Oceaneering International Inc Q4 FY2025 Earnings Call

Hello, and welcome to Oceaneering's Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is Sarah, and I will be your conference operator. With that, I will now turn the call over to Hilary Frisbie, Oceaneering's Senior Director of Investor Relations.

Thanks, Sarah. Good morning, and welcome to Oceaneering's Fourth Quarter and Full Year 2025 Earnings 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 for questions. Before we begin, please note that statements made during this call regarding 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 comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our fourth quarter press release, which is posted on our website. I'll now turn the call over to Rod.

Good morning, and thank you for joining the call today. We wrapped up 2025 with effective execution across the company and continued progress on our strategic priorities. Our results demonstrated ongoing pricing improvements in key areas, strong operational performance, and rising contributions from Aerospace and Defense Technologies. This was reflected in significant cash generation, with our cash balance increasing to $689 million by year-end, enhancing our financial flexibility. In 2025, we had order intake of $3.7 billion, translating to a book-to-bill ratio of 1.33, an increase from 1.1 in 2024. We expanded adjusted EBITDA margins by 140 basis points across all operating segments, achieved 99% ROV uptime for the second consecutive year, and improved ROV pricing by 7% throughout the year. We also secured our largest initial contract award in the company’s history through our ADTech business, integrated GDi into our IMDS segment, repurchased about 1.8 million shares for $40 million, and boosted our cash balance by $191 million. I'm particularly pleased with our record low total recordable incident rate of 0.22 achieved in 2025, reflecting our commitment to safety. Today, I will review our fourth-quarter and full-year 2025 results, our market outlook for 2026, and our consolidated guidance for 2026 along with our segment outlook for the year and the first quarter of 2026. I'll begin with our fourth-quarter results for 2025. We posted solid results in this quarter, consistent with typical seasonal trends, driven by strong operational execution across several business segments. Compared to the fourth quarter of 2024, consolidated revenue stood at $669 million, supported by substantial growth in ADTech, which helped offset the decline in our energy-focused businesses, leading to a 6% decrease from the prior year. The reduction in energy revenue was mainly due to a higher volume of international intervention and installation projects our Offshore Projects Group performed in the fourth quarter of 2024, which did not occur in the same period of 2025. Consolidated operating income was $65.4 million, also down year-over-year, with increases in ADTech, Manufactured Products, and Subsea Robotics partially balanced by significantly lower results in OPG due to the same project issues as mentioned earlier. IMDS also reported a year-over-year decline. We achieved net income of $178 million, or $1.76 per share, which is a remarkable 217% increase from last year, largely influenced by a $156 million discrete tax benefit from the release of U.S. valuation allowances. Our consolidated adjusted EBITDA of $90.5 million was at the high end of our guidance but, as expected, decreased year-over-year for the same reasons affecting revenue and operating income. During the fourth quarter, we generated $221 million in cash from operations and invested around $30 million in organic capital expenditures, with about 55% allocated to growth and 45% to maintenance. Our free cash flow for the quarter was $191 million, benefiting from the timing of customer payments, including several early receipts initially scheduled for the first quarter of 2026. By December 31, 2025, our cash balance of $689 million represented a 38% increase compared to the end of 2024. Now, let’s examine our segment performance for the fourth quarter of 2025 compared to the previous year's fourth quarter. SSR's operating income of $67.8 million was up 7%, even as revenue remained relatively flat. EBITDA margins improved to 38% from 36%, primarily due to better ROV pricing and higher tooling volumes. Survey revenues were lower due to reduced activity levels in the Americas, as several projects originally planned for Q4 2025 shifted to Q1 2026. The split of revenue from our ROV business versus our combined tooling and survey businesses was stable at 78% and 22%, respectively. Average ROV revenue per day climbed 7% from $10,481 in 2024 to $11,210 in 2025, ending the quarter at a rate of $11,550. These pricing benefits helped mitigate the effects of lower ROV fleet utilization that fell to 62%. A majority of this decline was from the vessel support of our OPG vessels while drill support utilization saw a slight increase compared to Q4 2024. We utilized 67% of ROV days for drill support and 33% for vessel services. By year-end 2025, we maintained 60% of the contracted floating rig market with ROV contracts on 81 of the 136 floating rigs under contract and finished the quarter with a fleet totaling 250 ROV systems, including 16 upgraded work class systems replacing retired units. Looking into Manufactured Products, our revenue for Q4 reached $132 million, a 7% decline year-over-year. Operating income significantly increased to $20.4 million, with a margin of 15%, boosted by converting high-margin backlog in our umbilicals business alongside positive outcomes in our non-energy projects. Our backlog at the end of 2025 was $511 million, down 15% from December 31, 2024, and the book-to-bill ratio for 2025 was 0.84, lower than 0.97 in 2024, primarily due to order timing. Notably, the revenue from Manufactured Products for the year was $569 million, with operating income at $72 million, both the highest levels since 2020. Meanwhile, OPG reported revenue of $131 million, a 29% decline from the same quarter last year, with operating income decreasing to $15 million and a margin of 11%. This trend was anticipated, largely due to the absence of large international projects in Q4 2025 compared to the previous year. For IMDS, revenue fell due to decreased activity in Europe and West Africa, and operating income dropped $2 million due to lower revenue and losses tied to a commercial dispute resolution. In contrast, ADTech saw a 43% increase in operating income and an improved margin of 11% based on a 29% revenue rise compared to last year, owing to new contracts and our strategic push to leverage our offshore expertise. Additionally, ADTech finished 2025 with two fourth-quarter contract awards on unexercised options that are expected to yield significant revenue in 2026. The current ADTech backlog sets a solid foundation for revenue growth beyond the conventional five-year horizon. Unallocated expenses for Q4 2025 were $52 million, up 26% from the previous year, reflecting increased performance-based compensation accruals. Now turning to our consolidated full-year 2025 results compared to 2024, we saw a 5% revenue increase to $2.8 billion, marking our fifth consecutive revenue growth year. Every operating segment, except for IMDS, experienced revenue growth. Total operating income for 2025 rose to $305 million, a $58 million or 24% improvement, and adjusted EBITDA climbed by $54 million or 16% to $401 million from 2024. All operating segments reported EBITDA growth. Cash flow from operations surged by $116 million to $319 million, mainly due to the timing of customer receipts in Q4. We allocated $111 million to organic capital expenditures, a 4% increase over 2024. Our free cash flow for 2025 was $208 million compared to $96.1 million in 2024. By year-end, our total liquidity was $904 million, consisting of $689 million in cash and cash equivalents plus $215 million from our undrawn revolving credit facility. Looking ahead to our 2026 market outlook, we see ADTech as the main growth driver, fueled by our current backlog and expected rises in defense spending. In the U.S., we foresee a well-funded defense sector with ongoing activities in protecting subsea critical infrastructure and submarine sustainment. Internationally, rising geopolitical tensions and increased allied expenditures create new opportunities for our AUVs, resident systems, and subsea monitoring solutions. For our energy-focused divisions, we expect 2026 results to mirror an oversupplied global oil market early in the year, gradually tightening as the year unfolds. Offshore activity is likely to remain flat during the first half of 2026, with a projected upturn in the latter part of the year and into 2027. The U.S. Energy Information Administration predicts Brent crude oil prices will average in the mid-$50 to low $60 range in 2026, which should support deepwater activity, akin to levels in 2025. Spinergie estimates that demand for deepwater rigs, indicative of ROV activity, will stay relatively consistent in 2026. Research indicates an anticipated rise in final investment decisions for deepwater projects in 2026, which are key indicators for future offshore activities. Turning to our consolidated outlook for 2026, we project revenue growth in the low to mid-single-digit percentage range based on our backlog and expected order intake. Year-over-year revenue for ADTech is expected to see significant gains, while revenue improvements in SSR and IMDS will counterbalance expected declines in OPG and Manufactured Products. Our energy-related backlog comprises multiyear contracts including various awards across geographies and business segments. We anticipate generating $390 million to $440 million in EBITDA for the year, with segment improvements expected in all areas, save for OPG. At our EBITDA midpoint, this will mark a modest increase over our adjusted EBITDA for 2025. EBITDA margins should improve in Manufactured Products and IMDS, remain stable in SSR and ADTech, while seeing a dip in OPG. We forecast free cash flow of $100 million to $120 million, with the decrease reflecting early customer payments received in Q4 2025 that were initially scheduled for Q1 2026. Our cash conversion rate for 2025 and 2026 combined will be nearly 40%. As in previous years, we expect substantial cash utilization in the first quarter due to working capital shifts related to lower customer payments linked to early collections in 2025 and payouts for performance-based incentive compensation. For 2026, we estimate our organic capital expenditures will be between $105 million and $115 million, with approximately 40% for growth and 60% for maintenance. We anticipate a 12% reduction in energy-focused capital expenses while increasing ADTech expenditures to accommodate new contracts. Interest expenses, net of income, are expected between $21 million to $26 million, with cash tax payments projected at $95 million to $105 million. Regarding operational segment outlooks in 2026, we expect continued progress in SSR led by increased tooling volume, improved survey results, and the benefits of pricing rises achieved in 2025. Revenue growth is forecasted in the low to mid-single-digit percentage range, while EBITDA margins are expected to average in the mid-30% range for the full year. For ROVs, we project a service mix of about 65% for drill support and 35% for vessel services, maintaining consistent ROV market share. Average ROV revenue per day is anticipated to stay flat compared to our Q4 2025 exit rate. We expect improvements in survey results due to better utilization of our upgraded Ocean Intervention II vessel and have deployed our Freedom AUV in commercial operations in West Africa. We plan to deliver a second commercial Freedom vehicle to the defense innovation unit in the first half of 2026 and are excited to announce that our newest electric work class ROV, Momentum, is set to be used for vessel support operations in the U.S. Gulf later this year. In Manufactured Products, we anticipate significant increases in operating income despite slightly lower revenue, driven by continued conversion of our umbilicals backlog, high absorption at our three umbilical plants, increased order flow in rotator products, and cost-cutting measures in non-energy products. Operating income margins should average in the mid-teens for the entire year. For OPG, we foresee a revenue decline and a notable drop in operating income as focus shifts toward traditional IMR work. We also predict reduced activity levels in the U.S. Gulf and West Africa, partially offset by higher engagements in Brazil, the Caspian, and the Middle East. Overall, OPG operating income margins are projected to average in the mid-teens range for the year. For IMDS, we expect a significant rise in operating income alongside increased revenue, driven by growth opportunities in digital and engineering services, with margins improving to the mid-single-digit range. ADTech operating income is expected to rise with substantial revenue growth in all three of our government-focused divisions, with margins averaging in the low teens for the year. Our growth forecasts are supported by contract awards from 2025 that encompass product development, maintenance, inspection, specialized services, and ongoing operations in complex maritime, space, and security domains, bolstering critical defense and space missions. For 2026, we expect unallocated expenses to average around $50 million per quarter, influenced by rising wage pressure, IT expenses, and foreign exchange effects. In terms of our first quarter 2026 outlook compared to Q1 2025, we predict a decline in consolidated revenue and expect EBITDA to fall between $80 million and $90 million. This guidance stems from anticipated lower energy market activity at the start of the year, which we believe will improve as 2026 progresses. For SSR, we project a small increase in revenue, though operating income may decrease due to the geographic distribution of ROV activities, which we expect to become more favorable later in the year. In Manufactured Products, operating income is expected to rise significantly despite a slight decrease in revenue, thanks to ongoing backlog conversion and the lack of the inventory release that had a negative impact on our theme park ride business in Q1 2025. Conversely, OPG is expected to see substantial declines in both revenue and operating income due to lower vessel utilization and project mix changes in the U.S. Gulf combined with reduced international activity. We project IMDS revenue and operating income to remain fairly stable. For ADTech, we anticipate a significant uptick in both revenue and operating income due to shifts in project compositions. We estimate unallocated expenses to align around $50 million. In conclusion, I would like to express my gratitude to our employees for their dedication throughout 2025. Their efforts propelled momentum across all our segments, enhancing our visibility for the future, particularly with increasing contributions from ADTech, growing prospects in digital and software services, and expanding international project opportunities. As we step into 2026, we remain committed to operating safely and reliably, supporting our customers, and delivering value to our shareholders. We appreciate everyone’s ongoing interest in Oceaneering and will now welcome any questions you may have.

Your first question comes from Keith Beckmann with Pickering Energy Partners.

I wanted to ask about the increased defense and government spending. ADTech seems to be performing well this year with some awards. What is the typical lead time and process for government services projects from the time they are awarded to when they usually begin? Is there a rough timeline or lead time for that?

It's really challenging to determine. It varies significantly. Some projects, especially those related to existing products and services, ramp up quickly. In contrast, new initiatives follow a more traditional process that begins with engineering studies, followed by prototyping, and other development stages. So, it's quite difficult to predict. Currently, we have a mix of projects, which includes both types.

No, that's very helpful. Makes sense. And then the other question that I had was around ADTech as well again. Whenever you think about kind of the other segments in your business, how those really helped supplement what ADTech does and kind of the growth we've seen in that segment? I think it's kind of like your knowledge around ROVs and maybe how that helps, but any color on that?

No, I think you're right. We operate in different areas. One focuses on offshore operations, ROVs, and vehicles. That's one group we discuss. The other is our maritime experience, which began with our welding expertise and offshore activities. We perform SUBSAFE work, specifically submarine sustainment, handling mechanical hull and sail repairs when submarines are in dry dock for nuclear refueling. We do significant pressure vessel maintenance and are among the few, aside from submarine builders, actively engaged in this. This is a unique SUBSAFE certification. The third area is Oceaneering space systems, where we support various astronaut needs in space, including tool and habitat creation and human interfaces. Our dive expertise translates well into working in low gravity environments. Additionally, we work on suits and thermal protection systems, which are fabric shrouds around rockets that burn up during launch. This business is thriving, especially with the renewed interest in space and the Golden Dome initiative.

Your next question comes from Josh Jayne with Daniel Energy Partners.

First one, I was just curious, could you talk about the future of IMDS and then also your digital software offerings and how you could potentially expand them sort of outside what you're doing within energy?

Yes. Those aspects are closely connected. It's exciting for us because we're seeing the integration of machine vision, machine learning, and AI. We are heading to a rig, and instead of relying solely on personnel for manual spot checks with tools like hammers and cameras, we are utilizing laser scanning. This technology allows us to create a 3D model of the rig, enabling precise detection of corrosion. By identifying corrosion, we can conduct a more thorough examination of the facility, quantify the corrosion, and predict when failure might occur, as well as identify parts that require more frequent inspections. This approach provides a significant advantage in early detection and improves the precision of our subsequent inspections. We are particularly excited that while this enhances topside inspections for our customers, we have also successfully tested the application of this technology underwater. If we can inspect subsea infrastructure similarly using laser scanning and 3D modeling, we can deploy this off an OPG vessel with an ROV. We believe this will address customer needs and also generate increased demand for ROVs and vessels.

That's helpful. And then just one more that I wanted to ask. I want to dig into M&A a little bit. I know it obviously hasn't been as much of a focus for you in the last couple of years. But just given that we've seen some on the rig side recently announced some larger deals. And I would say the current administration is pretty favorable towards moving deals. Has any of this changed your thoughts moving forward on M&A? Or should we expect Oceaneering just to sort of operate how they've been over the last couple of years and sort of sticking to your knitting and with the focus on free cash flow generation and returning it to shareholders with your capital allocation?

I don't think this will change my view on significant industry consolidation, where companies try to combine forces even if it requires some stretching to see the fit, just to become larger. However, it does provide us with a bit of confidence moving forward. We really value the GDi acquisition, as it added a new technology, specifically laser scanning, that enhances our capabilities. The more we can explore how to meet the upcoming needs of the oilfield or the defense sector, while acquiring new technologies that either expand our market reach or enhance our technological edge, those opportunities are very appealing. If these acquisitions become easier to pursue, coupled with the financial strength we are building through a solid balance sheet, it may motivate us to consider slightly larger opportunities.

Yes, I was going to add the same thing. I think for sure, the balance sheet strength and the growth in cash over the last several years, given the excellent work that's happened here, just gives us the opportunity, more flexibility and opportunity to do more when the time is right.

Your next question comes from Brandon Carnovale with Half Moon Capital. Yes, I was going to add the same thing. I think for sure, the balance sheet strength and the growth in cash over the last several years, given the excellent work that's happened here, just gives us the opportunity, more flexibility and opportunity to do more when the time is right.

Congrats on a great print. So curious if you're seeing any traction on the autonomous forklift side after kind of like the big delivery, I think you had kind of exiting last year.

There is significant interest from various parties considering the use of autonomous forklifts for truck loading and unloading, which presents a major opportunity for us. We have been focused on enhancing our capabilities in this area. Additionally, there are applications in locations where having a driver on the forklift is less feasible. Interest in the technology is widespread, primarily as a way for potential customers to become familiar with it, often looking to purchase a few units for testing. One key takeaway we've observed is that adoption depends heavily on readiness; we need to assess whether the people and the environment are prepared for integration. It is crucial to ensure smooth transitions during adoption. Overall, interest remains high, and we are optimistic about the pace of growth. We will continue to reach out and respond to inquiries.

This concludes the question-and-answer session. I'll turn the call to Rod Larson for closing remarks.

Well, since there's no more questions, I'll just wrap up by thanking everybody for joining the call. This concludes our fourth quarter and full year 2025 conference call. Have a great day.

This concludes today's conference call. Thank you for joining. You may now disconnect.