FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 6, 2002
- ---------------------------- -------------------------------
Common Stock, $.25 Par Value 24,758,578 shares
Page 1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<Table>
<Caption>
September 30, December 31,
2002 2001
------------- -------------
(restated)
ASSETS
Current Assets:
Cash and cash equivalents $ 50,000 $ 10,474
Accounts receivable, net of allowance
for doubtful accounts of $2,718 and $1,349 130,254 154,364
Prepaid expenses and other 38,595 40,380
------------- -------------
Total current assets 218,849 205,218
------------- -------------
Property and Equipment, at cost 579,692 573,738
Less: accumulated depreciation (254,849) (231,402)
------------- -------------
Net property and equipment 324,843 342,336
------------- -------------
Goodwill, net of amortization of $9,228 and $9,221 14,486 13,884
------------- -------------
Other Assets 18,874 18,173
------------- -------------
TOTAL ASSETS $ 577,052 $ 579,611
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 24,349 $ 28,902
Accrued liabilities 70,536 81,918
Income taxes payable 13,034 10,369
------------- -------------
Total current liabilities 107,919 121,189
------------- -------------
Long-term Debt, net of current portion 118,800 170,000
------------- -------------
Other Long-term Liabilities 38,346 40,650
------------- -------------
Commitments and Contingencies
Shareholders' Equity 311,987 247,772
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 577,052 $ 579,611
============= =============
</Table>
See Notes to Consolidated Financial Statements.
Page 2
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<Table>
<Caption>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(restated) (restated)
(in thousands, except per share amounts)
Revenue $ 130,608 $ 141,681 $ 411,006 $ 378,158
Cost of Services and Products 100,685 111,389 322,886 303,054
----------- ----------- ----------- -----------
Gross margin 29,923 30,292 88,120 75,104
Selling, General and Administrative Expenses 12,588 10,876 34,987 32,011
----------- ----------- ----------- -----------
Income from operations 17,335 19,416 53,133 43,093
Interest Income 171 120 375 325
Interest Expense, net of capitalized interest of
$107 and $2,037 in the three- and nine-month
periods in 2001 (1,984) (2,752) (6,666) (7,255)
Other Income (Expense), Net (1,012) 373 (1,782) 140
----------- ----------- ----------- -----------
Income before income taxes 14,510 17,157 45,060 36,303
Provision for Income Taxes (2,374) (6,005) (13,067) (12,706)
----------- ----------- ----------- -----------
Net Income $ 12,136 $ 11,152 $ 31,993 $ 23,597
=========== =========== =========== ===========
Basic Earnings per Share
$ 0.50 $ 0.48 $ 1.33 $ 1.03
Diluted Earnings per Share
Weighted average number of common shares $ 0.49 $ 0.48 $ 1.31 $ 1.01
Incremental shares from stock options 24,334 23,084 23,985 22,822
Weighted average number of common shares and 277 377 448 475
equivalents
24,611 23,461 24,433 23,297
</Table>
See Notes to Consolidated Financial Statements.
Page 3
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<Table>
<Caption>
For the Nine Months Ended
September 30,
------------------------------
2002 2001
------------ ------------
(restated)
(in thousands)
Cash Flows from Operating Activities:
Net Income $ 31,993 $ 23,597
------------ ------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 38,514 32,890
Currency translation adjustments and other 9,223 77
Increase (decrease) in cash from:
Accounts receivable 24,110 (50,992)
Prepaid expenses and other current assets 2,060 (2,490)
Other assets 17 (1,279)
Current liabilities (12,259) 22,060
Other long-term liabilities 124 3,012
------------ ------------
Total adjustments to net income 61,789 3,278
------------ ------------
Net Cash Provided by Operating Activities 93,782 26,875
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment and other (16,872) (50,745)
------------ ------------
Net Cash Used in Investing Activities (16,872) (50,745)
------------ ------------
Cash Flows from Financing Activities:
Net proceeds from (payments of) revolving credit and other long-term debt (51,200) 9,942
Proceeds from issuance of common stock 16,612 8,737
Purchases of treasury stock (2,796) (141)
------------ ------------
Net Cash Provided by (Used in) Financing Activities (37,384) 18,538
------------ ------------
Net Increase in Cash and Cash Equivalents 39,526 (5,332)
Cash and Cash Equivalents - Beginning of Year 10,474 9,911
------------ ------------
Cash and Cash Equivalents - End of Period $ 50,000 $ 4,579
============ ============
</Table>
See Notes to Consolidated Financial Statements.
Page 4
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Significant Accounting Policies
These 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
financial statements prepared in accordance with generally accepted
accounting principles. These financial statements reflect all
adjustments that Oceaneering's management believes are necessary to
present fairly Oceaneering's financial position at September 30, 2002
and its results of operations and cash flows for the periods presented.
All such adjustments are of a normal and recurring nature. The periods
before September 30, 2002 are presented on a restated basis to correct
accounting errors relating to restricted stock issued to key employees
of Oceaneering. See Note 2 for an explanation of this error and
restatement. The financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included
in Oceaneering's Annual Report on Form 10-K for the year ended December
31, 2001. The results for interim periods are not necessarily
indicative of annual results.
2. Restricted Stock - Corrections
As part of its long-term incentive compensation plan, Oceaneering uses
awards of restricted stock to provide key employees a proprietary
interest in the growth and performance of Oceaneering. The shares
awarded are subject to forfeiture unless a specified stock price
performance of Oceaneering, relative to an index of a peer group of
companies, is met and are subject to vesting over an extended period of
continued employment. In accordance with the plans, Oceaneering makes
tax-assistance payments on behalf of the employees upon the vesting of
the shares when the taxes are due.
Since the initiation of a restricted stock plan in 1993, Oceaneering
has accounted for the stock compensation and related tax-assistance
payments on a consistent basis. Oceaneering expensed the stock
compensation in equal increments over the three- or four-year vesting
period, as applicable. The tax-assistance payments are subject to
refund if the shares of stock are sold within three years after
vesting. Historically, Oceaneering amortized the tax-assistance
payments over the three-year period from the date the shares vested,
i.e., the period during which the payments made were subject to refund.
This accounting treatment was developed with the assistance of and
subsequently reviewed by our previous independent auditors.
In connection with the implementation of Oceaneering's 2002 long-term
incentive compensation plan, Oceaneering's management sought the advice
of its new independent auditors, Ernst & Young, concerning the
appropriate treatment of awards under the plan. Following these
consultations, Oceaneering determined that it had not been accounting
for its restricted stock expense and related tax-assistance correctly.
Oceaneering has concluded that (1) it should begin accruing for the
restricted stock expense at the date of the grant of the award, before
the performance criteria has been met, not over the vesting period,
which begins after the performance criteria has been met, and (2) it
should also accrue for and expense each tax-assistance payment over the
same period as the restricted stock, rather than amortize it over the
three-year period during which these payments are subject to refund.
The change in the accounting treatment used for the restricted stock
compensation plans does not represent any change in cash disbursements
or any increase in the total expense to be incurred over time. The
correction serves to accelerate the recognition of expense, moving
these costs forward, changing the periods over which the same total
expense is being recognized. It could also increase the volatility of
Oceaneering's quarterly compensation expense, which will adjust for
forfeitures and the change in our stock price.
During the restricted stock accounting review, Oceaneering also
determined that it had not been properly calculating the number of
common shares outstanding for earnings per share purposes. The total
number of shares issued under the restricted stock plans was included
as basic shares from the date of issue. The issued shares subject to
forfeiture are contingent shares and should not have been included
before being vested. In addition, for the dilutive calculation, the
shares, until vested, should have been calculated using the treasury
stock method. Under Oceaneering's previous method, the number of shares
used for purposes of calculating earnings per share was too high.
Oceaneering will be restating the results of previously reported
periods to reflect the appropriate accounting treatment for the
restricted stock expenses and related tax-assistance payments.
Page 5
In connection with this restatement, Oceaneering will request its
independent auditors to undertake a re-audit of previously reported
audited accounts. While the Company does not expect to make any other
adjustments, it is possible that the re-audit of prior periods will
result in additional adjustments to the previously reported financial
statements. In that event, the final restated results could differ from
those presented below.
Corrected for the accounting treatment afforded the restricted stock
program, Oceaneering expects its previously reported financials will be
impacted as follows (unaudited):
<Table>
<Caption>
Diluted EPS
% --------------------- %
Reported Restated Change Reported Restated Change
--------- --------- --------- --------- --------- ---------
(in thousands)
Retained Earnings,
March 31, 1999 $ 123,709 $ 120,430 (2.7)% N/A N/A N/A
Shareholders' Equity,
March 31, 1999 $ 179,439 $ 177,461 (1.1)% N/A N/A N/A
Net Income for the Fiscal Year
ended March 31, 2000 $ 16,784 $ 15,156 (9.7)% $ 0.73 $ 0.68 (6.8)%
Net Income for the Nine Months
ended Dec. 31, 2000 $ 11,313 $ 10,124 (10.5)% $ 0.49 $ 0.45 (8.2)%
Net Income for the Year ended
Dec. 31, 2001 $ 33,109 $ 32,344 (2.3)% $ 1.38 $ 1.39 0.7%
Net Income for the Six Months
ended June 30, 2002 $ 20,711 $ 19,857 (4.1)% $ 0.84 $ 0.82 (2.4)%
</Table>
The effects of the restatement in the three- and nine-month periods
ended September 30, 2001 are as follows (unaudited):
<Table>
<Caption>
For the Three Months Ended For the Nine Months Ended
September 30, 2001 September 30, 2001
--------------------------- ---------------------------
As Reported Restated As Reported Restated
----------- ----------- ----------- -----------
(in thousands, except per share amounts)
Revenues $ 141,681 $ 141,681 $ 378,158 $ 378,158
Gross margin 29,045 30,292 74,590 75,104
Income from operations 18,169 19,416 42,579 43,093
Income before income taxes 15,910 17,157 35,789 36,303
Net Income 10,342 11,152 23,263 23,597
Diluted earnings per share $ 0.43 $ 0.48 $ 0.97 $ 1.01
</Table>
Page 6
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
<Table>
<Caption>
September 30, December 31,
2002 2001
------------- -------------
(restated)
(in thousands)
Spare parts for remotely operated vehicles $ 12,462 $ 14,316
Inventories, primarily raw materials 11,905 9,385
Deferred taxes 10,634 10,359
Other 3,594 6,320
------------- -------------
Total $ 38,595 $ 40,380
============= =============
</Table>
4. Debt
Long-term Debt consisted of the following:
<Table>
<Caption>
September 30, December 31,
2002 2001
------------- -------------
(restated)
(in thousands)
6.72% Senior Notes $ 100,000 $ 100,000
Revolving credit facility -- 23,000
Term Loan 18,800 47,000
------------- -------------
Total $ 118,800 $ 170,000
============= =============
</Table>
During the quarter ended June 30, 2002, Oceaneering prepaid $21 million
of the principal owed under its Term Loan. As a result of the
prepayment, the remaining scheduled maturities of the Term Loan
changed. Oceaneering had an interest rate hedge in place that
effectively fixed the LIBOR component of the interest rate at 3.24% for
the Term Loan. Oceaneering revised the hedge to match the rescheduled
maturities of the Term Loan. Oceaneering charged $118,000 to interest
expense in the nine-month period ended September 30, 2002 as a result
of this change.
Scheduled maturities of Long-term Debt as of September 30, 2002 were as
follows:
<Table>
<Caption>
Revolving
(in thousands) 6.72% Notes Credit Facility Term Loan Total
-------------- ----------- ---------------- --------- ---------
Remainder of 2002 $ -- $ -- $ 1,200 $ 1,200
2003 -- -- 4,800 4,800
2004 -- -- 12,800 12,800
2005 -- -- -- --
2006 20,000 -- -- 20,000
Thereafter 80,000 -- -- 80,000
---------- ---------------- --------- ---------
Total $ 100,000 $ -- $ 18,800 $ 118,800
========== ================ ========= =========
</Table>
Maturities before September 2003 are not classified as current as of
September 30, 2002 since Oceaneering can extend the maturity by
borrowing under the revolving credit facility with a maturity date
after one year.
5. Shareholders' Equity
Shareholders' Equity consisted of the following:
<Table>
<Caption>
September 30, December 31,
2002 2001
------------- -------------
(restated)
(in thousands)
Common Stock, par value $0.25;
90,000,000 shares authorized; 24,813,289 and
24,017,046 shares issued $ 6,203 $ 6,004
Additional paid-in capital 106,129 87,305
Treasury stock; 123,708 and 249,872 shares, at average cost (2,692) (3,353)
Retained earnings 210,047 178,054
Other comprehensive income (7,700) (20,238)
------------- -------------
Total shareholders' equity $ 311,987 $ 247,772
============= =============
</Table>
Page 7
6. Income Taxes
In the nine-month period ended September 30, 2002, Oceaneering changed
its estimated annual effective tax rate for 2002 from 35% to 29%. The
change is a result of Oceaneering's anticipated realization of foreign
tax credits and the favorable finalization of tax positions related to
the foreign vessel and diving operations that were sold in 2000. The
effect of the change in the three months ended September 30, 2002
related to periods before the third quarter was a decrease of income
tax expense of $1,833,000.
Cash taxes paid were $10.5 million and $6.7 million for the nine months
ended September 30, 2002 and 2001, respectively.
7. Business Segment Information
Oceaneering supplies a comprehensive range of technical services and
specialty products to customers in a variety of industries.
Oceaneering's Offshore Oil and Gas business consists of four business
segments: Remotely Operated Vehicles ("ROVs"), Subsea Products, Mobile
Offshore Production Systems and Other Services. Oceaneering's Advanced
Technologies business is a separate segment that provides project
management, engineering services and equipment for applications outside
the oil and gas industry.
There are no differences in the basis of segmentation or in the basis
of measurement of segment profit or loss from those used in
Oceaneering's consolidated financial statements for the year ended
December 31, 2001. The periods before September 30, 2002 have been
restated to correct Oceaneering's accounting for restricted stock and
related tax-assistance payments. See Note 2 above for a discussion of
the corrections. The following summarizes certain financial data by
business segment:
<Table>
<Caption>
For the Three Months Ended For the Nine Months Ended
--------------------------------------------- -----------------------------
September 30, September 30, June 30, September 30, September 30,
2002 2001 2002 2002 2001
------------- ------------- ------------- ------------- -------------
(restated) (restated) (restated)
(in thousands)
Revenue
Offshore Oil and Gas
ROVs $ 38,068 $ 39,956 $ 37,616 $ 111,820 $ 112,774
Subsea Products 23,929 39,409 36,458 92,945 88,764
Mobile Offshore Production Systems 13,026 9,031 12,474 37,727 27,140
Other Services 28,649 26,836 32,440 92,210 74,325
------------- ------------- ------------- ------------- -------------
Total Offshore Oil and Gas 103,672 115,232 118,988 334,702 303,003
Advanced Technologies 26,936 26,449 22,561 76,304 75,155
------------- ------------- ------------- ------------- -------------
Total $ 130,608 $ 141,681 $ 141,549 $ 411,006 $ 378,158
============= ============= ============= ============= =============
Gross Margins
Offshore Oil and Gas
ROVs $ 8,952 $ 11,305 $ 10,111 $ 27,012 $ 33,455
Subsea Products 6,280 7,358 8,053 20,012 10,493
Mobile Offshore Production Systems 5,600 4,060 4,508 15,347 8,449
Other Services 3,411 2,801 5,092 13,001 9,384
------------- ------------- ------------- ------------- -------------
Total Offshore Oil and Gas 24,243 25,524 27,764 75,372 61,781
Advanced Technologies 5,680 4,768 4,010 12,748 13,323
------------- ------------- ------------- ------------- -------------
Total $ 29,923 $ 30,292 $ 31,774 $ 88,120 $ 75,104
============= ============= ============= ============= =============
</Table>
Page 8
8. Comprehensive Income
Comprehensive income is the total of net income and all nonowner
changes in equity. The amounts of comprehensive income for the three-
and nine-month periods ended September 30, 2002 and 2001 are as
follows:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(restated) (restated)
(in thousands)
Net Income per Consolidated Statements of Income $ 12,136 $ 11,152 $ 31,993 $ 23,597
Foreign Currency Translation Gains (Losses) 4,119 3,159 12,915 (2,170)
Change in Fair Value of Interest Rate Hedge (194) -- (377) --
----------- ----------- ----------- -----------
Comprehensive Income $ 16,061 $ 14,311 $ 44,531 $ 21,427
=========== =========== =========== ===========
</Table>
Amounts comprising other elements of comprehensive income in
Shareholders' Equity:
<Table>
<Caption>
September 30, December 31,
2002 2001
------------- -------------
(in thousands)
Accumulated Net Foreign Currency Translation Adjustments $ (7,387) $ (20,302)
Fair Value of Interest Rate Hedge (313) 64
------------- -------------
$ (7,700) $ (20,238)
============= =============
</Table>
9. New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires the use of the purchase
method of accounting for all business combinations entered into after
June 30, 2001. SFAS No. 141 also specifies criteria intangible assets
must meet to be recognized and reported apart from goodwill. SFAS No.
142 changes the accounting method for goodwill from an amortization to
an impairment-only approach. SFAS No. 142 was effective for
Oceaneering's quarter ended March 31, 2002, and early adoption of this
statement was not permitted. Oceaneering completed the impairment tests
of goodwill as of January 1, 2002 and determined that its goodwill is
not impaired. Goodwill amortization expense was $326,000 and $959,000
for the three- and nine-month periods ended September 30, 2001.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
All statements in this 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 refer 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, 2001. 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.
Material Changes in Financial Condition
We consider our liquidity and capital resources adequate to support our
operations and capital commitments. At September 30, 2002, we had working
capital of $111 million, including $50 million of cash and cash equivalents.
Additionally, we had $80 million of borrowing capacity available under our
revolving credit facility.
Our capital expenditures were $21 million during the nine months ended September
30, 2002, as compared to $51 million during the corresponding period of last
year. Capital expenditures in the current year consisted of expenditures
relating to the addition of units to our fleet of ROVs to replace older units we
retired. Prior-year expenditures consisted of final costs related to the
conversion of a jackup drilling rig to a mobile production unit, the Ocean
Legend, modifications to the FPSO Ocean Producer, and additions to our fleet of
ROVs.
We had no material commitments for capital expenditures at September 30, 2002.
Page 9
At September 30, 2002, we had long-term debt of $119 million and a 28%
debt-to-total capitalization ratio. We have $100 million of Senior Notes
outstanding, to be repaid from 2006 through 2010. We have an $80 million
revolving credit facility, under which we had no outstanding borrowings and $80
million available for future borrowings at September 30, 2002. This facility is
scheduled to expire in October 2003. We anticipate that we will replace it with
a new revolving credit facility before the end of February 2003. We also have a
term loan facility that is to be repaid through April 2004. At September 30,
2002, we had $19 million in outstanding borrowings under the term loan facility.
Both the revolving credit and term loan facilities have short-term interest
rates that float with market rates, plus applicable spreads. We have effectively
fixed the interest rate on the term loan at approximately 4% through an interest
rate swap. We have no off-balance sheet debt and have not guaranteed any debt
not reflected on our consolidated balance sheets.
Results of Operations
We operate in five business segments. The segments are contained within two
businesses - services and products provided to the offshore oil and gas industry
("Offshore Oil and Gas") and all other services and products ("Advanced
Technologies"). Our segments within the Offshore Oil and Gas business are
Remotely Operated Vehicles ("ROVs"), Subsea Products, Mobile Offshore Production
Systems and Other Services. We report our Advanced Technologies business as one
segment.
Consolidated revenue and margin information is as follows:
<Table>
<Caption>
For the Three Months Ended For the Nine Months Ended
----------------------------------------------- ------------------------------
September 30, September 30, June 30, September 30, September 30,
2002 2001 2002 2002 2001
------------- ------------- ------------- ------------- -------------
(restated) (restated) (restated)
(in thousands)
Revenue $ 130,608 $ 141,681 $ 141,549 $ 411,006 $ 378,158
Gross margin 29,923 30,292 31,774 88,120 75,104
Gross margin % 23% 21% 22% 21% 20%
Operating margin % 13% 14% 14% 13% 11%
</Table>
The periods before September 30, 2002 have been restated to correct our
accounting for restricted stock and related tax-assistance payments. See Note 2
to the Consolidated Financial Statements for a discussion of the corrections.
Our Offshore Oil and Gas business results are influenced by the level of capital
spending by oil and gas companies in the offshore sector, particularly in
deepwater, that is, at water depths of 1,000 feet or more. In 2002, we have seen
a decrease in deepwater exploration activity, particularly in the Gulf of
Mexico. We have noted continuing delays in the development of deepwater
prospects around the world. As a result, the increase in ROV drill support
services that we had expected to begin in the second half of 2002 has not yet
materialized. In addition, as evidenced by the decline in our Subsea Products
backlog from $61 million at December 31, 2001 to $29 million at September 30,
2002, a surge in activity appears unlikely before mid-2003. Based on the number
of subsea tree orders and our outstanding bids, we anticipate our backlog will
increase by year-end, with a subsequent increase in activity.
We generate a material amount of our consolidated revenue from contracts for
marine 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. However,
our exit from the diving sector in the North Sea in early 1998 and the
substantial number of multiyear ROV contracts that we entered into since
calendar year 1997 have reduced the seasonality of our Other Services and ROV
operations. Revenues in our Mobile Offshore Production Systems, Subsea Products
and Advanced Technologies segments are generally not seasonal.
Page 10
Offshore Oil and Gas
The table below sets forth our revenues and gross margins for our Offshore Oil
and Gas business for the periods indicated.
<Table>
<Caption>
For the Three Months Ended For the Nine Months Ended
----------------------------------------------- ------------------------------
September 30, September 30, June 30, September 30, September 30,
2002 2001 2002 2002 2001
------------- ------------- ------------- ------------- -------------
(restated) (restated) (restated)
(in thousands, except for percentages)
ROVs
Revenue $ 38,068 $ 39,956 $ 37,616 $ 111,820 $ 112,774
Gross margin 8,952 11,305 10,111 27,012 33,455
Gross margin % 24% 28% 27% 24% 30%
Work class utilization % 65% 79% 70% 68% 77%
Subsea Products
Revenue $ 23,929 $ 39,409 $ 36,458 $ 92,945 $ 88,764
Gross margin 6,280 7,358 8,053 20,012 10,493
Gross margin % 26% 19% 22% 22% 12%
Mobile Offshore Production Systems
Revenue $ 13,026 $ 9,031 $ 12,474 $ 37,727 $ 27,140
Gross margin 5,600 4,060 4,508 15,347 8,449
Gross margin % 43% 45% 36% 41% 31%
Other Services
Revenue $ 28,649 $ 26,836 $ 32,440 $ 92,210 $ 74,325
Gross margin 3,411 2,801 5,092 13,001 9,384
Gross margin % 12% 10% 16% 14% 13%
Total Offshore Oil and Gas
Revenue $ 103,672 $ 115,232 $ 118,988 $ 334,702 $ 303,003
Gross margin 24,243 25,524 27,764 75,372 61,781
Gross margin % 23% 22% 23% 23% 20%
</Table>
ROV segment gross margin had been increasing over the past several years due to
both additional units available for service and higher utilization rates. The
higher utilization rates had resulted from the return to service of more
floating drilling rigs and a rise in offshore construction-related activities.
This trend reversed in the first quarter of 2002, as there was weakness in the
semi-submersible drilling market, particularly in the Gulf of Mexico where we
have a large market share of ROV drill support. Our ROV revenues and margins
were also adversely affected in the third quarter as a result of offshore
evacuations caused by two tropical storms in the Gulf of Mexico. We are
forecasting ROV results will improve in the fourth quarter of 2002, as we have
recently mobilized some idle ROVs for drill support jobs.
During the quarter ended September 30, 2002, our Subsea Products revenues and
gross margins declined from the corresponding quarter of the prior year due to
reduced activity at our U.S. and Brazil umbilical plants. The nine-month results
of our Subsea Products segment for 2002 are substantially better than those
attained in the corresponding period of 2001. During the first half of 2001, we
were producing a large steel tube umbilical order, the largest umbilical
contract we had ever undertaken, at a loss. It was bid and undertaken during a
period of reduced demand. The completion of this project in the first half of
2001 freed up capacity at our U.K. plant for profitable work. While our outlook
for the Subsea Products segment is highly positive based on the projected growth
in subsea wellhead completions, we anticipate this segment's results will be
lower in the fourth quarter of 2002 as compared to the fourth quarter of 2001,
based on our reduced level of backlog of $29 million at September 30, 2002 as
compared to $61 million at December 31, 2001.
Our Mobile Offshore Production Systems gross margins were higher than the
corresponding periods of 2001. The Ocean Producer began operations in the fourth
quarter of 2001 under a new seven-year contract, which has been providing higher
revenues and margins than its prior contract. The Ocean Legend began receiving
partial dayrate in the first quarter of 2001 and began receiving full dayrate
mid-second quarter of 2001. As a result of brief operating problems during the
third and fourth quarters of 2001, the first quarter of 2002 was the first
quarter in which we achieved full dayrate for an entire quarter from the Ocean
Legend. In the third quarter of 2002, we received and recognized $1.3 million as
revenue relating to the settlement of a 2001-related dispute with our customer.
During the second quarter of 2002, our customer exercised its option to extend
the Ocean Legend contract for an additional two years. As a result, our revenue
and margin on this contract decreased by approximately $19,000 per day from
mid-May 2002, as compared to the first quarter of 2002. Consequently,
Page 11
gross margin for this segment, had it not been for the $1.3 million settlement
mentioned above, would have been less than the second quarter of 2002.
For our Other Services segment, a significant improvement in offshore activity
in the Gulf of Mexico contributed to the increase in Other Services gross
margins for the three- and nine-month periods ended September 30, 2002. We
experienced an increase in utilization of and profitability from our two Gulf of
Mexico Ocean Intervention multi-service vessels in the three- and nine-month
periods of 2002 compared to the corresponding periods of 2001. Additionally,
gross margin improved as a result of a significant engineering and specialized
diving contract, and, to a lesser extent, from topside inspection services. We
believe that for 2002 our Other Services segment will earn more revenue at
higher margins than it did in 2001. Currently, we project this segment's results
for the remainder of 2002 to be lower than the average of those achieved in the
first nine months of 2002 as a result of a soft vessel market in the Gulf of
Mexico due to the low level of offshore industry activity being experienced at
this time. The nine-month period of 2001 included benefits from our exit in 2000
from non-U.S. oilfield diving and vessel activities.
ADVANCED TECHNOLOGIES
Revenue and gross margin information is as follows:
<Table>
<Caption>
For the Three Months Ended For the Nine Months Ended
----------------------------------------------- ------------------------------
September 30, September 30, June 30, September 30, September 30,
2002 2001 2002 2002 2001
------------- ------------- ------------- ------------- -------------
(restated) (restated) (restated)
(in thousands, except for percentages)
Revenue $ 26,936 $ 26,449 $ 22,561 $ 76,304 $ 75,155
Gross margin 5,680 4,768 4,010 12,748 13,323
Gross margin % 21% 18% 18% 17% 18%
</Table>
Advanced Technologies revenues and margins were higher in the three- and
nine-month periods of 2002 as compared to the corresponding periods of 2001 from
improved revenues and margins in our entertainment and marine services
divisions, partially offset by lower levels of activities from our
telecommunications cable ROV services and from our space division as a result of
lower NASA spending. Gross margin was higher than the immediately preceding
quarter from our marine services operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
During the third quarter of 2002, selling, general and administrative expense
included a $1.4 million provision for a doubtful account associated with work
done in prior years for a customer of the space and thermal division of our
Advanced Technologies segment.
OTHER
Our equity in the earnings (loss) of our telecommunications joint venture was
$(687,000) and $(724,000) for the three and nine months ended September 30,
2002, compared to $266,000 and $988,000 for the three and nine months ended
September 30, 2001. The telecommunications cable lay and burial market is
suffering from reduced demand for services, and weak market conditions are
expected to continue at least through the balance of 2002.
Interest expense for the periods ended September 30, 2002 decreased compared to
the corresponding periods of the prior year from lower debt levels. Our debt had
been incurred to fund the acquisition of additional equipment, including the
Ocean Legend, and expansion of our Subsea Products production capacity. Interest
expense of $2,752,000 and $7,255,000 for the three and nine months ended
September 30, 2001 was net of capitalized interest of $107,000 and $2,037,000.
Other expense in the nine-month period ended September 30, 2001 included the
first quarter write-off of $600,000 related to the shares of Friede Goldman
Halter, Inc. we received as proceeds for the sale of an out-of-service jackup
rig in the fourth quarter of 1999. Friede Goldman Halter, Inc. filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code on
April 19, 2001. Friede Goldman Halter, Inc. was delisted from the New York Stock
Exchange on April 19, 2001.
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. As a result of the anticipated
realization of foreign tax credits and the favorable finalization of certain tax
positions related to the foreign vessel and diving operations we sold in 2000,
we have decreased our effective tax rate for 2002 from 35% to 29%. The 29%
effective rate is used for our nine-month results and the impact of the change
Page 12
upon the first half of the year is included in our third quarter. If we had used
a 29% income tax rate for the first half of 2002, income tax expense for the
third quarter would have increased by $1,833,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There are no material changes from the information provided in Item 7A of our
Annual Report on Form 10-K for the year ended December 31, 2001. For a
discussion of a change we implemented relating to our interest rate swap for our
term loan, see Note 4 to the Consolidated Financial Statements in this report.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90-day period immediately preceding the filing of this report, our
chief executive officer and chief financial officer have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934). Based on that evaluation, our chief executive officer and
chief financial officer concluded that the design and operation of our
disclosure controls and procedures were effective as of the date of that
evaluation. There have been no significant changes in our internal controls or
in other factors that could significantly affect those controls subsequent to
the date of that evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<Table>
<Caption>
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. 2001 3.02
* 10.01 2002 Incentive Plan 1-10945 10-Q Jun. 2002 10.01
10.02 Amended and Restated Supplemental
Executive Retirement Plan
10.03 2002 Non-Executive Incentive Plan
10.04 Amended and Restated 2002 Restricted
Stock Unit Award Incentive Agreements
with John R. Huff, T. Jay Collins,
M. Kevin McEvoy, Marvin J. Migura,
George R. Haubenreich, Jr. and
John L. Zachary
10.05 Non-qualified stock option award agreements
under the 2002 Incentive Plan with
John R. Huff, T. Jay Collins, M. Kevin McEvoy,
Marvin J. Migura, George R. Haubenreich, Jr.
and John L. Zachary
</Table>
- ----------
* Indicates exhibit previously filed with the Securities and Exchange
Commission as indicated and incorporated herein by reference.
(b) Oceaneering filed the following reports on Form 8-K during the quarter
for which this report is filed.
<Table>
<Caption>
Date Description
--------------- ------------
August 12, 2002 Information furnished under Item 9
regarding the certifications provided to the
Securities and Exchange Commission by Oceaneering's
chief executive officer and chief financial officer
under Section 906 of the Sarbanes-Oxley Act of
2002.
September 3, 2002 Information furnished under Item 9 regarding the posting of a presentation on Oceaneering's Web site.
</Table>
Page 13
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: November 12, 2002 By: /s/ JOHN R. HUFF
-------------------------------------
John R. Huff
Chairman and Chief Executive Officer
Date: November 12, 2002 By: /s/ MARVIN J. MIGURA
-------------------------------------
Marvin J. Migura
Senior Vice President and Chief
Financial Officer
Date: November 12, 2002 By: /s/ JOHN L. ZACHARY
-------------------------------------
John L. Zachary
Controller and Chief Accounting Officer
Page 14
CERTIFICATIONS
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 quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 12, 2002
/s/ JOHN R. HUFF
-----------------------------
John R. Huff
Chief Executive Officer
Page 15
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 quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 12, 2002
/S/ MARVIN J. MIGURA
----------------------------
Marvin J. Migura
Chief Financial Officer
Page 16
EXHIBIT INDEX
<Table>
<Caption>
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. 2001 3.02
* 10.01 2002 Incentive Plan 1-10945 10-Q Jun. 2002 10.01
10.02 Amended and Restated Supplemental
Executive Retirement Plan
10.03 2002 Non-Executive Incentive Plan
10.04 Amended and Restated 2002 Restricted
Stock Unit Award Incentive Agreements
with John R. Huff, T. Jay Collins,
M. Kevin McEvoy, Marvin J. Migura,
George R. Haubenreich, Jr. and
John L. Zachary
10.05 Non-qualified stock option award agreements
under the 2002 Incentive Plan with
John R. Huff, T. Jay Collins, M. Kevin McEvoy,
Marvin J. Migura, George R. Haubenreich, Jr.
and John L. Zachary
</Table>
- ----------
* Indicates exhibit previously filed with the Securities and Exchange
Commission as indicated and incorporated herein by reference.