commercial businesses. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are to the corresponding 2018 periods unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $495.8 million | $478.7 million | $989.7 million | $895.1 million |
| Gross margin | $42.0 million (8%) | $29.7 million (6%) | $69.6 million (7%) | $48.6 million (5%) |
| Operating income (loss) | $(9.6) million | $(19.6) million | $(31.3) million | $(46.8) million |
| Net income (loss) | $(35.2) million | $(33.1) million | $(60.0) million | $(82.2) million |
| Diluted loss per share | $(0.36) | $(0.34) | $(0.61) | $(0.83) |
- Cash flow: First-half operating cash flow was $72.7 million, versus $15.7 million a year earlier. Investing used $68.1 million, including $70.9 million of property and equipment purchases; financing used $2.7 million. Cash increased $1.6 million to $355.8 million.
- Liquidity and debt: Working capital was $704 million. The company reported $800 million principal amount of senior notes outstanding (balance-sheet debt carrying value $795.6 million) and no revolver borrowings; $500 million of revolving capacity was available. It reported compliance with credit-agreement covenants.
- Other balance-sheet items: Contract assets were $197.0 million, down from $256.2 million at year-end 2018. Adoption of the new lease standard resulted in $191.8 million of operating lease liabilities at June 30; these are separate from reported debt.
Changes and segment performance
- Q2 revenue rose about 4% year over year; first-half revenue rose about 11%. Operating losses narrowed in both periods, but Q2 net loss increased, partly reflecting higher tax expense and interest expense.
- Energy Services and Products operating income was $14.9 million in Q2, compared with a small operating loss in Q2 2018. ROV revenue and utilization improved; utilization was 62%, versus 54%. Subsea Products operating income improved to $7.4 million, supported by manufacturing throughput; backlog reached $596 million from $332 million at December 31, 2018. Subsea Projects returned to slight operating income, while Asset Integrity recorded an operating loss amid lower revenue and pricing.
- Advanced Technologies generated Q2 operating income of $7.2 million, down from $7.9 million year over year; first-half operating income increased to $16.8 million from $9.6 million, supported by automated guided vehicle results.
- First-half operating cash flow benefited from a $53.9 million cash source from receivables and contract assets, attributed to collections, working-capital management, and expected tax refunds. Inventory used $18.7 million of cash.
Outlook, risks, and notable items
- Management expected a slight improvement in Q3 consolidated operating results on moderately higher revenue. It anticipated lower ROV and Subsea Products operating contribution versus Q2, relatively flat Subsea Projects and Asset Integrity results, and improved Advanced Technologies revenue and margins.
- For the second half of 2019, management expected improved consolidated operating results on higher revenue, with positive EBITDA contributions from each operating segment. It projected meaningful improvement in Subsea Products and Advanced Technologies, relatively flat ROV and Asset Integrity results, and weaker Subsea Projects results than in the first half.
- Management expected 2019 capital expenditures of approximately $125 million, including $50 million for maintenance and $75 million for growth, and said cash flows should cover debt service and anticipated capital spending. It did not provide a full-year effective tax-rate forecast because of changing geographic earnings mix.
- Management cited the gradual offshore-market recovery, customer activity and spending, pricing pressure, seasonal declines, project call-outs, manufacturing mix, and execution on projects as factors affecting results. It also warned of foreign-exchange exposure, particularly in Angola, and uncertainty in litigation and tax audits. It stated that ordinary-course claims were not expected to materially affect the company, while noting outcomes cannot be assured.
- Q2 included higher tax expense despite a pretax loss; the filing attributes tax-rate differences to geographic mix and discrete items. First-half tax expense included $5.1 million of discrete items. Interest expense was expected to increase as interest on the Ocean Evolution was no longer capitalized after entering service in Q2.
- The company adopted lease accounting on January 1, 2019, recording a $5.9 million retained-earnings adjustment and lease assets and liabilities; management said adoption did not materially affect earnings or cash flows. No material contract-estimate adjustments were recorded in the first half. The prior-year comparison included $7.6 million of equipment and intangible-asset write-offs in Q2 2018.
Important facts for investors to verify
- Whether the $596 million Subsea Products backlog converts to revenue and operating margin as projected, including management’s full-year book-to-bill expectation of 1.25–1.4.
- Whether forecast second-half operating improvement and capital spending are supported by customer activity, project execution, and cash generation.
- Whether working-capital cash benefits recur, given the first-half decline in contract assets and the decrease in contract liabilities.
- Debt-service capacity, covenant headroom, and the effect of floating-rate exposure on $200 million of senior notes subject to interest-rate swaps.
- Potential effects of Angola currency movements and repatriation restrictions, tax audits and uncertain tax positions, and pending claims or litigation.