Oceaneering International - 10-Q quarterly report FY

(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 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):

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 October 29, 2007 was 55,072,938.

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 and 2008 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 and 95% of our operating income before Unallocated Expenses from our services and products provided to the oil and gas industry. Our net income for each of the three- and nine-month periods ended September 30, 2007 was higher than any corresponding periods in our company’s history. Compared to the second quarter of 2007, quarterly net income increased due to improved performances from our ROV, Subsea Products and Subsea Projects segments.

For the full-year 2007, we anticipate net income to be approximately 40% higher than 2006, mostly due to increases in operating income in our Subsea Products, ROV and Subsea Projects segments.

For 2008, we anticipate our net income to be approximately 15% higher than 2007, with increased ROV and Subsea Products operating income from continued demand growth, and decreased Subsea Projects operating income due to decreasing demand for our diving and shallow water vessel services as hurricane damage-related projects near completion and scheduled regulatory drydock inspections of four of our six owned vessels.

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 10 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 September 30, 2007, we had working capital of $369 million, including $44 million of cash and cash equivalents. Additionally, we had $97 million of borrowing capacity available under our $300 million revolving credit facility.

Our capital expenditures, including business acquisitions, were $178 million during the first nine months of 2007, as compared to $134 million during the corresponding period last year. Capital expenditures in 2007 included expenditures for: the purchase of Norway-based Ifokus Engineering AS, a designer and manufacturer of specialty subsea products, for $20 million; additions and upgrades to our ROV fleet; vessel upgrades; the acquisition of a small inspection company in the United Kingdom; and facility expansions in the United Kingdom, Norway, Morgan City, LA and Houston. Our facility expansions in the United Kingdom, 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 24 ROVs to our fleet and disposed of six older units during the nine months ended September 30, 2007, resulting in a total of 204 systems in the fleet. We have chartered theOcean Intervention III from another party for an initial term of three years which began in May 2007, with extension options for up to six additional years. The Ocean Intervention III is equipped with two of our work-class ROVs. We obtained a one-year contract for the vessel, with customer options for up to two additional one-year periods, to work on shallow water hurricane damage-related projects in the Gulf of Mexico. We have received notice that the customer has declined to exercise the extension options, and we now plan to utilize the Ocean Intervention IIIon deepwater projects after it has completed its current commitment. We have also chartered theOlympic Intervention IV for an initial term of five years, which we anticipate will begin in the third quarter of 2008. The Olympic Intervention IV will be outfitted with two high-specification work-class ROVs, and we anticipate using the vessel to perform subsea hardware installation and inspection, repair and maintenance projects, and to conduct well intervention services in the ultra-deep waters of the Gulf of Mexico. Capital expenditures in 2006 included additions and upgrades to our ROV fleet. 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 the cable-lay vessel in the third quarter of 2006. We had also commenced improvements in our Subsea Products manufacturing facilities, including the addition of equipment to increase the capacity of these facilities.

We had no material contractual commitments for capital expenditures at September 30, 2007. We currently estimate that our total capital expenditures, including completed business acquisitions, for 2007 will be approximately $220 million.

At September 30, 2007, we had long-term debt of $263 million and a 23% debt-to-total-capitalization ratio. We have $60 million of Senior Notes outstanding, to be repaid from 2008 through 2010, and $203 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. The amount available under the credit agreement can be increased to $450 million upon our agreement with the existing or additional lenders. 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, 2007, our cash and cash equivalents rose to $44 million. Our cash balance was higher than it was at December 31, 2006 due to our receipt of customer payments close to the end of the quarter, and too late to be used to pay down debt under our revolving credit agreement before the end of the quarter. We generated $109 million in cash from operating activities, used $171 million of cash in investing activities and obtained $79 million of cash from financing activities. The cash used in investing activities was used primarily for the capital expenditures and business acquisitions 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 business acquisitions and to finance an increase in working capital of $125 million. The increase in working capital was the result of higher accounts receivable and higher inventories, partially offset by increases in accounts payable and accrued liabilities. Receivables increased due to increased revenue, and inventory increased due to Subsea Products backlog requirements, increased ROV activity levels and continuing construction of new ROVs.

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 September 30, 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 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 2004 and 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 damage to the oil and gas producing infrastructure in the Gulf of Mexico. We expect these market conditions to continue through 2007. We expect hurricane-related repair work in our Subsea Projects segment to decline in 2008 as we complete projects.

Our ROV segment revenue reflects the utilization percentages, fleet sizes and average pricing of the respective periods. Operating income was favorably impacted in the three- and nine-month periods of 2007 compared to the corresponding periods of the prior year and the immediately preceding quarter by increases in the average revenue per day of ROV utilization and the number of days on hire. We expect our full-year 2007 ROV operating income to be $25 million to $30 million higher than 2006.

The increases in our Subsea Products revenue and operating income for the three- and nine-month periods ended September 30, 2007 compared to the corresponding periods of the prior year and the immediately preceding quarter were attributable to increased umbilical and specialty product sales. Margin percentages improved due to changes in product mix and increased throughput at our umbilical plants. We expect our full-year 2007 Subsea Products operating income to be $45 million to $50 million more than 2006, due to improved umbilical manufacturing results and higher specialty product sales. Our Subsea Products backlog was $344 million at September 30, 2007 compared to $359 million at December 31, 2006.

Our Subsea Projects operating income was higher in the three- and nine-month periods ended September 30, 2007 than that of the corresponding periods of the prior year and the immediately preceding quarter, due to an increase in hurricane damage-related projects, demand growth for our deepwater subsea equipment installation and inspection and repair and maintenance services. Our margin percentages decreased compared to the corresponding quarter of the prior year, as we chartered two vessels to perform hurricane damage-related repair projects, and our margin percentage is not as high when we charter vessels due to the higher third-party cost content. We expect our full-year 2007 operating income for Subsea Projects to be $25 million to $30 million higher than that of 2006.

Our Inspection margins increased as a result of strong demand in most of the geographic areas we serve. We expect higher operating income for the full-year 2007 as compared to 2006 from higher pricing and selling more value-added services.

Our Mobile Offshore Production Systems segment’s three main assets were working under the same contracts as in 2006. However, the contract for the use of our vessel PB San Jacinto was terminated and the vessel went off-hire in July 2007. The higher margins in the nine-month period ended September 30, 2007 compared to the corresponding period of the prior year were the result of a $2.8 million contract settlement reached in the quarter ended June 30, 2007 related to the contract termination for the use of the PB San Jacinto, as the customer did not return the unit in the condition specified in the contract. We are evaluating our options for this system, and a sale of the vessel appears to be the most likely outcome. We do not expect the loss of this contract to be material to our financial condition or results of operations. The lower margins and operating income for the quarter ended September 30, 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, and the termination of the San Jacinto contract described above.

Revenue and margin information is as follows:

Our Advanced Technologies segment’s revenue and margins for the three- and nine-month periods ended September 30, 2007 increased over the corresponding periods of the prior year due to increased work for the U.S. Navy on submarines and waterfront facilities and general engineering services. For the full-year 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 long-term incentive expenses were the principal cause of the increases in Unallocated Expenses in the three- and nine-month periods ended September 30, 2007 compared to the corresponding periods of the prior year. In the quarter ended September 30, 2006, there was a decline in our common stock price, which caused a decline in our long-term incentive expenses for the periods ended September 30, 2006. The increase in our gross margin expenses for the three months ended September 30, 2007 compared to the immediately preceding quarter was due to higher accruals for annual bonuses, as we anticipate that we will exceed our 2007 net income target. For the full-year 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 three- and nine-month periods ended September 30, 2007 compared to the corresponding periods 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- and nine-month periods ended September 30, 2007 increased compared to the corresponding periods of the prior year due to higher average debt levels.

Foreign currency gains of $0.8 million for the nine-month period ended September 30, 2007 are included in other income (expense) and are related primarily to the devaluation of the U.S. Dollar against the Brazilian Real.

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 35.0%. Tax credits reduced our effective tax rates to 34.7% and 35.0% for the three- and nine-month periods ended September 30, 2007, respectively.

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 $24.3 million and $8.4 million to our equity accounts for the nine-month periods ended September 30, 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 September 30, 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 September 30, 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.