Oceaneering International Inc. 2026 Q3 Earnings Call

Thanks, Alan. Good morning, and welcome to Oceaneering's third quarter 2026 results conference call. Today's call is being webcast and a replay will be available on our website. With me today are Rod Larson, President and Chief Executive Officer, who will provide our prepared comments, and Mike Sumruld, Senior Vice President and Chief Financial Officer. After Rod's remarks, we will open the call up to your questions. Before we begin, please note that statements made on this call about our future financial performance, business strategy, plans for future operations, and industry conditions are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our remarks also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our third quarter press release, which is available on our website.

With that, I'll turn the call over to Rod.

Good morning, everybody, and thanks for joining the call today. As Hilary mentioned, I'm going to be handling all of our prepared remarks today. Mike is saving his voice for all of your math questions, so be ready. Our third quarter performance demonstrates the earnings potential of our portfolio with favorable pricing activity and project mix alignment. Consolidated adjusted EBITDA was $119 million, in line with our guidance and our highest quarterly level since the fourth quarter of 2015. These results reflect solid performance in Subsea Robotics, or SSR, resilience in the Offshore Projects Group, or OPG, and improvement in Integrity Management and Digital Solutions, IMDS. Highlights from the quarter include SSR delivered increased revenue, operating income, and EBITDA margin, with the latter reaching its highest level since we resegmented our businesses in 2020.

We also won approximately $180 million of ROV and survey contracts across multiple regions, with contract terms extending into 2031. OPG saw steady demand for its higher-revenue services with a favorable mix of installation projects contributing to third quarter performance. Manufactured Products secured awards of approximately $160 million during the quarter, supporting our expectation for stronger order intake in the second half of the year. Aerospace and Defense Technologies, or ADTech, secured follow-on contracts for two strategically important U.S. Navy programs, dry deck shelters and submarine rescue systems. The dry deck shelter contract, a program we have supported for over 20 years, has a total potential value of $154 million over five years, while the submarine rescue system contract has a potential value of $67 million over 18 months.

Today, I'll focus my comments on our third quarter 2026 results, our outlook for the fourth quarter of 2026, and our initial guidance for 2027. Starting with our consolidated results for the third quarter of 2026 compared to the third quarter of 2025, we delivered revenue of $785 million, a 6% increase, with growth across every operating segment. Operating income of $92 million, a 7% increase, and adjusted EBITDA of $119 million, also a 7% improvement. Net income attributable to Oceaneering was $52.6 million, or $0.52 per share, a decrease of 26%. The decrease was primarily attributable to a one-time loss related to the refinancing of our long-term debt completed during the third quarter. Adjusted EBITDA increased 7% to $119 million. Turning to our cash flow and liquidity, we generated $163 million of cash from operating activities.

Capital expenditures were $21.1 million, with approximately 31% allocated to growth and 69% allocated to maintenance. This investment was less than anticipated, largely due to timing, with most of the deferred spending now expected in the fourth quarter. Free cash flow was $142 million, reflecting strong third-quarter results, as well as lower cash taxes and deferred capital expenditures. We expect both cash taxes and capital expenditures to increase in the fourth quarter, resulting in more moderate free cash flow generation to close the year. During the quarter, we also repurchased shares of approximately $5 million, with a focus on mitigating dilution associated with employee equity grants. We ended the quarter with a cash balance of $735 million, total liquidity of more than $1 billion, and no borrowings under our revolving credit facility.

Now let's look at our business operations by segment for the third quarter of 2026, also compared to the third quarter of 2025. SSR delivered revenue of $233 million and operating income of $75.4 million, both higher year-over-year. These results benefited from improved ROV pricing, with average revenue per day utilized increasing to $11,781 from $11,254, as well as higher survey activity. SSR EBITDA margin improved to 39%, primarily driven by ROV pricing improvements in Europe, West Africa, and Norway. Increased survey activity and a one-time contractual cost recovery related to U.S. Gulf operations also contributed to higher margins. ROV fleet utilization remained stable at 65% as higher activity levels in Europe, Guyana, and West Africa largely offset lower activity in the U.S. Gulf. For the quarter, the revenue split between our ROV business and our combined tooling and survey businesses as a percentage of our total SSR revenue was 75% and 25%, compared to 77% and 23% in the third quarter of 2025.

ROV days utilized in drill support were 62%, while vessel-based services were 38%, compared to 63% and 37%, respectively, in the prior year quarter. As of September 30, 2026, we had ROV contracts on 80 of the 136 floating rigs under contract for 59% market share. We maintained our fleet count of 250 ROV systems. Manufactured Products generated operating income of $25.1 million, relatively flat with the prior year quarter, while operating income margin decreased slightly to 15% on an 8% increase in revenue. These results were impacted by the final resolution of a legacy mobility solutions contract, including recognition of the previously unresolved contract value.

The decline in operating income margin was primarily due to lower Grayloc projects activity and profitability following a particularly profitable order in the prior year quarter. Our backlog as of September 30, 2026, was $435 million and was largely sustained by order intake during the quarter of $160 million. Our book-to-bill ratio was 0.77 for the trailing 12-month period. Based on these recent bookings, together with our sales funnel, we remain confident in our ability to achieve a full-year book-to-bill ratio of 0.9 to 1.0. OPG revenue, operating income, and operating income margin were relatively flat. Results benefited from international installation projects that concluded during the quarter, which more than offset lower activity in West Africa and a less favorable project mix in the U.S. Gulf. IMDS revenue increased 7%, while operating income and operating income margin were relatively flat, reflecting increased activity in the Middle East, Europe, and the U.S.

Gulf, which was partially offset by lower activity in West Africa, the changing project mix, and increased costs in the Middle East. ADTech revenue increased 7% to $135 million as our previously announced large-scale program reached its full staffing levels for its current phase. Operating income decreased by 11% to $14.7 million, and operating income margin decreased to 11% due to increases in pass-through activities during the quarter and increases in certain expenses. Unallocated expenses of $50 million were consistent with our guidance for the quarter. Turning to our outlook for the fourth quarter of 2026 compared to the fourth quarter of 2025. We expect consolidated revenue to increase year-over-year and consolidated EBITDA to be in the range of $85 million-$95 million.

By segment, for SSR, we expect revenue to increase, supported by higher ROV revenue per day utilized and increased survey activity. Operating income is expected to decrease due to changes in ROV geographic mix, additional mobilization costs as rigs relocate from the U.S. Gulf to other regions, and a greater mix of lower-margin survey activity. For Manufactured Products, we anticipate higher revenue and operating income. For OPG, we expect revenue to remain relatively flat and operating income to decrease due to changes in project mix, including the completion of an international intervention project that benefited the prior year quarter and a shift to lower-margin work in the U.S. Gulf. For IMDS, we anticipate higher revenue and operating income. For ADTech, we expect both revenue and operating income to be higher. We project unallocated expenses to be in the $50 million range. Now I'll discuss our initial outlook for 2027.

Looking ahead to 2027, the outlook for global deepwater markets remains constructive, with industry forecasts pointing to higher spending and activity. Floating rig activity is expected to strengthen over the course of the year as rigs complete transit to new regions and begin drilling programs. These trends provide a favorable backdrop as we establish our initial 2027 guidance. The U.S. Defense environment also remains supportive, particularly across subsea programs. However, the continuing resolution and uncertain timing of appropriations process could affect the timing of program activity within ADTech. These industry conditions support our expectations for improved performance in 2027. As we announced yesterday, we are initiating consolidated EBITDA guidance in the range of $430 million-$480 million, with free cash flow expected to exceed our anticipated 2026 level.

At the segment level, compared to the full year of 2026, for Subsea Robotics, we expect that higher ROV utilization levels and similar pricing levels, together with improved results in survey and tooling, will generate increases in revenue and operating income and stable EBITDA margins. For Manufactured Products, revenue, operating income, and operating margin are projected to be relatively flat. For OPG, we expect revenue to decrease, operating income to be flat, and operating margin to improve due to changes in project mix and similar utilization levels in the U.S. Gulf. For IMDS, we expect increased revenue, significantly increased operating income, and improved operating margin. For ADTech, we expect significantly higher revenue and operating income and improved operating margin. We expect a slight increase in unallocated expenses. We also plan to continue share repurchases in 2027, with approximately 5 million shares remaining under our existing repurchase authorization.