Oceaneering International Inc: Form 10-Q for the period ended Jun 30, 2024

Certain statements we make in this quarterly report on Form 10-Q are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements regarding our expectations about:

• increased costs to operate our business, including the availability and market for our chartered vessels;
• future demand, order intake and business activity levels;
• the collectability of accounts receivable and realizability of contract assets at the amounts reflected on our most recent balance sheet;
• the backlog of our Manufactured Products segment, to the extent backlog may be an indicator of future revenue or productivity;
• tax refunds and the expected timing thereof;
• our tax payments and projected capital expenditures for 2024;
• the adequacy of our liquidity, cash flows and capital resources to support our operations and internally generated growth initiatives;
• transactions we may engage in to manage our outstanding debt prior to maturity;
• shares that may be repurchased under our share repurchase plan;
• seasonality; and
• industry conditions.

These forward-looking statements are subject to various risks, uncertainties and assumptions, including those we have referred to under the headings “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” in Part I of our annual report on Form 10-K for the year ended December 31, 2023. Although we believe that the expectations reflected in such forward-looking statements are reasonable, because of the inherent limitations in the forecasting process, as well as the relatively volatile nature of the industries in which we operate, we can give no assurance that those expectations will prove to have been correct. Accordingly, evaluation of our future prospects must be made with caution when relying on forward-looking information.

The following discussion should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2023.

Overview of our Results

Our diluted earnings (loss) per share for the three- and six-month periods ended June 30, 2024 were $0.34 and $0.49, respectively, as compared to $0.19 and $0.23, respectively, for the corresponding periods of the prior year. In the second quarter of 2024, activity levels in our energy-related businesses increased, led by our Subsea Robotics segment. Compared to the same quarter in the prior year, our second quarter of 2024 operating income was 23% higher on a 12% increase in revenue, with higher revenue in all of our operating segments and improved operating results in our Subsea Robotics and Manufactured Products segments.

In the six-month period ended June 30, 2024, we utilized $17 million of cash in operating activities along with $27 million of cash for maintenance capital expenditures and $21 million for growth capital expenditures. These items were the largest contributors to our $79 million cash reduction during the first six months of 2024.

Results of Operations

We operate in five business segments. Our segments are contained within two businesses—services and products provided primarily to the oil and gas industry, and to a lesser extent, the mobility solutions and offshore renewables industries, among others (“Energy”), and services and products provided to non-energy industries (Aerospace and Defense Technologies (“ADTech”)). Our four business segments within the Energy business are Subsea Robotics,

Manufactured Products, OPG and Integrity Management & Digital Solutions (“IMDS”). We report our ADTech business as one segment. Our Unallocated Expenses are those not associated with a specific business segment.

Consolidated revenue and profitability information are as follows:

(dollars in thousands)

We generate a material amount of our consolidated revenue from contracts for services in the United States (“U.S.”) Gulf of Mexico in our OPG segment, which is usually more active in the second and third quarters, as compared to the rest of the year. Revenue in our Subsea Robotics segment is subject to seasonal variations in demand, with our first quarter generally being the low quarter of the year. The level of our Subsea Robotics seasonality depends on the number of remotely operated vehicles (“ROV”s) we have engaged in vessel-based subsea infrastructure inspection, maintenance, repair and installation, which is more seasonal than drilling support. Revenue in each of our Manufactured Products, IMDS and ADTech segments generally has not been seasonal.

Energy

The primary focus of our Energy business is maintaining the positive momentum from our operational efficiency programs that leverage our asset base and capabilities for providing services and products for offshore energy operations and subsea completions. These efforts continue to benefit us during the current upstream spending cycle that is consistent with the ongoing increase in global demand for energy. We also are focused on deploying our capabilities to grow business in mobile robotics, offshore wind installations, nuclear, and other clean energy solutions.

The table that follows sets out revenue and profitability for the business segments within our Energy business. In the Subsea Robotics section of the table that follows, “ROV days utilized” is the number of ROV days for which we earn revenue during a specified period. “ROV days available” includes all days from the first day that a ROV is placed into service until the ROV is retired. All days in this period are considered available days, including periods when a ROV is undergoing maintenance or repairs. Our ROVs do not have scheduled maintenance or repair that requires significant time during which the ROVs are not available for utilization. “ROV utilization” percentage is defined as “ROV days utilized” divided by “ROV days available”.

(dollars in thousands)

Subsea Robotics. We believe we are the world's largest provider of ROV services and, generally, this business segment has been the largest contributor to our Energy business operating income. Our Subsea Robotics segment revenue reflects the ROV utilization percentages, fleet sizes and average pricing in the respective periods. Our ROV tooling provides an additional operational interface between an ROV and equipment located subsea. Our survey services business provides survey and positioning, and geoscience services. The following table presents revenue from ROV services as a percentage of total Subsea Robotics revenue:

Subsea Robotics operating income for the three- and six-month periods ended June 30, 2024, increased as compared to the corresponding periods of the prior year on higher revenue, as a result of higher average revenue per day in 2024 resulting from improved pricing.

Fleet utilization was 70% in the three-month period ended June 30, 2024, as compared to 70% for the corresponding period of the prior year. Fleet utilization remained stable at 67% for the six-month period ended June 30, 2024 and 2023. We retired four of our conventional work-class ROV systems and replaced them with four upgraded conventional work-class ROV systems during the six months ended June 30, 2024, resulting in a total of 250 ROVs in our ROV fleet as of both June 30, 2024 and 2023.

Manufactured Products. Our Manufactured Products segment provides distribution systems such as production control umbilicals and connection systems made up of specialty subsea hardware, along with clamp connectors and subsea and topside control valves. We also provide turnkey solutions that include program management, engineering design, fabrication/assembly and installation of autonomous mobile robotic technology to industrial, manufacturing, healthcare, warehousing and commercial theme park markets.

Our Manufactured Products revenue and operating results increased for the three- and six-month periods ended June 30, 2024, as compared to the corresponding periods of the prior year. Revenue was higher in the three- and six-month periods ended June 30, 2024, primarily due to increased order intake in 2022 and 2023 leading to increased activity in the first six months of 2024. Operating results were improved in the three- and six-month periods ended June 30, 2024, as compared to the corresponding periods of the prior year, primarily due to an improved project mix and our ability to leverage our existing cost base.

Our Manufactured Products backlog was $713 million as of June 30, 2024, compared to $622 million and $418 million as of as of December 31, 2023 and June 30, 2023, respectively. Our book-to-bill ratio was 1.56 for the trailing 12 months ended June 30, 2024, as compared to 1.31 for the year ended December 31, 2023, and 1.19 for the trailing 12 months ended June 30, 2023.

Offshore Projects Group. Our OPG segment provides a broad portfolio of integrated subsea project capabilities and solutions as follows:

• subsea installation and intervention, including riserless light well intervention (“RLWI”) services, inspection, maintenance and repair (“IMR”) services, principally in the U.S. Gulf of Mexico and offshore Angola, utilizing owned and chartered vessels;
• installation and workover control systems (“IWOCS”) and ROV workover control systems (“RWOCS”);
• diving services;
• decommissioning services;
• project management and engineering; and
• drill pipe riser services and systems and wellhead load relief solutions.

Our OPG operating results decreased on higher revenue for the three- and six-month periods ended June 30, 2024, as compared to the corresponding periods of the prior year, primarily due to timing of pre-contract award costs that were expensed during the first six months of 2024 along with changes in the project mix. Our OPG operating results for the six-month period ended June 30, 2024, also included drydock expenses incurred during the first quarter of 2024 that decreased our operating results as compared to the corresponding period of the prior year.

Integrity Management & Digital Solutions. Our IMDS segment provides asset integrity management, corrosion management, inspection and nondestructive testing services, principally to customers in the oil and gas, power generation and petrochemical industries. We perform these services on both onshore and offshore facilities, both topside and subsea. We also provide software, digital and connectivity solutions for the energy industry and software and analytical solutions for the bulk cargo maritime industry.

Our IMDS operating results for the three-month period ended June 30, 2024 decreased slightly on higher revenue, as compared to the corresponding period of the prior year. Our IMDS revenue and operating results for the six-month period ended June 30, 2024 improved as compared to the corresponding period of the prior year primarily due to increased revenue and operating results for our integrity management business while our maritime and energy businesses were relatively flat.

Aerospace and Defense Technologies. Our ADTech segment provides government services and products, including engineering and related manufacturing in defense and space exploration activities, principally to U.S. government agencies and their prime contractors. Many of the services and products utilized in ADTech are applied technologies based on our core competencies and knowledge derived from decades of working in the offshore markets and solving complex problems in harsh environments.

Revenue and operating income (loss) information for our ADTech segment are as follows:

(dollars in thousands)

ADTech operating results for the three-month period ended June 30, 2024, declined significantly on higher revenue when compared to the corresponding period of the prior year, primarily due to a reserve taken during the quarter for a contract dispute as well as lower activity levels in our space systems business. Our ADTech operating results for the six-month period ended June 30, 2024, increased slightly on higher levels of revenue when compared to the corresponding period of the prior year, primarily due to due to increased activity and margins in our defense subsea technologies business, partially offset by a reserve taken during the second quarter of 2024 for a contract dispute and lower activity levels in our space systems business.

Unallocated Expenses

Our Unallocated Expenses (i.e., those not associated with a specific business segment) consist of expenses related to our incentive and deferred compensation plans, including restricted stock units, performance units and bonuses, as well as other general expenses that are recorded in gross margin, plus selling, general and administrative expenses related to corporate functions:

(dollars in thousands)

Our Unallocated operating expenses for the three- and six-month periods ended June 30, 2024, were higher as compared to the corresponding periods of the prior year primarily due to higher information technology costs.

Other

The following table sets forth our significant financial statement items below the income (loss) from operations line.

(in thousands)

Interest income for the three- and six-month periods ended June 30, 2024, as compared to the three- and six-month periods ended June 30, 2023, decreased primarily due to lower cash balances.

In addition to interest on borrowings, interest expense includes amortization of loan costs, interest rate swap settlements and debt discount, fees for lender commitments under our senior secured revolving credit agreement and fees for standby letters of credit and bank guarantees that banks issue on our behalf for performance bonds, bid bonds and self-insurance requirements. Interest expense for the three- and six-month periods ended June 30, 2024, as compared to the three- and six-month periods ended June 30, 2023, was relatively flat.

Foreign currency transaction gains and losses are the principal component of other income (expense), net. In the three-month periods ended June 30, 2024 and 2023, we incurred foreign currency transaction gains (losses) of $1.0 million and $(4.9) million, respectively. In the six-month periods ended June 30, 2024 and 2023, we incurred foreign currency transaction gains (losses) of $3.2 million and $(4.6) million, respectively. The currency gains (losses) in the 2024 and 2023 periods were primarily resulting from foreign currency fluctuations in multiple countries. We could incur further foreign currency exchange gains (losses) in countries where we operate due to foreign currency exchange fluctuations.

Our tax provision is based on (1) our earnings for the period and other factors affecting the tax provision and (2) the operations of foreign branches and subsidiaries that are subject to local income and withholding taxes. Factors that affect our tax rate include our profitability levels in general and the geographical mix of our results. The effective tax rate for the three- and six-month periods ended June 30, 2024 and 2023, was different than the U.S. federal statutory rate of 21%, primarily due to the geographical mix of revenue and earnings, changes in valuation allowances and uncertain tax positions, and other discrete items. We do not believe a comparison of the effective tax rate for the three- and six-month periods ended June 30, 2024 and 2023, is meaningful. We continue to make an assertion to indefinitely reinvest the unrepatriated earnings of any foreign subsidiary that would incur material tax consequences upon the distribution of such earnings.

During the three-month period ended June 30, 2023, we received refunds of $23 million under the U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), including interest of $1.7 million, which was recorded as a tax benefit.

Our income tax payments for the full year of 2024 are estimated to be in the range of $80 million to $90 million, which includes taxes incurred in countries that impose tax on the basis of in-country revenue, without regard to the profitability of such operations.

Liquidity and Capital Resources

We consider our liquidity and capital resources adequate to support our operations, capital commitments and strategic growth initiatives. Our ability to generate substantial cash flow over the last several years has allowed us to reduce our long-term debt while maintaining a strong liquidity position. As of June 30, 2024, we had working capital of $560 million, including cash and cash equivalents of $383 million. Additionally, as of June 30, 2024, we had $215 million of unused commitments through our senior secured revolving credit agreement that we entered into in April 2022 (as amended by an Agreement and Amendment No. 1 to the Credit Agreement, dated September 20, 2023, the “Revolving Credit Agreement”). Availability under the $215 million revolving credit facility (“Revolving Credit Facility”) may be limited by certain financial covenants and the requirement that any borrowing under the Revolving Credit Facility not require the granting of any liens to secure any senior notes issued by us. The indentures governing the 2028 Senior Notes generally limit our ability to incur secured debt for borrowed money (such as borrowings under the Revolving Credit Facility) to 15% of our Consolidated Net Tangible Assets (as defined in such indentures).

Our nearest maturity of indebtedness is $500 million of our 2028 Senior Notes. From time to time, we may engage in certain transactions in order to manage our outstanding debt prior to maturity, including repurchases via open-market or privately negotiated transactions, redemptions, exchanges, tender offers or otherwise. We can provide no assurances as to the timing of any such transactions or whether we will complete any such transactions at all. We do not intend to disclose further information regarding any such transactions, except to the extent required in our subsequent periodic filings on Forms 10-K or 10-Q, or unless otherwise required by applicable law.

Cash flows for the six months ended June 30, 2024 and 2023, are summarized as follows:

(in thousands)

Operating activities

Our primary sources and uses of cash flows from operating activities for the six months ended June 30, 2024 and 2023, are as follows:

(in thousands)

The decrease in cash related to accounts receivable and contract assets in the six months ended June 30, 2024, reflects the timing of project milestones and customer payments. The decrease in cash related to inventory in the six months ended June 30, 2024, was primarily due to higher activity and related increases in our Manufactured Products and Subsea Robotics inventory. The increase in cash related to current liabilities in the six months ended June 30, 2024, reflects the timing of vendor payments.

Investing activities

In the six months ended June 30, 2024, we used $43 million in net investing activities, primarily for capital expenditures of $48 million with over half being in our Subsea Robotics segment. Capital expenditures were higher during the first six months of 2024, as compared to $41 million in the first six months of 2023, primarily due to increased capital expenditures in our OPG segment to extend our capabilities for new contract awards and in our Manufactured Products segment related to our autonomous mobile robotic technology business.

For 2024, we expect our organic capital expenditures to total between $110 million to $130 million, exclusive of business acquisitions, which we expect to fund using our available cash.

We have several deepwater vessels under a mix of short-term charters where we can see firm workload and spot charters as market opportunities arise. During the second quarter of 2023, we entered into three new long-term charters for deepwater vessels, two of which began in the third and fourth quarters of 2023 and the other that began in the first quarter of 2024. Additionally, we have three long-term charters that began in 2022. With the current market conditions, we may add additional chartered vessels throughout the year to align with our strategy that balances vessel cost, availability and capability to capture work. We expect to do this through the continued utilization of a mix of short-term, spot and long-term charters.

Financing activities

In the six months ended June 30, 2024 and 2023, we used $7.0 million and $5.3 million, respectively, of cash in financing activities primarily due to payment of tax withholding related to vesting of stock awards.

As of June 30, 2024, we had long-term debt in the principal amount of $500 million outstanding consisting of our 2028 Senior Notes. We pay interest on the 2028 Senior Notes on February 1 and August 1 of each year, and the 2028 Senior Notes are scheduled to mature on February 1, 2028. In the six months ended June 30, 2024 and 2023, we did not repurchase or redeem any of the 2028 Senior Notes. For more on the 2028 Senior Notes, see Note 6—“Debt” in the Notes to Consolidated Financial Statements included in this quarterly report.

As of June 30, 2024, we had $215 million of unused commitments under our Revolving Credit Facility. As of June 30, 2024, we were in compliance with all of the financial covenants set forth in the Revolving Credit Agreement. For more on our Revolving Credit Facility (including the financial covenants thereunder), see Note 6—“Debt” in the Notes to Consolidated Financial Statements included in this quarterly report.

Share Repurchase Program. In December 2014, our Board of Directors approved a plan to repurchase up to 10 million shares of our common stock on a discretionary basis. Under this program, in 2015, we repurchased 2.0 million shares of our common stock for $100 million. We have not repurchased any shares under this plan since December 2015. We account for the shares we hold in treasury under the cost method, at average cost. The timing and amount of any future repurchases will be determined by our management. We expect that any additional shares repurchased under the plan will be held as treasury stock for possible future use. The plan does not obligate us to repurchase any particular number of shares.

Off-Balance Sheet Arrangements

We have not guaranteed any debt not reflected on our Consolidated Balance Sheets as of June 30, 2024, and we do not have any off-balance sheet arrangements, as defined by Securities and Exchange Commission's rules.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. These principles require us to make various estimates, judgments and assumptions that affect the reported amounts in our financial statements and accompanying notes. We disclose our significant accounting policies in Notes to Consolidated Financial Statements—Note 1—“Summary of Significant Accounting Policies” in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2023, in Part II. Item 7. “Financial Statements and Supplementary Data—Note 1—Summary of Significant Accounting Policies.”

For information about our critical accounting policies and estimates, see Part II. Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our annual report on Form 10-K for the year ended December 31, 2023. As of June 30, 2024, there have been no material changes to the judgments, assumptions and estimates upon which our critical accounting policies and estimates are based.

We are exposed to certain market risks arising from transactions we enter into in the normal course of business. These risks relate to interest rate changes and fluctuations in foreign exchange rates. As of June 30, 2024, we do not believe these risks are material. However, with the expansion of our international operations, we could be exposed to additional market risks from fluctuations in foreign currency exchange rates in the future. We have not entered into any market-risk-sensitive instruments for speculative or trading purposes. When we have a significant amount of borrowings, we typically manage our exposure to interest rate changes using a combination of fixed- and floating-rate debt. See Note 6—“Debt” in the Notes to Consolidated Financial Statements included in this quarterly report for a description of our revolving credit agreement and interest rates on our borrowings. We believe significant interest rate changes would not have a material near-term impact on our future earnings or cash flows.

Because we operate in various regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar. The functional currency for most of our international operations is the applicable local currency. A stronger U.S. dollar against the United Kingdom pound sterling, the Norwegian kroner and the Brazilian real could result in lower operating income. We manage our exposure to changes in foreign exchange rates by primarily denominating our contracts and providing for collections from our customers in U.S. dollars or freely convertible currency and endeavoring to match our contract costs with the denominated contractual currency. We use the exchange rates in effect as of the balance sheet date to translate assets and liabilities when the functional currency is the local currency, resulting in translation adjustments that we reflect as accumulated other comprehensive income or loss in the equity section of our Consolidated Balance Sheets. We recorded net adjustments to our equity accounts of $(11) million and $3.1 million in the three-month periods ended June 30, 2024 and 2023, respectively, and $(26) million and $1.2 million in the six-month periods ended June 30, 2024 and 2023, respectively. Negative adjustments reflect the net impact of the strengthening of the U.S. dollar against various foreign currencies for locations where the functional currency is not the U.S. dollar. Conversely, positive adjustments reflect the effect of a weakening U.S. dollar.

Foreign currency gains (losses) of $1.0 million and $(4.9) million in the three-month periods ended June 30, 2024 and 2023, respectively, and $3.2 million and $(4.6) million in the six-month periods ended June 30, 2024 and 2023, respectively. We recorded foreign currency transaction gains (losses) as a component of other income (expense), net in our Consolidated Statements of Operations in those respective periods.

In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2024, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

There has been no change in our internal control over financial reporting that occurred during the three months ended June 30, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.