-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NrLmfKn6gBDPZB1hmIX99zNNqii/VmWNfqbv4hlrRSyJjnj5iJl5Wy/hH722VLA3 WSE1OZncL8ivNsTAb1A84Q== 0000950129-04-003002.txt : 20040510 0000950129-04-003002.hdr.sgml : 20040510 20040507184028 ACCESSION NUMBER: 0000950129-04-003002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCEANEERING INTERNATIONAL INC CENTRAL INDEX KEY: 0000073756 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 952628227 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10945 FILM NUMBER: 04790604 BUSINESS ADDRESS: STREET 1: 11911 FM 529 CITY: HOUSTON STATE: TX ZIP: 77041 BUSINESS PHONE: 713-329-4500 MAIL ADDRESS: STREET 1: 11911 FM 529 CITY: HOUSTON STATE: TX ZIP: 77041 10-Q 1 h15176e10vq.txt OCEANEERING INTERNATIONAL, INC. - MARCH 31, 2004 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 EX-31.01 2 h15176exv31w01.txt RULE 13A-14A/15D-14A CERTIFICATION BY CEO Exhibit 31.01 CERTIFICATION I, John R. Huff, Chief Executive Officer of Oceaneering International, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Oceaneering International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 7, 2004 /s/ JOHN R. HUFF --------------------------- John R. Huff Chief Executive Officer EX-31.02 3 h15176exv31w02.txt RULE 13A-14A/15D-14A CERTIFICATION BY CFO Exhibit 31.02 CERTIFICATION I, Marvin J. Migura, Chief Financial Officer of Oceaneering International, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Oceaneering International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 7, 2004 /s/ MARVIN J. MIGURA --------------------------- Marvin J. Migura Chief Financial Officer EX-32.01 4 h15176exv32w01.txt SECTION 1350 CERTIFICATION BY CEO EXHIBIT 32.01 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Oceaneering International, Inc. ("Oceaneering") on Form 10-Q for the quarter ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Huff, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuanT to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Oceaneering. Dated: May 7, 2004 /s/ JOHN R. HUFF ---------------------------------- John R. Huff Chairman and Chief Executive Officer (Principal Executive Officer) EX-32.02 5 h15176exv32w02.txt SECTION 1350 CERTIFICATION BY CFO EXHIBIT 32.02 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Oceaneering International, Inc. ("Oceaneering") on Form 10-Q for the quarter ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marvin J. Migura, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxLEy Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Oceaneering. Dated: May 7, 2004 /s/ MARVIN J. MIGURA -------------------- Marvin J. Migura Senior Vice President and Chief Financial Officer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----