Oceaneering International - 10-Q quarterly report FY

 

 

(Mark One)

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code)

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. Yesþ, No o .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o, No þ.

The number of shares of the registrant’s common stock outstanding as of April 27, 2007 was 54,526,688.

 

 

We own a 50% equity interest in Medusa Spar LLC. Medusa Spar LLC owns a 75% interest in a production spar platform in the Gulf of Mexico. Medusa Spar LLC’s revenue is derived from processing oil and gas production for a fee based on the volumes processed through the platform (“throughput”). The majority working interest owner of the Medusa field, the spar’s initial location, has committed to deliver a minimum throughput, which we expect will generate sufficient revenue to repay Medusa Spar LLC’s bank debt. Medusa Spar LLC financed its acquisition of its 75% interest in the production spar platform using approximately 50% debt and 50% equity from its equity holders. We believe our maximum exposure to loss from our investment in Medusa Spar LLC is our $63 million investment. Medusa Spar LLC is a variable interest entity. As we are not the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation Number 46(R), Consolidation of Variable Interest Entities, we are accounting for our investment in Medusa Spar LLC under the equity method of accounting. Equity earnings from Medusa Spar LLC reflected in our financial statements are after amortization of our initial acquisition costs. The following are summarized 100% statements of income of Medusa Spar LLC.

Scheduled maturities of our long-term debt as of March 31, 2007 were as follows:

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes. This interpretation clarifies the criteria for recognizing income tax benefits under Statement of Financial Accounting Standards (“SFAS”) No. 109,Accounting for Income Taxes, and requires additional financial statement disclosures about uncertain tax positions. The interpretation became effective for us beginning January 1, 2007, and we made an adjustment of $1.6 million to our retained earnings account as of January 1, 2007 to record the effect of our adoption of this standard.

Comprehensive income is the total of net income and all nonowner changes in equity. The amounts of comprehensive income for the periods indicated are as follows:

Amounts comprising other elements of comprehensive income in Shareholders’ Equity are as follows:

All statements in this quarterly report on Form 10-Q, other than statements of historical facts, including, without limitation, statements regarding our expectations about 2007 net income and segment results, our plans for future operations, the adequacy of our working capital, our expectations about the profit contribution from our investment in Medusa Spar LLC, our expectations regarding inspection and repair work for the remainder of 2007 made necessary by hurricanes, our backlog, our anticipated tax rate for 2007 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 “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” in Part I of our annual report on Form 10-K for the year ended December 31, 2006. 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.

The following discussion should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2006.

We generate approximately 90% of our revenue from our services and products provided to the oil and gas industry. Our first quarter net income was higher than any previous first quarter in our company’s history. Compared to the fourth quarter of 2006, quarterly net income increased due to improved performances from our Subsea Products and Subsea Projects segments.

For 2007, we anticipate net income to be higher than 2006, mostly due to increases in operating income in our Subsea Products and ROV segments.

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, 2006 under the heading “Critical Accounting Policies and Estimates” in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operation.

For a discussion of new accounting standards applicable to us, see the discussion in Note 9 to the Consolidated Financial Statements contained in Item 1 of this quarterly report on Form 10-Q.

We consider our liquidity and capital resources adequate to support our existing operations and capital commitments. At March 31, 2007, we had working capital of $300 million, including $26 million of cash and cash equivalents. Additionally, we had $143 million of borrowing capacity available under our $300 million revolving credit facility.

Our capital expenditures were $51 million during the first quarter of 2007, as compared to $46 million during the first quarter last year. Capital expenditures in 2007 included expenditures for additions and upgrades to our ROV fleet to expand the fleet, upgrades to a dynamically positioned vessel, completion of a saturation diving system, and facility expansions in the U.K., Norway, Morgan City and Houston. Our facility expansions in the U.K., Norway and Houston relate to our Subsea Products manufacturing operations and our Morgan City expansion will support our ROV and Subsea Projects operations. We added seven ROVs to our fleet during the three months ended March 31, 2007, resulting in a total of 193 systems in the fleet. We have chartered the Ocean Intervention III from another party for an initial term of three years expected to start in May 2007. We have also chartered the Mærsk Attender for an initial term of one year, with two one-year extension options. Both the Ocean Intervention III and the Mærsk Attender will be equipped with two of our work-class ROVs and will work on either ultra-deepwater inspection, repair and maintenance or hurricane damage projects in the Gulf of Mexico. We have obtained one-

year contracts for each of these vessels, each with customer options for up to two additional one-year periods. Capital expenditures in 2006 included additions and upgrades to our ROV fleet to expand the fleet and replace older units we retired. In 2006, we also purchased (1) an oil tanker for possible future conversion to a mobile offshore production system in the event we obtain a suitable contract, and (2) the vessel from our cable-lay and maintenance joint venture. We subsequently sold that vessel in the third quarter of 2006.

We had no material contractual commitments for capital expenditures at March 31, 2007. We currently estimate that our capital expenditures will be approximately $150 million for 2007.

At March 31, 2007, we had long-term debt of $237 million and a 24% debt-to-total-capitalization ratio. We have $80 million of Senior Notes outstanding, to be repaid from 2007 through 2010, and $157 million outstanding under our $300 million revolving credit facility, which is scheduled to expire in January 2012. 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, 2007, our cash and cash equivalents remained at $26 million. We generated $4 million in cash from operating activities, used $47 million of cash in investing activities and obtained $43 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 the cash provided by operating activities, to pay for those capital expenditures and to finance an increase in working capital of $56 million. The increase in working capital was the result of higher accounts receivable, and higher inventories in anticipation of increased Subsea Products sales and spare parts for ROVs necessitated by more units, our continuing construction of more ROVs and higher activity levels.

In September 2002, our Board of Directors authorized us to repurchase up to 6 million shares of our common stock, subject to a $75 million aggregate purchase price limitation. Under this plan, we have repurchased an aggregate of 1,795,600 shares of common stock through March 31, 2007, 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 October compared to the rest of the year. In each of the periods presented, Subsea Projects had higher-than-normal revenue due to work made necessary by severe hurricanes in the Gulf of Mexico in 2005. Revenue in our ROV segment is slightly seasonal, with our first quarter generally being the low quarter of that year. The level of our ROV seasonality depends on the number of ROVs we have in construction support, which is more seasonal than drilling support.

Revenue in each of our Subsea Products, Mobile Offshore Production Systems and Advanced Technologies segments has generally not been seasonal.

The table that follows sets forth our revenues and margins for our Oil and Gas business for the periods indicated.

In general, our Oil and Gas business focuses on supplying services and products to the deepwater sector of the offshore market. In the past couple of years, we have had a high level of demand due to historically high hydrocarbon prices and hurricane damages to the oil and gas producing infrastructure in the Gulf of Mexico. We expect these market conditions to continue through 2007.

Our ROV segment revenues reflect the utilization percentages, fleet sizes and average pricing of the respective periods. Margins were favorably impacted in the first quarter of 2007 compared to the corresponding quarter of the prior year by increases in the average revenue per day of ROV utilization and the number of days on hire. The decrease in margins compared to the immediately preceding quarter was attributable to a slight seasonal decline in demand and higher costs for the recruitment, training and retention of personnel. We expect our 2007 ROV operating income to be $20 million to $30 million higher in 2007 than 2006.

For our Subsea Products segment, margins improved for all periods presented. As compared to the first quarter of the prior year, improvements were attributable to increased umbilical and specialty product sales and margin percentage improvements. Compared to the quarter ended December 31, 2006, profitability improved from higher sales and margin percentages in our specialty products group and improved operational efficiencies in our umbilical manufacturing. We expect our 2007 Subsea Products operating income to be $30 million to $45 million more than 2006, due to improved umbilical manufacturing results and higher specialty product sales. We expect that our Subsea Product margin percentages will be lower for the full year 2007 than they were for the first quarter due to our anticipated product mix. Our Subsea Products backlog remained at approximately the same level: $361 million at March 31, 2007 compared to $359 million at December 31, 2006.

For our Subsea Projects segment, our gross margin increased compared to both the corresponding quarter of the prior year and the preceding quarter due to $3.5 million of margin recognized in the first quarter of 2007 from the gain on the sale of a vessel. We expect our 2007 results for Subsea Projects to be similar to those of 2006.

Our Inspection margins increased compared to the first quarter of 2006 because we did not experience as much seasonal decline as usual, with higher demand in the U.K., Africa and the U.S. Gulf of Mexico. We expect comparable profitability for the full-year 2007 as compared to 2006.

Our Mobile Offshore Production Systems’ three main assets were working under the same contracts as in 2006. The lower revenue and margins in the first quarter of 2007 compared to the corresponding quarter of the prior year were the result of a lower dayrate going into effect in mid-May for the use of the Ocean Legend, as per the renewal option terms in the existing contract. The decrease in revenue and operating income from the immediately preceding quarter were due to a decrease in project engineering revenue. We have received notice of termination of the charter of our production barge San Jacinto effective July 2007. We are marketing this system for sale or new charter. We do not expect the loss of this contract to be material to our financial condition or results of operations.

Revenue and margin information is as follows:

Advanced Technologies’ revenue and margins for the three months ended March 31, 2007 increased over the first quarter of the prior year due to increased work for the U.S. Navy on submarines, waterfront facilities and general engineering services. Expenses incurred in 2006 to transfer The Performer to oilfield service in 2006 negatively affected 2006 margins for the first quarter of the prior year. For 2007, we expect our Advanced Technologies’

operating income will be higher than 2006 from higher U.S. Navy demand for general engineering services and submarine repair, maintenance and engineering projects.

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 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.

Our higher staffing level, including technology support, was the principal cause of the increase in Unallocated Expenses in the three-month period ended March 31, 2007 compared to the corresponding period of the prior year. Compared to the preceding quarter, our general and administrative unallocated expenses were lower because the preceding period included a charge of $2.8 million associated with an amendment to a service agreement we entered into with our prior chief executive officer. For 2007, we expect our Unallocated Expenses to increase from 2006 levels in line with the increase in the size of our operations.

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 certain specified surrounding areas. The lower earnings for the quarter ended March 31, 2007 compared to the first quarter of the prior year resulted from declining production as the reservoirs currently being produced deplete normally. For 2007, we anticipate lower equity income than in 2006 from our Medusa Spar LLC investment due to declines in production from the currently producing reservoirs.

Interest expense for the three-month period ended March 31, 2007 increased compared to the first quarter of the prior year due to higher average debt levels.

Foreign currency losses, which are included in other income, net, of $0.4 million for the three-month period ended March 31, 2007, related primarily to the devaluation of the U.S. Dollar against the Brazilian Real and the U.K. Pound Sterling.

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 2007 to be 35.9%.

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 several 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 adjustments of $2.6 million and $2.9 million to our equity accounts for the three-month periods ended March 31, 2007 and 2006, respectively, to reflect the net impact of the U.S. Dollar against various foreign currencies for locations where the functional currency is not the U.S. Dollar.

In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 that term is defined in Rules 13a–15(e) and 15d–15(e) under the Exchange Act) 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, 2007 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, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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.