Oceaneering International, Inc. — Q3 2018 Form 10-Q
Business context and period. Oceaneering provides engineered services and products, primarily to the offshore energy industry, as well as services to non-energy industries through Advanced Technologies. This unaudited quarterly report covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $519.3 million | $476.1 million | $1,414.4 million | $1,437.3 million |
| Gross margin | $47.6 million (9%) | $54.9 million (12%) | $96.2 million (7%) | $153.3 million (11%) |
| Operating income (loss) | $(1.6) million | $10.5 million | $(48.3) million | $19.8 million |
| Net income (loss) | $(66.0) million | $(1.8) million | $(148.2) million | $(7.2) million |
| Diluted loss per share | $(0.67) | $(0.02) | $(1.50) | $(0.07) |
| Cash provided by operating activities | Not presented separately for the quarter | $35.7 million | $144.0 million |
Q3 revenue rose about 9% year over year, but gross margin declined and operations moved to a small loss. The net loss was driven principally by income tax expense of $61.1 million, including $56.5 million of discrete tax items. Those items included a $39.1 million valuation allowance on deferred tax assets in certain foreign jurisdictions and $7.9 million of provisional Tax Act-related expense. Management said the discrete tax provision was expected to have minimal cash-tax implications in the foreseeable future.
For the nine-month period, revenue declined about 2%, while operating results and net loss deteriorated substantially. Results included second-quarter write-offs of equipment and intangible assets related to exiting land survey and equipment obsolescence. The filing also reports a $9.3 million pretax gain on the September sale of the ASV Global investment.
Liquidity, debt and cash flow
- At September 30, 2018, cash and cash equivalents were $367.2 million, down from $430.3 million at December 31, 2017. Working capital was $714 million.
- Nine-month operating cash flow was $35.7 million, versus $144.0 million a year earlier. Higher receivables used $85.3 million of cash; management attributed the increase partly to higher September activity and customer-payment timing.
- Nine-month investing cash use was $82.4 million, including $83.9 million of property and equipment purchases and the $68.4 million Ecosse acquisition, partly offset by Angola bond proceeds and investment-sale proceeds. Financing cash use was $5.7 million, reflecting the issuance of $300 million of 6.000% notes and repayment of the $300 million term loan.
- Long-term debt carrying value was $782.2 million; principal outstanding was $800 million. The company had $500 million available under its revolving credit facility and reported compliance with its covenants. No outstanding debt was scheduled to mature before November 2024.
- The 2028 Senior Notes carry a 6.000% coupon and were issued to repay the term loan, replacing that borrowing with longer-term notes. Interest expense rose to $28.1 million for the first nine months from $22.5 million.
Operating trends and material changes
- Energy Services and Products: Q3 revenue was $409.5 million, compared with $389.4 million; segment operating income was $14.5 million, down from $27.0 million. Nine-month revenue and operating income were $1,114.5 million and $13.0 million, respectively, versus $1,161.8 million and $74.5 million.
- ROVs: Q3 utilization improved to 56% from 50% a year earlier, but operating income fell to $0.8 million from $5.0 million. Management cited lower day rates from geographic mix and reactivation inefficiencies. The fleet remained at 279 ROVs.
- Subsea Products: Q3 revenue was $137.1 million and operating income $5.4 million, both below the prior-year quarter. Backlog was $333 million, versus $284 million a year earlier and $276 million at year-end 2017. Nine-month operating income fell to $9.4 million from $34.4 million.
- Subsea Projects: Q3 revenue increased to $105.0 million from $80.1 million, with $6.1 million of operating income. The segment reported a nine-month operating loss of $6.6 million, compared with $9.7 million of income in 2017; second-quarter write-offs and lower vessel demand and pricing weighed on results.
- Asset Integrity and Advanced Technologies: Q3 operating income was $2.3 million and $9.0 million, respectively. Advanced Technologies revenue grew to $109.8 million from $86.7 million; nine-month operating income was slightly lower year over year.
- Oceaneering acquired Ecosse Subsea Limited for approximately $68 million in March 2018, adding seabed preparation, route-clearance and trenching capabilities. Its results are included in Subsea Projects.
Outlook, risks and unusual items
- Management expected Q4 2018 operating results to decline from Q3 due to seasonal reductions in offshore activity, with most of the decline in Subsea Products and Subsea Projects. It expected an ROV operating loss and a Subsea Products operating loss; Hurricane Michael damage to the Panama City, Florida facility was expected to reduce Subsea Products production. Advanced Technologies operating income was expected to improve.
- For full-year 2018, management expected each operating segment to contribute positive EBITDA. It anticipated increased activity in each segment in 2019, likely led by Subsea Products, but said it was not prepared to provide detailed 2019 guidance. Management cautioned that pricing recovery requires sustained higher industry activity.
- Estimated 2018 capital expenditures, excluding acquisitions, were $100 million to $140 million, including $40 million to $50 million of maintenance and $60 million to $90 million of growth spending. Approximately $20 million was expected to complete the Ocean Evolution support vessel, planned for delivery at year-end 2018 and service entry in Q1 2019.
- Angola exposure remains material: the company recorded $15.5 million of foreign-currency transaction losses for the first nine months, reported that the kwanza had devalued almost 75% since year-end 2017, and warned further devaluation could create additional losses. It repatriated $57 million from Angola during the period; about $14 million of kwanza cash remained there at quarter-end.
- ASC 606 adoption affected reported nine-month revenue and loss: the filing states revenue was $12.6 million lower and net loss $1.3 million lower than it would have been without adoption. Contract assets were $233.4 million at quarter-end, up from $172.0 million at adoption.
- The company had suspended its quarterly dividend and did not anticipate reconsidering it until market outlook and projected free cash flow improved significantly. It disclosed ordinary-course litigation, mostly insured, and did not expect pending claims to materially affect its financial position, results or cash flows.
- The new lease accounting standard was scheduled for adoption January 1, 2019; the company expected a material increase in both assets and liabilities, predominantly from real estate operating leases.
Most important facts for investors to verify
- Whether operating cash flow and working-capital conversion improve, particularly collections of receivables.
- Whether the large tax charge, deferred-tax-asset valuation allowance and tax estimates have further effects in subsequent periods.
- Whether offshore activity, pricing and Subsea Products backlog translate into durable margins, given forecast seasonality and hurricane-related disruption.
- Whether Angola cash repatriation continues and whether currency movements or bond recoverability create further losses.
- Whether the stated 2018 capital-spending outlook, debt-service costs and suspended-dividend position remain consistent with liquidity and recovery plans.