UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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.
Index
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands)
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(unaudited)(in thousands, except per share amounts)
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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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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 expectations about 2005 net income and segment results, our plans for future operations, our expectations about the profit contribution from our investment in Medusa Spar LLC 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 c 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, 2004. 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, 2004.
Executive Overview
We generate over 80% of our revenue from our services and products provided to the oil and gas industry. The first quarter of 2004 included a $1.8 million pre-tax expense for a terminated acquisition effort in our unallocated expenses. Our 2005 quarterly net income was more than double that of the first quarter of 2004. This was attributable to higher profit contributions from ROVs, Subsea Projects and our equity interest in Medusa Spar LLC.
Compared to the fourth quarter of 2004, quarterly net income declined primarily due to lower results from Subsea Products. The profit decline was entirely attributable to a reduced level of earnings from our Multiflex umbilical operation as a result of longer raw material delivery times, therefore delaying our ability to generate revenue, and startup costs incurred at the new Panama City plant. For 2005, we expect net income to be higher than 2004.
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, 2004 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 March 31, 2005, we had working capital of $121 million, including $30 million of cash and cash equivalents. Additionally, we had $203 million of borrowing capacity available under our revolving credit facility.
Our capital expenditures were $20 million during the three months ended March 31, 2005, as compared to $67 million during the corresponding period of last year. Capital expenditures in the current year consisted primarily of additions and upgrades to our ROV fleet to replace older units we retired. Prior-year capital expenditures consisted primarily of the acquisition of the drill support ROV business of Stolt Offshore S.A. and Fugro N.V. and expenditures related to our new umbilical facility in Panama City, Florida.
We had no material commitments for capital expenditures at March 31, 2005. We are currently implementing a new business management system, which we anticipate will be used for our U.S. operations starting in July 2005 and then phased into our foreign locations starting in 2006.
At March 31, 2005, we had long-term debt of $148 million and a 24% debt-to-total capitalization ratio. We have $100 million of Senior Notes outstanding, to be repaid from 2006 through 2010, and $47 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 three-month period ended March 31, 2005, our cash and cash equivalents increased $13 million. We generated $23 million in cash from operating activities, used $20 million of cash in investing activities and obtained $9 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
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$15 million. The primary increase in working capital was the increase of cash and cash equivalents at the end of the quarter.
In September 2002, our Board of Directors authorized us to repurchase up to 3,000,000 shares of our common stock, subject to a $75 million aggregate purchase price limitation. Under this plan, we have repurchased 897,800 shares of common stock to date, at a total cost of $20 million. We have reissued all of those shares as contributions to our 401(k) plan or in connection with exercises of stock options. From time to time, we may effect additional repurchases in accordance with the terms of the Board authorization, which remains in effect.
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 the fourth quarter of 2004 and the first quarter of 2005, Subsea Projects had higher-than-normal revenues 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 that follows sets forth our revenues and gross margins for our Oil and Gas business for the periods indicated.
Our ROV segment revenues 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 and 10 ROVs from Fugro N.V. in September 2004. Gross margins declined over the previous quarter due to a reduced level of construction-related work in the Gulf of Mexico, higher repair and maintenance expenses and mobilization costs incurred in putting several systems to work.
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As compared to 2004, for 2005 we expect a higher profit contribution from our ROV business segment due to increases of our fleet size, utilization and pricing. We expect this to be driven by market demand for floating drilling rigs.
During the quarter ended March 31, 2005, our Subsea Products gross margin decreased from the corresponding quarter of the prior year and the preceding quarter. The profit decline was attributable to a reduced level of earnings from our Multiflex umbilical operation, as a result of longer raw material delivery times, therefore delaying our ability to generate revenue, and start-up costs incurred at the new Panama City plant. Recently, we determined the Panama City planetary cabling machine underrollers were inadequately designed and have to be replaced. Consequently, we now anticipate we will not be able to manufacture steel tube umbilicals at this plant until sometime in the fourth quarter of this year. We expect our Subsea Products profit contribution for 2005 to be lower than that achieved in 2004. We are now projecting an additional $4.0 to $6.0 million of capital expenditures to complete the installation of all of the Panama City plant equipment.
For our Subsea Projects segment, we experienced a significant revenue and gross margin increase compared to the corresponding quarter of the prior year due to the Hurricane Ivan repair work in the Gulf of Mexico. Revenues and gross margin were comparable to the preceding quarter, which also benefited from the Hurricane Ivan work. We believe our Subsea Projects segment results in 2005 will be higher than those achieved in 2004.
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 2004. We expect margins to continue at about the same levels through the remainder of 2005.
Compared to the corresponding period of 2004 and the immediately preceding quarter, our Inspection revenues and gross margins increased as a result of our efforts to secure more value-added services sales and realizing cost savings as the result of actions taken last year to reduce our operating expenses. We expect higher revenue and an improvement in margins for 2005 as compared to 2004, based on our forecast of selling more technically advanced services.
Advanced Technologies
Revenue and gross margin information is as follows:
Advanced Technologies revenues and gross margins were relatively flat in the periods presented, reflecting normal fluctuations in business activity and changes in job mix. We anticipate 2005 results to be comparable to those achieved in 2004.
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 that follows sets out our unallocated expenses for the periods indicated.
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Unallocated operating expenses in the three months ended March 31, 2004 include $1.8 million of accumulated transaction costs related to a terminated acquisition effort in the first quarter of 2004.
Other
The table that follows 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 increases in earnings of Medusa Spar LLC from each of the immediately preceding quarter and the corresponding quarter of the prior year were due to the first completely full quarter of production from the initial six Medusa wells. Quarterly production from the initial six Medusa wells is now expected to begin a natural decline. We anticipate, however, that this will be partially offset by the tieback of Medusa North completed early in April, and that the quarterly profit contribution from this operation will continue at a high level in the second quarter.
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 single vessel owned by the venture has been marketed for oilfield and other uses since 2004. In the fourth quarter of 2004, we recognized $1.9 million of pre-tax impairments related to the venture. In March 2005, we purchased the cable lay and maintenance equipment from the venture at a price equal to its adjusted book value.
In February 2005, we purchased 51% of Pro-Dive Oceaneering Co., a venture that operates our ROVs in Canada, from our partner in that venture. We now own 100% of this venture, so the results of its operations from that point forward are included in our consolidated financial statements.
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Interest expense for the three-month period ended March 31, 2005 increased compared to the corresponding period in the prior year due to higher average debt levels. Our debt had been incurred to fund business acquisitions, including the ROV drill support business of Stolt Offshore S.A. and Fugro N.V. in 2004 and OIS International Inspection plc in 2003, additional equipment, including the Ocean Legend, and expansion of our Subsea Products production capacity.
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 2005 to be 35.5%.
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 4 of notes to the consolidated financial statements contained in this report and note 4 of notes to consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2004 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 $4.1 million adjustment to our equity accounts for the three-month period ended March 31, 2005 to reflect the net impact of the strengthening 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. Our foreign currency losses related to Brazil were $44,000 and $86,000 for the three-month periods ended March 31, 2005 and 2004.
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 March 31, 2005 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 March 31, 2005 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 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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