Oceaneering International - 10-Q quarterly report FY

 

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

segment. These consist of expenses related to our incentive and deferred compensation plans, including restricted stock and bonuses, as well as other general expenses.

There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from those used in our consolidated financial statements for the year ended December 31, 2004. The following summarizes certain financial data by business segment:

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, our expectations regarding inspection and repair work for the remainder of 2005 and in 2006 made necessary by Hurricanes Katrina and Rita 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 ¾ 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.

We generate over 80% of our revenue from our services and products provided to the oil and gas industry. Our third quarter net income was higher than any previous quarter in our history. Compared to the second quarter of 2005, quarterly net income increased primarily due to improved performances from our ROV, Subsea Products and Subsea Projects segments.

For the fourth quarter of 2005, we anticipate overall net income to be comparable to that of the third quarter, with an improvement in our Subsea Products results, expected to be offset by seasonal declines in our ROV and Inspection results and lower equity earnings from our Medusa Spar LLC investment.

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.

We consider our liquidity and capital resources adequate to support our operations and capital commitments. At September 30, 2005, we had working capital of $157 million, including $36 million of cash and cash equivalents. Additionally, we had $175 million of borrowing capacity available under our revolving credit facility.

Our capital expenditures were $96 million during the nine months ended September 30, 2005, as compared to $122 million during the corresponding period of last year. Capital expenditures in the current year consisted primarily of the acquisition of Grayloc Products, L.L.C., as well as additions and upgrades to our ROV fleet to expand the fleet and 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., the acquisition of 10 ROVs and related equipment from Fugro N.V. and expenditures related to our new umbilical facility in Panama City, Florida.

We had no material contractual commitments for capital expenditures at September 30, 2005. We project incurring $4 million to $6 million of additional capital expenditures to complete the installation of our Panama City umbilical plant equipment. We are in the process of investing $42 million to build 21 new ROVs by the middle of 2006, which will increase our fleet size to approximately 190 work-class vehicles. Six of these vehicles were in service by the end of September 2005. We added a total of eight vehicles to our fleet during the quarter ended September 30, 2005. The eight vehicles consisted of three of the 21 announced new systems, the acquisition of four used units and the refurbishment of a previously retired unit.

At September 30, 2005, we had long-term debt of $175 million and a 25% debt-to-total capitalization ratio. We have $100 million of Senior Notes outstanding, to be repaid from 2006 through 2010, and $75 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, 2005, our cash and cash equivalents increased $19 million. We generated $60 million in cash from operating activities, used $95 million of cash in investing activities and obtained $54 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 $51 million. The increase in

working capital was the result of higher accounts receivable from higher revenue, and higher inventories in anticipation of increased Subsea Products sales and spare parts for ROVs necessitated by more units and higher utilization levels.

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 an aggregate of 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. Although we have not made any such repurchases since April 2003, we may from time to time effect additional repurchases in accordance with the terms of the Board’s authorization, which remains in effect.

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 first nine months 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.   Inspection and repair work made necessary by Hurricane Katrina also contributed to the increase in the third quarter. In the remainder of 2005 and for 2006, we expect our Subsea Projects and ROV segments to benefit from inspection and repair work made necessary by Hurricanes Katrina and Rita. Revenues in our Mobile Offshore Production Systems, Subsea Products and Advanced Technologies segments are generally not seasonal.

The table that follows sets forth our revenues and 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 improved over the previous quarter and the corresponding quarter of the prior year due to an increase in days on hire

with an 88% fleet utilization. We also had a higher average revenue per day of ROV utilization in the three- and nine-month periods ending September 30, 2005 as compared to those ending September 30, 2004. As compared to 2004, for 2005 we expect a higher profit contribution from our ROV business segment due to increases of our fleet size, fleet utilization and pricing. We expect our fourth quarter ROV operating income to decline slightly from that of the third quarter as a result of normal winter seasonality.

As compared to the quarter ended June 30, 2005, Subsea Products gross margin and operating income improved due to the benefit of the Grayloc Products acquisition at the end of the second quarter and better results from our umbilical manufacturing operations. Compared to the quarter and year-to-date periods ended September 30, 2004, profitability improved due to our Oceaneering Intervention Engineering operations, largely as the result of the Grayloc acquisition and higher ROV tooling and rental service sales. Mainly as a result of the difficulties experienced in beginning manufacturing operations at our Panama City plant, we expect our Subsea Products profit contribution for 2005 to be comparable to that achieved in 2004. We now anticipate we will be able to manufacture steel tube umbilicals at this plant in the first quarter of 2006, with our first deliveries to customers in the second quarter of 2006. We expect our fourth quarter Subsea Products results to improve over those of the third quarter on better umbilical manufacturing results, particularly from thermoplastic umbilical sales from our Brazil and Panama City plants.

For our Subsea Projects segment, we experienced a significant revenue and gross margin increase compared to the prior quarter and the corresponding quarter of the prior year due to an escalation in demand for our inspection, maintenance and repair services on the deepwater infrastructure in the Gulf of Mexico and inspection work related to Hurricane Katrina in 2005. We believe our Subsea Projects segment results for the full-year 2005 will be higher than those achieved in 2004 as the hurricane inspection and repair work continues. We expect a slight decline in our fourth quarter Subsea Projects results from those of the third quarter as a result of normal winter seasonality.

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. We expect the dayrate we receive on theOcean Legend will decline starting mid-May 2006, assuming that our customer exercises its fixed-price renewal option to continue to lease the unit beyond the initial five-year term.

Compared to the corresponding period of 2004, our Inspection revenues and gross margins increased as a result of our efforts to provide more value-added services and to reduce our operating expenses. Inspection revenues and margins declined from the prior quarter as we completed several large jobs in the first half of the year. Although we expect lower fourth quarter results than those we achieved in the third quarter of 2005 due to seasonality, we expect higher revenue and an improvement in margins for the full-year 2005 as compared to 2004, as a result of our operational improvements.

Revenue and margin information is as follows:

Advanced Technologies revenues and gross margins declined in the three- and nine-month periods ended September 30, 2005 due to lower demand. We anticipate our fourth quarter 2005 results to be comparable to those achieved in the third quarter.

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.

Higher compensation expenses related to incentive plans due to our anticipated higher earnings level for 2005 and our higher stock price were the principal causes of the increases in the periods ended September 30, 2005 over the prior periods presented. Unallocated operating expenses in the nine months ended September 30, 2004 included $1.8 million of accumulated transaction costs related to a terminated acquisition effort in the first quarter of 2004.

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:

We own a 50% equity interest in 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 from the immediately preceding quarter was attributable to a suspension of production from the spar in late August as a result of Hurricane Katrina, and production did not resume through the end of the quarter. The spar itself sustained minor damage, but transportation facilities owned and operated by third parties downstream of the platform have been closed to production from damage caused by Hurricane Katrina. We believe there will be minimal production throughput for the platform for the rest of 2005 and cannot predict when full production will resume.

We own 50% of Smit-Oceaneering Cable Systems, L.L.C., 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-laying and maintenance equipment from the venture at a price equal to its adjusted book value. We have a letter of intent to purchase the vessel and expect to close the purchase in early 2006. This purchase will effectively wind-up the venture. We do not anticipate a material impact on our net income from the wind-up of the venture.

In February 2005, we purchased 51% of Pro-Dive Oceaneering Co., a venture that operated our ROVs in Canada, from our partner in that venture. We now own 100% of this company, so the results of its operations from the acquisition date are included in our consolidated financial statements.

Interest expense for the three-month period ended September 30, 2005 increased compared to the corresponding period in the prior year due to higher average debt levels. We have recently borrowed funds under our credit facility to fund business acquisitions, including Grayloc Products in 2005, and the ROV drill support businesses of Stolt Offshore S.A. and Fugro N.V. in 2004.

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%.

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 $8.6 million adjustment to our equity accounts for the nine-month period ended September 30, 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 gains (losses) related to Brazil were $(49,000) and $503,000 for the three-month periods ended September 30, 2005 and 2004, respectively, and $453,000 and $2,000 for the nine-month periods ended September 30, 2005 and 2004, respectively.

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, 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 September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We are currently implementing a new business management system, which we started using for our U.S. operations in July 2005 and which will be phased into our foreign locations starting in 2006. We are taking the necessary steps to monitor and maintain appropriate internal controls during the implementation.

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.

 

* Indicates exhibit previously filed with the Securities and Exchange Commission as indicated and incorporated herein by reference.