SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2003 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission file number 1-12289
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SEACOR SMIT INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3542736
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
11200 Richmond, Suite 400, Houston, Texas 77082
- -------------------------------------------------- ---------------------------
(Address of Principal Executive Offices) (Zip Code)
(281) 899-4800
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The total number of shares of common stock, par value $.01 per share,
outstanding as of November 4, 2003 was 18,691,345. The Registrant has no other
class of common stock outstanding.
SEACOR SMIT INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002...................................................1
Condensed Consolidated Statements of Operations for each of the
Three and Nine Months Ended September 30, 2003 and 2002....................................2
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2003 and 2002......................................3
Notes to the Condensed Consolidated Financial Statements........................................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................18
Item 4. Controls and Procedures.............................................................................19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K....................................................................19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEACOR SMIT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA, UNAUDITED)
September 30, December 31,
2003 2002
------------------ ------------------
ASSETS
Current Assets:
Cash and cash equivalents.................................................... $ 261,826 $ 342,046
Available-for-sale securities................................................ 56,787 7,984
Trade and other receivables, less doubtful account allowance of $1,491
and $1,421 at September 30, 2003 and December 31, 2002, respectively...... 116,933 106,120
Prepaid expenses and other................................................... 26,171 17,041
------------------ ------------------
Total current assets....................................................... 461,717 473,191
------------------ ------------------
Investments, at Equity, and Receivables from 50% or Less Owned Companies........ 60,672 61,359
Available-for-Sale Securities................................................... - 80,641
Property and Equipment.......................................................... 977,903 988,443
Less accumulated depreciation................................................ (273,150) (250,475)
------------------ ------------------
Net property and equipment................................................. 704,753 737,968
------------------ ------------------
Construction Reserve Funds...................................................... 109,759 95,260
Other Assets.................................................................... 33,729 38,688
------------------ ------------------
$ 1,370,630 $ 1,487,107
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt............................................ $ 113 $ 614
Accounts payable and accrued expenses........................................ 21,315 31,799
Other current liabilities.................................................... 33,708 39,008
------------------ ------------------
Total current liabilities.................................................. 55,136 71,421
------------------ ------------------
Long-term Debt.................................................................. 332,213 402,118
Deferred Income Taxes........................................................... 180,167 174,987
Deferred Gains and Other Liabilities............................................ 32,413 31,938
Minority Interest in Subsidiaries............................................... 2,171 1,692
Stockholders' Equity:
Common stock, $.01 par value, 24,394,640 and 24,307,235 shares
issued at September 30, 2003 and December 31, 2002, respectively.......... 244 243
Additional paid-in capital................................................... 407,045 403,590
Retained earnings............................................................ 533,114 519,430
Less 5,665,895 and 4,386,143 shares held in treasury at
September 30, 2003 and December 31, 2002, respectively, at cost........... (175,097) (127,587)
Less unamortized restricted stock compensation............................... (3,564) (2,217)
Accumulated other comprehensive income:
Cumulative translation adjustments....................................... 4,693 5,750
Unrealized gain on available-for-sale securities......................... 2,095 5,742
------------------ ------------------
Total stockholders' equity.............................................. 768,530 804,951
------------------ ------------------
$ 1,370,630 $ 1,487,107
================== ==================
The accompanying notes are an integral part of these financial statements
and should be read in conjunction herewith.
1
SEACOR SMIT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA, UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
2003 2002 2003 2002
------------- -------------- -------------- --------------
Operating Revenues...............................................$ 103,234 $ 102,137 $ 305,253 $ 303,450
------------- -------------- -------------- --------------
Costs and Expenses:
Operating expenses............................................. 72,264 64,297 208,786 182,586
Administrative and general..................................... 13,676 13,434 41,146 38,597
Depreciation and amortization.................................. 13,411 14,381 41,755 42,253
------------- -------------- -------------- --------------
99,351 92,112 291,687 263,436
------------- -------------- -------------- --------------
Operating Income.................................................. 3,883 10,025 13,566 40,014
------------- -------------- -------------- --------------
Other Income (Expense):
Interest on debt............................................... (4,603) (3,503) (14,528) (11,300)
Interest income................................................ 1,540 2,043 5,966 6,012
Debt extinguishments........................................... - (2,338) (2,091) (2,338)
Income from equipment sales and retirements, net............... 2,349 2,321 7,910 5,558
Gain from Chiles Merger........................................ - 19,719 - 19,719
Gain (loss) from derivative transactions, net.................. 443) (3,251) 3,930 (2,619)
Gain (loss) from foreign currency transactions, net............ (1,714) 2,203 115 5,454
Gain from sale of marketable securities, net................... 2,411 3,377 5,852 2,699
Other, net..................................................... (15) 4 (759) 4
------------- -------------- -------------- --------------
(475) 20,575 6,395 23,189
------------- -------------- -------------- --------------
Income Before Income Taxes, Minority Interest and Equity in
Earnings of 50% or Less Owned Companies........................ 3,408 30,600 19,961 63,203
Income Tax Expense................................................ 1,334 10,369 7,329 21,768
------------- -------------- -------------- --------------
Income Before Minority Interest and Equity in Earnings of 50%
or Less Owned Companies........................................ 2,074 20,231 12,632 41,435
Minority Interest in Income of Subsidiaries....................... (112) (6) (451) (194)
Equity in Earnings of 50% or Less Owned Companies................. 935 1,070 1,503 3,708
------------- -------------- -------------- --------------
Net Income.......................................................$ 2,897 $ 21,295 $ 13,684 $ 44,949
============= ============== ============== ==============
Basic Earnings Per Common Share..................................$ 0.16 $ 1.06 $ 0.71 2.24
============= ============== ============== ==============
Diluted Earnings Per Common Share................................$ 0.15 $ 1.02 $ 0.71 2.16
============= ============== ============== ==============
Weighted Average Common Shares:
Basic.......................................................... 18,629,664 20,051,743 19,182,564 20,056,435
Diluted........................................................ 18,785,256 21,186,390 19,479,462 21,325,804
The accompanying notes are an integral part of these financial statements
and should be read in conjunction herewith.
2
SEACOR SMIT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
Nine Months Ended September 30,
2003 2002
------------------- ------------------
Net Cash Provided by Operating Activities....................................... $ 12,230 $ 52,144
------------------- ------------------
Cash Flows from Investing Activities:
Purchase of property and equipment........................................... (101,314) (88,565)
Proceeds from sale of property and equipment................................. 103,962 102,019
Purchase of available-for-sale securities.................................... (24,469) .. (26,028)
Proceeds from sale of available-for-sale securities.......................... 58,057 60,871
Investments in and advances to 50% or less owned companies................... (7,267) (22)
Principal payments on notes due from 50% or less owned companies............. 1,318 12,812
Dividends received from 50% or less owned companies.......................... 11,569 1,290
Net increase in construction reserve funds................................... (14,499) (32,306)
Cash settlements from derivative transactions................................ (171) (5,655)
Chiles Merger................................................................ - 25,365
Other, net................................................................... 957 722
------------------- ------------------
Net cash provided by investing activities................................. 28,143 50,503
------------------- ------------------
Cash Flows from Financing Activities:
Payments of long-term debt................................................... (71,341) (87,769)
Premium paid with 5-3/8% note extinguishment................................. (632) -
Net proceeds from sale of 5-7/8% Notes....................................... - 196,836
Proceeds from issuance of long-term debt..................................... - 231
Proceeds from exercise of stock options...................................... 33 349
Proceeds from employee stock purchase plan................................... 670 693
Common stock acquired for treasury........................................... (48,108) (5,602)
Dividends paid to minority interest holders.................................. (179) -
------------------- ------------------
Net cash provided by (used in) financing activities....................... (119,557) 104,738
------------------- ------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................... (1,036) 454
------------------- ------------------
Net Increase (Decrease) in Cash and Cash Equivalents............................ (80,220) 207,839
Cash and Cash Equivalents, Beginning of Period.................................. 342,046 180,394
------------------- ------------------
Cash and Cash Equivalents, End of Period........................................ $ 261,826 $ 388,233
=================== ==================
The accompanying notes are an integral part of these financial statements
and should be read in conjunction herewith.
3
SEACOR SMIT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial information for the three and nine-month
periods ended September 30, 2003 and 2002 has been prepared by the Company and
was not audited by its independent public accountants. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
have been made to present fairly the financial position, results of operations
and cash flows of the Company at September 30, 2003 and for all reported
periods. Results of operations for the interim periods presented are not
necessarily indicative of the operating results for the full year or any future
periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
related notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002.
Unless the context otherwise indicates, any references in this Quarterly Report
on Form 10-Q to the "Company" refer to SEACOR SMIT Inc. and its consolidated
subsidiaries, and any references in this Quarterly Report on Form 10-Q to
"SEACOR" refer to SEACOR SMIT Inc.
Certain reclassifications of prior period information have been made to conform
to the presentation of current period information.
2. CHANGES IN ACCOUNTING POLICIES AND ESTIMATES
Effective January 1, 2003, the Company adopted Statement of Financial Accounting
Standard No. 145, Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections ("SFAS 145"). This statement,
among other matters, eliminates the requirement that gains or losses on the
early extinguishment of debt be classified as extraordinary items and provides
guidance when gains or losses on the early retirement of debt should or should
not be reflected as an extraordinary item. During the nine-month period ended
September 30, 2003, the Company redeemed all of the then outstanding principal
amount of its 5-3/8% Convertible Subordinated Notes due 2006 (the "5-3/8%
Notes") and prepaid all outstanding principal and accrued interest payable to
holders of notes issued by the Company in connection with its acquisition of
Putford Enterprises Ltd. (the "Putford Notes"). During the three and nine-month
periods ended September 30, 2002, the Company redeemed $11,000,000 principal
amount of its 5-3/8% Notes, retired $13,000,000 principal amount of its 7.2%
Senior Notes due 2009 (the "7.2% Notes") and repaid the then outstanding balance
of its revolving credit facility maturing in February 2007 (the "Revolver"). In
accordance with SFAS 145, the early retirement of the 5 3/8% Notes, the Putford
Notes, a portion of the 7.2% Notes and the Revolver resulted in charges against
income from continuing operations of $2,091,000 in the nine-month period ended
September 30, 2003 and $2,338,000 (previously reported as an extraordinary item,
net of tax) in the three and nine-month periods ended September 30, 2002. These
charges against income consisted of premium payments and the write off of
related unamortized deferred financing costs and debt discount.
Effective January 1, 2003, the Company changed its estimated residual value for
newly constructed supply, towing supply and anchor handling towing supply vessel
assets from 10% to 5%. The effect on income of this change in accounting
estimate was not material.
3. COMPREHENSIVE INCOME
For the three-month periods ended September 30, 2003 and 2002, total
comprehensive income (loss) was ($2,236,000) and $24,750,000, respectively. For
the nine-month periods ended September 30, 2003 and 2002, total comprehensive
income was $8,980,000 and $53,397,000, respectively. Other comprehensive income
(loss) in 2003 and 2002 consisted of gains and losses from foreign currency
translation adjustments and unrealized holding gains and losses on
available-for-sale securities.
4
4. LONG-TERM DEBT
On February 20, 2003, the Company redeemed all of its then outstanding 5-3/8%
Notes in the aggregate principal amount of $35,319,000. On March 4, 2003, the
Company repaid all of its then outstanding 5.467% Subordinated Promissory Notes
(the "5.467% Notes") in the aggregate principal amount of $23,200,000. On April
7, 2003, the Company repaid all of its then outstanding Putford Notes in the
aggregate principal amount of (pound)7,500,000 or $11,705,000. In addition, the
Company repaid various other promissory notes in the aggregate principal amount
of $1,117,000 during the nine-month period ended September 30, 2003.
5. STOCK AND DEBT REPURCHASE PROGRAM
During the nine-month period ended September 30, 2003, the Company acquired a
total of 1,299,040 shares of its common stock for treasury at an aggregate cost
of $48,108,000. During 2003, the Company's Board of Directors increased the
Company's authorization for security repurchases and, as of November 12, 2003,
$65,000,000 of such authority remains available for future purchases. The
Company may repurchase its common stock, its 7.2% Notes and its 5-7/8% Senior
Notes due 2012 (the "5-7/8% Notes") through open market purchases, privately
negotiated transactions or otherwise, depending on market conditions.
6. EARNINGS PER SHARE
Basic earnings per share were computed based on the weighted average number of
common shares issued and outstanding during the relevant periods. Diluted
earnings per share were computed based on the weighted average number of common
shares issued and outstanding plus all potentially dilutive common shares that
would have been outstanding in the relevant periods assuming the vesting of
restricted stock grants and the issuance of common shares for stock options and
convertible subordinated notes through the application of the treasury stock and
if-converted methods. Diluted earnings per share exclude certain options and
share awards totaling 242,200 and 329,485 for the three and nine-month periods
ended September 30, 2003, respectively, and 168,100 and 69,300 for the three and
nine-month periods ended September 30, 2002, respectively, as the effect of
their inclusion in the computation would have been antidilutive.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
Per Per
Income Shares Share Income Shares Share
---------- ------------ -------- ------------ ---------- --------
2003
- ----
BASIC EARNINGS PER SHARE:
Net income................................... $ 2,897,000 18,629,664 $ 0.16 $ 13,684,000 19,182,564 $ 0.71
======== ========
EFFECT OF DILUTIVE SECURITIES, NET OF TAX:
Options and restricted stock................. - 155,592 - 158,704
Convertible securities....................... - - 167,000 138,194
------------ ------------ ------------ ----------
DILUTED EARNINGS PER SHARE:
Income available to common stockholders
plus assumed conversions.................. $ 2,897,000 18,785,256 $ 0.15 $ 13,851,000 19,479,462 $ 0.71
============ ============ ======== ============ ========== ========
2002
- ----
BASIC EARNINGS PER SHARE:
Net income................................... $ 21,295,000 20,051,743 $ 1.06 $ 44,949,000 20,056,435 $ 2.24
======== ========
EFFECT OF DILUTIVE SECURITIES, NET OF TAX:
Options and restricted stock................. - 237,081 - 268,934
Convertible securities....................... 290,000 897,566 1,155,000 1,000,435
------------ ------------ ------------ ----------
DILUTED EARNINGS PER SHARE:
Income available to common stockholders
plus assumed conversions.................. $ 21,585,000 21,186,390 $ 1.02 $ 46,104,000 21,325,804 $ 2.16
============ ============ ======== ============ ========== ========
5
7. STOCK COMPENSATION
Under Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
companies could either adopt a "fair value method" of accounting for its stock
based compensation plans or continue to use the "intrinsic value method" as
prescribed by APB Opinion No. 25. The Company has elected to continue accounting
for its stock compensation plans using the intrinsic value method. Had
compensation costs for the plans been determined using a fair value method
consistent with SFAS 123, the Company's net income and earnings per share would
have been reduced to the following pro forma amounts for the three and
nine-month periods ended September 30, 2003, and 2002:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
Earnings Per Share Earnings Per Share
------------------ -------------------
Net Income Basic Diluted Net Income Basic Diluted
------------- ------- -------- --------------- -------- --------
2003
- ----
AS REPORTED.......................................... $ 2,897,000 $ 0.16 $ 0.15 $ 13,684,000 $ 0.71 $ 0. 71
====== ====== ======= =======
Add: stock based compensation included in net income 425,000 1,331,000
Less: stock based compensation using fair value
method.................................... (709,000) (2,145,000)
------------- ---------------
PRO FORMA............................................ $ 2,613,000 $ 0.14 $ 0.14 $ 12,870,000 $ 0.67 $ 0.67
============= ====== ======= =============== ======= =======
2002
- ----
AS REPORTED...........................................$ 21,295,000 $ 1.06 $ 1.02 $ 44,949,000 $ 2.24 $ 2.16
====== ====== ======== =======
Add: stock based compensation included
in net income........................................ 383,000 1,124,000
Less: stock based compensation using
fair value method.................................... (882,000) (2,622,000)
-------------- --------------
PRO FORMA............................................. $ 20,796,000 $ 1.04 $.1.00 $ 43,451,000 $ 2.17 $ 2.09
============== ======= ====== ============== ======= =======
The effects of applying a fair value method consistent with SFAS 123 in this pro
forma disclosure are not indicative of future events and the Company anticipates
that it will award additional stock based compensation in future periods.
8. COMMITMENTS AND CONTINGENCIES
Future capital expenditures, based upon the Company's commitments at September
30, 2003, to purchase 9 newly constructed offshore support vessels, 208 newly
constructed inland river hopper barges, and 7 newly constructed helicopters will
approximate $121,400,000. Deliveries to the Company of newly constructed
vessels, barges and helicopters are expected over the next 15 months.
In addition, the Company holds options to purchase 11 additional newly
constructed helicopters and 183 additional newly constructed inland river hopper
barges.
In connection with an examination of the Company's income tax return for fiscal
year 2001, the Internal Revenue Service (IRS) has indicated that it may assert a
deficiency in the amount of taxes paid based on the manner in which vessel
assets were classified for the purpose of depreciation. If the IRS were able to
sustain its position, the Company would be required to pay currently certain
amounts, which have not yet been determined, that are currently reported as
long-term deferred tax obligations. Other than a potential charge for interest
related to any such deficiencies, the final resolution of this matter should not
have an effect on the Company's results of operations. The Company intends to
vigorously defend its position and to contest any deficiency that may be
asserted.
9. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51 ("FIN 46"). This interpretation provides guidance on the identification
of, and the financial reporting for, variable interest entities, as defined.
Consolidation of variable interest entities is required under FIN 46 only when a
company will absorb a majority of the variable interest entity's expected
losses, receive a majority of the variable interest entity's expected residual
returns, or both. This interpretation applied immediately to a variable interest
entity created or acquired after January 31, 2003. For variable entities
acquired before February 1, 2003, this interpretation was applied effective July
1, 2003. The adoption of FIN 46 did not have a material impact on the Company's
financial position or results of its operations.
6
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150").
This statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement applied immediately for financial instruments entered
into or modified after May 31, 2003. For financial instruments entered into or
modified before June 1, 2003, this statement was applied effective July 1, 2003.
The adoption of SFAS 150 did not have a material impact on the Company's
financial position or results of its operations.
10. SEGMENT INFORMATION
Accounting standards require public business enterprises to report information
about each of their operating business segments that exceed certain quantitative
thresholds or meet certain other reporting requirements. Operating business
segments have been defined as a component of an enterprise about which separate
financial information is available and is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company's basis of segmentation and its basis of measurement of
segment profit have not changed from those previously described in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2002, except
for a change in certain vessels' estimated residual values as described in Note
2 herein.
The Company's most significant business segment, offshore marine services, is
primarily engaged in the operation of a diversified fleet of offshore support
vessels serving oil and gas exploration and development activities in the U.S.
Gulf of Mexico, the North Sea, West Africa, Asia, Latin America and other
international regions. The Company's vessels deliver cargo and personnel to
offshore installations, handle anchors for drilling rigs and other marine
equipment, support offshore construction and maintenance work, provide standby
safety services, and support the Company's environmental service segment's oil
spill response activities. From time to time, vessels service special projects,
such as well stimulation, seismic data gathering and freight hauling. In
addition to vessel services, the Company's offshore marine services business
offers logistics services, which include shorebase, marine transport and other
supply chain management services also in support of offshore oil and gas
exploration and development operations.
The Company's environmental services segment provides contractual oil spill
response and other services, both domestically and internationally, to those who
store, transport, produce or handle petroleum and certain non-petroleum oils, as
required by the Oil Pollution Act of 1990, as amended ("OPA 90"), various state
regulations and the United Nations' MARPOL 73/78 regulations. Services include
training, consulting and supervision for emergency preparedness, response and
crisis management associated with oil or hazardous material spills, fires and
natural disasters and maintaining specialized equipment for immediate deployment
in response to spills and other events. The Company maintains relationships with
numerous environmental sub-contractors to assist with response operations,
equipment maintenance and provide trained personnel for deploying equipment in a
spill response. When oil spills occur, the Company mobilizes specialized oil
spill response equipment, using either its own personnel or personnel under
contract, to provide emergency response services for both land and marine oil
spills. The Company's clients include tank vessel owner/operators, refiners and
terminal operators, exploration and production facility operators, and pipeline
operators. In accordance with Statement of Financial Accounting Standards No.
131, the Company's environmental services segment has been separately reported
in the segment information presented below due to its recent improvement in
operating results. Certain reclassifications of prior period information have
been made to conform to the current period's reportable segment presentation.
7
Other business segments of the Company include inland river hopper barge
operations, offshore aviation services and equity in earnings of 50% or less
owned companies unrelated to the offshore marine services and environmental
services segments. The Company's offshore aviation services commenced operations
on December 31, 2002 with the acquisition of Tex-Air Helicopters, Inc. The
Company reported its equity in the earnings of Chiles Offshore Inc. ("Chiles"),
an owner and operator of jackup drilling rigs, until Chiles' merger with ENSCO
International Incorporated ("ENSCO") on August 7, 2002 (the "Chiles Merger").
Offshore Other
Marine Environmental Business
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 Services Services Segments Total
- ------------------------------------------------------------- ------------- -------------- -------------- ------------
OPERATING REVENUES :
External customers.........................................$ 81,190 $ 10,611 $ 11,433 $ 103,234
Intersegment................................................ 4 14 617 635
------------- -------------- -------------- ------------
$ 81,194 $ 10,625 $ 12,050 103,869
============= ============== ==============
Elimination................................................. (635)
------------
$ 103,234
============
REPORTABLE SEGMENT PROFIT:
Operating profit (loss)....................................$ 3,432 $ 3,419 $ (152) $ 6,699
Income from equipment sales and retirements, net............ 2,347 2 - 2,349
Equity in earnings (losses) of 50% or less owned companies.. 838 (5) 102 935
Other, net.................................................. (1,708) - (87) (1,795)
------------- -------------- -------------- ------------
$ 4,909 $ 3,416 $ (137) 8,188
============= ============== ==============
RECONCILIATION TO INCOME BEFORE INCOME TAXES,
MINORITY INTEREST AND EQUITY EARNINGS:
Interest expense........................................... (4,603)
Interest income............................................ 1,540
Loss from derivative transactions, net..................... (443)
Gain from sale of marketable securities, net............... 2,411
Corporate expenses......................................... (2,816)
Other, net................................................. 66
Equity in earnings of 50% or less owned companies.......... (935)
------------
$ 3,408
============
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
- -------------------------------------------------------------
OPERATING REVENUES :
External customers.........................................$ 92,894 $ 6,172 $ 3,071 $ 102,137
Intersegment................................................ 66 - - 66
------------- -------------- -------------- ------------
$ 92,960 $ 6,172 $ 3,071 102,203
============= ============== ==============
Elimination................................................. (66)
------------
$ 102,137
============
REPORTABLE SEGMENT PROFIT:
Operating profit...........................................$ 11,647 $ 515 $ 910 $ 13,072
Income from equipment sales and retirements, net............ 2,318 3 - 2,321
Equity in earnings (losses) of 50% or less owned companies.. 1,882 (1) (811) 1,070
Other, net.................................................. 2,180 - 27 2,207
------------- -------------- -------------- ------------
$ 18,027 $ 517 $ 126 18,670
============= ============== ==============
RECONCILIATION TO INCOME BEFORE INCOME TAXES,
MINORITY INTEREST AND EQUITY EARNINGS:
Interest expense........................................... (3,503)
Interest income............................................ 2,043
Debt extinguishment........................................ (2,338)
Loss from derivative transactions, net..................... (3,251)
Gain from sale of marketable securities, net............... 3,377
Gain from Chiles Merger.................................... 19,719
Corporate expenses......................................... (3,047)
Equity in earnings of 50% or less owned companies.......... (1,070)
------------
$ 30,600
============
8
Offshore Other
Marine Environmental Business
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 Services Services Segments Total
- ------------------------------------------------------------- ------------- -------------- -------------- ------------
OPERATING REVENUES :
External customers.........................................$ 241,840 $ 32,272 $ 31,141 $ 305,253
Intersegment................................................ 15 41 1,345 1,401
------------- -------------- -------------- ------------
$ 241,855 $ 32,313 $ 32,486 306,654
============= ============== ==============
Elimination................................................. (1,401)
------------
$ 305,253
============
REPORTABLE SEGMENT PROFIT:
Operating profit...........................................$ 12,031 $ 8,151 $ 1,584 $ 21,766
Income (loss) from equipment sales and retirements, net..... 8,238 83 (411) 7,910
Equity in earnings (losses) of 50% or less owned companies.. 1,993 (2) (488) 1,503
Other, net.................................................. 254 - (1,277) (1,023)
------------- -------------- -------------- ------------
$ 22,516 $ 8,232 $ (592) 30,156
============= ============== ==============
RECONCILIATION TO INCOME BEFORE INCOME TAXES,
MINORITY INTEREST AND EQUITY EARNINGS:
Interest expense........................................... (14,528)
Interest income............................................ 5,966
Debt extinguishment........................................ (2,091)
Gain from derivative transactions, net..................... 3,930
Gain from sale of marketable securities, net............... 5,852
Corporate expenses......................................... (8,200)
Other, net................................................. 379
Equity in earnings of 50% or less owned companies.......... (1,503)
------------
$ 19,961
============
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
- -------------------------------------------------------------
OPERATING REVENUES :
External customers.........................................$ 279,149 $ 16,690 $ 7,611 $ 303,450
Intersegment................................................ 200 - - 200
------------- -------------- -------------- ------------
$ 279,349 $ 16,690 $ 7,611 303,650
============= ============== ==============
Elimination................................................. (200)
------------
$ 303,450
============
REPORTABLE SEGMENT PROFIT:
Operating profit...........................................$ 45,055 $ 841 $ 1,921 $ 47,817
Income from equipment sales and retirements, net............ 5,554 4 - 5,558
Equity in earnings (losses) of 50% or less owned companies.. 5,194 (26) (1,460) 3,708
Other, net.................................................. 5,442 - 16 5,458
------------- -------------- -------------- ------------
$ 61,245 $ 819 $ 477 62,541
============= ============== ==============
RECONCILIATION TO INCOME BEFORE INCOME TAXES,
MINORITY INTEREST AND EQUITY EARNINGS:
Interest expense........................................... (11,300)
Interest income............................................ 6,012
Debt extinguishment........................................ (2,338)
Loss from sale of derivative transactions, net............. (2,619)
Gain from sale of marketable securities, net............... 2,699
Corporate expenses......................................... (7,803)
Gain from Chiles Merger.................................... 19,719
Equity in earnings of 50% or less owned companies.......... (3,708)
------------
$ 63,203
============
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements discussed in Item 2 (Management's Discussion and Analysis of
Financial Condition and Results of Operations), Item 3 (Quantitative and
Qualitative Disclosures About Market Risk) and elsewhere in this Form 10-Q
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
concerning management's expectations, strategic objectives, business prospects,
anticipated economic performance and financial condition and other similar
matters involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of
results to differ materially from any future results, performance or
achievements discussed or implied by such forward-looking statements. Such
risks, uncertainties and other important factors include, among others: general
economic and business conditions, the cyclical nature of our business, adequacy
of insurance coverage, currency exchange fluctuations, changes in foreign
political, military and economic conditions, the ongoing need to replace aging
vessels, dependence of spill response revenue on the number and size of spills
and upon continuing government regulation in this area and our ability to comply
with such regulation and other governmental regulation, industry fleet capacity,
changes in foreign and domestic oil and gas exploration and production activity,
competition, regulatory initiatives, customer preferences, marine-related risks,
effects of adverse weather conditions and seasonality on the Company's offshore
aviation business, helicopter related risks, effects of adverse weather and
river conditions and seasonality on inland river operations, the level of grain
export volume, variability in freight rates for inland river barges and various
other matters, many of which are beyond the Company's control and other factors
as are described at the end of Item 7 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) of the Company's Form 10-K for
the fiscal year ended December 31, 2002. The words "estimate," "project,"
"intend," "believe," "plan" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements speak only as of the date
of the document in which they are made. We disclaim any obligation or
undertaking to provide any updates or revisions to any forward-looking statement
to reflect any change in our expectations or any change in events, conditions or
circumstances on which the forward-looking statement is based.
OVERVIEW
Through its subsidiaries and joint venture arrangements, the Company's principal
business segment is primarily dedicated to operating a diversified fleet of
offshore support vessels that service oil and gas exploration and production
facilities mainly in the U.S. Gulf of Mexico, the North Sea, Latin America, West
Africa and Asia. The Company's vessels deliver cargo and personnel to offshore
installations, handle anchors for drilling rigs and other marine equipment,
support offshore construction and maintenance work and provide standby safety
support and oil spill response services. From time to time, vessels service
special projects, such as well stimulation, seismic data gathering and freight
hauling. In addition to vessel services, the Company's offshore marine service
business offers logistics services, which include shorebase, marine transport
and other supply chain management services also in support of offshore oil and
gas exploration and production operations.
The Company's environmental services segment provides contractual oil spill
response and other services, both domestically and internationally, to those who
store, transport, produce or handle petroleum and certain non-petroleum oils, as
required by OPA 90, various state regulations and the United Nations' MARPOL
73/78 regulations. Services include training, consulting and supervision for
emergency preparedness, response and crisis management associated with oil or
hazardous material spills, fires and natural disasters and maintaining
specialized equipment for immediate deployment in response to spills and other
events.
Other business segments of the Company include inland river hopper barge
operations, offshore aviation services and investments in various other
businesses.
OFFSHORE MARINE SERVICES
The Company's offshore marine service segment provides marine transportation,
logistics and related services primarily dedicated to supporting oil and gas
exploration and production.
Since its inception, the Company has actively monitored opportunities to buy and
sell vessels to maximize the overall utility and flexibility of its fleet. Fleet
growth has occurred principally through the purchase of vessels from
competitors, expansion of equity holdings in joint ventures that own and
charter-in vessels and from the construction of new equipment. In support of
fleet expansion, the Company has deposited proceeds from many of its vessel
sales into construction reserve fund accounts for the express purposes of
acquiring newly constructed U.S.-flag vessels in order to qualify for deferral
of taxable gains realized from the vessel sales.
10
The offshore marine service segment's operating revenues are influenced
primarily by the number of vessels owned and bareboat and time chartered-in by
the Company, rates per day worked and utilization of the Company's fleet.
Utilization for a vessel over a period of time is the ratio of number of days
worked by the vessel to the total calendar days available during such period.
The rate per day worked for a vessel over a period of time is the ratio of
aggregate time charter revenue earned by the vessel to the number of days worked
by such vessel during the period.
Rates per day worked and utilization of the Company's fleet are a function of
demand for and availability of marine vessels, which are closely aligned with
the level of exploration and development of offshore areas. Exploration and
drilling activities are influenced by a number of factors, including the current
and anticipated future prices of oil and natural gas, the expenditures by oil
and gas companies for exploration and development and the availability of
drilling rigs. In addition, demand for drilling services remains dependent on a
variety of political and economic factors that are also beyond the Company's
control, including worldwide demand for oil and natural gas driven by economic
activity, the ability of the Organization of Petroleum Exporting Countries
("OPEC") to set and maintain production levels and pricing, the level of
production of non-OPEC countries and the policies of various governments
regarding exploration and development of their oil and natural gas reserves.
Depressed offshore rig utilization that began in March 2001 has continued into
the first nine months of 2003 due to reduced exploration activities,
particularly in the U.S. Gulf of Mexico and North Sea. Drilling activity has
traditionally been linked to the cash flow of oil and gas companies, which is
directly related to oil and natural gas commodity prices. High oil and natural
gas prices have historically resulted in greater drilling activity, which
increases the demand for the Company's services. However, the strong cash flows
reported by oil and gas companies in 2003 have yet to produce an increase in
drilling activity. The Company has experienced less demand for offshore services
in the first three quarters of 2003 than during the same period in 2002.
The table below sets forth rates per day worked and utilization data for the
Company's offshore marine fleet during the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------- -------------- ------------- --------------
RATES PER DAY WORKED ($): (1) (2) (3)
Anchor Handling Towing Supply...................... 12,650 13,144 12,280 12,778
Crew............................................... 3,257 3,200 3,188 3,239
Geophysical, Freight and Other(4).................. - - - -
Mini-Supply........................................ 2,998 2,918 3,041 2,807
Standby Safety..................................... 6,733 6,268 6,613 5,817
Supply and Towing Supply........................... 7,470 8,153 7,612 8,032
Utility and Line Handling.......................... 1,774 1,761 1,778 1,752
OVERALL UTILIZATION (%): (1) (3)
Anchor Handling Towing Supply...................... 76.9 72.9 78.8 79.8
Crew............................................... 75.9 76.3 78.3 81.1
Geophysical, Freight and Other(4).................. - - - -
Mini-Supply........................................ 91.6 90.0 89.3 87.2
Standby Safety..................................... 89.9 88.2 87.0 87.0
Supply and Towing Supply........................... 82.8 88.9 81.4 88.9
Utility and Line Handling.......................... 58.7 62.4 56.8 61.4
Overall Fleet.............................. 77.5 77.7 77.2 79.1
- -------------------------
(1) Rates per day worked and overall utilization figures exclude owned vessels
that are bareboat chartered-out, minority-owned joint venture vessels and
managed vessels and include vessels bareboat and time chartered-in by the
Company.
(2) Revenues for certain of the Company's vessels included in the calculation
of rates per day worked, primarily its North Sea fleet, are earned in
foreign currencies, primarily Pounds Sterling, and have been converted to
U.S. dollars at the weighted average exchange rate for the periods
indicated.
(3) Statistics exclude vessels retired from service in the applicable periods,
comprised of 12 utility vessels at September 30, 2003.
(4) Vessels in this class were out of service during the reported periods.
From time to time, the Company bareboat or time charters-in vessels. A bareboat
charter is a vessel lease under which the charterer (i.e., the lessee) is
responsible for all crewing, insurance and other operating expenses, as well as
the payment of bareboat charter hire to the providing entity. A time charter is
a lease under which the entity providing the vessel is responsible for all
crewing, insurance and other operating expenses and the charterer pays only a
time charter hire fee to the providing entity. Operating revenues for vessels
owned and bareboat or time chartered-in are earned at similar rates. However,
operating expenses associated with vessels that are bareboat and time
chartered-in include charter hire expenses that, in turn, are included in vessel
expenses, but exclude depreciation expense.
11
The Company earns operating revenues primarily from the time or bareboat
charter-out of vessels, which are owned or bareboat or time chartered-in.
Operating revenues earned from the bareboat charter-out of vessels are generally
lower than for vessels time-chartered out because vessel expenses, normally
recovered through charter revenue, are paid by the charterer under a bareboat
charter. At various times, the Company also manages vessels for other owners and
earns a fee for this service.
The table below sets forth the Company's offshore marine fleet structure at the
dates indicated:
At September 30,
--------------------------------
Fleet Structure 2003 2002
- -------------------------------------------- --------------- ----------------
DOMESTIC:
Owned.................................... 99 120
Bareboat Chartered-In(1)................. 35 34
Pooled................................... 1 -
Joint Venture(2)......................... 3 3
FOREIGN:
Owned.................................... 83 83
Bareboat Chartered-In.................... 3 4
Managed.................................. 5 6
Joint Venture(2)......................... 50 50
--------------- ----------------
Total Fleet......................... 279(3) 300(3)
=============== ================
- -----------------------
(1) Resulting primarily from sale and leaseback transactions of prior periods.
(2) At September 30, 2003, 47 joint venture vessels participated in joint
ventures in which the Company owned less than a majority interest and 6
participated in joint ventures in which the Company owned the majority
interest.
(3) Fleet count at September 30, 2003 and 2002 excludes 12 and 13 utility
vessels, respectively, that have been retired from service.
Vessel operating expenses are primarily a function of fleet size, fleet
composition and vessel utilization. The most significant vessel operating
expense items are wages paid to marine personnel, maintenance and repairs and
marine insurance. Maintenance and repair expenses, including drydocking and main
engine overhaul, are expected to rise over time as the mix of vessels in our
fleet trends toward larger, more powerful equipment in response to the changing
needs of the customers that we serve and challenges of the markets in which we
compete. In addition to variable vessel operating expenses, the offshore marine
service segment incurs fixed charges related to the depreciation of property and
equipment and charter-in hire costs. Depreciation is a significant operating
expense; vessel depreciation is the most significant component.
Drydocking repairs, which are a substantial component of a vessel's maintenance
costs, are expensed when incurred. Under applicable maritime regulations,
vessels must be drydocked twice in a five-year period, or once in a two-year
period in the case of crewboats, for inspection by regulatory authorities. The
Company follows an asset management strategy pursuant to which it defers
drydocking of selected vessels during periods of weak market conditions and low
rates per day worked. Should the Company undertake a large number of drydockings
in a particular quarter or put through survey a disproportionate number of older
and/or larger vessels, which typically have higher drydocking costs, comparative
results may be affected. For the nine-month periods ended September 30, 2003 and
2002, drydocking costs totaled $7.6 million and $10.6 million, respectively.
During those same periods, the Company completed the drydocking of 54 and 66
vessels, respectively.
The number of main propulsion engine overhauls performed in a period
particularly affects engine repair expenses, which are also a significant
component of the Company's vessel maintenance costs. In recent years, the
Company has begun to replace older vessels with newer vessels that have more
powerful main propulsion engines, which may result in higher repair expenses.
This altered fleet mix has occurred primarily through the Company's introduction
of new aluminum-constructed Fast Support Intervention Vessels, the main
propulsion engines of which are as large as 9,000 horsepower, exceeding the
horsepower of older crew vessels that they replaced by as much as 7,000
horsepower. Should engine repair expenses, particularly those related to main
engine overhauls, increase in a quarter, comparative results may be affected.
For the nine-month periods ended September 30, 2003 and 2002, main propulsion
engine repair expenses totaled $10.7 million and $11.0 million, respectively.
The Company believes that the continuing threat of international terrorist
activity and past economic and political uncertainties have resulted in
significant increases in its cost to insure against liabilities to other parties
and damage to its vessels and other property. In the nine-month period ended
September 30, 2003, overall insurance expenses have not risen as compared to the
nine-month period ended September 30, 2002 as lower deductible costs, resulting
from fewer insurance claims, have offset higher premium costs. There can be no
assurance that in the future the Company will be able to maintain its existing
coverage or that it will not experience further substantial increases in
premiums.
12
At September 30, 2003, the Company had 34 vessels bareboat chartered-in pursuant
to sale and leaseback transactions that have been accounted for as operating
leases for financial reporting purposes. Income realized from the sale component
of these transactions has been deferred to the extent of the present value of
minimum lease payments and is being amortized to income as reductions in rental
expense over the applicable lease terms. Charter-in expense, net of deferred
income amortization, resulting from sale and leaseback transactions totaled
$11.2 million and $10.1 million in each of the nine-month periods ending
September 30, 2003 and 2002, respectively.
At September 30, 2003, 12 of the Company's U.S. utility vessels were considered
retired from service and are being marketed for sale. These vessels range in
length from 110 feet to 120 feet, average 24 years of age and had an aggregate
carrying value of $0.7 million at September 30, 2003. Vessels retired from
service have been excluded from the Company's utilization statistics and fleet
counts. Also at September 30, 2003, the Company had 27 additional U.S. vessels
out of service, of which 26 require drydocking prior to re-entering operations.
Out of service vessels included 13 utility, 9 crew, 2 supply, and 1 each of the
anchor handling towing supply, geophysical, and mini-supply classes.
A portion of the Company's revenues and expenses, primarily related to its North
Sea operations, are received or paid in foreign currencies, primarily pounds
sterling. For financial reporting purposes, these amounts are translated into
U.S. dollars at the weighted average exchange rates during the relevant period.
Overall, approximately 54% of the Company's offshore marine operating revenues
was derived from foreign operations (in U.S. dollars or foreign currencies) in
the nine-month period ended September 30, 2003.
The Company's foreign offshore marine operations are subject to various risks
inherent in conducting business in foreign nations. These risks include, among
others, political instability, potential vessel seizure, nationalization of
assets, terrorist attacks, fluctuating currency values, hard currency shortages,
controls of currency exchange, the repatriation of income or capital,
import-export quotas and other forms of public and governmental regulation, all
of which are beyond the control of the Company. Although, historically, the
Company's operations have not been affected materially by such conditions or
events, it is not possible to predict whether any such conditions or events
might develop in the future. The occurrence of any one or more of such
conditions or events could have a material adverse effect on the Company's
financial condition and results of operations.
Operating results are also affected by the Company's participation in various
joint ventures. The Company has formed or acquired interests in offshore marine
joint ventures with various third parties in order to enter new areas of
operation and enhance its marketing capabilities. These arrangements allow the
Company to expand its fleet while diversifying the risks and reducing the
capital outlays associated with independent fleet expansion. The Company also
owns a majority interest in a logistics joint venture whose mission has been to
provide shorebase, marine transport and other supply chain management services
in support of offshore exploration and production operations, principally in the
U.S. Gulf of Mexico.
ENVIRONMENTAL SERVICES
The Company's environmental services business provides contractual oil spill
response and other services, both domestically and internationally, to companies
that store, transport, produce or handle petroleum and certain non-petroleum
oils, as required by OPA 90, as amended, various state regulations and the
United Nations' MARPOL 73/78 regulations. Services include training, consulting
and supervision for emergency preparedness, response and crisis management
associated with oil or hazardous material spills, fires and natural disasters
and maintaining specialized equipment for immediate deployment in response to
spills and other events.
A recent acquisition completed by the Company has further diversified its
environmental services to include emergency response, site remediation,
industrial and marine contract cleaning, salvage support, hazardous waste
management services, and environmental equipment and product sales to both the
private and public sectors on the West Coast of the United States.
The Company charges a retainer fee to its customers for ensuring by contract the
availability (at predetermined rates) of its response services and equipment.
Spill response revenues and related operating profits are dependent on the
magnitude and the number of spill responses within a given period. Consequently,
spill response revenues and operating profits are subject to material variation
between comparable periods, and the revenues from any one period is not
indicative of a trend or of anticipated results in future periods. The Company
also charges consulting fees to customers for developing customized training
programs, planning and participating in customer oil spill response drill
programs and response exercises as well as other special projects.
Operating costs for environmental services primarily include salaries and
related benefits for operating personnel, payments to sub-contractors, equipment
maintenance and depreciation. These expenses are primarily a function of
regulatory requirements and the level of retainer business.
13
INLAND RIVER BUSINESS
The Company's inland river barge business earns operating revenues primarily
from voyage affreightments under which customers are charged for a committed
space to transport cargo for a specific time from a point of origin to a
destination at an established price per ton of cargo transported. The Company
also earns operating revenues while cargo is stored aboard barges and when
barges are chartered-out to third parties. Barge operating expenses are
typically differentiated between those directly related to voyages and all other
barge operating costs. Voyage operating expenses primarily include towing,
switching, fleeting and cleaning costs; whereas, non-voyage operating expenses
include such costs as repairs, insurance and depreciation.
A majority of the barges owned by the Company and certain of those managed for
third parties participate in two pooling arrangements. Pursuant to these pooling
arrangements, operating revenues and voyage expenses are pooled, and the net
results are allocated to each participating barge owner.
At September 30, 2003, the Company controlled 735 barges, including 332 directly
owned, 231 managed for third parties, 166 chartered-in and 6 owned by a 50%
owned partnership.
OFFSHORE AVIATION SERVICES
The Company's offshore aviation services business derives the majority of its
operating revenues from helicopter transportation services provided primarily to
oil and gas companies operating in the U.S. Gulf of Mexico. The number and type
of helicopters in the Company's fleet and their utilization and rates of hire
are the primary drivers of this business segment's operating revenues. Rates and
utilization are a function of demand for and availability of helicopters, which
are closely aligned with the level of offshore production activity. Offshore
production activities are influenced by a number of factors, including the
current and anticipated future prices of oil and natural gas and the
expenditures by oil and gas companies for management of their offshore
production facilities. In addition, demand for oil field services remains
dependent on a variety of political and economic factors that are also beyond
the Company's control, including worldwide demand for oil and natural gas, the
ability of the OPEC to set and maintain production levels and pricing, the level
of production of non-OPEC countries and the policies of various governments
regarding exploration and development of their oil and natural gas reserves.
Operating expenses are primarily a function of fleet size and utilization
levels, and operating expenses primarily consist of wages and related benefits,
insurance, repairs and maintenance and equipment leases.
At September 30, 2003, the Company's offshore aviation services fleet included
36 helicopters, including 19 directly owned, 16 leased and 1 managed for third
parties.
OTHER ACTIVITIES
Other activities primarily relate to the Company's 50% or less equity interest
in a marine telecommunications company, a handy-max bulk carrier joint venture,
and a developer of ship brokerage software that supports the shipping industry.
In addition, the Company made a $6.0 million minority equity investment on March
31, 2003 in a company that designs and manufactures water treatment systems for
sale and lease.
The Company, from time to time, may make other investments in related or
unrelated businesses.
RESULTS OF OPERATIONS
OFFSHORE MARINE SERVICES
OPERATING REVENUES. Operating revenues declined $11.8 million and $37.5 million
in the three and nine-month periods ended September 30, 2003, respectively, as
compared to the three and nine-month periods ended September 30, 2002. Between
comparable three and nine-month periods, reduced operating revenues resulted
primarily from declines of (i) $5.9 million and $15.0 million, respectively,
from net vessel dispositions, (ii) $3.6 million and $12.8 million, respectively,
from lower rates per day worked, (iii) $1.8 million and $10.4 million,
respectively, from fewer days worked and (iv) $0.3 million and $1.5 million,
respectively, from a net increase in the number of vessels entering bareboat
charter-out service upon concluding time charter-out arrangements. Between
comparable three and nine-month periods, these declines in operating revenues
were partially offset by an increase of $0.8 million and $3.9 million,
respectively, from the strengthening of the pound sterling currency relative to
the U.S. dollar.
14
Operating revenues were significantly affected by changes in the Company's owned
and bareboat chartered-in fleet. Since the beginning of 2002, the Company sold
52 vessels, including 17 vessels subsequently chartered-in pursuant to sale and
lease-back transactions, terminated the charter-in of 8 vessels, removed 18
vessels from service and reassigned certain vessels from time charter-out
arrangements to bareboat charter-out service. During this same time period, 20
vessels were acquired and 4 vessels, not previously owned, were chartered-in.
OPERATING PROFIT. Operating profit decreased $8.2 million and $33.0 million in
the three and nine-month periods ended September 30, 2003 as compared to the
three and nine-month periods ended September 30, 2002 due primarily to those
factors affecting operating revenues, higher vessel-related wages resulting from
raises in compensation provided to certain of the Company's international seamen
and higher repair costs for vessel hulls and winch and deck equipment.
Nine-month results also included higher charter-in expenses associated with
additional sale and leaseback transactions. Lower drydock expenses from fewer
vessels undergoing repair and lower insurance claim costs partially offset these
declines.
INCOME FROM EQUIPMENT SALES OR RETIREMENTS, NET. Income from equipment sales or
retirements remained constant in the three-month period ended September 30, 2003
as compared to the three-month period ended September 30, 2002 but increased
$2.7 million in the nine-month period ended September 30, 2003 as compared to
the nine-month period ended September 30, 2002. In comparable periods, the
Company sold approximately the same number of vessels. Nine-month results
improved due to a decline in income deferral resulting from fewer sale and
leaseback transactions.
EQUITY IN EARNINGS OF 50% OR LESS OWNED COMPANIES. Equity earnings decreased
$1.0 million and $3.2 million in the three and nine-month periods ended
September 30, 2003 as compared to the three and nine-month periods ended
September 30, 2002. Results for the quarter declined due to a charge against
equity earnings for U.S. income taxes payable on a dividend received from a
foreign joint venture and the continued weak demand for vessels in Trinidad.
Nine-month results additionally declined due to lower profits earned by the
Company's joint ventures operating in Asia and the North Sea. Two vessels
operating in Asia were sold at a loss and significant repairs were performed on
a North Sea joint venture vessel.
OTHER, NET. The Company recognized other losses of $1.7 million in the
three-month period ended September 30, 2003 as compared to other income of $2.2
million in the comparable three-month period ended September 30, 2002. Other
income decreased $5.2 million in the nine-month period ended September 30, 2003
as compared the nine- month period September 30, 2002. In all reported periods,
other income or loss primarily includes the effect of currency exchange rate
changes on intercompany loans and other transactions denominated in currencies
other than the functional currency of various SEACOR subsidiaries.
ENVIRONMENTAL SERVICES
OPERATING REVENUES. Operating revenues increased $4.5 million and $15.6 million
in the three and nine-month periods ended September 30, 2003 as compared to the
three and nine-month periods ended September 30, 2002 due primarily to spill
response, spill management, containment, and remediation services provided in
Iraq during the second and third quarters of 2003. The Company's work in Iraq
was completed on October 5, 2003. The Company seeks to be retained in future
periods for additional environmental services in Iraq.
OPERATING PROFIT. Operating profits increased $2.9 million and $7.3 million in
the three and nine-month periods ended September 30, 2003 as compared to the
three and nine-month periods ended September 30, 2002 due primarily to the
factors affecting operating revenues.
OTHER BUSINESS SEGMENTS
OPERATING REVENUES. Operating revenues increased $9.0 million and $24.9 million
in the three and nine-month periods ended September 30, 2003 as compared to the
three and nine-month periods ended September 30, 2002 due to the Company's
commencement of offshore aviation services on January 1, 2003 and the addition
of newly constructed and chartered-in barges to its fleet.
OPERATING PROFIT. Operating profit decreased $1.1 million and $0.3 million in
the three and nine-month periods ended September 30, 2003 as compared to the
three and nine-month periods ended September 30, 2002. An improvement in profits
of the inland river business due to fleet growth was offset by start-up costs
associated with the charter-in of 166 additional barges during the third quarter
of 2003. Offshore aviation operations incurred operating losses in the three and
nine-month periods ended September 30, 2003 due primarily to low utilization of
its helicopter fleet, particularly in the third quarter of 2003.
15
EQUITY IN EARNINGS (LOSSES) OF 50% OR LESS OWNED COMPANIES. Equity losses
decreased $0.9 million and $1.0 million in the three and nine-month periods
ended September 30, 2003 as compared to the three and nine-month periods ended
September 30, 2002. Results of the Company's marine telecommunication joint
venture improved between years. Results in the second and third quarters of 2002
included non-recurring impairment charges relating to the Company's investment
in a developer of ship brokerage software. These improvements in income were
partially offset by the fact that the Company ceased to report equity in the
earnings of Chiles following its merger with ENSCO on August 7, 2002.
OTHER, NET. Other expenses increased $1.3 million in the nine-month period ended
September 30, 2003 as compared to the nine-month period ended September 30,
2002. During the second quarter of 2003, the Company recognized an impairment
charge with respect to an investment accounted for using the cost method.
OTHER
INTEREST INCOME AND INTEREST EXPENSE. Net interest expense increased $1.6
million and $3.3 million in the three and nine-month periods ended September 30,
2003 as compared to the three and nine-month periods ended September 30, 2002
due to a net increase in the Company's outstanding indebtedness primarily
resulting from the sale of its $200.0 million aggregate principal amount 5-7/8%
Notes in the third quarter of 2002.
DEBT EXTINGUISHMENT. During the nine-month period ended September 30, 2003, the
Company redeemed all of the then outstanding principal amount of its 5-3/8%
Notes and prepaid all outstanding principal and accrued interest payable to
holders of the Putford Notes that resulted in the recognition of debt
extinguishment expense totaling $2.1 million. During the three and nine-month
periods ended September 30, 2002, the Company redeemed $11.0 million principal
amount of its 5-3/8% Notes, retired $13.0 million principal amount of its 7.2%
Notes and repaid the then outstanding balance of its Revolver that resulted in
the recognition of debt extinguishment expense totaling $2.3 million.
GAINS (LOSSES) FROM DERIVATIVE TRANSACTIONS, NET. Net gains from derivative
transactions increased $2.8 million and $6.5 million in the three and nine-month
periods ended September 30, 2003, respectively, as compared to the three and
nine-month periods ended September 30, 2002. Results in 2002 included
non-recurring losses from the revaluation of U.S. Treasury rate locks.
Three-month results also included a decline in income attributable to the
revaluation of interest rate swap and costless collar agreements.
GAINS (LOSSES) FROM SALE OF MARKETABLE SECURITIES, NET. Net gains from the sale
of marketable securities increased $3.2 million in the nine-month period ended
September 30, 2003, as compared to the nine-month period ended June 30, 2002 due
primarily to increased equity security sale gains and reduced net losses on a
mark to market basis of equity security short sales.
GAIN FROM CHILES MERGER. The Company recognized a gain of $19.7 million in the
three and nine-month periods ended September 30, 2002 as a result of the Chiles
Merger.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND MARKETABLE SECURITIES
During the nine-month period ended September 30, 2003, the Company's cash and
cash equivalents, available-for-sale securities and construction reserve funds
decreased by $97.5 million to $428.4 million. At September 30, 2003, cash and
cash equivalents totaled $261.8 million, available-for-sale securities totaled
$56.8 million and construction reserve funds totaled $109.8 million.
CASH GENERATION AND DEPLOYMENT
GENERAL. The Company's ongoing liquidity requirements arise primarily from its
need to service debt, fund working capital, acquire, construct or improve
equipment and make other investments. The Company's principal sources of
liquidity are cash flows from operations and borrowings under its revolving
credit facility although, from time to time, it may issue shares of common
stock, preferred stock, debt or a combination thereof, or sell vessels to
finance the acquisition of equipment and businesses or make improvements to
existing equipment. The Company's cash flow levels are determined by the size of
the Company's offshore marine fleet, rates per day worked and overall
utilization of the Company's offshore marine vessels and the operations of its
environmental services, inland river and offshore aviation business segments.
16
The volatility of oil and gas prices, worldwide economic activity and
development, the level of offshore production and exploration activity and other
factors beyond the Company's control will directly affect the Company's offshore
marine and offshore aviation businesses. A curtailment of drilling activity in
U.S. Gulf of Mexico beginning in March 2001 has adversely affected demand and
rates per day worked for most vessel types in the Company's U.S. offshore marine
fleet. Although oil and natural gas prices have improved in 2003, this has yet
to produce an increase in U.S. Gulf of Mexico drilling activity. The Company
cannot predict whether, or to what extent, market conditions will improve,
remain stable or deteriorate. Should present demand and rates per day worked for
the Company's U.S. vessels remain unchanged or further decline, results of
operations and cash flows will be adversely affected.
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES. Net cash flows provided from
operating activities were $12.2 million and $52.1 million in the nine-month
periods ended September 30, 2003 and 2002, respectively. Recent declines in
operating cash flows have resulted primarily from lower utilization and rates
per day worked for offshore support vessels.
CASH FLOWS PROVIDED BY OR USED IN INVESTING ACTIVITIES. Net cash flows provided
by investing activities were $28.1 million and $50.5 million in the nine-month
periods ended September 30, 2003 and 2002, respectively.
During the nine-month period ended September 30, 2003, cash flows were provided
by investing activities primarily from (i) the sale of equipment, primarily
consisting of 26 offshore support vessels that included two large North Sea
anchor handling towing supply vessels, for $104.0 million, (ii) the sale of
available-for-sale securities for $58.1 million and (iii) the receipt of
dividends and promissory note principal repayments from 50% or less owned
companies totaling $12.9 million. These increases in cash flows were partially
offset by uses of cash flows in investing activities primarily to (i) construct
offshore support vessels and inland river barges and acquire other equipment for
$101.3 million, (ii) purchase available-for-sale securities for $24.5 million,
(iii) acquire a minority equity interest in a company that designs and
manufactures water treatment systems for sale or lease and make additional
advances to joint ventures totaling $7.3 million and (iv) increase construction
reserve fund balances by $14.5 million.
During the nine-month period ended September 30, 2002, cash flows were provided
by investing activities primarily from (i) the sale of equipment for $102.0
million, (ii) the sale of available-for-sale securities for $60.9 million, (iii)
the receipt of dividends and promissory note principal repayments from 50% or
less owned companies for $14.1 million and (iv) proceeds from the Chiles Merger
of $25.4 million. These increases in cash flows were partially offset by uses of
cash flows in investing activities primarily to (i) construct offshore support
vessels for $88.6 million, (ii) increase construction reserve fund balances by
$32.3 million, (iii) acquire available-for-sale securities for $26.0 million and
(iv) settle derivative transactions of $5.7 million.
CASH FLOW USED IN FINANCING ACTIVITIES. Net cash flows of $119.6 million were
used in financing activities in the nine-month period ended September 30, 2003
as compared to net cash flows of $104.7 million provided by financing activities
in the nine-month period ended September 30, 2002.
During the nine-month period ended September 30, 2003, cash flows were used in
financing activities primarily to (i) repay $71.3 million of outstanding
indebtedness, including $35.3 million of 5-3/8% Notes, $23.2 million of 5.467%
Notes, $11.7 million of Putford Notes and $1.1 million of other outstanding
indebtedness and (ii) purchase for treasury 1,229,040 shares of common stock at
an aggregate cost of $48.1 million.
During the nine-month period ended September 30, 2002, cash flows were provided
by financing activities primarily from the sale of 5-7/8% Notes for $196.8
million. This increase in cash flows was partially offset by uses of cash flows
in financing activities primarily to (i) repay $87.8 million of outstanding
indebtedness and (ii) purchase for treasury 144,700 shares of common stock at an
aggregate cost of $5.6 million.
CAPITAL EXPENDITURES
Future capital expenditures, based upon the Company's commitments at September
30, 2003, to purchase 9 newly constructed offshore support vessels, 208 newly
constructed inland river hopper barges, and 7 newly constructed helicopters will
approximate $121.4 million. Deliveries to the Company of newly constructed
vessels, barges and helicopters are expected over the next 15 months. The
Company believes that existing cash and cash equivalents, construction reserve
funds, cash provided from operations or the sale of available-for-sale
securities, proceeds from vessel sales, or borrowings under its revolving credit
facility, or a combination thereof, will be sufficient to fund foreseeable
capital expenditures.
In addition, the Company holds options to purchase 11 additional newly
constructed helicopters and 183 additional newly constructed inland river hopper
barges.
17
REVOLVING CREDIT FACILITY
As of September 30, 2003, amount available for future borrowings under the
Company's revolving credit facility totaled $198.7 million.
STOCK AND DEBT REPURCHASE PROGRAM
As of November 12, 2003, $65.0 million of security repurchase authority granted
by the Board of Directors remains available for the future purchase of the
Company's common stock, its 7.2% Notes and its 5-7/8% Notes. The repurchase of
these securities may be conducted from time to time through open market
purchases, privately negotiated transactions or otherwise, depending on market
conditions.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Below is an aggregation of the Company's contractual obligations and commercial
commitments as of September 30, 2003, in thousands of dollars.
Payments Due By Period
-------------------------------------------------------------------
Less than After
Contractual Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years
- ----------------------------------- ---------- ---------- ----------- ---------- ----------
Long-term Debt .................... $ 334,768 $ 113 $ 93 $ 62 $ 334,500
Operating Leases................... 107,084 28,501 44,114 22,066 12,403
Construction Commitments........... 121,422 93,312 28,110 - -
---------- ---------- ----------- ---------- ----------
Total Contractual Cash
Obligations........................ $ 563,274 $ 121,926 $ 72,317 $ 22,128 $ 346,903
========== ========== =========== ========== ==========
Amount of Commitment Expiration Per Period
-------------------------------------------------------------------
Less than Over 5
Other Commercial Commitments Total 1 Year 1-3 Years 4-5 Years Years
- ------------------------------------ ---------- ---------- ----------- ---------- ----------
TMM Joint Venture Guarantee(1)..... $ 5,841 $ 379 $ 844 $ 976 $ 3,642
Pelican Joint Venture Guarantee(2). 1,500 - - 1,500 -
U.S. Joint Venture Guarantee(3).... 5,515 1,164 2,327 2,024 -
Letter of Credit .................. 1,265 1,205 60 - -
---------- ---------- ----------- ---------- ----------
Total Commercial Commitments.... $ 14,121 $ 2,748 $ 3,231 $ 4,500 $ 3,642
========== ========== =========== ========== ==========
- ---------------------------
(1) Guarantee for non-payment of obligations owing by the Company's Mexican
joint venture under a charter arrangement.
(2) Guarantee of amounts owed by an Asian joint venture under its banking
facilities.
(3) Guarantee for 50% non-payment of obligations owing by the Company's U.S.
joint venture under a charter arrangement.
CONTINGENCIES
In connection with an examination of the Company's income tax return for fiscal
year 2001, the Internal Revenue Service (IRS) has indicated that it may assert a
deficiency in the amount of taxes paid based on the manner in which vessel
assets were classified for the purpose of depreciation. If the IRS were able to
sustain its position, the Company would be required to pay currently certain
amounts, which have not yet been determined, that are currently reported as
long-term deferred tax obligations. Other than a potential charge for interest
related to any such deficiencies, the final resolution of this matter should not
have an effect on the Company's results of operations. The Company intends to
vigorously defend its position and to contest any deficiency that may be
asserted.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
There has been no significant change in the Company's exposure to market risk
during the nine-month period ended September 30, 2003, except with the
expiration of certain costless collars that were entered to partially hedge the
fluctuation in market value for part of the Company's common stock position in
ENSCO. For discussion of the Company's exposure to market risk that affects
financial positions other than the Company's equity security portfolio and
costless collars, refer to Item 7A, Quantitative and Qualitative Disclosures
about Market Risk, contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.
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In order to partially hedge the fluctuation in market value for part of the
Company's common stock investment in ENSCO acquired in connection with the
Chiles Merger, the Company entered into various transactions (commonly known as
"costless collars") during 2002 with a major financial institution on 1,000,000
shares of ENSCO common stock. The effect of these transactions was that the
Company would be guaranteed a minimum value of approximately $24.35 and a
maximum value of approximately $29.80 per share of ENSCO, at expiration. These
costless collars expired during the second quarter of 2003 and, as the share
value of ENSCO's common stock was between $24.35 and $29.80 at expiration,
neither party had a payment obligation under these transactions.
As of September 30, 2003, the Company held available-for-sale equity securities
with a fair value of $36.0 million, a significant portion of which was shares of
ENSCO received in connection with the Chiles Merger. A 10% decline in the value
of available-for-sale equity securities held by the Company would reduce other
comprehensive income, net of tax, by $2.3 million. The Company monitors these
investments on a regular basis and disposes of investments when it judges the
risk profile to be too high or when it believes that the investments have
reached an attractive valuation.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of September 30, 2003. Based on their evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of September 30, 2003.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended September 30, 2003, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
31.1 Certification by the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K:
(i) Current Report on Form 8-K, dated July 31, 2003, reporting under Item
9 that, on July 24, 2003, the Company issued a press release
announcing its financial results for the second quarter ended June 30,
2003.
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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.
SEACOR SMIT Inc.
(Registrant)
DATE: November 14, 2003 By: /s/ Charles Fabrikant
----------------------------------------
Charles Fabrikant, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
DATE: November 14, 2003 By: /s/ Randall Blank
-----------------------------------------
Randall Blank, Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
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EXHIBIT INDEX
31.1 Certification by the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
21