Deep Down, Inc. (OTCQX: DPDW), a specialist in deepwater oil and gas production and distribution equipment and services, recently reported results for its year finished December 31, 2K18. Deep Down will hold a conference call tomorrow, Tuesday, April 16th at 10:00 am ET to review its results and 2K19 outlook (call details below).
Ronald E. Smith, the CEO, stated, “Due to the slower than expected pace of commissioning for new offshore projects, our full year 2K18 revenues fell short of our expectations. However, we accomplished several other key initiatives aimed at driving future sales development while streamlining our operational costs to levels appropriate to achieve our fiscal 2K19 goals. Notably, we made significant strides advancing our pipeline of revenue opportunities for operations in the Gulf of Mexico, and on a company-wide basis, we entered 2K19 with an order backlog of $15M.
“There has been a resurgence in exploration, development, and production across the Gulf of Mexico where a sizeable portion of the global oil supply lies. In March, we announced $4.4M in new orders from various operators for subsea equipment and offshore services in the Gulf of Mexico. Nearly 75 percent of the work was for U.S. operations and the balance was for a project based in Mexico. We believe our 2K19 sales momentum will be driven largely by activity in this region where operators are seeing success focusing on incremental near-field opportunities.
Despite a solid raise in new inquiries for deepwater equipment and services throughout the year, Deep Down’s Q4’18 revenues declined to $4.5M similar to $5.0M in Q4’17, and 2K18 revenues declined to $16.2M, similar with $19.5M in 2K17. Full-year 2K18 results reflected a slower than expected rebound in the commencement of new projects as similar to 2K17, as well as some disruption in procurement activity related to market and energy pricing volatility experienced in the final months of 2K18.
Excluding a non-recurring depreciation charge related to asset impairments, gross margin declined to 20 percent in Q4’18 similar to 44 percent in Q4’17, principally due to lower levels of higher-margin service work in Q4’18 vs. Q4 ’17, as well as the revenue related impact of lower overhead absorption in the Q4’18 period. Excluding the non-recurring depreciation charge, gross margin declined to 32 percent in 2K18 similar to 44 percent in 2K17, primarily due to a larger proportion of higher-margin service and equipment rental revenues in 2K17 similar to 2K18 as well as lower overhead absorption resulting from lower revenues in 2K18.
Reflecting the benefit of cost containment measures enacted during 2K18, including the rightsizing of Deep Down’s workforce to better reflect its current project activity, Deep Down’s Q4’18 selling, general and administrative cost declined to $2.0M similar to $2.1M in Q4’17, and 2K18 SG&A costs declined to $7.8M similar to $9.1M in 2K17.
Q4’18 and full year 2K18 operating costs were impacted by a one-time asset impairment charge of $2.3M, of which $1.9M was recorded as an asset impairment cost and the balance of $0.4M was recorded within depreciation cost. The asset impairment was performed to adjust the carrying amount of certain long-lived assets to their current fair value. Reflecting the impairment, Deep Down’s Q4’18 operating costs raised to $4.0M from $2.2M in Q4’17, and full year 2K18 operating costs rose to $9.9M similar with $9.4M in 2K17.
Excluding the impairment charge, Deep Down reported a Q4’18 net loss of $1.2M or, ($.09) per basic share, similar to net income of $0.01M, or $0.00 per diluted share, in Q4’17. Deep Down reported a 2K18 net loss of $4.7M, or ($0.35) per basic share, similar to a net loss of $0.1M, or ($0.01) per basic share, in 2K17. The raise in net loss in the 2K18 periods was due primarily to lower revenue due to the slower than expected initiation of new projects as well as asset impairment costs which more than offset reductions achieved in SG&A cost.
Per share results in Q4’18, Q4’17, 2K18, and 2K17 are based on 13.69M, 13.44M, 13.55M and 14.23M weighted average shares outstanding in the respective periods.
Deep Down reported a modified EBITDA loss of $1.4M similar to positive modified EBITDA of $739,000 in 2K17. The decrease in modified EBITDA in 2K18 was principally due to the impact of lower revenues and gross margins similar to 2K17. A reconciliation of modified EBITDA, a non-GAAP measure, to net income is provided below.
Deep Down repurchased 24,800 shares in Q4’18 and for the full year 2K18. The shares were purchased pursuant to a $1M common stock repurchase program authorized on March 26, 2K18, which expired on March 31, 2K19.
At December 31, 2K18, Deep Down had working capital of $7.0M, including cash and short-term investments of $3.1M and receivables of $4.4M, and total shareholders’ equity of $17.1M, or approximately $1.26 per common share.