Oceaneering International, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $478.7 | $515.0 | $895.1 | $961.2 |
| Gross margin | $29.7 (6%) | $53.6 (10%) | $48.6 (5%) | $98.4 (10%) |
| Operating income (loss) | $(19.6) (-4%) | $9.4 (2%) | $(46.8) (-5%) | $9.2 (1%) |
| Net income (loss) | $(33.1) | $2.1 | $(82.2) | $(5.4) |
| Diluted EPS | $(0.34) | $0.02 | $(0.83) | $(0.06) |
| Operating cash flow | Not separately reported for the quarter | $15.7 | $102.6 |
Q2 revenue declined about 7% year over year; first-half revenue fell about 7%. The six-month operating cash flow decline reflected weaker results and working-capital movements, including a $12 million cash use from receivables, versus a $23 million source in 2017. Capital expenditures were $53.5 million in the first half. Investing used $94.8 million, including the $68.4 million Ecosse acquisition, partly offset by $33.4 million of Angolan bond redemptions. Cash decreased $90.8 million to $339.5 million.
Liquidity and debt: Working capital was $687 million. Long-term debt carrying value was $782.2 million; principal debt was $800 million. The company had no revolver borrowings and $500 million of availability through October 2021, stepping down to $450 million thereafter through January 2023. The $300 million term loan was repaid with proceeds from $300 million of 6.000% notes due 2028 and cash. The other senior notes are $500 million at 4.650%, due 2024. No debt maturities are scheduled before November 2024. The company reported compliance with credit covenants.
No dividend was declared in the first half; the quarterly dividend had been suspended in Q4 2017. No shares were repurchased in the first half.
Segment performance and material changes
- ROVs: Q2 revenue was $107.4 million, up from $103.4 million; utilization improved to 54% from 48% year over year and 44% in Q1 2018. Operating income was $4.5 million, down from $10.4 million a year earlier, due mainly to lower revenue per day and higher reactivation and mobilization costs.
- Subsea Products: Q2 revenue fell to $121.7 million from $174.9 million and operating income to $2.3 million from $10.6 million. Backlog was $245 million, down from $276 million at year-end 2017. Management cited weaker manufactured-product demand and equipment write-offs.
- Subsea Projects: Q2 revenue was $78.0 million versus $75.5 million, but the segment recorded a $10.4 million operating loss versus $3.0 million income. Lower-than-expected project margins, timing, competitive pricing, reduced Angola diving activity, and write-offs contributed.
- Asset Integrity: Q2 revenue rose to $67.4 million from $58.2 million; operating income was $3.4 million versus $3.8 million.
- Advanced Technologies: Q2 revenue was $104.1 million versus $103.0 million, and operating income was $7.9 million versus $7.6 million. First-half operating income declined due to execution issues in the automated guided vehicles business.
The company acquired Ecosse Subsea Limited in March 2018 for approximately $68 million in cash; its results are included in Subsea Projects. Q2 and first-half results also included write-offs of equipment and intangible assets connected with exiting land survey and equipment obsolescence; the filing does not provide a clear separate total for these write-offs.
Outlook, risks, and notable items
- Management expected Q3 consolidated operating results to improve from Q2, primarily as Subsea Projects returned to profitability. For the second half, it expected higher revenue and improved operating results, with positive EBITDA contributions from each operating segment.
- Despite anticipated improvement, management expected a full-year 2018 operating loss and net loss, while expecting positive consolidated EBITDA and positive EBITDA from each operating segment. It no longer provided guidance for the annual effective tax rate before discrete items.
- Expected Q3 segment trends: ROV results similar to Q2; Subsea Products slightly lower; Subsea Projects profitable; Asset Integrity flat to slightly down; Advanced Technologies flat. Unallocated expenses were expected in the upper-$20 million range per quarter.
- 2018 capital expenditures, excluding acquisitions, were estimated at $100 million to $140 million, including $60 million to $90 million of growth spending. Approximately $20 million was expected to complete the Ocean Evolution vessel, scheduled for delivery at year-end 2018 and service in Q1 2019.
- Angola remains a material foreign-exchange and cash-repatriation risk. First-half foreign currency transaction losses were $11.7 million, principally related to the kwanza; the filing separately attributes $12.4 million of kwanza-related losses for the six months. Angolan kwanza cash was approximately $12 million at June 30, down from $27 million at year-end. The company repatriated $31 million in Q2 and held approximately $46 million of Angolan bonds.
- Interest expense increased to $18.2 million for the first half from $13.9 million. Management expected further interest expense pressure from higher rates affecting floating-rate debt and swaps on $200 million of fixed-rate notes. It also expected a loss on its Medusa Spar LLC investment due to low production volumes.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, so prior-period results were not restated. For the six months, adoption increased reported revenue by $10.7 million and reduced the reported net loss by $8.0 million relative to balances without adoption.
- Ordinary-course maritime injury claims and other claims were disclosed; management did not expect them to materially affect financial position, results, or cash flows. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating and net losses for 2018, as forecast by management, were ultimately realized, and how much of Q2 losses reflected one-time write-offs.
- Subsea Projects’ margin recovery, Ecosse’s contribution, and Subsea Products backlog, awards, and pricing.
- Cash conversion and working-capital trends, capital spending, and liquidity relative to the company’s $800 million principal debt.
- Angolan currency losses, access to and repatriation of Angolan cash and bond proceeds, and any further kwanza devaluation.
- Interest expense, Medusa Spar losses, and the timing and conditions for any dividend reinstatement.