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 September 30, 1998 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.) 11911 FM 529 Houston, Texas 77041 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 329-4500 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 October 28, 1998 Common Stock, $.25 Par Value 22,567,301 shares PART I - FINANCIAL INFORMATION Item 1. Financial Statements. OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) September 30, March 31, 1998 1998 (unaudited) (audited) ASSETS Current Assets: Cash and cash equivalents $ 30,241 $ 9,064 Accounts receivable (net of allowance for doubtful accounts of $203 and $240) 116,048 114,923 Prepaid expenses and other 12,729 7,077 -------------------------------- Total Current Assets 159,018 131,064 -------------------------------- Property and Equipment, at cost: Marine services equipment 256,889 221,311 Mobile offshore production equipment 54,122 52,856 Buildings, improvements and other 57,426 44,542 -------------------------------- 368,437 318,709 Less: Accumulated Depreciation 160,029 149,874 -------------------------------- Net Property and Equipment 208,408 168,835 -------------------------------- Goodwill (net of amortization of $4,984 and $4,490) 9,920 10,414 Investments and Other Assets 6,638 6,230 -------------------------------- TOTAL ASSETS $383,984 $316,543 ================================ LIABILITIES and SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and current portion of Long-term Debt $ 28,050 $ 26,364 Accrued liabilities 54,076 51,385 Income taxes payable 10,747 8,425 -------------------------------- Total Current Liabilities 92,873 86,174 Long-term Debt, net of current portion 100,458 54,626 Other Long-term Liabilities 17,797 15,421 Commitments and Contingencies Shareholders' Equity 172,856 160,322 -------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $383,984 $316,543 ================================ The accompanying Notes are an integral part of these Consolidated Financial Statements. OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the Three Months Ended September 30, 1998 1997 (in thousands, except per share amounts) Revenues $110,042 $ 90,578 Cost of services 86,510 69,946 Selling, general and administrative expenses 10,305 9,580 ----------------------- Income from operations 13,227 11,052 Interest income 261 233 Interest expense, net of capitalized interest of $694 and $48 (625) (57) Other expense, net (126) (451) ----------------------- Income before income taxes 12,737 10,777 Provision for income taxes (4,842) (4,063) ----------------------- Net income $ 7,895 $ 6,714 ======================= Basic Earnings per Share $0.34 $0.29 Diluted Earnings per Share $0.34 $0.28 Weighted average number of common shares 22,813 23,346 Incremental shares from stock options 174 466 Weighted average number of common shares and equivalents 22,987 23,812 The accompanying Notes are an integral part of these Consolidated Financial Statements. OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the Six Months Ended September 30, 1998 1997 (in thousands, except per share amounts) Revenues $208,953 $185,741 Cost of services 163,934 146,176 Selling, general and administrative expenses 20,666 18,857 -------------------- Income from operations 24,353 20,708 Interest income 345 566 Interest expense, net at capitalized interest of $1,176 and $48 (1,192) (122) Other expense, net (164) (516) -------------------- Income before income taxes 23,342 20,636 Provision for income taxes (8,872) (7,958) -------------------- Net income $ 14,470 $ 12,678 ==================== Basic Earnings per Share $0.63 $0.54 Diluted Earnings per Share $0.62 $0.54 Weighted average number of common shares 22,883 23,317 Incremental shares from stock options 252 336 Weighted average number of common shares and equivalents 23,135 23,653 The accompanying Notes are an integral part of these Consolidated Financial Statements. OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended September 30, 1998 1997 (unaudited) (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $14,470 $12,678 Adjustments to reconcile net income to net cash provided by/(used in)operating activities: Depreciation and amortization 14,099 10,797 Currency translation adjustments and other (44) 4,265 (Increase)/decrease in accounts receivable (1,125) 15,736 Increase in prepaid expenses and other current assets (5,652) (3,470) Increase in other assets (82) (916) Increase/(decrease) in current liabilities 6,699 (13,589) Increase in other long-term liabilities 2,376 646 -------------------- Total adjustments to net income 16,271 13,469 -------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 30,741 26,147 -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment and other assets (52,257) (41,194) Other investing activity 1,704 (221) -------------------- NET CASH USED IN INVESTING ACTIVITIES (50,553) (41,415) -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowing, net of costs 98,620 -- Net proceeds/(payments) on revolving credit and other long-term debt (54,168) 16,000 Proceeds from issuance of common stock 1,541 3,031 Purchases of treasury stock (5,004) (12,503) -------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 40,989 6,528 -------------------- NET INCREASE (DECREASE) IN CASH 21,177 (8,740) -------------------- CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 9,064 23,034 -------------------- CASH AND CASH EQUIVALENTS - END OF PERIOD $30,241 $14,294 ==================== The accompanying Notes are an integral part of these 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 September 30, 1998 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, 1998. The results for interim periods are not necessarily indicative of annual results. Unless the context indicates otherwise, references to years indicate fiscal years. 2. Current Assets Cash and cash equivalents includes demand deposits and highly liquid investments with original maturities of three months or fewer from the date of the investment. Approximately $1.5 million of the Company's cash at March 31, 1998 was restricted and deposited in interest bearing accounts as security in connection with legal proceedings. Such legal proceedings were settled in the quarter ended September 30, 1998 and the restriction was removed. Prepaid expenses and other current assets as of September 30 and March 31, 1998 include spare parts of $6.7 million and $3.3 million, respectively, primarily for the Company's ROV fleet. 3. Long-term Debt Long-term debt consisted of the following: September 30, March 31, 1998 1998 (unaudited) (audited) (in thousands) 6.72% Senior Notes due 2010 $100,000 $ -- Revolving Credit Facility -- 54,000 Capital Leases 757 919 ------- ------ 100,757 54,919 Current portion of capital leases (299) (293) ------- ------ $100,458 $ 54,626 ======== ====== In September 1998, the Company issued $100 million aggregate principal amount of 6.72% Senior Notes dues 2010. The net proceeds were $98.6 million after issuance costs and were used to retire existing debt under the Company's revolving credit facility. The notes have an average life of ten years and are scheduled to be paid in five equal annual installments beginning at the end of the eighth year. In October 1998, the Company entered into a new $80 million revolving credit facility to replace its prior one which was scheduled to convert to a term loan in April 1999. The Senior Notes and the new revolving credit facility have similar maintenance covenants relative to the level of debt to total capitalization, fixed charge coverages and minimum net worth. 4. Shareholders' Equity Shareholders' Equity consisted of the following: September 30, March 31, 1998 1998 (unaudited) (audited) (in thousands, except share data) Common Stock, par value $0.25; 90,000,000 shares authorized; 24,017,046 shares issued $ 6,004 $ 6,004 Additional paid-in capital 81,610 81,442 Treasury stock, 1,400,106 and 1,075,303 shares, at average cost (20,614) (17,634) Retained earnings 112,472 98,002 Accumulated other elements of comprehensive income (6,616) (7,492) ------- ------- Total shareholders' equity $172,856 $160,322 ======= ======= 5. Income Taxes Cash taxes paid were $5.6 million and $7.9 million for the first six months of 1999 and 1998, respectively. 6. Earnings Per Share The Company has computed earnings per share in accordance with Financial Accounting Standards Board standard number ("SFAS") 128, "Earnings Per Share", which became effective in the third quarter of 1998. Prior periods comparative figures have been restated. 7. Comprehensive Income Effective April 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income and its components in financial statements. Comprehensive income is the total of net income and all non-owner changes in equity. The amount of comprehensive income for each of the three and six-month periods ended September 30, 1998 and 1997 and the components of accumulated other elements of comprehensive income in Shareholders' Equity at September 30, 1998 and March 31, 1998 are as follows: Three Months Ended Six Months Ended September 30, September 30, 1998 1997 1998 1997 (in thousands) (in thousands) Net income per Consolidated Statements of Income $7,895 $6,714 $14,470 $12,678 Foreign currency translation gains/(losses) 1,318 (361) 876 (1,292) ----- ----- ----- ------ Comprehensive income $9,213 $6,353 $15,346 $11,386 ===== ===== ====== ====== Amounts comprising other elements of comprehensive income in Shareholders' Equity: September 30, 1998 March 31, 1998 (in thousands) (in thousands) Accumulated foreign currency translation adjustments $(6,616) $(7,492) ===== ===== 8. New Accounting Pronouncements The FASB has issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way that public business enterprises report information about operating segments in interim and annual financial statements. As required, the Company will adopt SFAS 131 commencing with its 1999 Annual Report on Form 10-K. The FASB has also issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes standards for the way derivative instruments and hedging activities are reported. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Changes in a derivative's fair value are to be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has not yet quantified the impact, if any, on its financial statements that may result from adoption of SFAS No. 133, which is required no later than April 1, 2000. 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 industries 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 September 30, 1998, the Company had working capital of $66 million, including $30 million of unrestricted cash. At September 30, 1998, the Company had utilized none of its available $80 million credit facility and $20 million was unused under uncommitted lines of credit. In order to provide longer term funding, the Company issued $100 million of 6.72% Senior Notes which are repayable in five equal annual principal installments beginning at the end of the eighth year. In October 1998, the Company replaced its revolving credit facility with a new $80 million five year revolving credit facility. Capital expenditures were $52 million during the first six months of 1999, as compared to $41 million during the corresponding period of the prior fiscal year. Capital expenditures in 1999 consisted of additions to the Company's fleet of remotely operated vehicles ("ROVs"), multi-service support vessel construction and subsea products facilities expansion. Prior fiscal year expenditures consisted of additions to the Company's fleet of ROVs, support vessel expenditures and two out-of-service mobile offshore platforms for potential conversion to production systems or alternative service. Commitments for capital expenditures at September 30, 1998 were approximately $20 million for subsea product manufacturing facilities and multi-service support vessel construction. Results of Operations Consolidated revenue and margin information is as follows: Three Months Ended Six Months Ended September 30, September 30, 1998 1997 1998 1997 (in thousands, except percentages) Revenues $110,042 $90,578 $208,953 $185,741 Gross margin 23,532 20,632 45,019 39,565 Gross margin % 21% 23% 22% 21% Operating margin % 12% 12% 12% 11% 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 Services business. However, the Company's exit from the diving sector in the North Sea in early 1998 and the substantial number of multi-year ROV contracts which were entered into since 1997 should reduce the seasonality of the Company's Oilfield Marine Services operations. 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 Six Months Ended September 30, September 30, 1998 1997 1998 1997 (in thousands, except percentages) Revenues $55,912 $47,527 $108,616 $97,088 Gross margins 12,452 12,332 24,162 22,694 Gross margin % 22% 26% 22% 23% Revenue for the Oilfield Marine Services segment increased due to the expansion of the company's work class ROV fleet and increased sales of diving and engineering project management services. Gross margins showed a slight improvement on the strength of improved profitability associated with engineering project services. The gross margin percentage in the three months ended September 30, 1998 was lower than that of the comparable period of the prior year as a result of higher ROV-related training and payroll costs, a higher subcontractor component in work performed and inefficiencies due to an unusually high number of tropical storms in or threatening Gulf of Mexico work areas. Additionally the gross margin percentage from the year-earlier quarter was unusually high as the gross margin percentage for all of 1998 was 22%. Offshore Field Development Revenue and gross margin information is as follows: Three Months Ended Six Months Ended September 30, September 30, 1998 1997 1998 1997 (in thousands, except percentages) Revenues $28,697 $21,760 $56,351 $46,388 Gross margins 6,781 2,588 14,027 6,888 Gross margin % 24% 12% 25% 15% Revenues and gross margins were higher in the 1999 periods compared to the corresponding periods of the prior year as a result of increased product sales and the acquisition of a production barge in January 1998. Gross margins also benefitted from higher profitability on project management work. The Company's FPSO OCEAN PRODUCER continued to operate offshore West Africa under a contract which expires in January 2000. Advanced Technologies Revenue and gross margin information is as follows: Three Months Ended Six Months Ended September 30, September 30, 1998 1997 1998 1997 (in thousands, except percentages) Revenues $25,433 $21,291 $43,986 $42,265 Gross margins 4,299 5,712 6,830 9,983 Gross margin % 17% 27% 16% 24% Revenues rose on increased activity levels for subsea telecommunications cable services and the design and assembly of large, dynamic, animated figures for theme parks. However, gross margins declined due to a reduction in civil engineering and construction work and lower profitability on search and recovery services. Other Interest expense for the three and six month periods ended September 30, 1998 increased compared to the corresponding periods of the prior year as the Company incurred debt to fund the acquisition of additional equipment. 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. Year 2000. The Year 2000 problem is the result of computer programs which were written using two digits rather than four to define the applicable year. Programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. The Company has been reviewing its computer systems to identify potential problem areas. Based upon its assessment to date, much of the cost of compliance is included in regular system and equipment upgrades which are planned or are in progress. The Company does not expect the cost of compliance to have a material effect on its financial position, results of operations or liquidity. The Company will also be working with its major trading partners to avoid operational disruptions. However, there is no assurance that the systems of other companies on which the Company relies will be converted timely and will not have an adverse effect on the Company. PART II - OTHER INFORMATION Item 4. Submission of Matters to aVote of Security Holders. (a) The Company held its Annual Meeting of Shareholders on August 21, 1998. The following matters were voted upon at the Annual Meeting. Election of Directors. Nominee Shares For Shares Withheld David S Hooker 19,636,850 272,644 Harris J. Pappas 19,572,375 337,119 Ratification of the appointment of Arthur Andersen LLP as independent auditors of the Company. Shares For Shares Against Shares Abstained 19,814,100 9,216 86,178 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 4 Instruments defining the rights of security holders, including indentures. 4.01 Note Purchase Agreement dated as of September 8, 1998 relating to $100,000,000 6.72% Senior Notes due September 8, 2010 4.02 Loan Agreement ($80,000,000 Revolving Credit Facility) dated as of October 23, 1998 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: November 12, 1998 By: //s// JOHN R. HUFF John R. Huff, Chief Executive Officer Date: November 12, 1998 By: //s// MARVIN J. MIGURA Marvin J. Migura, Senior Vice President and Chief Financial Officer Date: November 12, 1998 By: //s// JOHN L. ZACHARY John L. Zachary, Controller and Chief Accounting Officer