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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended September 30, 2002
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________to ______________
-------------------------------
Commission File Number: 0-22739
-------------------------------
Cal Dive International, Inc.
(Exact Name of Registrant as Specified in its Charter)
Minnesota 95--3409686
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
400 N. Sam Houston Parkway E.
Suite 400
Houston, Texas 77060
(Address of Principal Executive Offices)
(281) 618-0400
(Registrant's telephone number,
including area code)
---------------------------
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13(b) or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 [ ]
At November 13, 2002 there were 37,326,368 shares of common stock, no par
value outstanding.
CAL DIVE INTERNATIONAL, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
September 30, 2002 and December 31, 2001............................. 1
Consolidated Statements of Operations --
Three Months Ended September 30, 2002 and
September 30, 2001............................................... 2
Nine Months Ended September 30, 2002 and
September 30, 2001............................................... 3
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 2002 and
September 30, 2001............................................... 4
Notes to Consolidated Financial Statements................................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk........ 18
Item 4. Controls and Procedures.......................................... 19
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 21
Signatures................................................................. 23
PART I. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 0 $ 34,837
Restricted cash 2,287 2,286
Accounts receivable --
Trade, net of revenue allowance on gross
amounts billed of $4,090 and $4,262 52,969 45,527
Unbilled 15,605 10,659
Other current assets 23,516 20,055
--------- ---------
Total current assets 94,377 113,364
--------- ---------
PROPERTY AND EQUIPMENT 693,859 423,742
Less - Accumulated depreciation (115,877) (92,430)
--------- ---------
577,982 331,312
--------- ---------
OTHER ASSETS:
Goodwill 86,985 14,973
Investment in Deepwater Gateway LLC 25,444 0
Other assets, net 18,090 13,473
--------- ---------
$ 802,878 $ 473,122
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 56,690 $ 42,252
Accrued liabilities 21,740 21,011
Income taxes payable 0 0
Current maturities of long-term debt 4,044 1,500
--------- ---------
Total current liabilities 82,474 64,763
--------- ---------
LONG-TERM DEBT 221,243 98,048
DEFERRED INCOME TAXES 63,352 54,631
DECOMMISSIONING LIABILITIES 93,387 29,331
REDEEMABLE STOCK IN SUBSIDIARY 7,528 0
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par, 120,000 shares
authorized, 50,876 and 46,239 shares issued
and outstanding 192,590 99,105
Retained earnings 146,737 133,570
Other comprehensive loss (682) 0
Treasury stock, 13,602 and 13,783 shares, at cost (3,751) (6,326)
--------- ---------
Total shareholders' equity 334,894 226,349
--------- ---------
$ 802,878 $ 473,122
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
- 1 -
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
September 30,
------------------------
2002 2001
-------- --------
(unaudited)
NET REVENUES:
Subsea and salvage $ 68,102 $ 39,356
Oil and gas production 15,913 12,214
-------- --------
84,015 51,570
COST OF SALES:
Subsea and salvage 63,322 30,025
Oil and gas production 9,120 8,338
-------- --------
Gross profit 11,573 13,207
SELLING AND ADMINISTRATIVE EXPENSES 6,372 4,969
-------- --------
INCOME FROM OPERATIONS 5,201 8,238
OTHER (INCOME) EXPENSE:
Interest (income) expense, net 424 (157)
Other (income), net 235 327
-------- --------
INCOME BEFORE INCOME TAXES 4,542 8,068
Provision for income taxes 1,590 2,824
-------- --------
NET INCOME $ 2,952 $ 5,244
======== ========
EARNINGS PER COMMON SHARE:
Basic $ 0.08 $ 0.16
Diluted $ 0.08 $ 0.16
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 37,268 32,551
Diluted 37,432 33,006
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended
September 30,
---------------------------
2002 2001
--------- ---------
(unaudited)
NET REVENUES:
Subsea and salvage $ 172,132 $ 103,215
Oil and gas production 38,116 55,623
--------- ---------
210,248 158,838
COST OF SALES:
Subsea and salvage 149,838 78,849
Oil and gas production 20,534 27,610
--------- ---------
Gross profit 39,876 52,379
SELLING AND ADMINISTRATIVE EXPENSES 18,869 15,439
--------- ---------
INCOME FROM OPERATIONS 21,007 36,940
OTHER (INCOME) EXPENSE:
Interest (income) expense, net 1,224 (72)
Other (income), net (474) 975
--------- ---------
INCOME BEFORE INCOME TAXES 20,257 36,037
Provision for income taxes 7,090 12,613
Minority interest 0 (140)
--------- ---------
NET INCOME $ 13,167 $ 23,564
========= =========
EARNINGS PER COMMON SHARE:
Basic $ 0.38 $ 0.73
Diluted $ 0.37 $ 0.71
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 34,888 32,443
Diluted 35,231 33,083
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30,
---------------------------
2002 2001
--------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,167 $ 23,564
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization 28,343 27,321
Deferred income taxes 8,721 10,008
Gain on sale of property (14) (1,201)
Changes in operating assets and liabilities:
Accounts receivable, net 4,454 (7,137)
Other current assets (2,282) 60
Accounts payable and accrued liabilities (3,126) 4,321
Income taxes payable/receivable 0 11,197
Other non-current, net (7,840) (6,036)
--------- ---------
Net cash provided by operating activities 41,423 62,097
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (140,325) (115,713)
Acquisition of businesses, net of cash acquired (118,326) 0
Investment in Deepwater Gateway LLC (25,444) 0
Restricted cash 0 1,917
Proceeds from sale of properties 23 1,500
--------- ---------
Net cash used in investing activities (284,072) (112,296)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of transaction costs 87,223 0
MARAD borrowings 43,898 0
Repayment of MARAD borrowings (1,318) 0
Borrowings on line of credit 52,045 38,529
Borrowings on term loan 26,857 0
Repayment of capital leases (4,715) 0
Exercise of stock options 3,822 3,686
--------- ---------
Net cash provided by financing activities 207,812 42,215
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (34,837) (7,984)
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 34,837 44,838
--------- ---------
Balance, end of period $ 0 $ 36,854
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH CASH FLOW INFORMATION:
Decommissioning liabilities assumed in offshore property
acquisitions $ 66,086 $ 1,732
CDI common stock issued in purchase of Canyon
Offshore, Inc. $ 4,163 $ 0
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation and Significant Accounting Policies
The accompanying financial statements include the accounts of Cal Dive
International, Inc. (Cal Dive, CDI or the Company) and its wholly owned
subsidiaries, Energy Resource Technology, Inc. (ERT), Canyon Offshore, Inc. and
Well Ops (U.K.) Ltd. All significant intercompany accounts and transactions have
been eliminated. These financial statements are unaudited, have been prepared
pursuant to instructions for the Quarterly Report on Form 10-Q required to be
filed with the Securities and Exchange Commission and do not include all
information and footnotes normally included in financial statements prepared in
accordance with generally accepted accounting principles.
Management has reflected all adjustments (which were normal recurring
adjustments) which it believes are necessary for a fair presentation of the
consolidated balance sheets, results of operations, and cash flows, as
applicable. Operating results for the period ended September 30, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. These financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's 2001 Annual Report on Form 10-K.
Certain reclassifications were made to previously reported amounts in
the consolidated financial statements and notes to make them consistent with the
current presentation format.
Note 2 - Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, Goodwill and Intangible Assets, which supersedes APB Opinion No.
17, Intangible Assets. SFAS 142 eliminates the current requirement to amortize
goodwill and indefinite-lived intangible assets, addresses the amortization of
intangible assets with a defined life and addresses the impairment testing and
recognition for goodwill and intangible assets. SFAS 142, which is effective for
2002, applies to goodwill and intangible assets arising from transactions
completed before and after the Statement's effective date. The Company adopted
this standard effective January 1, 2002, the effect of which was immaterial to
CDI's financial position and results of operations.
In July 2001, the FASB released SFAS No. 143, Accounting for Asset
Retirement Obligations, which is required to be adopted by the Company no later
than January 1, 2003. SFAS 143 addresses the financial accounting and reporting
obligations and retirement costs related to the retirement of tangible
long-lived assets. The Company is currently reviewing provisions of SFAS 143 to
determine the standard's impact on the financial statements upon adoption. Among
other things, SFAS 143 will require oil and gas companies to reflect
decommissioning liabilities on the face of the balance sheet at fair market
value on a discounted basis. Historically, ERT has reflected this liability on
the balance sheet on an undiscounted basis.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which was effective for the Company
beginning January 1, 2002. SFAS No. 144 supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and the accounting and reporting provisions relating to the disposal of a
segment of a business of APB Opinion No. 30. The Company adopted this standard
effective January 1, 2002, the effect of which was immaterial to CDI's financial
position and results of operations.
5
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which is effective for fiscal
periods after December 31, 2002. SFAS No. 146 requires companies to recognize
costs associated with restructurings, discontinued operations, plant closings,
or other exit or disposal activities, when incurred as opposed to when the
entity commits to an exit plan under Emerging Issues Task Force No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company plans to adopt the standard
as of the effective date and will implement its provisions on a prospective
basis.
Note 3 - Comprehensive Income
The components of total comprehensive income for the nine months ended
September 30, 2002 are as follows (in thousands):
2002
---------
Net Income $ 13,167
Cumulative translation adjustment 549
Unrealized loss on commodity hedge (1,230)
--------
Total comprehensive income $ 12,486
========
The components of accumulated other comprehensive income as of September 30,
2002 are as follows (in thousands):
2002
--------
Cumulative translation adjustment $ 549
Unrealized loss on commodity hedge (1,230)
-------
Accumulated other comprehensive loss ($ 681)
=======
Note 4 - Derivatives
The Company's price risk management activities involve the use of
derivative financial instruments to hedge the impact of market price risk
exposures primarily related to our oil and gas production. Under SFAS No. 133,
all derivatives are reflected in our balance sheet at their fair market value.
Under SFAS No. 133 there are two types of hedging activities: hedges of
cash flow exposure and hedges of fair value exposure. The Company engages
primarily in cash flow hedges. Hedges of cash flow exposure are entered into to
hedge a forecasted transaction or the variability of cash flows to be received
or paid related to a recognized asset or liability. Changes in the derivative
fair values that are designated as cash flow hedges are deferred to the extent
that they are effective and are recorded as a component of accumulated other
comprehensive income until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a cash flow hedge's change in value is
recognized immediately in earnings in oil and gas production revenues.
6
As required by SFAS No. 133, we formally document all relationships
between hedging instruments and hedged items, as well as our risk management
objectives, strategies for undertaking various hedge transactions and our
methods for assessing and testing correlation and hedge ineffectiveness. All
hedging instruments are linked to the hedged asset, liability, firm commitment
or forecasted transaction. We also assess, both at the inception of the hedge
and on an on-going basis, whether the derivatives that are used in our hedging
transactions are highly effective in offsetting changes in cash flows of the
hedged items. We discontinue hedge accounting prospectively if we determine that
a derivative is no longer highly effective as a hedge.
The market value of hedging instruments reflects our best estimate and
is based upon exchange or over-the-counter quotations whenever they are
available. Quoted valuations may not be available due to location differences or
terms that extend beyond the period for which quotations are available. Where
quotes are not available, we utilize other valuation techniques or models to
estimate market values. These modeling techniques require us to make estimations
of future prices, price correlation and market volatility and liquidity. Our
actual results may differ from our estimates, and these differences can be
positive or negative.
During the third quarter of 2002, the Company entered into various cash
flow hedging swap contracts to fix cash flows relating to a portion of the
Company's oil and gas production. All of these qualified for hedge accounting
and none extended beyond a year and a half. The aggregate fair market value of
the swaps was a liability of $2.0 million as of September 30, 2002. The Company
recognized a reduction in revenues of $140,000 as related to the ineffective
portion of the hedging instruments and recorded the effective portion of $1.2
million of loss, net of taxes, in other comprehensive loss within shareholders'
equity.
As of September 30, 2002, the Company has the following volumes under
derivative contracts related to its oil and gas producing activities:
Production Period Instrument Average Monthly Weighted Average
Type Volumes Price
- --------------------------------- ------------- --------------------- -------------------
Crude Oil:
October - December 2003 Swap 47 MBbl $26.50
October - December 2002 Swap 31 MBbl $26.49
October - December 2002 Swap 9 MBbl $26.70
Natural Gas:
October - December 2002 Swap 347,000 MMBtu $4.04
November - December 2002 Swap 420,000 MMBtu $3.56
October 2002 Swap 360,000 MMBtu $2.98
Subsequent to September 30, 2002, the Company entered into natural gas
swaps for the period January through December 2003. The contracts cover 800,000
MMBtu per month at $4.21 for January through March 2003, and 400,000 MMBtu per
month at $4.015 for April through December 2003.
In March 2002 and April 2002, the Company entered into swap contracts
which were not designated as hedging instruments. These instruments settled
during the third quarter of 2002, the results of which were not material to the
statement of operations.
In June 2002, CDI signed an agreement with Coflexip to acquire the
Subsea Well Operations Business Unit for 44.8 million British pounds (which at
the time equaled $67.5 million) which subsequently closed in July. CDI entered
into a foreign currency forward contract to lock in the British pound to U.S.
dollar exchange rate. Under SFAS No. 133, we accounted for this transaction with
changes in its fair value reported in earnings. Accordingly, a $1.1 million gain
was recorded in other income for the quarter ended June 30, 2002 as a result of
the change in
7
market value of the contract as of June 30, 2002. This contract settled in July
2002 for $1.1 million.
Note 5 - Business Segment Information (in thousands)
September 30, 2002 December 31, 2001
------------------ -----------------
(unaudited)
Identifiable Assets --
Subsea and salvage $620,157 $436,085
Oil and gas production 182,721 37,037
-------- --------
Total $802,878 $473,122
-------- --------
With respect to the third quarter of 2002, Well Ops (U.K.) Ltd. (which
is included in the Subsea and salvage segment) generated revenues and gross
profit of $15.9 million and $4.3 million, respectively, which were derived from
the North Sea.
Note 6 - Long-Term Financings
In August 2000, the Company closed a $138.5 million long-term financing
for construction of the Q4000. This U.S. Government guaranteed financing is
pursuant to Title XI of the Merchant Marine Act of 1936 which is administered by
the Maritime Administration ("MARAD Debt"). In January 2002, the Maritime
Administration agreed to expand the facility to $160 million to include the
modifications to the vessel which had been approved during 2001. To date the
Company has drawn $143.5 million on this facility, which approximates the
maximum of qualified expenditures. The MARAD Debt is payable in equal
semi-annual installments beginning in August 2002 and maturing 25 years from
such date. It is collateralized by the Q4000, with CDI guaranteeing 50% of the
debt, and bears interest at a rate which currently floats at a rate
approximating AAA Commercial Paper yields plus 20 basis points (approximately 2%
as of September 30, 2002). For a period up to ten years from delivery of the
vessel in April 2002, CDI has options to lock in a fixed rate. In accordance
with the MARAD Debt agreements, CDI is required to comply with certain covenants
and restrictions, including the maintenance of minimum net worth, working
capital and debt-to-equity requirements. As of December 31, 2001 and September
30, 2002, the Company was in compliance with these covenants.
The Company has a revolving credit facility which was increased from
$40 million to $70 million during 2002 and the term extended for three years.
The Company drew upon this facility only 134 days during the past four years
with maximum borrowing of $11.9 million. The Company had no outstanding balance
under this facility as of December 31, 2001. This facility is collateralized by
accounts receivable and most of the remaining vessel fleet, bears interest at
LIBOR plus 125-250 basis points depending on CDI leverage ratios (approximately
4% as of September 30, 2002) and, among other restrictions, includes three
financial covenants (cash flow leverage, minimum interest coverage and fixed
charge coverage). As of September 30, 2002, the Company had drawn $52.0 million
under this revolving credit facility and was in compliance with these covenants
with the exception of the cash flow leverage covenant, for which the Company
obtained a waiver. Management believes the Company will be in compliance with
these covenants at December 31, 2002 and throughout 2003.
In November 2001, ERT (with a corporate guarantee by CDI) entered into
a five-year lease transaction with an entity owned by a third party to fund
CDI's portion of the construction costs ($67 million) of the spar for the
Gunnison field. As of December 31, 2001 and June 30, 2002, the entity had drawn
down $5.6 million and $22.8 million, respectively, on this facility. Accrued
interest cost on the outstanding balance is capitalized to the cost of the
facility during construction and is payable monthly thereafter. In August 2002,
CDI acquired 100% of the equity of the entity and converted the notes into a
term loan. The total commitment of the loan was reduced to $35 million and will
be payable in quarterly installments of $1.75 million for three years after
delivery of the spar with the remaining $15.75 million due at the end of the
three years. The
8
facility bears interest at LIBOR plus 225-300 basis points depending on CDI
leverage ratios (approximately 4.3% as of September 30, 2002) and includes,
among other restrictions, three financial covenants (cash flow leverage, minimum
interest coverage and debt to total book capitalization). The Company was in
compliance with these covenants as of September 30, 2002 with the exception of
the cash flow leverage covenant, for which the Company obtained a waiver.
Management believes the Company will be in compliance with these covenants at
December 31, 2002 and throughout 2003. The debt ($26.9 million at September 30,
2002) and related asset have been reflected on CDI's balance sheet beginning in
the third quarter of 2002. The purchase price was allocated entirely to
construction in progress.
During the nine months ended September 30, 2002 and 2001, the Company
made cash payments for interest charges, net of capitalized interest, of $1.4
million and $1.6 million, respectively.
Note 7 - Commitments and Contingencies
The Company is involved in various routine legal proceedings primarily
involving claims for personal injury under the General Maritime Laws of the
United States and Jones Act as a result of alleged negligence. In addition, the
Company from time to time incurs other claims, such as contract disputes, in the
normal course of business. During the third quarter of 2002, the Company engaged
in a large construction project at the Bombax field in Trinidad. In late
September, supports engineered by a subcontractor failed resulting in over a
month of downtime for the Q4000. Management believes that under the terms of the
contract the Company is entitled to the contractual stand-by rate for the Q4000
during its downtime. Although we have not reached agreement on these issues with
the customer, we continue to maintain constructive dialogue in order to resolve
this matter amicably. Although such matters have the potential of significant
liability, the Company believes that the outcome of all such matters and
proceedings will not have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
In 1998, one of the Company's subsidiaries entered into a subcontract
with Seacore Marine Contractors Limited to provide the Sea Sorceress to a
Coflexip subsidiary in Canada. Due to difficulties with respect to the sea
states and soil conditions the contract was terminated and an arbitration to
recover damages was commenced. A preliminary liability finding has been made by
the arbitrator against Seacore and in favor of the Coflexip subsidiary. Cal Dive
was not a party to this arbitration proceeding. Only one of the grounds is
potentially applicable to our subsidiary. In the event that Seacore chooses to
seek contribution from our subsidiary which could entail another arbitration, it
is anticipated that the Company's exposure if any, should be less than $500,000.
In another lengthy commercial dispute, EEX Corporation sued Cal Dive and others
alleging breach of fiduciary duty by a former EEX employee and damages resulting
from certain construction and property acquisition agreements. Cal Dive has
responded alleging EEX Corporation breached various provisions of the same
contracts and is defending the litigation vigorously. The Company has commenced
the variety of activities necessary in connection with the trial date, which has
been set for February 2003. Although such litigation has the potential of
significant liability, the Company believes that the outcome of all such
proceedings is not likely to have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
Note 8 - Acquisition of Businesses
Canyon Offshore
In January 2002, CDI purchased Canyon, a supplier of remotely operated
vehicles (ROVs) and robotics to the offshore construction and telecommunications
industries. CDI purchased approximately 85% of Canyon's stock for cash of $52.9
million, the assumption of $9.0 million of Canyon debt (offset by $3.1 million
of cash acquired) and 181,000 shares of our
9
common stock (143,000 shares of which we purchased as treasury shares during the
fourth quarter of 2001). Cal Dive committed to purchase the remaining 15% for
cash at a price to be determined by Canyon's performance during the years 2002
through 2004 from continuing employees at a minimum purchase price of $13.53 per
share. As they are employees, amounts paid, if any, in excess of the $13.53 per
share will be recorded as compensation expense. These remaining shares have been
classified as redeemable stock in subsidiary in the accompanying balance sheet
and will be adjusted to their estimated redemption value at each reporting
period based on Canyon's performance. The acquisition was accounted for as a
purchase with the acquisition price allocated to the assets acquired and
liabilities assumed based upon their estimated fair values, with the excess
being recorded as goodwill, which totaled approximately $45.1 million. The
allocation of the purchase price to the fair market value of the net assets
acquired in the Canyon acquisition are based on preliminary estimates of fair
market values and may be revised when additional information concerning asset
and liability valuation is obtained; however, management does not anticipate the
adjustments, if any, will have a material impact on the Company's results of
operations or financial position. The results of Canyon are included in the
accompanying statements of operations since the date of the purchase, January 2,
2002.
Well Ops (UK) Ltd.
In July 2002, CDI purchased the Subsea Well Operations Business Unit of
CSO Ltd., a wholly owned subsidiary of Technip-Coflexip, for $68.6 million. Well
Ops (UK) Ltd. performs life of field well operations and marine construction
tasks primarily in the North Sea. The acquisition was accounted for as a
business purchase with the acquisition price allocated to the assets acquired
and liabilities assumed based upon their estimated fair values, with the excess
being recorded as goodwill, which totaled approximately $28.6 million. The
allocation of the purchase price to the fair market value of the net assets
acquired in this acquisition are based on preliminary estimates of fair market
values and may be revised when additional information concerning asset and
liability valuation is obtained; however, management does not anticipate the
adjustments, if any, will have a material impact on the Company's results of
operations or financial position.
The financial statements of this foreign subsidiary are measured using
the local currency as the functional currency. Assets and liabilities of this
subsidiary are translated at exchange rates as of the balance sheet date.
Revenues and expenses are translated at average rates of exchange in effect
during the period. The resulting cumulative translation adjustments of $549,000,
net of taxes, have been recorded as other comprehensive income, which is a
separate component of stockholder's equity. Foreign currency transaction gains
and losses are included in consolidated net income.
Note 9 - Offshore Property Acquisitions
In August 2002 ERT, a wholly owned subsidiary of Cal Dive
International, Inc. acquired the 74.8% working interest of Shell Exploration &
Production Company in the South Marsh Island 130 (SMI 130) field (Shell
acquisition). ERT paid $10.3 million in cash and assumed Shell's pro-rata share
of the related decommissioning liability. SMI 130 consists of two blocks,
located in approximately 215 feet of water, with approximately 155 wells on five
8-pile platforms. Unaudited pro forma combined operating results of CDI and the
Shell acquisition for the nine months ended September 30,2002 and 2001,
respectively are summarized as follows (in thousands, except per share data):
2002 2001
---------- ----------
Net revenues............................. $ 228,729 $ 186,019
Income before taxes...................... 24,906 44,935
Net income............................... 16,189 29,348
10
EARNINGS PER SHARE:
Basic............................... $0.46 $0.90
Diluted............................. $0.46 $0.89
In August 2002, ERT also completed the purchase of seven Gulf of Mexico
fields from Amerada Hess including its 25% ownership position in SMI 130 for
$9.3 million in cash and assumption of Amerada Hess's pro-rata share of the
related decommissioning liability. As a result, ERT took over as operator with
an effective 100% working interest in that field.
In June 2002, ERT acquired a package of offshore properties from
Williams exploration and production. ERT paid $5.5 million and assumed the
pro-rata share of the abandonment obligation for the acquired interests. The
blocks purchased represent an average 30% net working interest in 26 Gulf of
Mexico leases.
In April 2002, ERT acquired a 100% interest in East Cameron Block 374,
including existing wells, equipment and improvements. The property, located in
425 feet of water, was jointly owned by Murphy Exploration & Production Company
and Callon Petroleum Operating Company. Terms included a cash payment to
reimburse the owners for the inception-to-date cost of the subsea wellhead and
umbilical, and an overriding royalty interest in future production. Cal Dive
completed the temporarily abandoned number one well and performed a subsea
tie-back to a host platform. The cost of completion and tie-back was
approximately $7 million, with first production occurring in August 2002.
Note 10 - Equity Offering
In May 2002 CDI sold 3.4 million shares of primary common stock for
$23.16 per share, along with 517,000 additional shares to cover over-allotments.
Net proceeds to the Company of approximately $87.2 million were used for the
Coflexip Well Operations acquisition (see Note 8), ERT acquisitions and to
retire debt under the Company's revolving line of credit.
Note 11 - Marco Polo Project
In June 2002 CDI, along with El Paso Energy Partners, formed Deepwater
Gateway L.L.C. (a 50/50 venture) to design, construct, install, own and operate
a tension leg platform ("TLP") production hub primarily for Anadarko Petroleum
Corporation's Marco Polo field discovery in the Deepwater Gulf of Mexico. CDI's
share of the construction costs is estimated to be approximately $110 million.
In August 2002 the Company, along with El Paso, completed a non-recourse project
financing for this venture, terms of which include a minimum CDI equity
investment of $33 million, $25.4 million of which had been paid as of September
30, 2002. This is recorded as Investment in Deepwater Gateway L.L.C. in the
accompanying consolidated balance sheet. Terms of the financing also require CDI
to guarantee a balloon payment at the end of the financing term (estimated to be
$22.5 million).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS AND ASSUMPTIONS
This Quarterly Report on Form 10-Q includes or incorporates by
reference certain statements that may be deemed "forward looking statements"
under applicable law. Forward looking statements and assumptions in this Form
10-Q that are not statements of historical fact involve risks and assumptions
that could cause actual results to vary materially from those predicted,
including among other things, unexpected delays and operational issues
associated with turnkey projects, the price of crude oil and natural gas,
offshore weather conditions, change in site conditions, and capital expenditures
by customers. The Company strongly encourages
11
readers to note that some or all of the assumptions, upon which such forward
looking statements are based, are beyond the Company's ability to control or
estimate precisely, and may in some cases be subject to rapid and material
change.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 2002 and 2001
Revenues. During the three months ended September 30, 2002, the
Company's revenues increased 63% to $84.0 million compared to $51.6 million for
the three months ended September 30, 2001. Of the overall $32.4 million
increase, $28.7 million was generated by the Subsea and Salvage segment as
revenues in the third quarter of 2002 increased to $68.1 million from $39.4 in
the comparable prior year period. This increase was primarily due to our
acquisitions of Canyon ($8.3 million) and Well Ops UK Limited ($15.9 million).
In addition, the Q4000 and the Intrepid were in service in the third quarter of
2002, which contributed an additional $12.7 million as compared to the quarter
ended September 30, 2001. These increases were offset by a 30% decline in our
base fleet revenues due primarily to significant tropical disturbances in the
Gulf in September 2002 and downtime on the Uncle John for main engine
replacement and new thruster installations.
Oil and gas production revenue for the three months ended September 30,
2002 increased $3.7 million, or 30%, to $15.9 million from $12.2 million during
the comparable prior year period. The increase was due to higher average
realized commodity prices and an increase in production. For the quarter ended
September 30, 2002, average realized natural gas prices increased 16% to $3.28
per mcf from $2.82 during the third quarter of 2001, and realized oil prices
increased to $27.42 per barrel from $25.60 per barrel during the comparable
prior year quarter. Production of 4.4 Bcfe in the third quarter of 2002
increased over the comparable prior year quarter production of 3.3 Bcfe due to
significant acquisitions in September 2002 (Shell and Amerada Hess -- see
discussion below) and successful deployment of our PUD strategy at EC 374.
Gross Profit. Gross profit of $11.6 million for the third quarter of
2002 represents a 12% decrease compared to the $13.2 million recorded in the
comparable prior year period despite increases in revenue in both segments.
Subsea and Salvage gross profit decreased $4.6 million, or 49%, to $4.8 million
for the three months ended September 30, 2002 from $9.3 million in the
comparable prior year period. Most of this gross profit was provided by the
newly acquired Well Ops (UK) Ltd. subsidiary. Vessels operating in the Gulf of
Mexico only broke even due to weather downtime and Uncle John repairs. Slightly
offsetting this decline was a $2.9 million, or 75%, increase in oil and gas
production gross profit due to the increases in the average realized commodity
prices and production noted above.
Gross margins fell to 14% in the third quarter of 2002 from 26% in the
comparable prior year period due mainly to the loss of 17 margin points in the
Subsea and Salvage segment. Gross margins in this segment fell from 24% in the
third quarter of 2001 to only 7% in the current year quarter due primarily to
the combination of tropical weather, vessels out of service, and low margin on a
large project in Trinidad (Bombax) due in part to revenues for downtime on the
Q4000 and Eclipse resulting from failure of improperly engineered third party
supports. In late September, supports engineered by a subcontractor failed
resulting in over a month of downtime for the Q4000. Management believes that
under the terms of the contract the Company is entitled to the contractual
stand-by rate for the Q4000 during its downtime. Although we have not reached
agreement on these issues with the customer, we continue to maintain
constructive dialogue in order to resolve this matter amicably. Oil and gas
production gross margins increased to 43% in the third quarter of 2002 from 32%
in the year ago quarter due to the aforementioned increases in average realized
commodity prices.
12
Selling & Administrative Expenses. Selling and administrative expenses
of $6.4 million in the third quarter of 2002 are $1.4 million higher than the
$5.0 million incurred in the third quarter of 2001 due to the addition of Canyon
($900,000) and the Well Ops (UK) Ltd. division ($300,000).
Other (Income) Expense. The Company reported net interest expense and
other of $659,000 for the three months ended September 30, 2002 compared to
$170,000 for the three months ended September 30, 2001. The increase between
periods is due primarily to the increase in our debt, as well as reduced
capitalized interest expense as the Q4000 and Intrepid were in service in the
third quarter of 2002.
Income Taxes. Income taxes decreased to $1.6 million for the three
months ended September 30, 2002 compared to $2.8 million in the comparable prior
year period due to decreased profitability.
Net Income. Net income of $3.0 million for the three months ended
September 30, 2002 was $2.3 million, or 44%, less than the comparable period in
2001 as a result of factors described above.
Comparison of Nine Months Ended September 30, 2002 and 2001
Revenues. During the nine months ended September 30, 2002, the
Company's revenues increased $51.4 million, or 32%, to $210.2 million compared
to $158.8 million for the nine months ended September 30, 2001 with the Subsea
and Salvage segment contributing an additional $68.9 million, which was
partially offset by a decline in the oil and gas production segment of $17.5
million. Our acquisitions of Canyon and Well Ops UK Ltd added $29.3 million and
$15.9 million, respectively, with the remaining increase due to the addition of
three deepwater construction vessels.
Oil and gas production revenue for the nine months ended September 30,
2002 decreased 31% to $38.1 million from $55.6 million during the comparable
prior year period due to a 28% decline in our average realized commodity prices
to $3.43 per Mcfe ($3.08 per Mcf of natural gas and $24.56 per barrel of oil) in
the first nine months of 2002 from $4.78 per Mcfe ($4.90 per Mcf of natural gas
and $26.37 per barrel of oil) in the comparable prior year period. Production
also decreased slightly (6%) to 10.4 Bcfe in the first nine months of 2002 from
11.1 Bcfe in the first nine months of 2001.
Gross Profit. Gross profit of $39.9 million for the first nine months
of 2002 was $12.5 million, or 24%, lower than the $52.4 million gross profit
recorded in the comparable prior year period due mainly to the revenue decrease
in oil and gas production mentioned above. Oil and gas production gross profit
decreased $10.4 million from $28.0 million in the first nine months of 2001 to
$17.6 million for the nine months ended September 30, 2002, due to the
aforementioned decreases in average realized commodity prices and production.
Subsea and Salvage gross profit declined $2.1 million to $22.3 million in the
first nine months of 2002 from $24.4 million in the prior year period. While the
acquisitions of Canyon and Well Ops UK Ltd added additional gross profit of $4.6
million and $4.3 million, respectively, our DP vessels only generated $6.1
million of gross profit, just half of the $11.2 million in the comparable prior
year period.
Gross margins decreased from 33% for the nine months ended September
30, 2001 to 19% for the first nine months of 2002. Subsea and Salvage margins
decreased to 13% for the nine months ended September 30, 2002 from 24% in the
comparable prior year period due mainly to the softened demand in the
construction and ROV support markets and low margins on the Nansen/Boomvang
project, which included a high level of pass-through revenues, as well as a
significant level of tropical weather in the Gulf in September 2002. Oil and gas
production gross margins declined slightly from 50% in the first nine months of
2001 to 46% for the nine months ended September 30, 2002 due to the
aforementioned decrease in average realized commodity prices.
13
Selling & Administrative Expenses. Selling and administrative expenses
were $18.9 million in the first nine months of 2002, which is $3.5 million more
than the $15.4 million incurred in the first nine months of 2001 due almost
exclusively to the acquisitions of Canyon and Well Ops UK Ltd. We gained one
operating margin point as overhead dropped to 9% of revenues in the nine month
period ended September 30, 2000 from 10% in the comparable prior year period.
Other (Income) Expense. The Company reported net interest expense and
other of $750,000 for the nine months ended September 30, 2002 in contrast to
$903,000 for the comparable period in the prior year. The increase in debt from
our capital program resulted in an additional $1.3 million in interest expense
in the first nine months of 2002 compared to the first nine months of 2001.
However, the $1.1 million gain on our foreign currency hedge relating to the
Well Ops acquisition included in other income for the nine months ended
September 30, 2002 more than offset this increase in interest expense.
Income Taxes. Income taxes decreased to $7.1 million for the nine
months ended September 30, 2002, compared to $12.6 million in the comparable
prior year period due to decreased profitability.
Net Income. Net income of $13.2 million for the nine months ended
September 30, 2002 was $10.4 million, or 44%, less than the comparable period in
2001 as a result of factors described above.
LIQUIDITY AND CAPITAL RESOURCES
During the three years following our initial public offering in 1997,
internally generated cash flow funded approximately $164 million of capital
expenditures and enabled us to remain essentially debt-free. During the third
quarter of 2000, we closed the long-term MARAD financing for construction of the
Q4000. This U.S. Government guaranteed financing is pursuant to Title XI of the
Merchant Marine Act of 1936 which is administered by the Maritime
Administration. We refer to this debt as MARAD Debt. In January 2002, the
Maritime Administration agreed to expand the facility to $160 million to include
the modifications to the vessel which had been approved during 2001. Through
September 30, 2002, we have drawn $143.4 million on this facility. Significant
internally generated cash flow during 2001, coupled with the collection of a $10
million tax refund, enabled us to acquire the Mystic Viking, the Eclipse and
Professional Divers of New Orleans, while maintaining cash balances of $37.1
million as of December 31, 2001. In January 2002, we acquired Canyon Offshore,
Inc., in July 2002 we acquired the Subsea Well Operations Business Unit from
Technip-Coflexip and in August 2002, ERT made a significant property
acquisition. (See further discussion below.) As of October 31, 2002, we had
$142.1 million of debt outstanding under the MARAD facility and $60.5 million of
debt outstanding under our $70 million revolving credit facility. In addition,
as of October 31, 2002, $28.2 million had been drawn on the project financing
facility covering our share of costs for the construction of the spar production
facility at Gunnison.
Derivative Activities. The Company's price risk management activities
involve the use of derivative financial instruments to hedge the impact of
market price risk exposures primarily related to our oil and gas production.
Under SFAS No. 133, all derivatives are reflected in our balance sheet at their
fair market value.
Under SFAS No. 133 there are two types of hedging activities: hedges of
cash flow exposure and hedges of fair value exposure. The Company engages
primarily in cash flow hedges. Hedges of cash flow exposure are entered into to
hedge a forecasted transaction or the variability of cash flows to be received
or paid related to a recognized asset or liability. Changes in the derivative
fair values that are designated as cash flow hedges are deferred to the extent
that they are effective and are recorded as a component of accumulated other
comprehensive income until the hedged transactions occur and are recognized in
earnings. The ineffective
14
portion of a cash flow hedge's change in value is recognized immediately in
earnings in oil and gas production revenues.
As required by SFAS No. 133, we formally document all relationships
between hedging instruments and hedged items, as well as our risk management
objectives, strategies for undertaking various hedge transactions and our
methods for assessing and testing correlation and hedge ineffectiveness. All
hedging instruments are linked to the hedged asset, liability, firm commitment
or forecasted transaction. We also assess, both at the inception of the hedge
and on an on-going basis, whether the derivatives that are used in our hedging
transactions are highly effective in offsetting changes in cash flows of the
hedged items. We discontinue hedge accounting prospectively if we determine that
a derivative is no longer highly effective as a hedge.
The market value of hedging instruments reflects our best estimate and
is based upon exchange or over-the-counter quotations whenever they are
available. Quoted valuations may not be available due to location differences or
terms that extend beyond the period for which quotations are available. Where
quotes are not available, we utilize other valuation techniques or models to
estimate market values. These modeling techniques require us to make estimations
of future prices, price correlation and market volatility and liquidity. Our
actual results may differ from our estimates, and these differences can be
positive or negative.
During the third quarter of 2002, the Company entered into various cash
flow hedging swap contracts to fix cash flows relating to a portion of the
Company's oil and gas production. All of these qualified for hedge accounting
and none extended beyond a year and a half. The aggregate fair market value of
the swaps was a liability of $2.0 million as of September 30, 2002. The Company
recognized a reduction in revenues of $140,000 as related to the ineffective
portion of the hedging instruments and recorded the effective portion of $1.2
million of loss, net of taxes, in other comprehensive loss within
shareholders' equity.
In March 2002 and April 2002, the Company entered into swap contracts
which were not designated as hedging instruments. These instruments settled
during the third quarter of 2002, the results of which were not material to the
statement of operations.
In June 2002, CDI signed the agreement with Coflexip to acquire the
Subsea Well Operations Business Unit for 44.8 million British pounds (which at
the time equaled $67.5 million) which subsequently closed in July. CDI entered
into a foreign currency forward contract to lock in the British pound to U.S.
dollar exchange rate. Under SFAS No. 133, we accounted for this transaction with
changes in its fair value reported in earnings. Accordingly, a $1.1 million gain
was recorded in other income for the quarter ended June 30, 2002 as a result of
the change in market value of the contract as of June 30, 2002. This contract
settled in July 2002 for $1.1 million.
Operating Activities. Net cash provided by operating activities was
$41.4 million during the nine months ended September 30, 2002, as compared to
$62.1 million during the first nine months of 2001. This decrease was due mainly
to decreased profitability and to last year's collection of a $10 million tax
refund from the Internal Revenue Service relating to the deduction of Q4000
construction costs as research and development expenditures for federal tax
purposes.
Investing Activities. Capital expenditures have consisted principally
of strategic asset acquisitions related to the purchase of DP vessels;
construction of the Q4000 and conversion of the Intrepid; acquisition of
Aquatica, Professional Divers, Canyon and Well Ops (UK) Ltd.; improvements to
existing vessels and the acquisition of offshore natural gas and oil properties.
As a result of our anticipation of an acceleration in Deepwater demand over the
next several years, we incurred $284.1 million of capital expenditures
(including the acquisitions of Canyon and Well Ops (UK) Ltd. and investment in
Deepwater Gateway L.L.C.) during the first nine months of 2002, and $151.3
million during 2001.
15
We incurred $140.3 million of capital expenditures during the first
nine months of 2002 compared to $115.7 million during the comparable prior year
period. Included in the capital expenditures during the first nine months of
2002 was $25.2 million for the construction of the Q4000 and $31.8 million
relating to the Intrepid DP conversion and Eclipse upgrade. Included in the
$115.7 million of capital expenditures in the first nine months of 2001 is $40.0
million for the construction of the Q4000 and $23.0 million relating to the
Intrepid DP conversion project. In addition, in May 2001, Cal Dive acquired a DP
marine construction vessel, the Mystic Viking. The remaining capital
expenditures relate primarily to well exploitation work of ERT.
On August 30, 2002, ERT acquired the 74.8% working interest of Shell
Exploration & Production Company in the South March Island 130 (SMI 130) field.
ERT paid $10.3 million in cash and assumed Shell's pro-rata share of the related
decommissioning liability. ERT also completed the purchase of interests in seven
Gulf of Mexico fields from Amerada Hess including its 25% ownership position in
SMI 130 for $9.3 million in cash and assumption of Amerada Hess' pro-rata share
of the related decommissioning liability. As a result, ERT will take over as
operator with an effective 100% working interest in that field.
In July 2002, CDI purchased the Subsea Well Operations Business Unit of
CSO Ltd., a wholly owned subsidiary of Technip-Coflexip, for $68.6 million using
existing cash balances and our revolving credit facility. The acquisition was
accounted for as a purchase with the acquisition price allocated to the assets
acquired and liabilities assumed based upon their estimated fair values, with
the excess being recorded as goodwill, which totaled approximately $28.6
million. The allocation of the purchase price to the fair market value of the
net assets acquired in this acquisition are based on preliminary estimates of
fair market values and may be revised when additional information concerning
asset and liability valuation is obtained; however, management does not
anticipate the adjustments, if any, will have a material impact on the Company's
results of operations or financial position.
In January 2002, we acquired Canyon Offshore, a supplier of ROVs and
robotics to the offshore construction and telecommunications industries, in
exchange for cash of $52.9 million, the assumption of $9.0 million of Canyon
debt (offset by $3.1 million of cash acquired) and 181,000 shares of our common
stock, 143,000 shares of which we purchased as treasury shares during the fourth
quarter of 2001 for $2.6 million. We will purchase the remaining 15% at a price
to be determined by Canyon's performance during the years 2002 through 2004 from
continuing employees at a minimum purchase price of $13.53 per share. As they
are employees, amounts paid, if any, in excess of the $13.53 per share will be
recorded as compensation expense. The acquisition was accounted for as a
purchase with the acquisition price being allocated to the assets acquired and
liabilities assumed based upon their estimated fair values, with the excess of
$45.1 million being recorded as goodwill. The allocation of the purchase price
to the fair market value of the net assets acquired in this acquisition are
based on preliminary estimates of fair market values and may be revised when
additional information concerning asset and liability valuation is obtained;
however, management does not anticipate the adjustments, if any, will have a
material impact on the Company's results of operations or financial position.
In April 2002, ERT acquired a 100% interest in East Cameron Block 374,
including existing wells, equipment and improvements. The property, located in
425 feet of water, was jointly owned by Murphy Exploration & Production Company
and Callon Petroleum Operating Company. Terms include a cash payment to
reimburse the owners for the inception-to-date cost of the subsea wellhead and
umbilical, and an overriding royalty interest in future production. Cal Dive
completed the temporarily abandoned number one well and performed a subsea
tie-back to host platform. The cost of completion and tie-back was approximately
$7 million with first production occurring in August 2002.
In June 2002, ERT acquired a package of offshore properties from
Williams Exploration and Production. ERT paid $5.5 million and assumed the
pro-rata share of the abandonment
16
obligation for the acquired interests. The blocks purchased represent an average
30% net working interest in 26 Gulf of Mexico leases.
In June 2002 CDI, along with El Paso Energy Partners, formed Deepwater
Gateway L.L.C. (a 50/50 venture) to design, construct, install, own and operate
a tension leg platform ("TLP") production hub primarily for Anadarko Petroleum
Corporation's Marco Polo field discovery in the Deepwater Gulf of Mexico. Our
share of the construction costs is estimated to be approximately $110 million.
In August 2002, the Company along with El Paso, completed a non-recourse project
financing for this venture, terms of which would include a minimum equity
investment for CDI of $33 million, $25.4 million of which had been paid as of
September 30, 2002 and is recorded as Investment in Deepwater Gateway L.L.C. in
the accompanying consolidated balance sheet. Terms of the financing also require
CDI to guarantee a balloon payment at the end of the financing term (estimated
to be $22.5 million).
In April 2000, ERT acquired a 20% working interest in Gunnison, a
deepwater Gulf of Mexico project of Kerr-McGee Oil & Gas Corporation. Consistent
with our philosophy of avoiding exploratory risk, financing for the exploratory
costs, initially estimated at $15 million, was provided by an investment
partnership, the investors of which are Cal Dive senior management, in exchange
for a 25% revenue override of our 20% working interest. We provide no guarantees
to the investment partnership. At that time, the Board of Directors established
three criteria to determine a commercial discovery and the commitment of Cal
Dive funds: 75 million barrels (gross) of reserves, total development costs of
$500 million consistent with such a reserve level, and a Cal Dive estimated
shareholder return of no less than 12%. Kerr-McGee, the operator, drilled
several exploration wells and sidetracks in 3,200 feet of water at Garden Banks
667, 668 and 669 (the Gunnison project) and encountered significant potential
reserves resulting in the three criteria being achieved during 2001. The
exploratory phase was expanded to ensure field delineation resulting in the
investment partnership, which assumed the exploratory risk, funding $20 million
of exploratory drilling costs, considerably above the initial $15 million
estimate. With a commercial discovery being approved for development, Cal Dive
is funding its 20% share of ongoing development and production costs (estimated
in a range of $100 million to $110 million), $58.2 million of which had been
incurred by September 30, 2002, with $26.9 of that for construction of the spar
production facility.
Financing Activities. We have financed seasonal operating requirements
and capital expenditures with internally generated funds, borrowings under
credit facilities, the sale of common stock and project financings. In August
2000, we closed a $138.5 million long-term financing for construction of the
Q4000. In January 2002, the Maritime Administration agreed to expand the
facility to $160 million to include the modifications to the vessel which had
been approved during 2001. During 2001, we borrowed $59.5 million on this
facility and during the first nine months of 2002 drew another $43.9 million
bringing the total to $143.5 million at September 30, 2002. The MARAD debt will
be payable in equal semi-annual installments beginning in August 2002 and
maturing 25 years from such date. It is collateralized by the Q4000, with Cal
Dive guaranteeing 50% of the debt, and bears an interest rate which currently
floats at a rate approximating AAA Commercial Paper yields plus 20 basis points
(approximately 2% as of September 30, 2002). For a period up to four years from
delivery of the vessel in April the Company has options to lock in a fixed rate.
In accordance with the MARAD debt agreements, we are required to comply with
certain covenants and restrictions, including the maintenance of minimum net
worth and debt-to-equity requirements. As of December 31, 2001 and September 30,
2002, we were in compliance with these covenants.
The Company has a revolving credit facility which was increased from
$40 million to $70 million during 2002 and the term extended for three years.
The Company drew upon this facility only 134 days during the past four years
with maximum borrowing of $11.9 million. The Company had no outstanding balance
under this facility as of December 31, 2001. This facility is collateralized by
accounts receivable and most of the remaining vessel fleet, bears interest at
LIBOR plus 125-250 basis points depending on CDI leverage ratios and, among
other
17
restrictions, includes three financial covenants (cash flow leverage, minimum
interest coverage and fixed charge coverage). As of September 30, 2002, the
Company had drawn $52.0 million under this revolving credit facility and was in
compliance with, or obtained waivers for, these covenants with the exception of
the cash flow leverage covenant, for which the Company obtained a waiver.
Management believes the Company will be in compliance with these covenants at
December 31, 2002 and throughout 2003.
In November 2001, ERT (with a corporate guarantee by CDI) entered into
a five-year lease transaction with an entity owned by a third party to fund
CDI's portion of the construction costs ($67 million) of the spar for the
Gunnison field. As of December 31, 2001 and June 30, 2002, the entity had drawn
down $5.6 million and $22.8 million, respectively, on this facility. Accrued
interest cost on the outstanding balance is capitalized to the cost of the
facility during construction and is payable monthly thereafter. In August 2002,
CDI acquired 100% of the equity of the entity and converted the notes into a
term loan. The total commitment of the loan was reduced to $35 million and will
be payable in quarterly installments of $1.75 million for three years after
delivery of the spar with the remaining $15.75 million due at the end of the
three years. The facility bears interest at LIBOR plus 225-300 basis points
depending on CDI leverage ratios and includes, among other restrictions, three
financial covenants (cash flow leverage, minimum interest coverage and debt to
total book capitalization). The Company was in compliance with these covenants
as of September 30, 2002 with the exception of the cash flow leverage covenant,
for which the Company obtained a waiver. Management believes the Company will be
in compliance with these covenants at December 31, 2002 and throughout 2003. The
debt ($26.9 million at September 30, 2002) and related asset have been reflected
on CDI's balance sheet beginning in the third quarter of 2002. The purchase
price was allocated entirely to construction in progress.
In May 2002 CDI sold 3.4 million shares of primary common stock for
$23.16 per share, along with 517,000 additional shares to cover over-allotments.
Net proceeds to the Company of approximately $87.2 million were used for the
Coflexip Well Operation acquisition, ERT acquisitions and to retire debt under
the Company's revolving credit facility.
During the first nine months of 2002, we made payments of $4.7 million
on capital leases assumed in the Canyon acquisition. The only other financing
activity during the nine months ended September 30, 2002 and 2001 involved the
exercise of employee stock options.
The following table summarizes our contractual cash obligations as of
September 30, 2002 and the scheduled years in which the obligation are
contractually due:
Total Less Than 1 2-3 Years 4-5 Years Thereafter
(in thousands) Year
---------- ------------ ----------- ---------- ---------
MARAD debt $142,128 $ 2,500 $ 6,000 $ 7,000 $126,628
Gunnison Term Debt 26,857 -- 6,835 $ 20,022 --
Revolving debt 52,045 -- 52,045 -- --
Gunnison development 52,000 41,000 11,000 --
Investments in Deepwater Gateway
L.L.C (A) 7,600 7,600 -- -- --
Operating leases 21,200 9,408 10,888 462 442
Redeemable stock in subsidiary 7,528 2,509 5,019 -- --
Canyon capital leases and other 4,257 1,579 2,174 504 --
Total cash obligations $313,615 $ 64,596 $ 93,961 $ 27,988 $127,070
(A) Excludes CDI guarantee of balloon payment on non-recourse project
financing (estimated to be $22.5 million).
In addition, in connection with our business strategy, we evaluate
acquisition opportunities (including additional vessels as well as interest in
offshore natural gas and oil
18
properties). We believe that internally-generated cash flow, borrowings under
existing credit facilities and use of project financings along with other debt
and equity alternatives will provide the necessary capital to meet these
obligations and achieve our planned growth.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is currently exposed to market risk in two major areas:
commodity prices and foreign currency. Because all of the Company's debt at
September 30, 2002 was based on floating rates, changes in interest would,
assuming all other things equal, have a minimal impact on the fair market value
of the debt instruments.
Commodity Price Risk
The Company has utilized derivative financial instruments with respect
to a portion of 2002 and 2003 oil and gas production to achieve a more
predictable cash flow by reducing its exposure to price fluctuations. The
Company does not enter into derivative or other financial instruments for
trading purposes.
As of September 30, 2002, the Company has the following volumes under
derivative contracts related to its oil and gas producing activities:
Production Period Instrument Average Monthly Weighted Average
Type Volumes Price
- ---------------------------------------- ------------- --------------------- -------------------
Crude Oil:
October - December 2003 Swap 47 MBbl $26.50
October - December 2002 Swap 31 MBbl $26.49
October - December 2002 Swap 9 MBbl $26.70
Natural Gas:
October - December 2002 Swap 347,000 MMBtu $4.04
November - December 2002 Swap 420,000 MMBtu $3.56
October 2002 Swap 360,000 MMBtu $2.98
Changes in NYMEX oil and gas strip prices would, assuming all other
things being equal, cause the fair market value of these instruments to increase
or decrease.
Subsequent to September 30, 2002, the Company entered into natural gas
swaps for the period January through December 2003. The contracts cover 800,000
MMBtu per month at $4.21 for January through March 2003, and 400,000 MMBtu per
month at $4.015 for April through December 2003.
Foreign Currency Exchange Rates
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 (primarily with respect to Well Ops (UK) Ltd.). The
functional currency for Well Ops (UK) Ltd. is the applicable local currency.
Although the revenues are denominated in the local currency, the effects of
foreign currency fluctuations are partly mitigated because local expenses of
such foreign operations also generally are denominated in the same currency. The
impact of exchange rate fluctuations during the nine months ended September 30,
2002 did not have a material effect on reported amounts of revenues or net
income.
Assets and liabilities of Well Ops (UK) Ltd. are translated using the
exchange rates in effect at the balance sheet date, resulting in translation
adjustments that are reflected in
19
accumulated other comprehensive loss in the stockholders' equity section of our
balance sheet. Approximately 25% of our net assets are impacted by changes in
foreign currencies in relation to the U.S. dollar. We recorded a $549,000
adjustment, net of taxes, to our equity account for the nine months ended
September 30, 2002 to reflect the net impact of the decline of the British Pound
against the U.S. dollar.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2002, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the CEO and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective as of September 30, 2002.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
September 30, 2002.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings primarily
involving claims for personal injury under the General Maritime Laws of the
United States and Jones Act as a result of alleged negligence. In addition, the
Company from time to time incurs other claims, such as contract disputes, in the
normal course of business. During the third quarter of 2002, the Company engaged
in a large construction project at the Bombax field in Trinidad. In late
September, supports engineered by a subcontractor failed resulting in over a
month of downtime for the Q4000. Management believes that under the terms of the
contract the Company is entitled to the contractual stand-by rate for the Q4000
during its downtime. Although we have not reached agreement on these issues with
the customer, we continue to maintain constructive dialogue in order to resolve
this matter amicably. Although such matters have the potential of significant
liability, the Company believes that the outcome of all such matters and
proceedings will not have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
In 1998, one of the Company's subsidiaries entered into a subcontract
with Seacore Marine Contractors Limited to provide the Sea Sorceress to a
Coflexip subsidiary in Canada. Due to difficulties with respect to the sea
states and soil conditions the contract was terminated and an arbitration to
recover damages was commenced. A preliminary liability finding has been made by
the arbitrator against Seacore and in favor of the Coflexip subsidiary. Cal Dive
was not a party to this arbitration proceeding. Only one of the grounds is
potentially applicable to our subsidiary. In the event that Seacore chooses to
seek contribution from our subsidiary which could entail another arbitration, it
is anticipated that the Company's exposure if any, should be less than $500,000.
In another lengthy commercial dispute, EEX Corporation sued Cal Dive and others
alleging breach of fiduciary duty by a former EEX employee and damages resulting
from certain construction and property acquisition agreements. Cal Dive has
responded alleging EEX Corporation breached various provisions of the same
contracts and is defending the litigation vigorously. The Company has commenced
the variety of activities necessary in connection with the trial date, which has
been set for February 2003. Although such litigation has the potential of
significant liability, the Company believes that the outcome of all such
proceedings is not likely to have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits --
Exhibit 99.1 -- Certification of Periodic Report by Chief
Executive Officer
Exhibit 99.2 -- Certification of Periodic Report by Chief
Financial Officer
(b) Reports on Form 8-K --
Current Report on Form 8-K filed August 2, 2002 to report the
Company's 2002 second quarter financial results and its forecasted
results for the quarter ending September 30, 2002.
Current Report on Form 8-K filed September 16, 2002 to disclose
business acquisitions.
21
Current report on Form 8-K/A filed November 13, 2002 amending
September 16, 2002 Form 8-K to include audited financial
statements of significant business acquisitions.
22
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.
CAL DIVE INTERNATIONAL, INC.
Date: November 14, 2002 By:
---------------------------------------
Owen Kratz, Chairman
and Chief Executive Officer
Date: November 14, 2002 By:
---------------------------------------
A. Wade Pursell, Senior Vice
President and Chief Financial Officer
23
CERTIFICATIONS
I, Owen Kratz, the Principal Executive Officer of Cal Dive International,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cal Dive
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
24
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
------------------------------------
Owen Kratz
Chairman and Chief Executive Officer
-----------------------
I, A. Wade Pursell, the Principal Financial Officer of Cal Dive
International, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cal Dive
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
25
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
-------------------------------
A. Wade Pursell
Senior Vice President and
Chief Financial Officer
26
EXHIBIT INDEX
Exhibit 99.1 -- Certification of Periodic Report by Chief Executive Officer
Exhibit 99.2 -- Certification of Periodic Report by Chief Financial Officer
24