UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
For the quarterly period ended September 30, 2004
OR
For the transition period from ____________ to ____________
Commission File Number 1-10945
OCEANEERING INTERNATIONAL, INC.
(713) 329-4500
Not Applicable
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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Oceaneering International, Inc.Form 10-Q
Index
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands)
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OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(unaudited)(in thousands, except per share amounts)
See Notes to Consolidated Financial Statements.
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OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(in thousands)
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OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Inventory is stated at the lower of cost or market. We determine cost using the weighted average method.
3. Debt
Our long-term debt consisted of the following:
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Scheduled maturities of our long-term debt as of September 30, 2004 were as follows:
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
All statements in this quarterly report on Form 10-Q, other than statements of historical facts, including, without limitation, statements regarding our 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. These forward-looking statements are subject to various risks, uncertainties and assumptions, including those we have referred to under the headings “Business — Risks and Insurance” and “Cautionary Statement Concerning Forward-Looking Statements” in Part I of our annual report on Form 10-K for the year ended December 31, 2003. Although we believe 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 we operate, we can give no assurance that those expectations will prove to be correct. Accordingly, evaluation of our future prospects must be made with caution when relying on forward-looking information.
This section should be read in conjunction with the Management’s Discussion and Analysis included in our annual report on Form 10-K for the year ended December 31, 2003.
Executive Overview
We generate over 80% of our revenue from our services and products provided to the oil and gas industry. In 2003, we operated in what we considered to be a difficult market for oilfield services and products in general. These same market conditions persisted through the first quarter of 2004 and improved during the second and third quarters. The first quarter of 2004 included a $1.8 million pre-tax expense for a terminated acquisition effort in our unallocated expenses.
Compared to the second quarter of 2004, we experienced an increase in earnings in our ROV segment from higher utilization and lower repair expenses. The added capacity from the acquisition of the drill support ROV business of Stolt Offshore S.A. in February 2004 has contributed to the improvement in our ROV results. For the fourth quarter of 2004, we expect net income to be comparable to the third quarter. We expect improvements in our Subsea Products and Subsea Projects segments, and declines from seasonality and timing of projects in our ROV, Inspection and Advanced Technologies segments. The expected improvement in our Subsea Projects segment is attributable to inspection and repair work in the Gulf of Mexico made necessary by Hurricane Ivan.
Critical Accounting Policies and Estimates
For information about our Critical Accounting Policies and Estimates, please refer to the discussion in our annual report on Form 10-K for the year ended December 31, 2003 under the heading “Critical Accounting Policies and Estimates” in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Liquidity and Capital Resources
We consider our liquidity and capital resources adequate to support our operations and capital commitments. At September 30, 2004, we had working capital of $124 million, including $26 million of cash and cash equivalents. Additionally, we had $185 million of borrowing capacity available under our revolving credit facility.
Our capital expenditures were $122 million during the nine months ended September 30, 2004, as compared to $88 million during the corresponding period of last year. Capital expenditures in the current year consisted mainly of the acquisition of the drill support ROV business of Stolt Offshore S.A., the acquisition of 10 ROVs and related equipment from Fugro N.V. and expenditures related to our new umbilical facility in Panama City, Florida. Prior-year capital expenditures consisted primarily of the acquisition of OIS International Inspection plc, Rotator AS, Nauticos Corporation and Reflange, Inc.
We had no material commitments for capital expenditures at September 30, 2004.
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At September 30, 2004, we had long-term debt of $166 million and a 28% debt-to-total capitalization ratio. We have $100 million of Senior Notes outstanding, to be repaid from 2006 through 2010, and $65 million outstanding under our $250 million revolving credit facility that expires in January 2008. The revolving credit facility has short-term interest rates that float with market rates, plus applicable spreads. We have not guaranteed any debt not reflected on our consolidated balance sheet and do not have any off balance sheet arrangements as defined by SEC rules.
In the nine-month period ended September 30, 2004, our cash and cash equivalents increased $8 million. We generated $61 million in cash from operating activities, used $121 million of cash in investing activities and obtained $69 million of cash from financing activities. The cash used in investing activities was used primarily for the capital expenditures described above and the cash obtained from financing activities was used, along with a substantial portion of the cash provided by operating activities, to pay for those capital expenditures and to finance an increase in working capital of $33 million. Much of the increase in working capital was from accounts receivable associated with increased ROV revenue associated with the ROVs acquired from Stolt and the seasonal Inspection and Subsea Projects revenue increases during the second and third quarters.
Results of Operations
We operate in six business segments. The segments are contained within two businesses — services and products provided to the oil and gas industry (“Oil and Gas”) and all other services and products (“Advanced Technologies”). Our unallocated expenses are those not associated with a specific business segment.
Consolidated revenue and margin information is as follows:
We generate a material amount of our consolidated revenue from contracts for marine services and inspection services in the Gulf of Mexico and North Sea, which are usually more active from April through November compared to the rest of the year. In 2004, we expect higher-than-normal fourth quarter revenues from our Subsea Projects segment due to inspection and repair work made necessary in the Gulf of Mexico by Hurricane Ivan. Revenues in our Mobile Offshore Production Systems, Subsea Products and Advanced Technologies segments are generally not seasonal.
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Oil and Gas
The table below sets forth our revenues and gross margins for our Oil and Gas business for the periods indicated.
Our ROV segment gross margins reflect the utilization percentages of the respective periods and increased capacity from the acquisition of 34 ROVs from Stolt Offshore S.A. in February 2004. As a result of increased construction support work, which began during the latter half of 2003 and carried through the first nine months of 2004, the average revenue per day of ROV utilization was higher than the corresponding period in 2003 and comparable to that of the preceding quarter. Gross margins increased over the prior quarter due to lower repair expenses. We expect gross margin percentage to be slightly lower in the fourth quarter, as we expect our repair expenses to rise closer to historical levels.
During the quarter ended September 30, 2004, our Subsea Products revenues increased from the corresponding quarter of the prior year and the preceding quarter. Our margin contributions increased compared to the corresponding periods of 2003 from the higher revenue levels after our acquisition of Rotator in 2003. Margins decreased from the prior quarter due to competitive pricing pressure in the umbilical market. The nine-month period ended September 30, 2003 was positively impacted by $1.3 million due to the successful completion of a project at a lower cost
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than previously estimated. Our outlook for the Subsea Products segment is positive, based on the growth in the number of subsea wellhead completions and the level of bid activity we are experiencing, although the competitive pricing environment still exists in the umbilical market, particularly in regard to Gulf of Mexico steel tube umbilicals. Our Subsea Products backlog increased from $60 million at June 30, 2004 to $73 million at September 30, 2004. During the fourth quarter of 2004, we expect higher revenue and margin contributions than we had in the third quarter. Our steel tube cabling machine in Brazil is now operational, and we expect our Panama City, Florida facility, with steel tube capability, to be operational in December 2004.
For our Subsea Projects segment, we experienced a slight revenue decrease compared to the preceding quarter, but slightly increased margins due to better results from our Gulf of Mexico diving operations. Reflecting less demand for our services, our margin contributions were below those achieved in the corresponding quarter of 2003. The nine months of 2003 included reductions in cost estimates totaling $1.9 million. We adjusted the cost estimates due to the favorable completion of an installation project and the settlement of a personal injury claim. We believe, that for the full year, our Subsea Projects segment results in 2004 will be slightly below those achieved in 2003.
Our Mobile Offshore Production Systems gross margins were flat for all periods presented, as our three main assets were working under the same contracts as in 2003. We expect margins to continue at about the same levels through the remainder of 2004.
Compared to the corresponding periods of 2003, our Inspection gross margins decreased as a result of three major storms in the Gulf of Mexico, which delayed and interrupted work. Our margins were also negatively impacted by restructuring costs following the acquisition of OIS International Inspection plc in January 2003.
Advanced Technologies
Revenue and gross margin information is as follows:
Advanced Technologies revenues were higher and margin percentages were flat in the periods presented from additional work for the U.S. Navy and space-related products and services associated with the next Space Shuttle launch. We anticipate the fourth quarter results to be slightly lower than those achieved during the third quarter, due to the timing of projects.
Unallocated Expenses
Our unallocated expenses, i.e., those not associated with a specific business segment, within gross margin consist of expenses related to our incentive and deferred compensation plans, including restricted stock and bonuses, as well as other general expenses. Our restricted stock expense varies with the market price of our common stock. Our unallocated expenses within operating income consist of those within gross margin plus general and administrative expenses related to corporate functions. The table below sets out our unallocated expenses for the periods indicated.
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Unallocated operating expenses in the nine months ended September 30, 2004 include the expensing of $1.8 million of accumulated transaction costs related to a terminated acquisition effort in the first quarter of 2004.
Other
The table below sets forth our significant financial statement items below the income from operations line.
The amounts of equity earnings (losses) of unconsolidated affiliates are as follows:
In December 2003, we acquired 50% of Medusa Spar LLC, which owns a 75% interest in the Medusa Spar production platform in the Gulf of Mexico. Medusa Spar LLC earns revenue on a tariff basis on oil and gas production throughput processed by the spar from the Medusa field and surrounding dedicated blocks. The decrease in earnings of Medusa Spar LLC from the prior quarter resulted from an interruption of production associated with Hurricane Ivan in mid-September. Production was resumed in mid-October.
We own 50% of Smit-Oceaneering Cable Systems, L.L.C., which is a telecommunications cable laying and maintenance venture. Due to the current condition of the telecommunications market, the venture is currently inactive and the single vessel owned by the venture is being marketed for oilfield and other uses.
We own 49% of Pro-Dive Oceaneering Co., a venture that operates our ROVs in Canada.
Interest expense for the three- and nine-month periods ended September 30, 2004 increased compared to the corresponding period in the prior year due to higher debt levels. Our debt had been incurred to fund business acquisitions, including the ROV drill support business of Stolt Offshore S.A. in 2004 and OIS International Inspection plc in 2003, additional equipment, including the Ocean Legend, and expansion of our Subsea Products production capacity. We capitalized $81,000 and $126,000 of interest during the three- and nine-month periods ended September 30, 2004, respectively. We did not capitalize any interest during 2003.
We recognized additional interest income in the three months ended September 30, 2004 from interest on tax refunds associated with amended U.S. tax returns.
The provisions for income taxes were related to U.S. income taxes that we provided at estimated annual effective rates using assumptions as to earnings and other factors that would affect the tax calculation for the remainder of the year and to the operations of foreign branches and subsidiaries that were subject to local income and withholding taxes. We anticipate our effective tax rate for 2004 to be 35%.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are currently exposed to certain market risks arising from transactions we have entered into in the normal course of business. These risks relate to interest rate changes and fluctuations in foreign exchange rates. We do not believe these risks are material. We have not entered into any market risk-sensitive instruments for trading purposes. We manage our exposure to interest rate changes through the use of a combination of fixed and floating rate debt. See note 3 of notes to the consolidated financial statements contained in this report and note 3 of notes to consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2003 for a description of our long-term debt agreements, interest rates and maturities. We believe that significant interest rate changes will not have a material near-term impact on our future earnings or cash flows. Because we operate in various oil and gas exploration and production regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar. The functional currency for many of our international operations is the applicable local currency. We manage our exposure to changes in foreign exchange rates primarily through arranging compensation in U.S. dollars or freely convertible currency and, to the extent possible, by limiting compensation received in other currencies to amounts necessary to meet obligations denominated in those currencies. We use the exchange rates in effect as of the balance sheet date to translate assets and liabilities as to which the functional currency is the local currency, resulting in translation adjustments that we reflect as accumulated other comprehensive income or loss in the shareholders’ equity section of our consolidated balance sheets. We recorded a $1.4 million adjustment to our equity accounts for the three- and nine-month periods ended September 30, 2004 to reflect the net impact of the weakening of the U.S. dollar against various foreign currencies for locations where the functional currency is not the U.S. dollar.
Our Subsea Products business in Brazil conducts much of its operations in U.S. dollars, which is its functional currency. We recorded $1.9 million of foreign currency losses in our consolidated statement of income for 2003 related to our operations in Brazil. Foreign currency gains and (losses) related to Brazil were $503,000 and ($43,000) for the three-month periods ended September 30, 2004 and 2003 and $2,000 and ($420,000) for the nine-month periods ended September 30, 2004 and 2003, respectively.
Item 4. Controls and Procedures.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2004 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 5. Other Information.
Item 6. Exhibits.
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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.
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Index to Exhibits
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