FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 1-10945 OCEANEERING INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-2628227 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16001 Park Ten Place, Suite 600 Houston, Texas 77084 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (281) 578-8868 Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X , No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 31, 1997 Common Stock, $.25 Par Value 23,880,801 shares PART I - FINANCIAL INFORMATION Item 1. Financial Statements. OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) December 31, March 31, 1996 1996 (unaudited) (audited) ASSETS Current Assets: Cash and cash equivalents $ 39,902 $ 9,351 Accounts receivable (net of allowance for doubtful accounts of $1,005 at December 31 and $1,201 at March 31) 83,472 96,391 Prepaid expenses and other 7,032 4,733 ----------------------- Total Current Assets 130,406 110,475 ----------------------- Property and Equipment, at cost: Marine services equipment 205,978 187,337 Mobile offshore production equipment 31,461 56,607 Buildings, improvements and other 33,234 29,438 ----------------------- 270,673 273,382 Less: Accumulated Depreciation 163,639 145,105 ----------------------- Net Property and Equipment 107,034 128,277 ----------------------- Goodwill (net of amortization of $3,255 and $2,515) 11,649 12,082 Investments and Other Assets 6,166 5,262 ----------------------- TOTAL ASSETS $255,255 $256,096 ======================= LIABILITIES and SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 16,889 $ 25,607 Accrued liabilities 53,020 35,823 Income taxes payable 9,426 6,618 ----------------------- Total Current Liabilities 79,335 68,048 ----------------------- Long-Term Debt --- 48,000 ----------------------- Other Long-Term Liabilities 22,390 12,950 ----------------------- Shareholders' Equity 153,530 127,098 ----------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $255,255 $256,096 ======================= See Notes to Consolidated Financial Statements. OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the Three Months Ended December 31, 1996 1995 (in thousands, except per share amounts) Revenues $ 94,117 $ 74,236 Gain on disposition of FPSO 25,047 --- Cost of services 72,840 59,783 Impairment adjustment and provision for special drydocking 15,960 --- Selling, general and administrative expenses 8,924 8,792 ----------------------- Income from operations 21,440 5,661 Interest income 199 551 Interest expense, net (958) (642) Other income (expense), net 3 (154) ----------------------- Income before income taxes 20,684 5,416 Provision for income taxes (13,944) (1,888) ----------------------- Net income $ 6,740 $ 3,528 ======================= Earnings per common share equivalent $0.28 $0.15 Weighted average number of common share equivalents outstanding 24,138 23,267 See Notes to Consolidated Financial Statements. OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the Nine Months Ended December 31, 1996 1995 (in thousands, except per share amounts) Revenues $271,416 $222,865 Gain on disposition of FPSO 25,047 --- Cost of services 218,465 179,139 Impairment adjustment and provision for special drydocking 15,960 --- Selling, general and administrative expenses 26,148 25,753 ----------------------- Income from operations 35,890 17,973 Interest income 848 1,203 Interest expense, net (1,956) (1,574) Other income (expense), net 276 (131) ----------------------- Income before income taxes 35,058 17,471 Provision for income taxes (19,491) (6,583) ----------------------- Net income $ 15,567 $ 10,888 ======================= Earnings per common share equivalent $0.65 $0.47 Weighted average number of common share equivalents outstanding 23,864 23,216 See Notes to Consolidated Financial Statements. OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Nine Months Ended December 31, 1996 1995 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $15,567 $10,888 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Gain on disposal of property and equipment (25,047) --- Depreciation and amortization 18,925 15,306 Impairment adjustment 7,980 --- Currency translation adjustments and other 1,018 462 (Increase)/decrease in accounts receivable 12,919 (31,525) Increase in prepaid expenses and other current assets (2,299) (1,052) Increase in current liabilities 11,431 847 Increase in other long-term liabilities 9,440 1,582 ---------------------- Total adjustments to net income 34,367 (14,380) ---------------------- NET CASH PROVIDED BY/(USED IN)OPERATING ACTIVITIES 49,934 (3,492) ---------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment and other assets (66,014) (29,272) Disposal of property and equipment 92,566 --- Increase in investments (904) (451) ---------------------- NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 25,648 (29,723) ---------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 33,000 30,528 Repayment of long-term borrowings (81,000) --- Proceeds from issuance of common stock 2,969 1,876 ---------------------- NET CASH PROVIDED BY/(USED IN)FINANCING ACTIVITIES (45,031) 32,404 ---------------------- NET INCREASE/(DECREASE) IN CASH 30,551 (811) ---------------------- CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 9,351 12,865 ---------------------- CASH AND CASH EQUIVALENTS - END OF PERIOD $39,902 $12,054 ====================== See Notes to Consolidated Financial Statements. OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation and Significant Accounting Policies These Consolidated Financial Statements are unaudited and have been prepared pursuant to instructions for the Quarterly Report on Form 10-Q required to be filed with the Securities and Exchange Commission and do not include all information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles. Management has reflected all adjustments which it believes are necessary to present fairly the Company's financial position at December 31, 1996 and its results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant's Annual Report on Form 10-K for its fiscal year ended March 31, 1996. The results for interim periods are not necessarily indicative of annual results. 2. Cash and Cash Equivalents Cash and cash equivalents includes demand deposits and highly liquid interest-bearing investment grade securities. Approximately $1.5 million and $1.4 million of the Company's cash at December 31 and March 31, 1996, respectively, was restricted and is posted as security in interest-bearing accounts related to litigation involving the Company's United Kingdom subsidiary. The Company believes it has adequate defenses to the claims and that the outcome will not have a material adverse effect on the financial position or results of operations of the Company. 3. Property and Equipment During the third quarter of fiscal 1997, a major oil company customer exercised its option to purchase the Floating Production, Storage and Offloading system ("FPSO"), ZAFIRO PRODUCER. Upon disposition, the related property and equipment cost and accumulated depreciation accounts were relieved and the resulting gain of $25 million was included in the Company's consolidated statement of income as gain on disposition of FPSO. 4. Shareholders' Equity Shareholders' Equity consisted of the following: December 31, March 31, 1996 1996 (unaudited) (audited) (in thousands, except share data) Shareholders' Equity: Common Stock, par value $0.25; 90,000,000 shares authorized; 24,017,046 shares issued $ 6,004 $ 6,004 Additional paid-in capital 80,595 81,921 Treasury stock, 159,945 and 793,170 shares, at cost (1,434) (6,976) Retained earnings 72,123 56,556 Cumulative translation adjustments (3,758) (10,407) ----------------------- Total Shareholders' Equity $153,530 $127,098 ======================= 5. Income Taxes Cash taxes paid were $6.7 million and $6.2 million for the nine months ended December 31, 1996 and 1995, respectively. 6. Accounting for impairment of long-lived assets In March 1995, Statement of Financial Accounting Standards Board standard number ("SFAS") 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was issued. SFAS 121, effective for fiscal years beginning after December 15, 1995, requires that certain long-lived assets be reviewed for impairment whenever events indicate that the carrying amount of an asset may not be recoverable and that an impairment loss be recognized under certain circumstances in the amount by which the carrying value exceeds the fair value of the asset. The Company adopted SFAS 121 on April 1, 1996, as required. There was no material effect on the Company's results of operations or financial position as a result of the adoption of SFAS 121. However, during the third quarter of fiscal 1997 it became apparent that operating results for the Company's North Sea diving support vessel were below expectation. The vessel was originally acquired as a construction support vessel but changing market conditions necessitated utilizing the vessel in an inspection and maintenance mode at lower margins. After management review of the first full work season it was concluded that the manner in which the vessel was being used had changed significantly from its originally intended purpose and the recoverability of the carrying amount of the asset should be assessed. The Company determined that an impairment loss of $8 million should be recorded. The amount was determined by comparing the carrying value of the vessel with the net present value of the expected cash flows from the vessel over its remaining life. The impairment adjustment was recorded and included in the Company's Oilfield Marine Services business segment. 7. Commitments and Contingencies During the third quarter of fiscal 1997, the Company determined that substantial repairs will be necessary to maintain the FPSO OCEAN PRODUCER in operating condition in compliance with regulatory requirements. The unit is currently working offshore West Africa under a contract which expires in January 2000. These repairs will require a special drydocking and are expected to be performed in fiscal 1998. The Company recorded an $8 million provision in the third quarter of fiscal 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. All statements in this Form 10-Q, other than statements of historical facts, including, without limitation, statements regarding the Company's 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. The Company utilizes a variety of internal and external data and management judgment in order to develop such forward-looking information. Although the Company believes 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 industry in which the Company operates, it can give no assurance that such expectations will prove to have been correct. Accordingly, evaluation of future prospects of the Company must be made with caution when relying on forward-looking information. Material Changes in Financial Condition The Company considers its liquidity and capital resources adequate to support continuing operations and capital commitments. At December 31, 1996, the Company had working capital of $51 million, including $38 million of unrestricted cash. Additionally, the Company has available all of its $120 million credit facility and $14 million under its $20 million uncommitted line of credit. In November 1995, the Company announced that it had been awarded a contract by a major oil company to provide an FPSO. The contract was a dayrate lease arrangement which had an initial term of three years with a commencement date of August 1996. The Company purchased and converted an existing 268,000 dwt crude oil tanker into the FPSO ZAFIRO PRODUCER at a capital cost of $68 million. To facilitate the funding of the capital expenditures required for this project, the Company expanded its committed credit facility from $75 million to $120 million during the first quarter of fiscal 1997. The contract provided the customer with an option to purchase the FPSO ZAFIRO PRODUCER and terminate the lease at any time during the initial three-year period. The customer exercised the purchase option in December 1996. Proceeds from the disposition were used to repay borrowings under the credit facility. Upon disposition of the FPSO, the related property and equipment accounts were relieved and the resulting gain of $25 million was included in the Company's consolidated statement of income as gain on disposition of FPSO. As a result of the above transaction, total long-term debt of $48 million as of the end of fiscal 1996 was fully repaid at the end of December 1996. Capital expenditures were $66 million during the first nine months of fiscal 1997, as compared to $29 million during the corresponding period of the prior fiscal year. Fiscal 1997 expenditures included $16 million of additions to the Company's fleet of remotely operated vehicles ("ROV") and construction costs of $38 million to complete the FPSO ZAFIRO PRODUCER, discussed above. Expenditures of $29 million for the corresponding period of fiscal 1996 included $12 million relating to the FPSO ZAFIRO PRODUCER, upgrade costs of two offshore support vessels and upgrades to the Company's ROV fleet. There were no material commitments for capital expenditures at December 31, 1996. Results of Operations Consolidated revenue and margin information is as follows: Three Months Ended Nine Months Ended December 31, December 31, 1996 1995 1996 1995 (in thousands) Revenues $ 94,117 $ 74,236 $271,416 $222,865 Gain on disposition of FPSO 25,047 --- 25,047 --- Gross margin 30,364 14,453 62,038 43,726 Gross margin % 32% 19% 23% 20% Operating margin % 23% 8% 13% 8% The quarters ending June 30 and September 30 have generally been the Company's peak in both revenues and net income for its Oilfield Marine business. Revenues and net income in the Offshore Field Development and Advanced Technologies businesses are generally not seasonal. Oilfield Marine Services Revenue and gross margin information is as follows: Three Months Ended Nine Months Ended December 31, December 31, 1996 1995 1996 1995 (in thousands) Revenues $ 43,829 $ 32,865 $129,028 $100,910 Gross margin 749 2,917 16,698 16,461 Gross margin % 2% 9% 13% 16% During the three-month and nine-month periods ended December 31, 1996, revenues for the Oilfield Marine Services segment increased and gross margin percentage decreased compared to the corresponding periods of the prior year. The Company experienced increased demand for all service lines. Gross margin for the third quarter includes an adjustment of $8 million to reduce the carrying value of the Company's North Sea diving support vessel. The vessel was originally acquired as a construction support vessel but changing market conditions have necessitated utilizing the vessel for inspection and maintenance work with lower revenues and margins. After review of the first full work season it was concluded that the manner in which the vessel was being used had changed significantly from its originally intended purpose and the recoverability of the carrying amount of the asset should be assessed. This adjustment reduced gross margin percentages by 18% and 6% for the three and nine month periods ended December 31, 1996, respectively. See Note 6 of Notes to Consolidated Financial Statements. Gross margin for the nine-month period ended December 31, 1995 included a gain of $1.1 million arising from the settlement of a dispute relating to a contract executed in West Africa in fiscal 1992; this gain increased gross margin percentage by 1%. Offshore Field Development Revenue and gross margin information is as follows: Three Months Ended Nine Months Ended December 31, December 31, 1996 1995 1996 1995 (in thousands) Revenues $ 27,268 $ 17,884 $ 66,802 $62,394 Gain on disposition of FPSO 25,047 - 25,047 - Gross margin 23,801 6,444 31,757 15,762 Gross margin % 87% 36% 48% 25% Revenues for offshore production systems were higher in the third quarter of fiscal 1997 compared to the corresponding period of the prior year as a result of contributions from the Company's second FPSO, ZAFIRO PRODUCER, which commenced operations in August 1996 under a three-year contract. The Company's FPSO OCEAN PRODUCER continued to work offshore West Africa under a contract which expires in January 2000. During the third quarter, the customer exercised its option to purchase the FPSO ZAFIRO PRODUCER and the Company recognized a gain of $25 million as a result of this transaction. The Company will continue to operate the unit under a management agreement for the remainder of the contract term. Gross margins for the three-month and nine-month periods ended December 31, 1996 were negatively impacted by an $8 million provision for repairs on the Company's first FPSO, OCEAN PRODUCER. During the third quarter, the Company determined that substantial repairs are necessary to maintain the unit in operating condition in compliance with regulatory requirements. These repairs will be performed as soon as is practicable. Excluding the gain on the disposition of the FPSO ZAFIRO PRODUCER, the effect on gross margins of the repair provision was to reduce gross margin percentages by 29% from 25% to (4%)for the third quarter and by 12% from 22% to 10% for the nine months ended December 31, 1996. For the nine month period ended December 31, 1996, higher revenues and gross margins from FPSO operations were offset by lower revenues and gross margins in project management compared to the corresponding period of the prior year. In fiscal 1996 the Company undertook a project to convert a rig to a production system. The Company did not have a similar project in fiscal 1997. Revenues and gross margins for the three and nine-month periods ended December 31, 1995 included a $2.7 million gain on the involuntary conversion of the OCEAN DEVELOPER rig which sank while under tow in August 1995. Advanced Technologies Revenue and gross margin information is as follows: Three Months Ended Nine Months Ended December 31, December 31, 1996 1995 1996 1995 (in thousands) Revenues $ 23,020 $ 23,487 $ 75,586 $59,561 Gross margin 5,814 5,092 13,583 11,503 Gross margin % 25% 22% 18% 19% Gross margin for the third quarter of fiscal 1997 increased over the corresponding period of the prior year as a result of improved profitability in subsea cable burial and deep ocean search services. For the nine months ended December 31, 1996, revenues and gross margins increased as a result of higher activity in subsea cable burial and space related products. Other Interest expense for the nine-month period ended December 31, 1996 was net of capitalized interest of $1.1 million relating to the FPSO ZAFIRO PRODUCER conversion project. For the three-month and nine- month periods ended December 31, 1996, interest income decreased and net interest expense increased compared to the corresponding periods of the prior year as the Company had utilized its cash resources and drawn on its loan facilities to finance conversion of the FPSO ZAFIRO PRODUCER. As of the end of the third quarter of fiscal 1997, the Company had no debt outstanding. The provisions for income taxes were related to U.S. income taxes which were provided at estimated annual effective rates using assumptions as to earnings and other factors which would affect the tax calculation for the remainder of the fiscal year, and to the operations of foreign branches and subsidiaries which were subject to local income and withholding taxes. During the third quarter, an impairment adjustment relating to the North Sea diving support vessel and vessel repair costs relating to the FPSO OCEAN PRODUCER totaling $16 million were incurred in the Company's United Kingdom subsidiary for which no tax benefit was available owing to net operating losses. These costs increased the Company's effective tax rate from 38% to 67% for the third quarter and from 38% to 56% for the nine months ended December 31, 1996. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 27 Financial Data Schedule (b) The Company did not file any reports on Form 8-K during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OCEANEERING INTERNATIONAL, INC. (Registrant) Date: February 7, 1997 By: //s// JOHN R. HUFF John R. Huff, President and Chief Executive Officer Date: February 7, 1997 By: //s// MARVIN J. MIGURA Marvin J. Migura, Senior Vice President and Chief Financial Officer Date: February 7, 1997 By: //s// RICHARD V. CHIDLOW Richard V. Chidlow, Controller and Chief Accounting Officer