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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] 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 1-10945
OCEANEERING INTERNATIONAL, INC.
-----------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2628227
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11911 FM 529
Houston, Texas 77041
- ----------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(713) 329-4500
--------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2004
- ---------------------------- -----------------------------
Common Stock, $.25 Par Value 24,946,167 shares
PAGE 1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
Mar. 31, Dec. 31,
2004 2003
-------- -------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 14,226 $ 18,396
Accounts receivable, net of allowance
for doubtful accounts of $2,763 148,407 151,206
Prepaid expenses and other 56,194 55,163
---------- ----------
Total Current Assets 218,827 224,765
---------- ----------
Property and Equipment, at cost 706,146 650,099
Less: accumulated depreciation 335,918 321,029
---------- ----------
Net Property and Equipment 370,228 329,070
---------- ----------
Goodwill 49,562 38,468
Investments in unconsolidated affiliates 54,833 54,632
Other 16,370 15,921
---------- ----------
TOTAL ASSETS $ 709,820 $ 662,856
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 30,808 $ 32,130
Accrued liabilities 84,853 85,406
Income taxes payable 11,686 15,436
---------- ----------
Total Current Liabilities 127,347 132,972
Long-term Debt, net of current portion 152,038 122,324
Other Long-term Liabilities 50,110 48,185
Commitments and Contingencies
Shareholders' Equity 380,325 359,375
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 709,820 $ 662,856
========== ==========
See Notes to Consolidated Financial Statements.
PAGE 2
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2004 2003
--------- ---------
Revenue $ 166,628 $ 140,669
Cost of services and products 140,994 116,506
--------- ---------
Gross Margin 25,634 24,163
Selling, general and administrative expense 16,677 12,706
--------- ---------
Income from Operations 8,957 11,457
Interest income 55 164
Interest expense (2,094) (1,920)
Equity earnings (losses) of unconsolidated affiliates, net 1,136 (136)
Other income (expense), net (623) (280)
--------- ---------
Income before Income Taxes 7,431 9,285
Provision for income taxes (2,601) (3,250)
--------- ---------
Net Income $ 4,830 $ 6,035
========= =========
Basic Earnings per Share $ 0.20 $ 0.25
Diluted Earnings per Share $ 0.19 $ 0.25
Weighted average number of common shares 24,478 23,919
Incremental shares from stock options and restricted stock 900 581
Weighted average number of common shares and equivalents 25,378 24,500
See Notes to Consolidated Financial Statements.
PAGE 3
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
For the Three Months Ended
March 31,
--------------------------
2004 2003
-------- --------
Cash Flows from Operating Activities:
Net Income $ 4,830 $ 6,035
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,621 13,746
Non-cash compensation and other 1,359 861
Increase (decrease) in cash from:
Accounts receivable 2,799 1,499
Prepaid expenses and other current assets 94 868
Other assets (175) 515
Current liabilities (4,274) (2,061)
Other long-term liabilities 1,305 511
-------- --------
Total adjustments to net income 16,729 15,939
-------- --------
Net Cash Provided by Operating Activities 21,559 21,974
-------- --------
Cash Flows from Investing Activities:
Business acquisitions (49,780) (28,882)
Purchases of property and equipment and other (17,085) (8,355)
Investment in unconsolidated affiliates (202) --
-------- --------
Net Cash Used in Investing Activities (67,067) (37,237)
-------- --------
Cash Flows from Financing Activities:
Net proceeds (payments) on revolving credit and
other long-term debt, net of expenses 29,194 (1,200)
Proceeds from issuance of common stock 12,144 1,146
Purchases of treasury stock -- (11,071)
-------- --------
Net Cash Provided by (Used in) Financing Activities 41,338 (11,125)
-------- --------
Net Decrease in Cash and Cash Equivalents (4,170) (26,388)
Cash and Cash Equivalents - Beginning of Period 18,396 66,201
-------- --------
Cash and Cash Equivalents - End of Period $ 14,226 $ 39,813
======== ========
See Notes to Consolidated Financial Statements.
PAGE 4
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies
We have prepared these unaudited consolidated financial statements
pursuant to instructions for the quarterly report on Form 10-Q required to
be filed with the Securities and Exchange Commission. These financial
statements do not include all information and footnotes normally included
in financial statements prepared in accordance with generally accepted
accounting principles. These financial statements reflect all adjustments
that we believe are necessary to present fairly our financial position at
March 31, 2004 and our results of operations and cash flows for the
periods presented. All such adjustments are of a normal and recurring
nature. The financial statements should be read in conjunction with the
consolidated financial statements and related notes included in our annual
report on Form 10-K for the year ended December 31, 2003. The results for
interim periods are not necessarily indicative of annual results.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expense
during the reporting period. Actual results could differ from those
estimates.
Stock-Based Compensation
We use the intrinsic value method of accounting established by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
to account for our stock-based compensation programs. Accordingly, we do
not recognize any compensation expense when the exercise price of an
employee stock option is equal to the market price per share of our common
stock on the grant date. The following illustrates the pro forma effect on
net income and earnings per share if we had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation:
For the
Three Months Ended
March 31,
------------------------
2004 2003
--------- ---------
(in thousands, except per
share amounts)
Net Income:
As reported $ 4,830 $ 6,035
Employee stock-based compensation
included in net income, net of income
tax benefit 1,588 863
Pro forma compensation expense
determined under fair value methods for
all awards, net of income tax benefit (3,093) (2,113)
--------- ---------
Pro forma $ 3,325 $ 4,785
========= =========
Reported earnings per common share:
Basic $ 0.20 $ 0.25
========= =========
Diluted $ 0.19 $ 0.25
========= =========
Pro forma earnings per common share:
Basic $ 0.14 $ 0.20
========= =========
Diluted $ 0.13 $ 0.20
========= =========
For purposes of these pro forma disclosures, we estimate the fair value of
each option grant as of the date of grant using a Black-Scholes option
pricing model. The estimated fair value of the options is amortized to pro
forma expense over the expected average lives of the options.
PAGE 5
Variable Interest Entities
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. FIN No. 46 requires a company to consolidate a variable
interest entity if it is designated as the primary beneficiary of that
entity. A variable interest entity is generally defined as an entity whose
equity is insufficient to absorb the expected losses or whose owners lack
the risk and rewards of ownership. FIN No. 46 is effective for all
variable interest entities created or modified after January 31, 2003 and
requires certain disclosures for all variable interest entities. In
December 2003, the FASB published a revision to FIN No. 46 ("FIN No. 46R")
to clarify some of the provisions of the Interpretation and to defer the
effective date of implementation for certain entities created before
January 31, 2003. Under the guidance of FIN No. 46R, entities that do not
have interests in structures that are commonly referred to as special
purpose entities ("SPEs") are required to apply the provisions of the
Interpretation in financials statements for periods ending after March 14,
2004. The adoption of the provisions of FIN No. 46 did not have a material
impact on our consolidated financial position, results of operations or
liquidity. In December 2003, we purchased a 50% equity interest in Medusa
Spar LLC for $43.7 million. Medusa Spar LLC owns a 75% interest in a
production spar platform. Medusa Spar LLC's revenue is derived from
processing oil and gas production for a fee based on the volumes processed
("throughput"). The majority working interest owner of the Medusa field,
the spar's initial location, has committed to deliver a minimum
throughput, which we expect will generate sufficient revenue to repay
Medusa Spar LLC's bank debt. The Medusa Spar LLC financed its acquisition
of its 75% interest in the production spar platform using approximately
50% debt and 50% equity from its equity holders. Our maximum exposure to
loss from our investment in Medusa Spar LLC is our current carrying value
of $44.7 million. Medusa Spar LLC is a variable interest entity. As we are
not the primary beneficiary under FIN 46, we are accounting for our
investment in Medusa Spar LLC under the equity method of accounting. In
the first quarter of 2004, we recorded $1.1 million of equity earnings of
unconsolidated affiliates from this investment.
2. Prepaid Expenses and Other Current Assets
Our prepaid expenses and other current assets consisted of the following:
Mar. 31, Dec. 31,
2004 2003
--------- --------
(in thousands)
Spare parts for remotely operated vehicles $ 12,834 $ 12,865
Inventories, primarily raw materials 20,800 19,595
Deferred taxes 17,390 16,265
Other 5,170 6,438
--------- --------
Total $ 56,194 $ 55,163
========= ========
Inventory is stated at the lower of cost or market. We determine cost
using the weighted average method.
3. Debt
Our long-term debt consisted of the following:
Mar. 31, Dec. 31,
2004 2003
--------- ---------
(in thousands)
6.72% Senior Notes $ 100,000 $ 100,000
Revolving credit facility 50,000 20,000
Software vendor financing 2,038 2,324
--------- ---------
Long-term Debt 152,038 122,324
Less: current portion -- --
--------- ---------
Long-term Debt, net of current portion $ 152,038 $ 122,324
========= =========
PAGE 6
Scheduled maturities of our long-term debt as of March 31, 2004 were as follows:
Software
Vendor
6.72% Notes Revolving Credit Financing Total
----------- ---------------- --------- ---------
(in thousands)
Remainder of 2004 $ -- $ -- $ 866 $ 866
2005 -- -- 1,172 1,172
2006 20,000 -- -- 20,000
2007 20,000 -- -- 20,000
2008 20,000 50,000 -- 70,000
Thereafter 40,000 -- -- 40,000
-------- --------- --------- ---------
Total $100,000 $ 50,000 $ 2,038 $ 152,038
======== ========= ========= =========
Maturities through March 31, 2005 are not classified as current as of
March 31, 2004, since we can extend the maturity by reborrowing under the
revolving credit facility with a maturity date after one year.
4. Shareholders' Equity
Our shareholders' equity consisted of the following:
Mar. 31, Dec. 31,
2004 2003
--------- ---------
(in thousands)
Common Stock, par value $0.25;
90,000,000 shares authorized; 24,930,525 and 24,813,289
shares issued $ 6,233 $ 6,203
Additional paid-in capital 118,909 113,704
Treasury stock; zero and 429,545 shares, at cost -- (9,563)
Retained earnings 249,881 245,051
Other comprehensive income 5,302 3,980
--------- ---------
Total shareholders' equity $ 380,325 $ 359,375
========= =========
5. Income Taxes
During interim periods, we provide for income taxes at our estimated
annual effective tax rate, using assumptions as to (1) earnings and other
factors that would affect the tax calculation for the remainder of the
year and (2) the operations of foreign branches and subsidiaries that are
subject to local income and withholding taxes.
We paid cash taxes of $6.9 million and $2.8 million for the three months
ended March 31, 2004 and 2003, respectively.
6. Business Segment Information
We supply a comprehensive range of technical services and specialty
products to customers in a variety of industries. Our Oil and Gas business
consists of five business segments: Remotely Operated Vehicles ("ROVs");
Subsea Products; Subsea Projects; Mobile Offshore Production Systems; and
Inspection. Our Advanced Technologies business is a separate segment that
provides project management, engineering services and equipment for
applications outside the oil and gas industry. Unallocated expenses are
those not associated with a specific business segment. These consist of
expenses related to our incentive and deferred compensation plans,
including restricted stock and bonuses, as well as other general expenses.
PAGE 7
There are no differences in the basis of segmentation or in the basis of
measurement of segment profit or loss from those used in our consolidated
financial statements for the year ended December 31, 2003. The following
summarizes certain financial data by business segment:
For the Three Months Ended
-----------------------------------
Mar. 31, Mar. 31, Dec. 31,
2004 2003 2003
--------- --------- ---------
(in thousands)
Revenue
Oil and Gas
ROVs $ 46,405 $ 35,064 $ 43,772
Subsea Products 33,326 24,041 25,873
Subsea Projects 12,483 12,534 17,520
Mobile Offshore Production Systems 12,767 11,289 11,747
Inspection 31,899 30,480 33,670
--------- --------- ---------
Total Oil and Gas 136,880 113,408 132,582
Advanced Technologies 29,748 27,261 29,483
--------- --------- ---------
Total $ 166,628 $ 140,669 $ 162,065
========= ========= =========
Gross Margins
Oil and Gas
ROVs $ 10,853 $ 8,859 $ 11,968
Subsea Products 5,697 3,588 4,096
Subsea Projects 1,476 2,291 3,819
Mobile Offshore Production Systems 4,534 4,601 4,444
Inspection 2,920 3,150 3,192
--------- --------- ---------
Total Oil and Gas 25,480 22,489 27,519
Advanced Technologies 5,497 5,387 4,899
Unallocated Expenses (5,343) (3,713) (4,395)
--------- --------- ---------
Total $ 25,634 $ 24,163 $ 28,023
========= ========= =========
Operating Income
Oil and Gas
ROVs $ 8,565 $ 7,073 $ 9,985
Subsea Products 2,025 769 (261)
Subsea Projects 366 1,341 2,743
Mobile Offshore Production Systems 4,038 3,943 3,807
Inspection 98 635 156
--------- --------- ---------
Total Oil and Gas 15,092 13,761 16,430
Advanced Technologies 3,701 3,857 2,807
Unallocated Expenses (9,836) (6,161) (7,490)
--------- --------- ---------
Total $ 8,957 $ 11,457 $ 11,747
========= ========= =========
In February 2004, we acquired the drill support ROV business of Stolt
Offshore S.A. for approximately $50 million (see note 8). All of the
assets that we acquired are in our ROV segment.
7. Comprehensive Income
Comprehensive income is the total of net income and all nonowner changes
in equity. The amounts of comprehensive income for the three-month periods
ended March 31, 2004 and 2003 are as follows:
Three Months Ended
March 31,
----------------------
2004 2003
----- ------
(in thousands)
Net Income per Consolidated Statements of Income $ 4,830 $ 6,035
Foreign Currency Translation Gains (Losses) 1,403 (2,304)
Change in Fair Value of Interest Rate Hedge -- 54
Change in Minimum Pension Liability Adjustment (81) 69
------- -------
Comprehensive Income $ 6,152 $ 3,854
======= =======
PAGE 8
Amounts comprising other elements of comprehensive income in Shareholders'
Equity are as follows:
Mar. 31, 2004 Dec. 31, 2003
------------- -------------
(in thousands)
Accumulated Net Foreign Currency Translation Adjustments $ 7,564 $ 6,161
Minimum Pension Liability Adjustment (2,262) (2,181)
------- -------
$ 5,302 $ 3,980
======= =======
8. Business Acquisition
In February 2004, we acquired the drill support ROV business of Stolt
Offshore S.A. for approximately $50 million. This business acquisition is
being accounted for using the purchase method of accounting, with the
purchase price being allocated to the assets and liabilities acquired
based on their fair market values at the date of acquisition. We have made
the purchase price allocation based on information currently available to
us and the allocation is subject to change when we obtain final asset and
liability valuations. The acquisition was not material. As a result, we
have not included pro forma information in this report. The results of the
business acquired are included in our consolidated statement of income
from the date of the acquisition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
All statements in this quarterly report on Form 10-Q, other than statements of
historical facts, including, without limitation, statements regarding our
business strategy, plans for future operations and industry conditions, are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to various risks, uncertainties and assumptions,
including those we have referred to under the headings "Business -- Risks and
Insurance" and "Cautionary Statement Concerning Forward-Looking Statements" in
Part I of our annual report on Form 10-K for the year ended December 31, 2003.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, because of the inherent limitations in the
forecasting process, as well as the relatively volatile nature of the industries
in which we operate, we can give no assurance that those expectations will prove
to be correct. Accordingly, evaluation of our future prospects must be made with
caution when relying on forward-looking information.
This section should be read in conjunction with the Management's Discussion and
Analysis included in our annual report on Form 10-K for the year ended December
31, 2003.
Executive Overview
We generate over 80% of our revenue from our services and products provided to
the oil and gas industry. In 2003, we operated in what we considered to be a
difficult market for oilfield services and products in general. These same
market conditions persisted through the first quarter of 2004. Exclusive of a
$1.8 million pre-tax expense for a terminated acquisition effort, our net
results for the three months ended March 31, 2004 would have been consistent
with those achieved in the three-month periods ended March 31, 2003 and December
31, 2003.
We anticipate that our quarterly earnings for the remainder of 2004 will
increase as we are experiencing higher bidding levels for umbilicals within our
Subsea Products business, and we expect that our Inspection segment will have a
seasonal increase. With the closing of the acquisition of the drill support ROV
business of Stolt Offshore S.A. in February 2004, we expect better ROV results
for the remainder of 2004.
Critical Accounting Policies and Estimates
For information about our Critical Accounting Policies and Estimates, please
refer to the discussion in our annual report on Form 10-K for the year ended
December 31, 2003 under the heading "Critical Accounting Policies and Estimates"
in Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Liquidity and Capital Resources
We consider our liquidity and capital resources adequate to support our
operations and capital commitments. At March 31, 2004, we had working capital of
$91 million, including $14 million of cash and cash equivalents. Additionally,
we had $200 million of borrowing capacity available under our revolving credit
facility.
Our capital expenditures were $67 million during the three months ended March
31, 2004, as compared to $38 million during the corresponding period of last
year. Capital expenditures in the current year consisted primarily of the
acquisition of the drill support ROV business of Stolt Offshore S.A. and
expenditures related to our new umbilical facility in Panama City, Florida.
Prior-year capital expenditures consisted primarily of the acquisition of OIS
PAGE 9
International Inspection plc and expenditures relating to the addition of units
to our fleet of ROVs to replace older units we retired.
We had no material commitments for capital expenditures at March 31, 2004.
At March 31, 2004, we had long-term debt of $152 million and a 29% debt-to-total
capitalization ratio. We have $100 million of Senior Notes outstanding, to be
repaid from 2006 through 2010. We have a $250 million revolving credit facility
that expires in January 2008. The revolving credit facility has short-term
interest rates that float with market rates, plus applicable spreads. We have
not guaranteed any debt not reflected on our consolidated balance sheet and do
not have any off balance sheet arrangements as defined by SEC rules.
In the three-month period ended March 31, 2004, our cash and cash equivalents
decreased $4 million. We generated $22 million in cash from operating
activities, used $67 million of cash in investing activities and obtained $41
million of cash from financing activities. The cash used in investing activities
was used primarily for the acquisition of the drill support ROV business of
Stolt Offshore S.A., and the cash obtained from financing activities was used,
along with the cash provided by operating activities, to pay for the capital
expenditures.
Results of Operations
We operate in six business segments. The segments are contained within two
businesses - services and products provided to the oil and gas industry ("Oil
and Gas") and all other services and products ("Advanced Technologies").
Consolidated revenue and margin information is as follows:
For the Three Months Ended
-----------------------------------
Mar. 31, Mar. 31, Dec. 31,
2004 2003 2003
--------- --------- ---------
(in thousands, except for percentages)
Revenue $ 166,628 $ 140,669 $ 162,065
Gross margin 25,634 24,163 28,023
Operating margin 8,957 11,457 11,747
Gross margin % 15% 17% 17%
Operating margin % 5% 8% 7%
We generate a material amount of our consolidated revenue from contracts for
marine services and inspection services in the Gulf of Mexico and North Sea,
which are usually more active from April through November compared to the rest
of the year. Revenues in our Mobile Offshore Production Systems, Subsea Products
and Advanced Technologies segments are generally not seasonal.
PAGE 10
OIL AND GAS
The table below sets forth our revenues and gross margins for our Oil and Gas
business for the periods indicated.
For the Three Months Ended
-----------------------------------
Mar. 31, Mar. 31, Dec. 31,
2004 2003 2003
--------- --------- ---------
(in thousands, except for percentages)
ROVs
Revenue $ 46,405 $ 35,064 $ 43,772
Gross margin 10,853 8,859 11,968
Gross margin % 23% 25% 27%
Operating margin 8,565 7,073 9,985
Operating margin % 18% 20% 23%
Work class utilization % 69% 64% 72%
Subsea Products
Revenue $ 33,326 $ 24,041 $ 25,873
Gross margin 5,697 3,588 4,096
Gross margin % 17% 15% 16%
Operating margin 2,025 769 (261)
Operating margin % 6% 3% (1)%
Subsea Projects
Revenue $ 12,483 $ 12,534 $ 17,520
Gross margin 1,476 2,291 3,819
Gross margin % 12% 18% 22%
Operating margin 366 1,341 2,743
Operating margin % 3% 11% 16%
Mobile Offshore Production Systems
Revenue $ 12,767 $ 11,289 $ 11,747
Gross margin 4,534 4,601 4,444
Gross margin % 36% 41% 38%
Operating margin 4,038 3,943 3,807
Operating margin % 32% 35% 32%
Inspection
Revenue $ 31,899 $ 30,480 $ 33,670
Gross margin 2,920 3,150 3,192
Gross margin % 9% 10% 9%
Operating margin 98 635 156
Operating margin % 0% 2% 0%
Total Oil and Gas
Revenue $ 136,880 $ 113,408 $ 132,582
Gross margin 25,480 22,489 27,519
Gross margin % 19% 20% 21%
Operating margin 15,092 13,761 16,430
Operating margin % 11% 12% 12%
Our ROV segment gross margins reflect the utilization percentages of the
respective periods. As a result of increased construction support work, which
began during the latter half of 2003 and carried through the first quarter of
2004, the average revenue per day of ROV utilization was higher than the
corresponding period in 2003, and comparable to that of the preceding quarter.
Gross margin per day of utilization during the first quarter of 2004 was
comparable to that of the corresponding period in 2003, and down from the
unusually high levels experienced during the last quarter of 2003. Over the
balance of the year, we anticipate an increase in profitability from our
international operations, particularly due to the February 2004 acquisition of
34 ROVs from Stolt Offshore S.A.
During the quarter ended March 31, 2004, our Subsea Products revenues and gross
margins increased from the corresponding quarter of the prior year and the
preceding quarter. Our outlook for the Subsea Products segment is highly
positive based on the projected growth in subsea wellhead completions and the
level of bid activity we are experiencing. We anticipate this segment's results
will be higher in 2004 as compared to 2003. Our steel tube cabling
PAGE 11
machine in Brazil is now operational, and we expect our Panama City, Florida
facility, with steel tube capability, to be operational during the fourth
quarter of 2004.
For our Subsea Projects segment, we experienced a seasonal decline compared to
the preceding quarter. Our margins were slightly below those achieved in the
corresponding quarter of 2003. The corresponding period of 2003 included
reductions in cost estimates totaling $1.9 million. We adjusted the cost
estimates due to the favorable completion of an installation project and the
settlement of a personal injury claim. We believe that for 2004 our Subsea
Projects segment will have comparable results to 2003.
Our Mobile Offshore Production Systems gross margins were flat for all periods
presented, as our three main assets were working under the same contracts as in
2003. On a gross margin percentage basis, the first three-month period of 2004
was lower than the other periods presented because 2004 revenue was higher as a
result of low-margin project engineering work. We expect margins to continue at
about the same levels through 2004.
Our Inspection revenues and gross margins were relatively flat. Because our
Inspection segment is headquartered in Aberdeen, Scotland, our Inspection
administrative expenses were higher in 2004 compared to the 2003 period,
primarily due to increases of 13%, compared to the corresponding period of 2003,
and 8%, compared to the preceding quarter, in the value of the British Pound
Sterling measured against the U.S. Dollar. We anticipate having higher margin
percentages for this business for the remainder of 2004 from seasonal factors,
and expect 2004 to have slightly better results than 2003.
ADVANCED TECHNOLOGIES
Revenue and gross margin information is as follows:
For the Three Months Ended
-----------------------------------
Mar. 31, Mar. 31, Dec. 31,
2004 2003 2003
--------- --------- ---------
(in thousands, except for percentages)
Revenue $ 29,748 $ 27,261 $ 29,483
Gross margin 5,497 5,387 4,899
Gross margin % 18% 20% 17%
Operating margin 3,701 3,857 2,807
Operating margin % 12% 14% 10%
Advanced Technologies revenues were higher and margins were flat in the first
three months of 2004 as compared to the corresponding period in 2003 from a mix
of services, with improved revenues and margins in our space services division
being partially offset by lower levels of activities from our entertainment
services division. Gross margin was higher than the immediately preceding
quarter from our space services division. We anticipate quarterly results for
the rest of 2004 to be similar to those achieved in the first three months.
UNALLOCATED EXPENSES
Our unallocated expenses, i.e., those not associated with a specific business
segment, within gross margin consist of expenses related to our incentive and
deferred compensation plans, including restricted stock and bonuses, as well as
other general expenses. Our restricted stock expense varies with the market
price of our common stock. Our unallocated expenses within operating income
consist of those within gross margin plus general and administrative expenses
related to corporate functions. The table below sets out our unallocated
expenses for the three-month periods ended March 31, 2004, March 31, 2003 and
December 31, 2003.
For the Three Months Ended
-----------------------------------
Mar. 31, Mar. 31, Dec. 31,
2004 2003 2003
--------- --------- ---------
(in thousands, except for percentages)
Gross margin expenses $(5,343) $(3,713) $(4,395)
% of revenue 3% 3% 3%
Operating expenses (9,836) (6,161) (7,490)
% of revenue 6% 4% 5%
Unallocated operating expenses in the current quarter include the expensing of
$1.8 million of accumulated transaction costs related to a terminated
acquisition effort.
PAGE 12
OTHER
The table below sets forth our significant financial statement items below the
income from operations line.
For the Three Months Ended
-----------------------------------
Mar. 31, Mar. 31, Dec. 31,
2004 2003 2003
--------- --------- ---------
(in thousands)
Interest expense $(2,094) $(1,920) $(1,855)
Equity earnings (losses) of
unconsolidated affiliates, net 1,136 (136) 226
Other income, net (623) (280) (861)
Provision for income taxes (2,601) (3,250) (3,299)
The amounts of equity earnings (losses) of unconsolidated affiliates are as
follows:
For the Three Months Ended
-----------------------------------
Mar. 31, Mar. 31, Dec. 31,
2004 2003 2003
--------- --------- ---------
(in thousands)
Medusa Spar LLC $1,137 $ -- $ (65)
Smit-Oceaneering Cable Systems, L.L.C. (172) (231) 56
Pro-Dive Oceaneering Co. 171 95 235
------ ------- ------
$1,136 $ (136) $ 226
====== ======= ======
In December 2003, we acquired 50% of Medusa Spar LLC, which owns a 75% interest
in the Medusa Spar production platform in the Gulf of Mexico. Medusa Spar LLC
earns revenue on a tariff basis on oil and gas production throughput processed
by the spar from the Medusa field and surrounding dedicated blocks. The increase
in earnings of Medusa Spar LLC resulted from a full quarter of production in
2004, as compared to several days of production in December 2003.
We own 50% of Smit-Oceaneering Cable Systems, L.L.C., which is a
telecommunications cable laying and maintenance venture. Due to the current
condition of the telecommunications market, the venture is currently inactive
and the single vessel owned by the venture is being marketed for oilfield and
other uses. Results for the first three months of 2004 are comparable to the
corresponding period of 2003.
We own 49% of Pro-Dive Oceaneering Co., a venture that operates our ROVs in
Canada.
Interest expense for the three months ended March 31, 2004 increased compared to
the corresponding period in the prior year due to higher debt levels. Our debt
had been incurred to fund business acquisitions, including the ROV drill support
business of Stolt Offshore S.A. in 2004 and OIS International Inspection plc in
2003, additional equipment, including the Ocean Legend, and expansion of our
Subsea Products production capacity. We did not capitalize any interest during
the three months ended March 31, 2004 or March 31, 2003.
The provisions for income taxes were related to U.S. income taxes that we
provided at estimated annual effective rates using assumptions as to earnings
and other factors that would affect the tax calculation for the remainder of the
year and to the operations of foreign branches and subsidiaries that were
subject to local income and withholding taxes. We anticipate our effective tax
rate for 2004 to be 35%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are currently exposed to certain market risks arising from transactions we
have entered into in the normal course of business. These risks relate to
interest rate changes and fluctuations in foreign exchange rates. We do not
believe these risks are material. We have not entered into any market
risk-sensitive instruments for trading purposes. We manage our exposure to
interest rate changes through the use of a combination of fixed and floating
rate debt. See note 3 of notes to the consolidated financial statements
contained in this report and note 3 of notes to consolidated financial
statements contained in our annual report on Form 10-K for the year ended
December 31, 2003 for a description of our long-term debt agreements, interest
rates and maturities. We believe that significant interest rate changes will not
have a material near-term impact on our future earnings or cash flows. Because
we operate in various oil and gas exploration and production regions in the
world, we conduct a portion of our business in currencies
PAGE 13
other than the U.S. dollar. The functional currency for many of our
international operations is the applicable local currency. We manage our
exposure to changes in foreign exchange rates primarily through arranging
compensation in U.S. dollars or freely convertible currency and, to the extent
possible, by limiting compensation received in other currencies to amounts
necessary to meet obligations denominated in those currencies. We use the
exchange rates in effect as of the balance sheet date to translate assets and
liabilities as to which the functional currency is the local currency, resulting
in translation adjustments that we reflect as accumulated other comprehensive
income or loss in the shareholders' equity section of our consolidated balance
sheets. We recorded a $1.4 million adjustment to our equity accounts for the
three-month period ended March 31, 2004 to reflect the net impact of the
weakening of the U.S. dollar against various foreign currencies for locations
where the functional currency is not the U.S. dollar.
Our Subsea Products business in Brazil conducts much of its operations in U.S.
dollars, which is its functional currency. We recorded $1.9 million of foreign
currency losses in our consolidated statement of income for 2003 related to our
operations in Brazil. Foreign currency losses were $730,000 and $672,000 for the
three-month periods ended March 31, 2004 and 2003, respectively.
ITEM 4. CONTROLS AND PROCEDURES.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our chief executive officer and chief financial officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures were effective as of March 31, 2004 to provide reasonable assurance
that information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
There has been no change in our internal control over financial reporting that
occurred during the three months ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PAGE 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Registration
or File Form or Report Exhibit
Number Report Date Number
------------ ------- --------- -------
* 3.01 Restated Certificate of Incorporation 1-10945 10-K Dec. 2000 3.01
* 3.02 Amended and Restated By-Laws 1-10945 10-K Dec. 2002 3.02
31.01 Rule 13a-14(a)/15d-14(a) Certification by John R. Huff, Chief Executive Officer
31.02 Rule 13a-14(a)/15d-14(a) Certification by Marvin J. Migura, Chief Financial Officer
32.01 Section 1350 Certification by John R. Huff, Chief Executive Officer
32.02 Section 1350 Certification by Marvin J. Migura, Chief Financial Officer
- ----------------
* Indicates exhibit previously filed with the Securities and Exchange Commission
as indicated and incorporated herein by reference.
(b) We furnished the following reports on Form 8-K during the quarter for
which this report is filed.
Date Description
- ----------- -----------
January 6, 2004 Information furnished under Item 9 regarding a press
release titled "Oceaneering Awarded Key Umbilical
Contract."
January 8, 2004 Information furnished under Item 9 regarding the posting
of a presentation on our website.
February 18, 2004 Information furnished under Item 12 regarding the press
release announcing our financial results for the quarter
and year ended December 31, 2003.
February 20, 2004 Information furnished under Item 9 regarding a press
release titled "Oceaneering Acquires Drill Support
ROV Business Operations from Stolt Offshore S.A."
March 10, 2004 Information furnished under Item 9 regarding the posting
of a presentation on our website.
March 16, 2004 Information furnished under Item 9 regarding a press
release titled "Oceaneering and Subsea 7 Terminate
Acquisition Agreement."
March 30, 2004 Information furnished under Item 9 regarding the posting
of a presentation on our website.
PAGE 15
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.
OCEANEERING INTERNATIONAL, INC.
(Registrant)
Date: May 7, 2004 By: /S/ JOHN R. HUFF
---------------------------------------
John R. Huff
Chairman and Chief Executive Officer
Date: May 7, 2004 By: /S/ MARVIN J. MIGURA
---------------------------------------
Marvin J. Migura
Senior Vice President and Chief
Financial Officer
Date: May 7, 2004 By: /S/ JOHN L. ZACHARY
---------------------------------------
John L. Zachary
Controller and Chief Accounting Officer
PAGE 16
INDEX TO EXHIBITS
Registration
or File Form or Report Exhibit
Number Report Date Number
------------ ------- --------- -------
* 3.01 Restated Certificate of Incorporation 1-10945 10-K Dec. 2000 3.01
* 3.02 Amended and Restated By-Laws 1-10945 10-K Dec. 2002 3.02
31.01 Rule 13a-14(a)/15d-14(a) Certification by John R. Huff, Chief Executive Officer
31.02 Rule 13a-14(a)/15d-14(a) Certification by Marvin J. Migura, Chief Financial Officer
32.01 Section 1350 Certification by John R. Huff, Chief Executive Officer
32.02 Section 1350 Certification by Marvin J. Migura, Chief Financial Officer
- -------------
* Indicates exhibit previously filed with the Securities and Exchange Commission
as indicated and incorporated herein by reference.
PAGE 17