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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 June 30, 2004
( ) 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 ( )
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes (X) No ( )
At August 9, 2004 there were 38,279,995 shares of common stock, no par
value, outstanding.
CAL DIVE INTERNATIONAL, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003 ................................... 1
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 2004 and
June 30, 2003 ................................................... 2
Six Months Ended June 30, 2004 and June 30, 2003 ...................... 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2004 and June 30, 2003 ...................... 4
Notes to Condensed Consolidated Financial Statements ...................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk ......... 22
Item 4. Controls and Procedures ........................................... 23
Part II: Other Information
Item 1. Legal Proceedings ................................................. 23
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities ........................... 23
Item 4 Submission of Matters to a Vote of Security Holders ............... 24
Item 6. Exhibits and Reports on Form 8-K .................................. 25
Signatures ................................................................ 26
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 67,308 $ 6,378
Restricted cash ....................................................... - 2,433
Accounts receivable --
Trade, net of revenue allowance on gross amounts billed
of $8,559 and $8,518 .............................................. 72,169 78,733
Unbilled revenue ................................................... 18,412 17,874
Other current assets .................................................. 26,410 25,232
--------- ---------
Total current assets .......................................... 184,299 130,650
--------- ---------
Property and equipment .................................................. 824,171 802,694
Less-- Accumulated depreciation ....................................... (228,735) (183,891)
--------- ---------
595,436 618,803
Other assets:
Investment in production facilities - Deepwater Gateway, L.L.C ........ 50,300 34,517
Goodwill, net ......................................................... 82,458 81,877
Other assets, net ..................................................... 26,628 16,995
--------- ---------
$ 939,121 $ 882,842
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 42,092 $ 50,897
Accrued liabilities ................................................... 58,518 36,850
Current maturities of long-term debt .................................. 15,736 16,199
--------- ---------
Total current liabilities ..................................... 116,346 103,946
--------- ---------
Long-term debt .......................................................... 167,712 206,632
Deferred income taxes ................................................... 103,725 89,274
Decommissioning liabilities ............................................. 73,740 75,269
Other long-term liabilities ............................................. 1,351 2,042
--------- ---------
Total liabilities ............................................. 462,874 477,163
Convertible preferred stock ............................................. 54,016 24,538
Commitments and contingencies
Shareholders' equity:
Common stock, no par, 120,000 shares authorized, 51,864
and 51,460 shares issued ........................................... 208,479 199,999
Retained earnings ..................................................... 210,572 178,718
Treasury stock, 13,602 shares, at cost ................................ (3,741) (3,741)
Accumulated other comprehensive income ................................ 6,921 6,165
--------- ---------
Total shareholders' equity .................................... 422,231 381,141
--------- ---------
$ 939,121 $ 882,842
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
2004 2003
-------- --------
Net revenues:
Marine contracting ............................... $ 66,418 $ 68,982
Oil and gas production ........................... 61,283 32,857
-------- --------
127,701 101,839
Cost of sales:
Marine contracting ............................... 58,622 59,545
Oil and gas production ........................... 27,664 18,097
-------- --------
Gross profit .................................. 41,415 24,197
Selling and administrative expenses ................ 12,663 8,628
-------- --------
Income from operations ............................. 28,752 15,569
Equity in earnings of Deepwater Gateway, L.L.C ... 1,310 -
Net interest expense and other ................... 1,242 1,077
-------- --------
Income before income taxes ......................... 28,820 14,492
Provision for income taxes ....................... 10,228 5,217
-------- --------
Net income ......................................... 18,592 9,275
Preferred stock dividends and accretion .......... 384 363
-------- --------
Net income applicable to common shareholders ....... $ 18,208 $ 8,912
======== ========
Earnings per common share:
Basic ............................................ $ 0.48 $ 0.24
Diluted .......................................... $ 0.47 $ 0.24
======== ========
Weighted average common shares outstanding:
Basic ............................................ 38,180 37,634
Diluted .......................................... 39,452 37,732
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2004 2003
--------- ---------
Net revenues:
Marine contracting ........................................ $ 131,938 $ 123,210
Oil and gas production .................................... 116,478 67,529
--------- ---------
248,416 190,739
Cost of sales:
Marine contracting ........................................ 120,169 113,788
Oil and gas production .................................... 55,090 33,558
--------- ---------
Gross profit ........................................... 73,157 43,393
Selling and administrative expenses ......................... 23,821 17,581
--------- ---------
Income from operations ...................................... 49,336 25,812
Equity in earnings (losses) of Deepwater Gateway, L.L.C ... 1,310 (107)
Net interest expense and other ............................ 2,796 2,071
--------- ---------
Income before income taxes and change in accounting
principle ................................................. 47,850 23,634
Provision for income taxes ................................ 15,248 8,508
--------- ---------
Income before change in accounting principle ................ 32,602 15,126
Cumulative effect of change in accounting
principle, net .......................................... - 530
--------- ---------
Net Income .................................................. 32,602 15,656
Preferred stock dividends and accretion ................... 748 706
--------- ---------
Net income applicable to common shareholders ................ $ 31,854 $ 14,950
========= =========
Earnings per common share
Basic:
Earnings per share before change in
accounting principle ................................ $ 0.84 $ 0.38
Cumulative effect of change in accounting
principle ............................................. - 0.01
--------- ---------
Earnings per share ...................................... $ 0.84 $ 0.39
========= =========
Diluted:
Earnings per share before change in accounting
principle ............................................. $ 0.83 $ 0.38
Cumulative effect of change in accounting
principle ............................................. - 0.01
--------- ---------
Earnings per share ...................................... $ 0.83 $ 0.39
========= =========
Weighted average common shares outstanding:
Basic ..................................................... 38,063 37,593
Diluted ................................................... 39,357 37,699
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
--------- ---------
Cash flows from operating activities:
Net income ...................................................... $ 32,602 $ 15,656
Adjustments to reconcile net income to net cash
provided by operating activities--
Cumulative effect of change in accounting principle .......... - (530)
Depreciation and amortization ................................ 52,581 32,353
Deferred income taxes ........................................ 15,248 8,343
Equity in (earnings) losses of Deepwater Gateway, L.L.C ...... (1,310) 107
Loss on sale of assets ....................................... - 45
Changes in operating assets and liabilities:
Accounts receivable, net ................................... 6,251 (11,248)
Other current assets ....................................... (1,153) 1,886
Accounts payable and accrued liabilities ................... 12,345 (13,649)
Other noncurrent, net ...................................... (13,067) (8,572)
--------- ---------
Net cash provided by operating activities ............... 103,497 24,391
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................................ (20,776) (42,286)
Investment in Deepwater Gateway, L.L.C .......................... (14,473) (1,545)
Restricted cash ................................................. (4,259) 74
Proceeds from sales of property ................................. - 200
--------- ---------
Net cash used in investing activities ................... (39,508) (43,557)
--------- ---------
Cash flows from financing activities:
Sale of convertible preferred stock, net of transaction costs ... 30,000 24,100
Repayment of MARAD borrowings ................................... (1,451) (1,361)
Repayments on line of credit, net ............................... (30,189) (6,197)
Borrowings on term loan ......................................... - 3,774
Repayment of term loan borrowings ............................... (3,500) -
Capital lease payments .......................................... (1,849) (740)
Preferred stock dividends paid .................................. (520) (481)
Redemption of stock in subsidiary ............................... (2,462) (2,676)
Exercise of stock options, net .................................. 6,795 3,088
--------- ---------
Net cash (used in) provided by financing activities ..... (3,176) 19,507
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents ..................................................... 117 45
Net increase in cash and cash equivalents ......................... 60,930 386
Cash and cash equivalents:
Balance, beginning of period .................................... 6,378 -
--------- ---------
Balance, end of period .......................................... $ 67,308 $ 386
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Cal Dive International, Inc., (collectively, "Cal Dive", "CDI" or
the "Company") and its majority owned subsidiaries. The Company accounts for its
50% interest in Deepwater Gateway, L.L.C. using the equity method of accounting
as the Company does not have voting or operational control of this entity. All
material intercompany accounts and transactions have been eliminated. These
condensed consolidated 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 annual financial statements
prepared in accordance with generally accepted accounting principles.
Management has reflected all adjustments (which were normal recurring
adjustments) that it believes are necessary for a fair presentation of the
condensed consolidated balance sheets, results of operations, and cash flows, as
applicable. Operating results for the period ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. The Company's balance sheet as of December 31, 2003 included
herein has been derived from the audited balance sheet as of December 31, 2003
included in the Company's 2003 Annual Report on Form 10-K. These condensed
consolidated financial statements should be read in conjunction with the annual
consolidated financial statements and notes thereto included in the Company's
2003 Annual Report on Form 10-K.
Certain reclassifications were made to previously reported amounts in the
condensed consolidated financial statements and notes to make them consistent
with the current presentation format.
Note 2 - Statement of Cash Flow Information
The Company defines cash and cash equivalents as cash and all highly
liquid financial instruments with original maturities of less than three months.
The Company had $2.4 million of restricted cash as of December 31, 2003, of
which $2.3 million represented amounts securing a performance bond which was
released in March 2004. As of June 30, 2004, the Company had $6.7 million of
restricted cash included in other assets, net, of which $6.5 million related to
Energy Resource Technology, Inc. ("ERT") escrow funds for decommissioning
liabilities associated with the South Marsh Island 130 ("SMI 130") field
acquisitions in 2002. Under the purchase agreement, ERT is obligated to escrow
50% of production up to the first $20 million of escrow and 37.5% of production
on the remaining balance up to $33 million in total escrow. Once the escrow
reaches $10 million, ERT may use the restricted cash for decommissioning the
related fields.
During the three and six months ended June 30, 2004, the Company made cash
payments for interest charges, net of capitalized interest, of $438,000 and $1.6
million, respectively. During the three and six months ended June 30, 2003, the
Company made cash payments for interest charges, net of capitalized interest, of
$0 and $451,000, respectively.
Note 3 - Major Customers and Concentration of Credit Risk
In March 2004, the Company elected not to renew its alliance with Horizon
Offshore, Inc. As part of the settlement of outstanding trade accounts
receivable with Horizon, the Company obtained exclusive use of a Horizon
spoolbase facility for a period of five years. Utilization of the spoolbase
facility was
5
valued at approximately $2.0 million with the Company offsetting a corresponding
amount of trade accounts receivable in exchange for the utilization agreement.
The value of the spoolbase facility is being amortized over the five year term
of the agreement. Trade receivables from Horizon at June 30, 2004 were
approximately $4.4 million.
Note 4 - Comprehensive Income
The components of total comprehensive income for the three and six months
ended June 30, 2004 and 2003 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net Income ................................................ $ 18,592 $ 9,275 $ 32,602 $ 15,656
Cumulative foreign currency translation adjustment, net ... (762) 2,150 1,208 1,347
Unrealized gain (loss) on commodity hedges, net ........... 320 (77) (452) (1,796)
-------- -------- -------- --------
Total comprehensive income ................................ $ 18,150 $ 11,348 $ 33,358 $ 15,207
======== ======== ======== ========
The components of accumulated other comprehensive income are as follows
(in thousands):
June 30, Dec. 31,
2004 2003
-------- -------
Cumulative foreign currency translation adjustment, net .... $ 8,800 $ 7,592
Unrealized loss on commodity hedges, net ................... (1,879) (1,427)
-------- -------
Accumulated other comprehensive income ..................... $ 6,921 $ 6,165
======== =======
Note 5 - 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 the Company's oil and gas production. All
derivatives are reflected in the Company's balance sheet at fair market value.
During 2003 and the first six months of 2004, the Company entered into
various cash flow hedging swap and costless collar contracts to fix cash flows
relating to a portion of the Company's expected oil and gas production. All of
these qualified for hedge accounting and none extended beyond a year and a half.
The aggregate fair value of the hedge instruments was a net liability of $2.9
million as of June 30, 2004. The Company recorded approximately $452,000 of
unrealized losses, net of taxes of $239,000, during the first six months of 2004
in other comprehensive income, a component of shareholders' equity, as these
hedges were highly effective. During the second quarter and first six months of
2004, the Company reclassified approximately $2.2 million and $3.9 million,
respectively, of losses from other comprehensive income to oil and gas
production revenues upon the sale of the related oil and gas production.
As of June 30, 2004, the Company had the following volumes under
derivative contracts related to its oil and gas producing activities:
6
AVERAGE
INSTRUMENT MONTHLY WEIGHTED
PRODUCTION PERIOD TYPE VOLUMES AVERAGE PRICE
----------------- ---- ------- -------------
Crude Oil:
July - December 2004 Swap 77 MBbl $31.18
January - June 2005 Swap 20 MBbl $35.80
Natural Gas:
July - December 2004 Collar 600,000 MMBtu $5.33 - $7.43
January - June 2005 Collar 200,000 MMBtu $5.50 - $7.70
Note 6 - Foreign Currency
The functional currency for the Company's foreign subsidiary Well Ops
(U.K.) Limited is the applicable local currency (British Pound). Results of
operations for this subsidiary are translated into U.S. dollars using average
exchange rates during the period. Assets and liabilities of this foreign
subsidiary are translated into U.S. dollars using the exchange rate in effect at
the balance sheet date and the resulting translation adjustment, which was a
loss of $762,000 and a gain of $1.2 million, net of taxes of $410,000 and
$650,000, respectively, in the second quarter and first six months of 2004,
respectively, is included in accumulated other comprehensive income, a component
of shareholders' equity. All foreign currency transaction gains and losses are
recognized currently in the statements of operations. These amounts for the
quarter and six months ended June 30, 2004 were not material to the Company's
results of operations or cash flows.
Canyon Offshore, Inc. ("Canyon"), the Company's ROV subsidiary, has
operations in the United Kingdom and Southeast Asia sectors. Canyon conducts the
majority of its operations in these regions in U.S. dollars which it considers
the functional currency. When currencies other than the U.S. dollar are to be
paid or received, the resulting gain or loss from translation is recognized in
the statements of operations. These amounts for the quarter and six months ended
June 30, 2004 were not material to the Company's results of operations or cash
flows.
Note 7 - Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing the net income
available to common shareholders by the weighted-average shares of outstanding
common stock. The calculation of diluted EPS is similar to basic EPS except the
denominator includes dilutive common stock equivalents and the income included
in the numerator excludes the effects of the impact of dilutive common stock
equivalents, if any. The computation of basic and diluted per share amounts for
the Company were as follows (in thousands, except per share amounts):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Income before change in accounting principle ......................... $ 18,592 $ 9,275 $ 32,602 $ 15,126
Preferred stock dividends and accretion .............................. (384) (363) (748) (706)
-------- ---------- -------- --------
Net income applicable to common shareholders before change in
accounting principle ............................................... $ 18,208 $ 8,912 $ 31,854 $ 14,420
======== ========== ======== ========
7
Weighted-average common shares outstanding:
Basic ................................................ 38,180 37,634 38,063 37,593
Effect of dilutive stock options ..................... 244 98 218 106
Effect of convertible preferred stock ................ 1,028 - 1,076 -
-------- ---------- -------- --------
Diluted .............................................. 39,452 37,732 39,357 37,699
======== ========== ======== ========
Basic Earnings Per Share:
Income before change in accounting
principle ......................................... $ 0.49 $ 0.25 $ 0.86 $ 0.40
Preferred stock dividends and accretion .............. (0.01) (0.01) (0.02) (0.02)
-------- ---------- -------- --------
$ 0.48 $ 0.24 $ 0.84 $ 0.38
======== ========== ======== ========
Diluted Earnings Per Share:
Income before change in accounting
principle ......................................... $ 0.47 $ 0.25 $ 0.83 $ 0.40
Preferred stock dividends and accretion .............. - (0.01) - (0.02)
-------- ---------- -------- --------
$ 0.47 $ 0.24 $ 0.83 $ 0.38
======== ========== ======== ========
Stock options to purchase approximately 0 and 124,000 shares for the three
and six months ended June 30, 2004, respectively, and 1.1 million shares for
each of the three and six months ended June 30, 2003, respectively, were not
dilutive and, therefore, were not included in the computations of diluted income
per common share amounts. In addition, approximately 1.4 million and 1.1 million
shares attributable to the convertible preferred stock were excluded in the
three and six months ended June 30, 2003, respectively, calculation of diluted
EPS, as the effect was antidilutive. Net income for the diluted earnings per
share calculation for the three and six months ended June 30, 2004 was adjusted
to add back the preferred stock dividends and accretion.
Note 8 - Stock Based Compensation Plans
The Company uses the intrinsic value method of accounting to account for
its stock-based compensation programs. Accordingly, no compensation expense is
recognized when the exercise price of an employee stock option is equal to the
common share market price on the grant date. The following table reflects the
Company's pro forma results if the fair value method had been used for the
accounting for these plans (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income applicable to common
shareholders before change in
accounting principle:
As Reported ..................................... $ 18,208 $ 8,912 $ 31,854 $ 14,420
Stock-based employee
compensation cost, net of tax ................... (631) (820) (1,147) (1,871)
---------- --------- ---------- ----------
Pro Forma ....................................... $ 17,577 $ 8,092 $ 30,707 $ 12,549
========== ========= ========== ==========
8
Earnings per common share before
change in accounting principle:
Basic, as reported $ 0.48 $ 0.24 $ 0.84 $ 0.38
Stock-based employee
compensations cost, net of tax (0.02) (0.02) (0.03) (0.05)
---------- --------- ---------- ----------
Basic, pro forma $ 0.46 $ 0.22 $ 0.81 $ 0.33
========== ========= ========== ==========
Diluted, as reported $ 0.47 $ 0.24 $ 0.83 $ 0.38
Stock-based employee
compensation cost, net of tax (0.02) (0.02) (0.03) (0.05)
---------- --------- ---------- ----------
Diluted, pro forma $ 0.45 $ 0.22 $ 0.80 $ 0.33
========== ========= ========== ==========
For the purposes of pro forma disclosures, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used: expected dividend
yields of 0 percent; expected lives ranging from three to ten years; risk-free
interest rate assumed to be approximately 4.0 percent and 3.8 percent in 2004
and 2003, respectively; and expected volatility to be approximately 56 percent
and 59 percent, respectively, in 2004 and 2003. The fair value of shares issued
under the Employee Stock Purchase Plan was based on the 15 percent discount
received by the employees. The weighted average per share fair value of the
options granted during the first six months of 2004 and 2003 was $17.59 and
$12.63, respectively. The estimated fair value of the options is amortized to
pro forma expense over the vesting period.
Note 9 - Business Segment Information (in thousands)
June 30, 2004 December 31, 2003
------------- -----------------
Identifiable Assets --
Marine contracting ........... $670,253 $623,095
Oil and gas production ....... 268,868 259,747
-------- --------
Total .............. $939,121 $882,842
======== ========
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Income (loss) from operations .........
Marine contracting ........... $ (396) $ 3,985 $ (3,534) $ (1,759)
Oil and gas production ....... 29,148 11,584 52,870 27,571
-------- -------- -------- --------
Total ............... $ 28,752 $ 15,569 $ 49,336 $ 25,812
======== ======== ======== ========
During the three and six months ended June 30, 2004, the Company derived
$22.0 million and $34.7 million, respectively, of its revenues from the U.K.
sector utilizing $116.1 million of its total assets in this region. During the
three and six months ended June 30, 2003, the Company derived $16.2 million and
$21.8 million, respectively, from the U.K. sector utilizing $111.6 million of
its total assets in this region. Additionally, $35,000 and $2.3 million, of
revenues were derived from the Latin America sector during the three and six
months ended June 30, 2004, respectively, and $22.8 million and $33.1 million
during the three and six months ended June 30, 2003, respectively. The majority
of the remaining revenues were generated in the U.S. Gulf of Mexico.
9
Note 10 - Long-Term Debt
At June 30, 2004, $137.9 million was outstanding on our 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"). The MARAD Debt is
payable in equal semi-annual installments which began in August 2002 and matures
25 years from such date. The MARAD Debt 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 1.35% as of June 30, 2004). For a period up to ten years from
delivery of the vessel in April 2002, CDI has the ability 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 June 30, 2004,
the Company was in compliance with these covenants.
The Company has a $70 million revolving credit facility due in February
2005. This facility is collateralized by accounts receivable and certain of the
Company's Marine Contracting vessels, bears interest at LIBOR plus 125-250 basis
points depending on CDI leverage and, among other restrictions, includes three
financial covenants (cash flow leverage, minimum interest coverage and fixed
charge coverage). As of June 30, 2004, the Company was in compliance with these
covenants and there was no outstanding balance under this facility. A new
revolving credit facility is currently being negotiated.
The Company has a $35 million term loan facility which was obtained to
assist CDI in funding its portion of the construction costs of the spar for the
Gunnison field. The loan is payable in quarterly installments of $1.75 million
for three years after delivery of the spar (which was December 2003) with the
remaining $15.75 million due at the end of the three years (2006). The facility
bears interest at LIBOR plus 225-300 basis points depending on CDI leverage
ratios (approximately 3.38% as of June 30, 2004) 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 June 30, 2004.
In August 2003, Canyon Offshore, Ltd. (a U.K. subsidiary - "COL") (with a
parent guarantee from Cal Dive) completed a capital lease with a bank
refinancing the construction costs of a newbuild 750 horsepower trenching unit
and a ROV. COL received proceeds of $12 million for the assets and agreed to pay
the bank sixty monthly installment payments of $217,174 (resulting in an
implicit interest rate of 3.29%). No gain or loss resulted from this
transaction. COL has an option to purchase the assets at the end of the lease
term for $1. The proceeds were used to reduce the Company's revolving credit
facility, which had initially funded the construction costs of the assets. This
transaction was accounted for as a capital lease with the present value of the
lease obligation (and corresponding asset) being reflected on the Company's
consolidated balance sheet beginning in the third quarter of 2003.
Scheduled maturities of Long-term Debt outstanding as of June 30, 2004
were as follows (in thousands):
Capital
MARAD Gunnison Lease &
Debt Revolver Term Loan Other Total
--------- -------- --------- --------- ---------
Less than one year $ 3,045 $ -- $ 7,000 $ 5,691 $ 15,736
One to two years 3,246 -- 7,000 2,789 13,035
Two to Three years 3,461 -- 17,500 2,580 23,541
Three to four years 3,689 -- -- 2,546 6,235
Four to five years 3,933 -- -- 433 4,366
Over five years 120,535 -- -- -- 120,535
--------- ---- --------- --------- ---------
137,909 -- 31,500 14,039 183,448
Long-term debt
Current maturities (3,045) -- (7,000) (5,691) (15,736)
--------- ---- --------- --------- ---------
Long-term debt, less current maturities $ 134,864 $ -- $ 24,500 $ 8,348 $ 167,712
========= ==== ========= ========= =========
10
In June 2004, the Deepwater Gateway, L.L.C. construction loan, excluded
from the Company's long-term debt, was converted to a term loan. The term loan
is collateralized by substantially all of Deepwater Gateway, L.L.C.'s assets and
is non-recourse to the Company except for the balloon payment due at the end of
the term. In the event of default, the Company would be required to pay up to
$22.5 million; however, the Company has not recorded any liability for this
guarantee as management believes that it is unlikely the Company will be
required to pay the $22.5 million.
The Company capitalized interest totaling $0 and $243,000 during the three
and six months ended June 30, 2004 respectively. The Company capitalized
interest totaling $1.0 million and $1.9 million during the three and six months
ended June 30, 2003, respectively. The Company incurred interest expense of $1.0
million and $2.1 million during the three and six months ended June 30, 2004,
respectively, and $833,000 and $1.6 million during the three and six months
ended June 30, 2003, respectively.
Note 11 - Income Taxes
The effective tax rate of 35.5% in the second quarter of 2004 is lower
than the 36% effective tax rate for the second quarter of 2003, primarily due to
a higher proportion of the Company's pre-tax income being generated in lower tax
rate jurisdictions in the second quarter of 2004 than in the second quarter of
2003.
The Internal Revenue Service ("IRS") concluded its examination of the 2001
pre-acquisition income tax return for Canyon in the second quarter of 2004. The
resolution of this audit did not have a material impact on the condensed
consolidated financial statements of the Company.
The examination of the Company's 2001 and 2002 income tax returns by the
IRS was concluded in the first quarter of 2004. As a result, the Company
recorded an income tax benefit of $1.7 million during the first quarter of 2004
primarily related to research and development credits offset by $430,000 of
interest expense related to timing differences with respect to research and
development deductions.
The Company considers the undistributed earnings of its non-U.S.
subsidiaries to be permanently reinvested. The Company has not provided deferred
U.S. income tax on those earnings, as it is not practicable to estimate the
amount of additional tax that might be payable should these earnings be remitted
or deemed remitted as dividends, or if the Company should sell its stock in the
subsidiaries.
Note 12 - 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 the 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. In that regard, in 1998, one of the Company's
subsidiaries entered into a subcontract with Seacore Marine Contractors Limited
("Seacore") to provide the Sea Sorceress to a Coflexip subsidiary in Canada
("Coflexip"). Due to difficulties with respect to the sea 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. The Company was not a party to this
arbitration proceeding. Seacore and Coflexip settled this matter prior to the
conclusion of the arbitration proceeding with Seacore paying Coflexip $6.95
million CDN. Seacore has initiated an arbitration proceeding against Cal Dive
Offshore Ltd. ("CDO"), a subsidiary of Cal Dive, seeking contribution of
one-half of this amount. One of the grounds in the preliminary findings by the
arbitrator is applicable to CDO, and CDO holds substantial counterclaims against
Seacore.
11
During 2002, the Company engaged in a large construction project offshore
Trinidad and in late September of that year, supports engineered by a
subcontractor failed resulting in over a month of downtime for two of CDI's
vessels. Management believes under the terms of the contract the Company is
entitled to indemnification for the contractual stand-by rate for the vessels
during their downtime. The customer has disputed these invoices along with
certain other change orders. In May 2004, the Company and its customer settled
certain elements of the dispute. Of the amounts billed by CDI for this project,
$6.8 million had not been collected as of June 30, 2004. The Company has
initiated arbitration proceedings on the remaining disputed invoices in
accordance with the terms of the contract.
Although the above discussed matters have the potential of significant
additional liability, the Company believes 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.
Note 13 - Canyon Offshore
In January 2002, CDI purchased Canyon, a supplier of remotely operated
vehicles (ROVs) and robotics to the offshore construction and telecommunications
industries. In connection with the acquisition, the Company committed to
purchase the redeemable stock in Canyon 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 (or $7.5 million). The Company also
agreed to make future payments relating to the tax impact on the date of
redemption, whether employment continued or not. As they are employees, any
share price paid in excess of the $13.53 per share will be recorded as
compensation expense. These remaining shares have been classified as long-term
debt in the accompanying balance sheet and will be adjusted to their estimated
redemption value at each reporting period based on Canyon's performance. In
April 2004 and 2003, the Company purchased approximately one-third and
one-third, respectively, of the redeemable shares at the minimum purchase price
of $13.53 per share. Consideration included approximately $344,000 and $400,000,
respectively, of contingent consideration relating to tax gross-up payments paid
to the Canyon employees in accordance with the purchase agreement. These
gross-up amounts were recorded as goodwill in the period paid (i.e., the second
quarters of 2004 and 2003).
Note 14 - Convertible Preferred Stock
On January 8, 2003, CDI completed the private placement of $25 million of
a newly designated class of cumulative convertible preferred stock (Series A-1
Cumulative Convertible Preferred Stock, par value $0.01 per share) that is
convertible into 833,334 shares of Cal Dive common stock at $30 per share. The
preferred stock was issued to a private investment firm. Subsequently in June
2004, the preferred stockholder exercised its existing right and purchased $30
million in additional cumulative convertible preferred stock (Series A-2
Cumulative Convertible Preferred Stock, par value $0.01 per share). In
accordance with the January 8, 2003 agreement, the $30 million in additional
preferred stock is convertible into 982,029 shares of Cal Dive common stock at
$30.549 per share.
The preferred stock has a minimum annual dividend rate of 4%, subject to
adjustment, payable quarterly in cash or common shares at Cal Dive's option. CDI
paid these dividends in 2004 and 2003 on the last day of the respective quarter
in cash. After the second anniversary of the original issuance, the holder may
redeem the value of its original and additional investment in the preferred
shares to be settled in common stock at the then prevailing market price or cash
at the discretion of the Company. In the event the Company is unable to deliver
registered common shares, CDI could be required to redeem in cash. Under certain
conditions (the Company's stock price falling below $7.35 per share and the
occurrence of a restatement in the Company's earnings), the holder could redeem
its investment prior to the second anniversary of the original issuance.
The proceeds received from the sales of this stock, net of transaction
costs, have been classified outside of shareholders' equity on the balance sheet
below total liabilities. The transaction costs have
12
been deferred, and are being accreted through the statement of operations
through January 2005. Prior to the conversion, common shares issuable will be
assessed for inclusion in the weighted average shares outstanding for the
Company's diluted earnings per share using the if converted method based on the
Company's common share price at the beginning of the applicable period for the
original $25 million issuance and on the date of issuance (June 25, 2004) for
the additional $30 million.
Note 15 - Related Party Transactions
In April 2000, ERT acquired a 20% working interest in Gunnison, a
Deepwater Gulf of Mexico prospect of Kerr-McGee Oil & Gas Corp. Consistent with
CDI's philosophy of avoiding exploratory risk, financing for the exploratory
costs of approximately $20 million was provided by an investment partnership
(OKCD Investments, Ltd. or "OKCD"), the investors of which include current and
former CDI senior management, in exchange for a revenue interest that is an
overriding royalty interest of 25% of CDI's 20% working interest. CDI provided
no guarantees to the investment partnership. 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, estimated development costs
of $500 million consistent with 75 MBOE, and a CDI 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 prospect) 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 approximately $20 million of
exploratory drilling costs. With the sanctioning of a commercial discovery, the
Company funded ongoing development and production costs. Cal Dive's share of
such project development costs is estimated to be $121 million ($114 million of
which had been incurred as of June 30, 2004) with over half of that for
construction of the spar which was placed in service in December 2003. The
Company's Chief Executive Officer, as a Class A limited partner of OKCD,
personally owns approximately 57% of the partnership. Other executive officers
of the Company own approximately 6% combined, of the partnership. OKCD has also
awarded Class B limited partnership interests to key CDI employees. Production
began in December 2003. Payments to OKCD from ERT totaled $4.9 million and $7.7
million in the three and six months ended June 30, 2004, respectively.
13
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 certain statements that may be
deemed "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. 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 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. For a complete discussion of risk
factors, we direct your attention to our Annual Report on Form 10-K for the year
ended December 31, 2003, filed with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements. We prepare
these financial statements in conformity with accounting principles generally
accepted in the United States. As such, we are required to make certain
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. We base our estimates on
historical experience, available information and various other assumptions we
believe to be reasonable under the circumstances. These estimates may change as
new events occur, as more experience is acquired, as additional information is
obtained and as our operating environment changes. There have been no material
changes or developments in authoritative accounting pronouncements or in our
evaluation of the accounting estimates and the underlying assumptions or
methodologies that we believe to be Critical Accounting Policies and Estimates
as disclosed in our Form 10-K for the year ended December 31, 2003.
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 2004 and 2003
Revenues. During the three months ended June 30, 2004, the Company's
revenues increased 25% to $127.7 million compared to $101.8 million for the
three months ended June 30, 2003. The overall $25.9 million increase was
generated entirely by the Oil and Gas Production segment due to increased oil
and gas production and higher commodity prices.
Oil and Gas Production revenue for the three months ended June 30, 2004
increased $28.4 million, or 87%, to $61.3 million from $32.9 million during the
comparable prior year period. Production increased 49% (10.0 Bcfe for the three
months ended June 30, 2004 compared to 6.7 Bcfe in the second quarter of 2003)
primarily as a result of our successful well exploitation program, bringing a
subsea PUD development at High Island 544 online late in 2003, and the Gunnison
spar wells which began producing in December 2003 (2.0 BCFe in second quarter
2004 compared with 0 BCFe in second quarter 2003). The average realized natural
gas price of $6.22 per Mcf, net of hedges in place, during the second quarter of
2004 was 24% higher than the $5.02 per Mcf realized in the comparable prior year
quarter while average realized oil prices, net of hedges in place, increased 24%
to $32.97 per barrel compared to $26.64 per barrel realized during the second
quarter of 2003.
Gross Profit. Gross profit of $41.4 million for the second quarter of 2004
represented a 71% increase compared to the $24.2 million recorded in the
comparable prior year period with the Oil and Gas Production segment
contributing all of the increase. Marine Contracting gross profit decreased $1.6
14
million to $7.8 million, for the three months ended June 30, 2004, from $9.4
million in the prior year period. The majority of the decrease was attributable
to lower utilization of our Deepwater vessels (57% in the second quarter of 2004
compared with 78% in the second quarter of 2003) and lower utilization of one of
our Well Ops vessels, the Q4000 (49% in the second quarter of 2004 compared with
82% in the second quarter of 2003). Oil and gas production gross profit
increased $18.8 million, or 128%, due to the aforementioned 49% increase in
production and higher commodity prices.
Gross margins of 32% in the second quarter of 2004 were eight points
better than the 24% in the prior year period. Marine Contracting margins
decreased two points to 12% for the three months ended June 30, 2004, from 14%
in the comparable prior year quarter, due to the factors noted above. In
addition, margins in the Oil and Gas Production segment increased ten points to
55% for the three months ended June 30, 2004, from 45% in the year ago quarter,
due primarily to the higher oil and gas prices.
Selling & Administrative Expenses. Selling and administrative expenses of
$12.7 million for the three months ended June 30, 2004 were $4.0 million higher
than the $8.6 million incurred in the second quarter of 2003 due to an increase
in the costs associated with the 2004 Marine Contracting compensation program
which is based on certain individual performance criteria and the Company's
profitability, and the ERT incentive compensation program (which is tied
directly to the Oil and Gas Production segment profitability that was
significantly higher in the second quarter of 2004 compared to the second
quarter of 2003). Selling and administrative expenses at 10% of revenues for the
second quarter increased one point as compared to the comparable prior year
period.
Equity in Earnings of Deepwater Gateway, L.L.C. Equity in earnings of the
Company's 50% investment in Deepwater Gateway, L.L.C. increased to $1.3 million
in the second quarter of 2004 compared with $0 in the comparable prior year
period. The increase was attributable to the demand fees which commenced
following the March 2004 mechanical completion of the Marco Polo tension leg
platform, owned by Deepwater Gateway, L.L.C.
Other (Income) Expense. The Company reported other expense of $1.2 million
for the three months ended June 30, 2004 compared to other expense of $1.1
million for the three months ended June 30, 2003. Net interest expense of $1.1
million in the second quarter of 2004 was higher than the $824,000 incurred in
the three months ended June 30, 2003 due primarily to $0 of capitalized interest
in the second quarter of 2004 compared with $1.0 million in the second quarter
of 2003, which related to the Company's investment in Gunnison and construction
of the Marco Polo tension leg platform. The overall net decrease in interest
(including the effect of capitalized interest) was primarily due to lower
outstanding levels of debt.
Income Taxes. Income taxes increased to $10.2 million for the three months
ended June 30, 2004 compared to $5.2 million in the comparable prior year period
due to increased profitability. The effective tax rate of 35.5% in the second
quarter of 2004 is lower than the 36% effective tax rate for the second quarter
of 2003, primarily due to a higher proportion of the Company's pre-tax income
being generated in lower tax rate jurisdictions in the second quarter of 2004
than in the second quarter of 2003.
Net Income. Net income of $18.2 million for the three months ended June
30, 2004 was $9.3 million greater than the comparable period in 2003 as a result
of factors described above.
Comparison of Six Months Ended June 30, 2004 and 2003
Revenues. During the six months ended June 30, 2004, the Company's
revenues increased 30% to $248.4 million compared to $190.8 million for the six
months ended June 30, 2003. Of the overall $57.7 million increase, $48.9 million
was generated by the Oil and Gas Production segment due to increased oil and gas
production and higher commodity prices. Marine Contracting revenues increased
$8.7 million from $123.2 million for the first six months of 2003 to $131.9
million for the first six months of 2004 due primarily to increased utilization
for the Company's Well Operations vessel, the Seawell.
15
Oil and Gas Production revenue for the six months ended June 30, 2004
increased $48.9 million, or 72%, to $116.5 million from $67.5 million during the
comparable prior year period. Production increased 49% (20.0 Bcfe for the six
months ended June 30, 2004 compared to 13.5 Bcfe in the first six months of
2003) primarily as a result of our successful well exploitation program,
bringing a subsea PUD development at High Island 544 online late in 2003, and
the Gunnison spar wells which began producing in December 2003. The average
realized natural gas price of $5.90 per Mcf, net of hedges in place, during the
first six months of 2004 was 15% higher than the $5.14 per Mcf realized in the
comparable prior year period while average realized oil prices, net of hedges in
place, increased 15% to $31.85 per barrel compared to $27.69 per barrel realized
during the first six months of 2003.
Gross Profit. Gross profit of $73.2 million for the first six months of
2004 represented a 69% increase compared to the $43.4 million recorded in the
comparable prior year period with the Oil and Gas Production segment
contributing 92% of the increase. Marine Contracting gross profit increased to
$11.8 million, for the six months ended June 30, 2004, from $9.4 million in the
prior year period. The increase was primarily attributable to improved
utilization of one of our Well Ops vessels, the Seawell. Utilization of this
vessel was 84% in the first six months of 2004 compared with 64% in the first
six months of 2003. Oil and gas production gross profit increased $27.4 million,
or 81%, due to the aforementioned higher levels of production and commodity
price increases.
Gross margins of 29% in the first six months of 2004 were six points
better than the 23% in the first six months of 2003. Marine Contracting margins
increased one point to 9% for the six months ended June 30, 2004, from 8% in the
comparable prior year period, due to the factors noted above. In addition,
margins in the Oil and Gas Production segment increased three points to 53% for
the six months ended June 30, 2004, from 50% in the first six months of 2003,
due primarily to the higher oil and gas prices.
Selling & Administrative Expenses. Selling and administrative expenses of
$23.8 million for the six months ended June 30, 2004 were $6.2 million higher
than the $17.6 million incurred in the first six months of 2003 due to an
increase in the costs associated with the 2004 Marine Contracting compensation
program which is based on certain individual performance criteria and the
Company's profitability, and the ERT incentive compensation program (which is
tied directly to the Oil and Gas Production segment profitability that was
significantly higher in the first six months of 2004 compared to the first six
months of 2003) and selling and administrative expenses at 10% of revenues for
the first six months of 2004 increased one point as compared to the comparable
prior year period.
Equity in Earnings of Deepwater Gateway, L.L.C. Equity in earnings of the
Company's 50% investment in Deepwater Gateway, L.L.C. increased to $1.3 million
in the first six months of 2004 compared with a loss of $107,000 in the first
six months of 2003. The increase was attributable to the demand fees which
commenced following the March 2004 mechanical completion of the Marco Polo
tension leg platform, owned by Deepwater Gateway, L.L.C.
Other (Income) Expense. The Company reported other expense of $2.8 million
for the six months ended June 30, 2004 compared to other expense of $2.1 million
for the six months ended June 30, 2003. Net interest expense of $2.5 million in
the first six months of 2004 was higher than the $1.6 million incurred in the
six months ended June 30, 2003, due primarily to $243,000 of capitalized
interest in the first six months of 2004 compared with $1.9 million in the first
six months of 2003, which related to the Company's investment in Gunnison and
construction of the Marco Polo tension leg platform. Including capitalized
interest, total interest decreased due to lower outstanding levels of debt.
Income Taxes. Income taxes increased to $15.2 million for the six months
ended June 30, 2004 compared to $8.5 million in the comparable prior year period
due to increased profitability. The effective tax rate of 32% in the first six
months of 2004 is lower than the 36% effective tax rate for the first six months
of 2003 primarily due to the benefit recognized by the Company for its research
and development credits in the first quarter of 2004, as a result of the
conclusion of the Internal Revenue Service examination of the Company's income
tax returns for 2001 and 2002.
16
Net Income. Net income of $31.9 million for the six months ended June 30,
2004 was $16.9 million greater than the comparable period in 2003 as a result of
factors described above.
17
LIQUIDITY AND CAPITAL RESOURCES
In August 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, we
acquired Canyon Offshore, Inc., in July 2002 we acquired the Well Operations
Business Unit of Technip-Coflexip and in August 2002, ERT made two significant
property acquisitions. These acquisitions significantly increased our debt to
total book capitalization ratio from 31% at December 31, 2001 to 40% at December
31, 2002. Cash flow from operations and the private placement of convertible
preferred stock in January 2003 and June 2004, have enabled us to reduce this
ratio to 28% as of June 30, 2004 as well as to build $67.3 million of
unrestricted cash as of June 30, 2004.
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 the Company's oil and gas
production. All derivatives are reflected in the Company's balance sheet at fair
market value.
During 2003 and the first six months of 2004, the Company entered into
various cash flow hedging swap and costless collar contracts to fix cash flows
relating to a portion of the Company's expected oil and gas production. All of
these qualified for hedge accounting and none extended beyond a year and a half.
The aggregate fair value of the hedge instruments was a liability of $2.9
million as of June 30, 2004. The Company recorded approximately $452,000 of
unrealized losses, net of taxes of $239,000, in other comprehensive income
within shareholders' equity as these hedges were highly effective. During the
second quarter and first six months of 2004, the Company reclassified
approximately $2.2 million and $3.9 million, respectively, of losses from other
comprehensive income to oil and gas production revenues upon the sale of the
related oil and gas production.
Operating Activities. Net cash provided by operating activities was $103.5
million during the six months ended June 30, 2004, more than four times the
$24.3 million generated during the first six months of 2003 due primarily to an
increase in profitability ($16.8 million), a $20.2 million increase in
depreciation and amortization resulting from the aforementioned increase in
production levels (including the Gunnison spar wells that began producing in
December 2003), funding from accounts receivable collections increasing $17.5
million, and higher trade payables and accrued liabilities balances of $26.0
million due primarily to higher accruals for ERT royalties as a result of
increased production, higher accruals for ERT and Marine Contracting incentive
compensation, and an increase in insurance and claims to be reimbursed.
In March 2004, the Company elected not to renew its alliance with Horizon
Offshore, Inc. As part of the settlement of outstanding trade accounts
receivable with Horizon, the Company obtained exclusive use of a Horizon
spoolbase facility for a period of five years. Utilization of the spoolbase
facility was valued at approximately $2.0 million with the Company offsetting a
corresponding amount of trade accounts receivable in exchange for the
utilization agreement. The value of the spoolbase facility is being amortized
over the five year term of the agreement. Trade receivables from Horizon at June
30, 2004 were approximately $4.4 million.
Investing Activities. We incurred $20.8 million of capital expenditures
during the first six months of 2004 compared to $42.3 million during the
comparable prior year period. Included in the capital expenditures during the
first six months of 2004 was $5.5 million for the purchase of our intervention
riser system installed on the Q4000, $2.0 million for ERT well exploitation
programs and $9.3 million for further Gunnison field development. Included in
the capital expenditures during the first six months of 2003 was $13.8 million
for the Canyon Master Service Agreement with Technip/Coflexip, which included
the construction of a trencher and three ROVs. $9.1 million related to ERT's
well exploitation program and $12.4 million related to Gunnison development
costs, including the spar.
18
In March 2003, ERT acquired additional interests, ranging from 45% to 84%,
in four fields acquired in 2002, enabling ERT to take over as operator of one
field. ERT paid $858,000 in cash and assumed Exxon/Mobil's pro-rata share of the
abandonment obligation for the acquired interests.
In January 2002, CDI purchased Canyon, a supplier of remotely operated
vehicles (ROVs) and robotics to the offshore construction and telecommunications
industries. In connection with the acquisition, the Company committed to
purchase the redeemable stock in Canyon 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 (or $7.5 million). The Company also
agreed to make future payments relating to the tax impact on the date of
redemption, whether employment continued or not. As they are employees, any
share price paid in excess of the $13.53 per share will be recorded as
compensation expense. These remaining shares have been classified as long-term
debt in the accompanying balance sheet and will be adjusted to their estimated
redemption value at each reporting period based on Canyon's performance. In
April 2004 and 2003, the Company purchased approximately one-third and
one-third, respectively, of the redeemable shares at the minimum purchase price
of $13.53 per share. Consideration included approximately $344,000 and $400,000,
respectively, of contingent consideration relating to tax gross-up payments paid
to the Canyon employees in accordance with the purchase agreement. These
gross-up amounts were recorded as goodwill in the period paid (i.e., the second
quarters of 2004 and 2003).
In June 2002, CDI, along with GulfTerra Energy Partners L.P.
("GulfTerra"), formed Deepwater Gateway, L.L.C. (a 50/50 venture accounted for
by CDI under the equity method of accounting) 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 was approximately $120 million, all
of which had been incurred as of June 30, 2004. In August 2002, the Company
along with GulfTerra, completed a non-recourse project financing for this
venture, terms of which include a minimum equity investment for CDI of $33
million, all of which had been paid as of June 30, 2004, and is recorded as
Investment in Production Facilities in the accompanying consolidated balance
sheet. In June 2004, the Deepwater Gateway, L.L.C. construction loan, excluded
from the Company's long-term debt, was converted to a term loan. The term loan
is collateralized by substantially all of Deepwater Gateway, L.L.C's assets and
is non-recourse to the Company except for the balloon payment due at the end of
the term. In the event of default, the Company would be required to pay up to
$22.5 million; however, the Company has not recorded any liability for this
guarantee as management believes that it is unlikely the Company will be
required to pay the $22.5 million.
In April 2000, ERT acquired a 20% working interest in Gunnison, a
Deepwater Gulf of Mexico prospect of Kerr-McGee Oil & Gas Corp. Consistent with
CDI's philosophy of avoiding exploratory risk, financing for the exploratory
costs of approximately $20 million was provided by an investment partnership
(OKCD Investments, Ltd. or "OKCD"), the investors of which include current and
former CDI senior management, in exchange for a revenue interest that is an
overriding royalty interest of 25% of CDI's 20% working interest. CDI provided
no guarantees to the investment partnership. 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, estimated development costs
of $500 million consistent with 75 MBOE, and a CDI 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 prospect) 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 approximately $20 million of
exploratory drilling costs. With the sanctioning of a commercial discovery, the
Company funded ongoing development and production costs. Cal Dive's share of
such project development costs is estimated to be $121 million ($114 million of
which had been incurred as of June 30, 2004) with over half of that for
construction of the spar which was placed in service in December 2003. The
Company's Chief Executive Officer, as a Class A limited partner of OKCD,
personally owns approximately 57% of the partnership. Other executive officers
of the Company own approximately 6% combined, of the partnership. OKCD has also
awarded Class B limited partnership interests to key CDI employees. See footnote
10 to the
19
Company's Condensed Consolidated Financial Statements included herein for
discussion of the financing related to the spar construction. Production began
in December 2003. Payments to OKCD from ERT totaled $4.9 million and $7.7
million in the three and six months ended June 30, 2004, respectively.
As of June 30, 2004, the Company had $6.7 million of restricted cash of
which $6.5 million related to ERT's escrow funds for decommissioning liabilities
associated with the South Marsh Island 130 ("SMI 130") field acquisitions in
2002. Under the purchase agreement, ERT is obligated to escrow 50% of production
up to the first $20 million of escrow and 37.5% of production on the remaining
balance up to $33 million in total escrow. Once the escrow reaches $10 million,
ERT may use the restricted cash for decommissioning the related fields.
Financing Activities. We have financed seasonal operating requirements and
capital expenditures with internally generated funds, borrowings under credit
facilities, the sale of equity and project financings. Our largest debt
financing has been the MARAD debt. No draws were made on this facility in 2004
and 2003. The MARAD debt is payable in equal semi-annual installments which
began in August 2002 and matures 25 years from such date. We made one payment
each during the six months ended June 30, 2004 and 2003 totaling $1.5 million
and $1.4 million, respectively. The MARAD Debt 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 1.35% as of June 30, 2004). For a period up to ten
years from delivery of the vessel in April 2002, 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, working capital and debt-to-equity requirements. As of June
30, 2004, we were in compliance with these covenants.
The Company has a $70 million revolving credit facility which expires in
February 2005. This facility is collateralized by accounts receivable and
certain of the Company's Marine Contracting vessels, bears interest at LIBOR
plus 125-250 basis points depending on CDI leverage ratios and, among other
restrictions, includes three financial covenants (cash flow leverage, minimum
interest coverage and fixed charge coverage). As of June 30, 2004, the Company
was in compliance with these covenants and there was no outstanding balance
under this facility. A new $150 million revolving credit facility, which will
replace the existing credit facility, is currently being negotiated and is
expected to be closed during the third quarter of 2004.
The Company has a $35 million term loan facility which was obtained to
assist CDI in funding its portion of the construction costs of the spar for the
Gunnison field. The loan is payable in quarterly installments of $1.75 million
for three years after delivery of the spar (which was December 2003) with the
remaining $15.75 million due at the end of the three years (2006). The facility
bears interest at LIBOR plus 225-300 basis points depending on CDI leverage
ratios (approximately 3.38% as of June 30, 2004) 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 June 30, 2004.
In January 2003, CDI completed the private placement of $25 million of
preferred stock which is convertible into 833,334 shares of CDI common stock at
$30 per share. The preferred stock was issued to a private investment firm.
Subsequently in June 2004, the preferred stockholder exercised its existing
right and purchased $30 million in additional cumulative convertible preferred
stock. In accordance with the January 8, 2003 agreement, the $30 million in
additional preferred stock is convertible into 982,029 shares of Cal Dive common
stock at $30.549 per share. The preferred stock has a minimum annual dividend
rate of 4%, or LIBOR plus 150 basis points if greater, payable quarterly in cash
or common shares at Cal Dive's option. CDI paid these dividends in 2004 and 2003
on the last day of the respective quarter in cash. After the second anniversary
of the original issuance the holder may redeem the value of its original and
additional investments in the preferred shares to be settled in common stock at
the then prevailing market price or cash at the discretion of the Company. Under
certain conditions, the holder could redeem its investment prior to the second
anniversary of the original issuance. Prior to the conversion, common shares
issuable will be assessed for inclusion in the weighted average shares
outstanding for the Company's diluted earnings per share under the if converted
method based on the
20
Company's common share price at the beginning of the applicable period for the
original $25 million issuance and the date of issuance (June 25, 2004) for the
additional $30 million.
During the first six months of 2004 and 2003, we made payments of $1.8
million and $740,000, respectively, on capital leases relating to Canyon. The
only other financing activity during the six months ended June 30, 2004 and 2003
involved the exercise of employee stock options ($6.8 million and $3.1 million,
respectively).
The following table summarizes our contractual cash obligations as of June
30, 2004 and the scheduled years in which the obligations are contractually due
(in thousands):
Total (A) Less Than 1 Year 1-3 Years 3-5 Years After 5 Years
- ---------------------------------------------------------------------------------------------------------------------
MARAD debt $137,909 $ 3,045 $ 6,707 $ 7,622 $120,535
- ---------------------------------------------------------------------------------------------------------------------
Gunnison term loan 31,500 7,000 24,500 - -
- ---------------------------------------------------------------------------------------------------------------------
Revolving debt - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Canyon capital leases and other 14,039 5,691 5,369 2,979 -
- ---------------------------------------------------------------------------------------------------------------------
Gunnison development 7,000 7,000 - - -
- ---------------------------------------------------------------------------------------------------------------------
Operating leases 16,293 7,025 2,395 1,871 5,002
- ---------------------------------------------------------------------------------------------------------------------
Total cash obligations $206,741 $29,761 $38,971 $12,472 $125,537
- ---------------------------------------------------------------------------------------------------------------------
(A) Excludes CDI guarantee of payment due in 2009 on term loan (estimated to be
$22.5 million).
In addition, in connection with our business strategy, we regularly
evaluate acquisition opportunities (including additional vessels as well as
interest in offshore natural gas and oil properties). We believe
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.
21
ITEM 3. Quantitative and qualitative disclosure about market risk
The Company is currently exposed to market risk in three major areas:
interest, commodity prices and foreign currency. Because the majority of the
Company's debt at June 30, 2004 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, but every 100 basis points move in interest rates
would result in $1.8 million of annualized interest expense or savings, as the
case may be, to the Company.
Commodity Price Risk
The Company has utilized derivative financial instruments with respect to
a portion of 2004 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 June 30, 2004, the Company has the following volumes under
derivative contracts related to its oil and gas producing activities:
Instrument Average Monthly Weighted Average
Production Period Type Volumes Price
- ------------------------------ ---------- --------------- ----------------
Crude Oil:
July - December 2004 Swap 77 MBbl $31.18
January - June 2005 Swap 20 MBbl $35.80
Natural Gas:
July - December 2004 Collar 600,000 MMBtu $5.33 - $7.43
January - June 2005 Collar 200,000 MMBtu $5.50 - $7.70
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 inversely to the change in NYMEX prices.
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 (U.K.) Limited). The
functional currency for Well Ops (U.K.) Limited is the applicable local currency
(British Pound). 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 three and six
months ended June 30, 2004 and 2003, respectively, did not have a material
effect on reported amounts of revenues or net income.
Assets and liabilities of Well Ops (U.K.) Limited are translated using the
exchange rates in effect at the balance sheet date, resulting in translation
adjustments that are reflected in accumulated other comprehensive income (loss)
in the shareholders' equity section of our balance sheet. Approximately 14% of
our assets are impacted by changes in foreign currencies in relation to the U.S.
dollar. We recorded (losses) gains of $(762,000) and $1.2 million, net of taxes,
to our equity account in the three and six months ended June 30, 2004, and gains
of $2.2 million and $1.3 million, net of taxes, to our equity account in the
three and six months ended June 30, 2003.
Canyon Offshore, the Company's ROV subsidiary, has operations in the
United Kingdom and Southeast Asia sectors. Canyon conducts the majority of its
operations in these regions in U.S. dollars which it considers the functional
currency. When currencies other than the U.S. dollar are to be paid or
22
received the resulting gain or loss from translation is recognized in the
statements of operations. These amounts for the three and six months ended June
30, 2004 and 2003, respectively, were not material to the Company's results of
operations or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's
principal executive officer (CEO) and principal financial officer (CFO),
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
fiscal quarter ended June 30, 2004. Based on this evaluation, the CEO and CFO
have concluded that the Company's disclosure controls and procedures were
effective as of the end of the fiscal quarter ended June 30, 2004 to ensure that
information that is required to be disclosed by the Company in the reports it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms. There
were no changes in the Company's internal control over financial reporting that
occurred during the fiscal quarter ended June 30, 2004 that have materially
affected, or are reasonable likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item I, Note 12 to the Condensed Consolidated Financial
Statements, which is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
In accordance with a January 2003 agreement (the "Agreement"), on June 25, 2004,
Fletcher International, Ltd., an affiliate of Fletcher Asset Management, Inc.
("Fletcher"), exercised its right to purchase 30,000 shares of a new Series A-2
Cumulative Convertible Preferred Stock ("Series A-2 Preferred Stock") at $1,000
per share. The aggregate purchase price for the Series A-2 Preferred Stock was
$30 million. Cal Dive plans to use the proceeds for general corporate purposes,
potentially including acquisitions, debt reduction and/or buy back of common
stock.
The Series A-2 Preferred Stock issued in the financing may be converted
into an aggregate of 982,029 shares Cal Dive common stock ("Common Stock") at
the holders' option at an initial conversion price of $30.549 (the "Conversion
Price"). In accordance with the provisions of the Agreement, Cal Dive has
registered for resale the shares of Common Stock issuable upon conversion. If,
during the term of the Agreement, the Daily Market Price, as defined in the
Certificate of Rights and Preferences of Series A-2 Cumulative Convertible
Preferred Stock (the "Certificate") of the Common Stock is less than $7.3461 (or
such adjusted amount as provided for in the Agreement), upon the occurrence of
certain events, the Conversion Price could be reduced to $7.3461 (or such
adjusted amount as provided for in the Agreement).
Commencing on December 31, 2004, or earlier upon the occurrence of certain
events, the holders of the Series A-2 Preferred Stock have the right to cause
Cal Dive to redeem all or a portion of their shares of Series A-2 Preferred
Stock for shares of registered Common Stock or, at Cal Dive's election, for
cash. The number of shares of Common Stock to be issued by Cal Dive shall be
determined by dividing the stated value of the shares of Series A-2 Preferred
Stock being redeemed by the Prevailing Market Price (as defined in the
Certificate) at the time of such redemption. If Cal Dive elects to redeem the
shares of Series A-2 Preferred Stock for cash it will pay the holders the
Redemption Cash Amount (as defined in the Certificate).
23
The Series A-2 Preferred Stock will bear a dividend at a minimum rate of
4% per year, which may be paid, at Cal Dive's election, in cash or shares of
registered Common Stock. The Series A-2 Preferred Stock will not have voting
rights on ordinary corporate matters, except as required by Minnesota law. The
Series A-2 Preferred Stock will only have the right to approve specified
corporate actions which affect the Preferred Stock.
During the term of the Agreement, neither Fletcher, nor any of its
affiliates, shall engage in "short sales" of Cal Dive Common Stock; provided,
however, that Fletcher or any of its affiliates are not prohibited from engaging
in any transaction in any stock index, portfolio or derivative of which Cal Dive
Common Stock is a component.
The sale of the Series A-2 Preferred Stock was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended. The sale was made without general solicitation or advertising.
Fletcher is a sophisticated investor with access to all relevant information
necessary to evaluate an investment in the securities, and Fletcher represented
to Cal Dive that the securities were being acquired for investment purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 11,
2004, in Houston, Texas, for the purpose of electing three Class I directors.
Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934, and there was no solicitation in opposition to
management's solicitations.
Each of the Class I directors nominated by the Board of Directors and
listed in the proxy statement was elected with votes as follows:
Nominee Shares For Shares Withheld
- -------------------- ---------- ---------------
Bernard Duroc-Danner 32,652,873 2,962,777
- -------------------------------------------------
Owen Kratz 34,880,582 735,068
- -------------------------------------------------
John V. Lovoi 35,221,731 411,310
- -------------------------------------------------
The term of office of each of the following directors continued after the
meeting:
Gordon F. Ahalt
Martin R. Ferron
S. James Nelson, Jr.*
T. William Porter
Anthony Tripodo
William L. Transier
* Effective June 15, 2004, Jim Nelson retired from the Company and the Board of
Directors.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit 15.1 - Independent Registered Public Accounting Firm's
Acknowledgement Letter
Exhibit 31.1 - Certification Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934 by Owen Kratz, Chief Executive
Officer
Exhibit 31.2 - Certification Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934 by A. Wade Pursell, Chief Financial
Officer
Exhibit 32.1 - Section 1350 Certification by Owen Kratz, Chief
Executive Officer
Exhibit 32.2 - Section 1350 Certification by A. Wade Pursell, Chief
Financial Officer
Exhibit 99.1 - Report of Independent Registered Public Accounting
Firm
(b) Reports on Form 8-K -
Current Report on Form 8-K furnished to the SEC on May 3, 2004 to
report the Company's 2004 first quarter financial results.
Current Report on Form 8-K filed with the SEC on June 28, 2004 to
disclose the private placement of 30,000 shares of a new Series A-2
Cumulative Convertible Preferred Stock at $1,000 per share.
25
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: August 9, 2004 By: /s/ Owen Kratz
---------------------------------------
Owen Kratz, Chairman
and Chief Executive Officer
Date: August 9, 2004 By: /s/ A. Wade Pursell
---------------------------------------
A. Wade Pursell, Senior Vice President
and Chief Financial Officer
26
EXHIBIT INDEX
Exhibit 15.1 - Independent Registered Public Accounting Firm's
Acknowledgement Letter
Exhibit 31.1 - Certification Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934 by Owen Kratz, Chief Executive
Officer
Exhibit 31.2 - Certification Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934 by A. Wade Pursell, Chief Financial
Officer
Exhibit 32.1 - Section 1350 Certification by Owen Kratz, Chief
Executive Officer
Exhibit 32.2 - Section 1350 Certification by A. Wade Pursell, Chief
Financial Officer
Exhibit 99.1 - Report of Independent Registered Public Accounting
Firm