Oceaneering International, Inc.

My name is Lindsay and I will be your conference operator. I would like to welcome everyone to Oceaneering's third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations.

Thanks, Lindsay. Good morning and welcome everyone to Oceaneering's third quarter 2020 results conference call. Today's call is being webcast and a replay will be available on Oceaneering's website. With me on the call today are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments, and Alan Curtis, Senior Vice President and Chief Financial Officer. Before we begin, I would just like to remind participants that statements we make during the course of 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 third quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Good morning. Thanks, Mark, and thanks, everyone, for joining the call today. Today I'll review the details of our third quarter results, and I'll provide you with outlook commentary and guidance for the fourth quarter of 2020 and for the full year of 2021. And after my closing remarks, we'll open the call for questions. So to start with, I'm pleased to report that our third quarter 2020 results reflect the benefit of previously disclosed cost improvement initiatives and the recently announced realignment of our segments. Despite continuing energy and entertainment market headwinds, we generated free cash flow and both adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, and adjusted operating income improved as compared to the second quarter of 2020. I'm proud of how our employees have stepped up to the challenges brought on by the global pandemic, operating model changes, and cost improvement initiatives, all the while continuing to deliver quality services and products to our customers safely and with minimal logistical delays. Now, looking at our third quarter 2020 financial results. Our adjusted operating results exceeded our initial expectations and consolidated adjusted EBITDA of $45.1 million exceeded published consensus. Overall, we were encouraged by the performance of our energy businesses and the stable contribution from our aerospace and defense technology segment, or ADTEC. Compared to our adjusted second quarter 2020 results, consolidated adjusted operating income for the third quarter 2020 improved by $5.1 million, as efficiency gains from our cost-out efforts are meaningfully enhancing our bottom line results. Each operating segment reported positive adjusted operating income and adjusted EBITDA. Sequentially, the adjusted operating results for each of our segments, except subsea robotics, improved as compared to our second quarter 2020. Our cash position of $359 million at September 30, 2020, increased by $25.3 million from June 30, 2020, as we generated $19 million of free cash flow, largely driven by positive contributions from operations and working capital and ongoing capital conservation. Now let's look at our business operations by segment for the third quarter of 2020. Subsea Robotics adjusted operating income declined by $1.3 million on flat revenue as compared to the second quarter 2020, primarily due to lower contributions from our tooling and survey businesses. Due to this lower contribution, Subsea Robotics adjusted EBITDA margin decline for the third quarter 2020 as compared to 32% in the second quarter 2020. For the third quarter 2020, the revenue split between our remotely operated or ROV business and our combined tooling and survey businesses as a percentage of our subsea robotics revenue was 83% and 17% respectively, the same as the prior quarter. Our third quarter ROV performance was comparable with the second quarter 2020. As of September 30, 2020, our ROV fleet count was 250 systems, the same as June 30, 2020. Our fleet utilization during the third quarter 2020 was 59%, the same as the prior quarter. Days on hire were 13,601 in the third quarter as compared to 13,501 in the second quarter. Average ROV revenue per day on hire was marginally lower, declining 1% sequentially, primarily due to the changes in geographic mix. Our ROV fleet use mix during the quarter was 56% in drill support and 44% in vessel-based activity as compared to 64% and 36% respectively in the prior quarter. The average number of working floating rigs during the third quarter 2020 was 85 as compared to 96 during the prior quarter, which led to fewer days on hire for drill support services. However, this decrease was offset by an increase in days on hire for vessel-based services. During the quarter, our drill support market share decreased to 57% with ROV contracts on 76 of the 133 floating rigs under contract at the end of September. This compares to a 62% drill support market share with ROV contracts on 86 of the 139 floating rigs contracted at the end of June. Subject to quarterly variances, we continue to expect our drill support market share to generally remain in the 60% range. Turning to manufactured products, sequentially, third quarter 2020 adjusted operating income improved slightly on a 10% increase in revenue. Much of the revenue increase was attributed to percentage of completion revenue recognition on certain lower margin project components in our umbilical manufacturing business. During the third quarter, COVID-19 had limited impact on our energy manufacturing business, but continued to adversely affect manufacturing timing in our non-energy entertainment business. Overall, for year-to-date 2020, reduced order intake in our energy-related manufacturing business is primarily attributable to significant decrease in final investment decisions undertaken by our oil and gas customers due to low oil demand and pricing. Our manufactured products backlog at September 30, 2020, was $318 million compared to our recast June 30, 2020 backlog of $380 million. During the third quarter, order intake was $49 million. Our book-to-bill ratio year-to-date was 0.4, and for the past 12 months was 0.5. Sequentially, offshore projects group adjusted operating results improved on flat revenues. Call-out work during the third quarter was relatively consistent with the second quarter 2020, with improved results benefiting from the cost-outs and operating synergies implemented in connection with our new operating model. The impacts of COVID-19 continue to delay the Angola Light Well Intervention Project, but we are optimistic that this work will begin to move forward either late in the fourth quarter 2020 or early in the first quarter 2021. For integrity management and digital solutions, adjusted operating results improved sequentially on flat revenue. These results were largely due to improved execution as second quarter adjusted results were impacted by non-recurring costs on certain completed projects. Our aerospace and defense technology segment reported slightly higher sequential adjusted operating results for the third quarter 2020 on slightly higher revenue. ADTECH represented approximately 19% of our consolidated revenue for the third quarter, and we appreciate the relative stability of these businesses considering the challenges currently faced in our energy businesses. As previously announced, we were awarded two meaningful contracts during the quarter. one in our space systems business, where we will be teaming with Dynetics in support of developing a human lunar landing system for NASA, and one in our defense subsea technologies business, where we will be operating and maintaining the U.S. Navy's submarine rescue systems for up to five years, assuming annual contract renewals. Unallocated expenses for the third quarter 2020 were lower than the second quarter 2020, due primarily to lower accruals for incentive-based compensation. Capital expenditures for the third quarter 2020 totaled $8 million as we continue to exercise strict capital discipline. For the nine months ended September 30, 2020, we generated $32.4 million of cash flow from operating activities and spent $45.8 million on capital expenditures, resulting in a net use of cash of $13.5 million. At the end of the third quarter, we had $359 million in cash and an undrawn $500 million unsecured revolving credit facility, providing us with strong liquidity. Now I'll address the outlook for the fourth quarter of 2020. With the onset of lower seasonal offshore activity and customer budget exhaustion negatively affecting our energy businesses, we believe our fourth quarter 2020 results will decline sequentially. We are expecting lower operating results in each of our segments except manufactured products. Unallocated expenses are expected to approximate $30 million. During the fourth quarter, we expect to generate positive free cash flow, which will benefit from positive changes in working capital and CARES Act tax refunds. By segment, for our subsea robotics segment, we are expecting lower revenue and operating results due to fewer utilization days in connection with reduced seasonal demand for vessel-based ROV services, tooling services, and survey services. We believe that the working count for floating drilling rigs has largely stabilized over the past few months, and we will not see a marked decline in working count during the fourth quarter. We are forecasting our overall ROV fleet utilization for the quarter will decline to the low 50% range, and we project EBITDA margins will decline to the high 20% range. For manufactured products, we expect higher revenue and operating results due to increased throughput on certain percentage of completion projects in our umbilical manufacturing business. We project operating margins to remain in the mid-single-digit range. Order intake is expected to remain at subdued levels in our energy manufactured products and entertainment businesses. For offshore projects group, we expect a decline in revenue and operating results, primarily attributable to lower anticipated levels of call-out work being performed in the U.S., Gulf of Mexico. For integrity management and digital solutions, we expect modestly lower revenue and operating results during the fourth quarter. For aerospace and defense technologies, we expect operating income to be flat to slightly down on higher revenue. The revenue increase is primarily attributable to the startup of several new projects across our ad tech businesses, with the implied lower operating margins resulting from startup costs and change in project mix. For the full year of 2020, we expect to generate adjusted EBITDA in the range of $165 to $175 million. We are narrowing our guidance range for capital expenditures to $50 million to $60 million. We affirm guidance on cash tax payments in the range of $30 million to $35 million and our expectation of CARES Act and other tax refunds in the range of $16 to $34 million. We continue to expect generating positive free cash flow for the full year of 2020. We announced a plan at the end of first quarter 2020 to reduce annualized expenses in the range of $125 to $160 million by the end of 2020, inclusive of $35 to $40 million of reduced depreciation expense. We estimate that, since launching this plan, approximately $100 million of annualized cost reductions have been initiated exclusive of depreciation, with additional savings expected to be achieved through the fourth quarter of 2020. We continue to estimate that the cash costs associated with these actions to approximate $15 million for 2020. And now looking ahead to 2021, we anticipate the oil sector will face continuing headwinds in 2021 due to uncertainties around demand recovery and the resulting softness in energy commodity prices. Despite this backdrop, we currently expect our consolidated activity levels and EBITDA performance in 2021 will closely resemble 2020. We also expect to generate significant free cash flow in 2021, which will also benefit from a working capital release associated with final project milestones in our manufactured product segments. We will continue to review our forecast as we develop a definitive operating plan for 2021, and we will update our expectations during the year-end reporting process. And in conclusion, this has been a challenging year for all of us. Oceaneering has responded to these challenges by instituting significant structural cost reductions and reorganizing our business segments to capture operating synergies and operate profitably in a lower activity market. Thanks to the hard work of our dedicated team, these actions are showing quantifiable results as evidenced by our expectation to meet or exceed 2019's adjusted EBITDA performance in 2020 and maintaining or improving this performance in 2021 despite continuing energy market headwinds. We remain focused on generating free cash flow. Preserving and improving our liquidity and balance sheet remains a high priority. The firm capital discipline policy we adopted in 2020 is delivering results, which we expect will provide meaningful free cash flow in the future and gives us the flexibility to address our revolving credit facility maturity in January 2023 and our $500 million senior notes maturity in November 2024. We appreciate everyone's continued interest in Oceaneering and will now be happy to take any questions you may have.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Our first question comes from the line of Ian McPherson with Simmons Energy. Your line is open. Please go ahead.

Good morning, Ian. Hey, Rod. Good morning. Thanks for the overview. Always very helpful and well organized. I mean, what really strikes me is the, you know, the call for flat-ish results next year. particularly robotics. I mean, you're witnessing a downsloping year from Q1 to Q4 of 2020. And the rig contracting forensics have been obviously been very anemic. So you see this business, you know, much more clearly than the outsiders like I do. So what gives you comfort on that? And then also on products as well, you've had, you know, 0.5 book to bill year to date. So how do you see that stabilizing into next year as well? I think those are the two biggest pieces I'd like to get maybe some more paint on the palette if you can provide it.

You know what? I'm really glad you asked, Ian, because we've talked ourselves about trying to give at least a little better understanding. When we talk about the consolidated results, the puzzle pieces are going to be different. So what we see for robotics, and I'll talk a little bit about those, but I want everybody to think about the strength in our ad tech division that we've talked about and some of the other parts of our business that are flying a little bit separate from energy. um that's part of that that's part of the puzzle that helps us in 2021 but but specifically to robotics um you know this we know it's not a it's not a a mirror image where you say you know first quarter looks good like it did in 20 and we we modeled through the others it's really is about you know a a stepping off point that's a very believable walk from from q3 to q4 to into 2021 so we we don't see any huge springbacks in working rigs. But we do think that you can close the gap between contract and working rigs. We can get a couple more contracts, and we'll see some lift. And that comes directly from our customers and their confidence to build budgets around offshore activities. So, I mean, we've reviewed with all of them just in the past few weeks, and we feel comfortable with that. But it's not – I don't want anybody to think we baked in some big V-shaped recovery because that's not what's in there. And the same for manufactured products. I mean, we think that we can keep collecting some orders and doing some things, but, again, we don't expect a huge springback in FID in 2021. So it's some good work that we're finishing in the first half of the year and then, you know, collecting some of the smaller bits and pieces, tiebacks and things like that for the back half of the year that we can get in there. we can get into the plants. But it's nothing dramatic, so it's nothing that would run, I would say, in contrast to what other people are saying.

Yeah, and Rod, just a quick comment. It also, 21, benefits from the full year of the cost improvement initiatives that we've executed on during 2020. So that also factors into the overall decision with our guidance. Exactly. Thanks, Alan.

Yeah, thank you both on those. And then on ad tech, is that more of a likely grower for you in 21 based on the recent contract wins and what you expect to garner?

Yeah, we see those a couple of wins in the bucket already and some other opportunities. So we do think that, well, again, not dramatic growth, but steady delivery and less susceptible to some of the, I think, concerns everybody has about the offshore market.

Very good. Thanks, Rod. Thanks, Ian.

On the next question, come to the line of Sean Meekin with J.P. Morgan. Your line is open.

Morning, Sean.

Thank you. Morning. So to start, yeah, I mean, kudos for your willingness to provide some expectations for next year. Most have not been willing or able for obvious reasons. So just to build on that discussion, so we talk about the confidence around free cash flow and in the next year and working capital being a big piece of it. So if we could, maybe from Alan, Rod, I'd love to hear your thoughts too. It'd be nice to hear your expectations for free cash for maybe operating cash flow and how that translates into free cash, 20 and 21 X working capital and or one time items like the CARES Act. So if you're kind of able to strip those pieces out, which no doubt you'll take the cash wherever you can get it at this point in the cycle. Where do we stand on an operating cash flow normalized basis for 2021? Does that make sense?

Yeah, let me start here, and Rod can add some color if he wants. You know, for the guidance that we were giving with saying significant free cash flow next year, that does not include any money coming in from the CARES Tax Act. So, you know, that – Expectation is built in that we would have most of that received this year in 2020. Could it bleed over into 21? Yes, but that's not a component that we're using to drive significant free cash flow in 21. The prevailing items that will help us with driving significant free cash flow are, one, the expectation we can keep our EBITDA in the same ballpark that we're at this year. That's a primary contributor, as well as the release from receivables, I'll say, as working capital with milestone-related events on the two projects that we have in the umbilical business right now. So the timing of those payments, you know, while it's been a little bit of a cash negative for us this year, it turns to a positive next year. So that's going to be the prevailing other item that will help us drive free cash flow.

And the only thing I do is I just – I like to throw out simple math, right? If you say that we identified these $100 million of cost outs over the period of 2020 – and just figure if it was all straight lines, started at the beginning, you know, got through a lot, and you only realized part of them this year, simple math would tell you, you know, we probably didn't even get half of those that contributed to results this year. Think about a full year of those results for next year. So it's a year-over-year. That cost-off stuff has a lot more impact in next year than it did this year.

Right. Okay. Fair enough. I appreciate that. And then could we maybe just – Walk through the decision-making around the CapEx guide for this year. There's only one quarter left. I was a little curious. I thought maybe that we just narrowed around the midpoint but didn't necessarily take it down. And just thoughts around where you'll end up. I understand the $30 million number for unallocated for 4Q. I'm not sure if there's any seasonality to that. What's the proper run rate for unallocated and thoughts around CapEx? as we stand here for next year?

Yeah, I would look at, first off, the unallocated. I think $30 million is probably a reasonable run rate until we get a definitive plan in place. Looking at 21, when I look at the CapEx guide, certainly we have looked at growth versus maintenance CapEx. We see that we've had some growth CapEx in 2020, as we had the drill pipe riser contract that we were completing, we could go a little bit lower, obviously, if you just took off the growth capex that we had in 2020 from where we are at this point in time. I would say, though, we do still see reason for investment in our digital solutions within our integrity management digital solutions. We see opportunity there. We see opportunity with some of the ISRAS-type vehicles within the ROV space as well as what we're doing with our Freedom vehicles. So there will continue to be some element of growth capex required as we move forward.

All right, fair enough. I appreciate that.

Our next question comes from the line of Taylor Zurcher with Tudor Pickering and Holt. Your line is now open.

Hey, good morning, and thanks for all the call around Q4 and 2021 as well. The first question is on the cost out program. You've clearly made quite a bit of progress there year to date, I think, including DD&A. You're right in the middle of that. original $125 to $160 million cost-out target range you provided earlier this year. Do you have a target as to where you expect to be exiting the year on that cost-out program? As we continue to move forward, it just seems you're finding incremental ways to drive that target a bit higher, at least those savings a bit faster than you previously anticipated. So any thoughts on where that total... annualized cost outnumber could end up as we enter 2021?

I think we're going to get a big part of the remaining 20 in Q4. We've just got a lot of work going, and you hit it right. I mean, whenever you do work like this, it's sort of that peeling the onion model. I mean, as you find things and you take care of them, Number one, you find other things, but number two, you also get better at it, and you see it better. So I think the possibilities increase as you go. It's sort of a logarithmic decline. Obviously, you take care of the big things first, but you see that that tail runs for a long time. And so I would say that, like, again, I think we get most of 20 in 20, to make sure I get that clear, this year. And then we're going to be still looking for things in 2021. So it's a gift that keeps giving if you've got a team stood up and you keep driving that sort of mentality inside the company.

Understood. And then for 2021, it doesn't sound like you're – forecasting really much in the way of a V-shaped recovery at all in subsea robotics. I think in one of the previous questions, you said you had just caught up with a number of your customers. I was wondering if you could just characterize the tone of those conversations, or is it a bit mixed where some are getting back to work and others are still down for COVID or whatever other reasons they may be down? But what's the general tone you're hearing from your customers right now with respect to for offshore activity and spending plans over the next 12 months?

So I would say kind of just general tone, very little being chewed off as COVID. And they all are global operators, right? They go through a lot of tough things going on in the world, generally not all at the same time like right now, but they know how to operate in tough conditions. So they're back to work largely. As far as they see that there's underinvestment going on, So far this year, there's, you know, a fair amount of economic recovery happening around the world. So they believe that, you know, that underinvestment and recovery could support prices and certainly at a point that supports continued offshore work. But they're also being very focused on where they work. You know, they say there's not a lot of rank wildcat type exploration they're going to chase leveraged oil as they speak, you know, things close to infrastructure that allow them to get maximum benefit from the infrastructure that's already installed. And so they're very focused, but they believe that it's a good time to make investment. And for us, we like that because that kind of work, you know, single oil tiebacks, things like that, near field tiebacks, that's good work for Oceaneering. So we're encouraged by what they're saying.

Got it. Well, congrats on the quarter and thanks for the responses. Thank you.

My next question comes from the line of Mike Sabella with Bank of America. Your line is now open.

Hey, good morning, everyone.

I was kind of wondering if we could talk for a little bit about sort of the outlook for maintenance spending at the customer base next year. You know, a lot of what we hear from your guys, there's still a bit of hesitancy to kind of step into these big, long-cycle projects. You know, it seems that, you know, maintaining production with as little capital as possible is is key. Can you just talk to us about how you think maintenance spending kind of as a whole trends over the next year? Commodity prices kind of remain, you know, range bound near current levels.

So let me divide maintenance spending into a couple of things. Production maintenance versus just integrity management. I think integrity management is something that's very key. because number one just just the license to operate you know with everything that's going on esg you just can't afford mistakes you can't afford a loss of mechanical integrity so so they will continue to invest that will be something that they want to do smarter and at a better cost point because Because it's not revenue generating necessarily, it's cost avoidance. So they'll work really hard to look for good solutions. Not a bad thing for us because we believe we can be part of that, I would call it upskilling and getting better at that. So I see that as a fairly positive trend in that integrity management part. And then in the production management where we're trying to, again, you know, the cheapest barrels are already behind pipe. You know, they're already connected to the flow line. So we want to make sure that we can do all we can with light well intervention, with flow remediation, and some of the other work that we do with that sub-CGET. And I think that's going to be strong, especially if we see some price support and, you know, how to make the most of your budget. Those are good spends generally. Like you said, you don't have to commit to long-cycle projects. So I think you hit it. I think those are going to be fairly decent spots coming up for the next year.

Perfect. And then, you know, when we kind of think of capital allocation from here for auctioneering, you also, you know, continue to build cash. Is there anything you can do at this point to maybe help improve the capital efficiency, the efficiency in the capital structure? Is there any way to kind of put that pile of cash to work to earn a return over the near term?

I'll let Alan answer a little bit, but I'll just jump in with, you know, we were looking at a lot of things. I mean, obviously, you look at what's going on. If the debt starts trading at a discount, what things can you do out there in the market? So, yeah. And, you know, like we've said pretty obviously, you know, that is a lot of that cash is sitting there with the expectation it's going to be used to retire a significant portion of our 24 debt maturity. So it's still a goal. It's still something we're watching. So I think that's where we're looking right now.

Spot on, Rod. I mean, good clarity.

Great. Thanks, guys. Thank you.

Our next question comes from the line of Kurt Halle with RBC. Your line is now open.

Hey, good morning. Morning, Kurt. Good morning. Appreciate you guys going out on a limb and taking a stab at 2021. Kudos.

Thank you. Thank you.

You're welcome. You're welcome. Hey, just I know you guys kind of gave us a high-level dynamic, and that's the most important thing. you know, element as we kind of look out into 2021. But, you know, always kind of beg the question around, you know, when you look at your different segments, you know, which ones, you know, when you're thinking about flat on a year-on-year basis for overall EBITDA, you already mentioned some positive tailwinds for ad tech. Looks like you have some positive tailwinds for manufactured products. So kind of taking that information, ad tech and manufactured products could be up on a year-on-year basis and segment EBITDA and the other ones could be maybe flat to slightly down. Is that kind of a good way to at least start to think about the individual pieces for next year?

I think we're going to have to wait for the details on where it goes, but you caught the ad tech flavor certainly correctly from Rod. We do see that year-on-year that could be You know, an element that's outside the energy sector with the recent contract awards, it could be beneficial. You know, manufactured products, I think what I was hearing was more of, you know, we have contracts that kind of will be working through their backlog the first half of the year, and the back half of the year is probably going to be more challenged. So I don't think we were trying to guide anyone up on manufactured products for next year. I think it's more of the timing of when some of that revenue could come through. You know, if you look at the other parts of the business within the offshore projects group, you know, while we would have anticipated executing on the light well intervention project in 2020, it looks like more of that is probably moving into 21. So, you know, that could be a little bit of a tell when as we go into the next year. So there's going to be various moving pieces, and we still need to work through the

the details to give you better clarity okay that's fine i appreciate that so uh in the context of the uh you know uh incremental free cash flow expected in 2021 you were kind of addressed the the prior question to a certain extent but as you think it through when you build cash on the balance sheet you know can you give us some insights as to you know are you looking at this as a potential opportunity for the debt, or are you actually looking at the prospect of reducing some of that debt load as you work through 2021?

I think all of the above. I think it is going to be the flexibility and optionality that the cash will provide us. We will look at the markets and what they may bring to us and what would be right to do at the time. So we actively review that.

Okay. And finally, you know, in the context, you guys have exposure to the renewable energy segment. I think you guys are very well aware of how much attention that has gotten from investors lately, unfortunately, at the expense of oil field service and other traditional energy plays. But you do have exposure to the offshore wind market through a cost. I was just wondering if you might be able to give us, you know, an updated, maybe some of your updated thoughts on how you see your exposure to the renewable market evolving.

I think we're still very excited about it. Like you said, we've got exposure. We're already doing a lot of work. I don't think most people realize that while we have a cost in the route clearance that came with it, Our biggest participation is still in the traditional businesses, the survey and the ROV and some of the work that we're doing with tooling. So that stuff is there, and it's alive and well. And we build more and more relationships with... with the other installers and companies that service that business. So we're excited about it. I think we're all kind of hoping that it grows like it is expected, but it's always been a little bit further out than we thought. So it's got to be big, and hopefully it happens sooner now with some of the emphasis that's been put on energy transition.

Thanks. So can you give us some general sense of maybe what the revenue exposure currently is, you know, for maybe that renewable piece of the business?

We haven't broken it out because – and it's why I try not to oversell this a little bit because it's still a fairly small part of our business because it only affects us in certain places, right? I mean, it's actually a decent portion of our North Sea business, but overall across the globe it doesn't – large and we've been we've been pretty good at capturing some of the work happening here in the east coast united states but that's been it's just not a ton of activity yet okay great appreciate that color thank you my next question comes from blake gendron with wolf research your line is now open

Yeah, thanks. Good morning. I wanted to circle back on the ad tech business and just try to get a split for government revenue versus commercial. I think the old ad tech business was about two-thirds government. And then within that government piece, how much of that is space versus other aerospace and defense spending? On the contractor side, you know, just to put a fine point on it, there seems to be some worry about just U.S. government spending rolling over in 2022 and beyond. That's obviously not a 2021 problem. We'll see what happens with the election. But I guess to get a better feel for how much is space exposure versus, you know, broader A&D would be helpful.

So let me – I'm going to let Alan talk to Splits, and then I'll talk about contracting. Go ahead.

Okay. Yeah, no. So – Effectively, 100% of the aerospace and defense is government-related. I mean, there are a few small commercial applications made for space, but it's a small component. So I think it's best to think of it as 100% is government-related. We have not broken out the space component by itself, but it tends to be a smaller component of the overall ad tech segment itself. So the lion's share of what we see in that is more the traditional defense technologies that we provide.

And as far as contracting goes, a lot of the work we do is rollover contracts, stuff that's been continuing work. It has grown, but it's not new work. And so when we look at a change of administration or things that could go wrong, a lot of what we do or most of what we do would be under continuing resolution. So we don't see a lot of risk to that work. As far as new work coming up, I think the work that's going on at NASA seems to have really good bipartisan support. especially return to the moon and the things that we talked about today. So, you know, I just met with a group of colleagues yesterday who are very close to support for the space program because it's what they live and breathe every day, and they felt comfortable with that as well. So I don't think there's a lot of risk in that government business, but, you know, there could always be some knee-jerk reactions, but it would have to dig deep because it would have to disrupt work that's already going on.

That's totally fair. And I don't want to focus too much on the smaller parts of your business, but integrity in digital solutions is one of the more exciting, I think, directionally some of the changes you made internally and maybe becoming a little bit more commercially intense there. So I appreciate the growth capital potentially could go to that segment, and I appreciate the rundown on the prior question as to the various opportunities. I guess I'm just wondering what opportunities would you consider incremental for that segment? And then if you were to pursue these opportunities, would you anticipate any modest margin friction until you got critical scale in those applications? Or are you going to focus on being more commercially intense in the services that you provide currently?

Hey, so... Great question. I'm excited to answer that. It is a great focus area for us, and it's something that I've been passionate about for a while because I think especially the integrity management piece has been very hands-on mechanical work for a long time. And all of our customers say, you know, I want to be able to inspect everything. the pipeline, the pressure vessel, without having to open it up and put a man inside and things like this. So they're directionally, they really want to go this way. And when we talk about what can we do, some of it is predictive analytics, some of it is big data processing, some of it is embedded sensors, some of it is use of drones and crawlers to get men out of the way. So there's this opportunity, number one, to gather more data safely, and we feel like we're well-positioned to do that because we've got subject matter expertise. We've had the guys hanging from ropes underneath the platforms, so we know what inspection gets done and how it gets done today. But we've also got the robotics side that, you know, this is something we did once before. We took divers out of the water and replaced them with machines. We believe we can take men off the ropes and replace them with machines. So there's that data gathering part that I think is really good. And generally speaking, that whole business has been lower capital intensity. But we do see the need to invest in some of the robotics and some of the software to drive this vision ahead. And, you know, software has some, like you said, some frictional effects. You invest early. Developing robotics, you invest early. But they're very scalable. And so while you go through some of that, it's not huge capital investment like building vessels. And the scalability of the investment is much, much better once you get the product developed. So I think it's a great space to watch, if you will, because there's market pull for it. And I think that the bang for the buck is pretty high there.

Understood. And if I could just squeeze one more in. In a hypothetical world in which you had zero debt and you're looking to do some M&A, which segments in particular would you look to do, either because you see attractive opportunities or because you think it's a space that, from a technological perspective, could benefit from the bolt-on of various disparate technologies from different end markets?

I think there's bolt-ons in most of our businesses. And I would say, though, that when we talk about what I just mentioned with robotics and specialty robotics, I think there's a lot of ways to leverage our knowledge about how to deploy, how to maintain, how to service, how to navigate and operate and train people to run robotics, that we could always take a unique robotic application and put it in our arsenal and be able to deploy that quickly, whereas somebody who who had a really great idea but doesn't know how to get it out in the market and get it operating, those partnerships could be really powerful for us. So I think there's that. Again, software development, maybe adding capabilities to our marine logistics, those are opportunities for us. It's pretty broad across the business. If we look for large bolt-ons for scale, those are a little more challenging because we just have to say, you know, how healthy are those businesses and is it something that's going to be accretive in the near term, even if it is maybe longer term.

That's very interesting. Thanks, guys.

Thank you.

As a reminder, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of David Smith with Heiken and Energy Advisors. Your line is now open.

Hey, good morning. Good morning. Thank you. I'll reiterate what everyone else has said about the 21 guidance. Very helpful and appreciated. I just want to ask, with the segment realignment, we got a better view at some of the product and service lines. And I was a little surprised at how negative the mobility solutions margins were in the first half. And I understand there's uncertainty around the COVID outlook and when that business picks back up. But I wanted to ask about your approach to limiting losses from that subsegment and whether it's possible to get those margins up to break even without theme parks getting back to normal.

So that's an interesting – it's a little bit of a really two-sided coin. Most of our business in the mobility solutions has been the entertainment business. That's been the big part of it. And, of course, entertainment, you want to talk about any business that's been challenged – the theme parks have been extremely challenged the first half of the year. So they slammed on the brakes on almost everything they were doing. And, you know, a lot of our work actually was in China for the first half of this year. So that was very challenged about getting back to China. We're actually there in a small way right now. But that's the biggest challenge there. So we did. We shifted down a lot. We made some pretty significant cost cuts in that business where we could without losing capability. So that was a big reaction there. If you look at the other half, though, the other half of the business is one that is smaller, and we've been more project-based to date. We've been working on more standardized products. But you think about reducing the number of people in a plant by adding mobility solutions to a manufacturing plant. keen interest in that because now after a global pandemic, a lot of the customers are saying anytime that we could reduce the interaction of people to make sure these plants can keep up and running in a situation like we've experienced this year, definitely renewed interest. And whether it's a manufacturing plant, we've done some work for hospitals as well. The interest in that product is definitely going up. So, you know, trying to field those interests to make sure which ones are real and which ones are looky-loos, so to speak, you know, that just are curious about what that would mean has been kind of the challenge there is to make sure that we aren't chasing things that won't ever develop. But it's a two-sided business, and, you know, we knew that exactly, you know, I think we believed that some people had maybe higher expectations or higher understanding of those businesses, and we expected we'd get some questions when that was, you know, when you could get a little more visibility to that going forward.

Appreciate it, Nicola. And the other one, following question, it looks like your vessel-based RV activity was higher in Q3 than at any point since 2015. Just wondering if you could give any color around that pickup and whether anything in your 21 outlook includes higher vessel-based RV activity compared to the 20s.

I would just say that relationships keep getting better with the vessel operators, and for a while it's a little bit challenging sometimes for us because we were vessel operators in a big way, and they saw us as a competitor, and so it was a little bit difficult to reconcile friend or enemy. But now that, number one, we're doing more of our vessel operations on spot hire and short-term charter as well, I think we're starting to resolve those relationships. We just picked up a significant contract with a vessel operator. So the relationships are getting better. Our placement on board vessels owned by others is getting better, and I think that's just a sign of how we're building that part of the market for our customers.

Good stuff. Appreciate it.

There are no further questions in queue at this time. I'll now hand the call over to Mr. Rod Larson for closing comments.

Well, thanks, everybody, for all the great questions. And since there are no more, I'd wrap up by thanking everybody for joining the call. And this concludes our third quarter 2020 conference call.

This concludes today's conference call. You may now disconnect.