Item 1. BUSINESS.
General Development of Business
Oceaneering International, Inc., (together with its subsidiaries, "Oceaneering" or the "Company") is an advanced applied technology company that provides engineered services and hardware to customers who operate in marine, space and other harsh environments. The Company supplies a comprehensive range of integrated technical services to a wide array of industries and is one of the world's largest underwater services contractors. Principal services are provided to the oil and gas industry and include drilling support, subsea construction, production systems, facilities maintenance and repair, survey and positioning and specialized onshore and offshore engineering and inspection. Oceaneering was organized in 1969 out of the combination of three diving service companies founded in the early 1960s. Since its establishment, the Company has concentrated on the development and marketing of underwater services requiring the use of advanced deepwater technology. The Company conducts operations in the United States and 28 other countries. The Company's international operations, principally in the North Sea, Africa and Far East, accounted for approximately 51% of its 1998 revenues, or $184 million.
Since 1990, the Company has concentrated on expanding its capabilities to provide technical solutions to customers operating in harsh environments. It has accomplished this through acquisitions and internal growth.
In January 1990, the Company acquired all of the outstanding capital stock of Sonsub Limited, a United Kingdom company, whose principal assets were ten work class Remotely Operated Vehicles ("ROVs"). ROVs are unmanned submersible vehicles operated from the surface that are used widely in the offshore oil and gas industry.
In December 1990, the Company was awarded a contract by a major oil company to provide and maintain a Floating Production, Storage and Offloading system ("FPSO"). This represented the first major project for the Company's Offshore Production Systems division ("OPS"), which was formed to develop economical production alternatives for offshore oil and gas fields. A 78,000 deadweight ton ("dwt") tanker was purchased and converted into an FPSO, the OCEAN PRODUCER, for this project. The unit was delivered to its first location in December 1991 and is currently under contract for operations offshore West Africa.
In August 1992, the Company acquired Eastport International, Inc., ("Eastport"), a designer, developer and operator of advanced robotic systems and ROVs specializing in the non-oilfield market, in a transaction accounted for as a pooling of interests. Eastport's assets included two specialized ROVs, one of which is rated for water depths to 25,000 feet, a deep tow sonar system and two other work class ROVs.
In May 1993, the Company purchased the business and assets of the Space Systems Division of ILC Dover, Inc., ("ILC") which were consolidated with the Company's Oceaneering Space Systems division. This business designs, develops and fabricates spacecraft hardware and high temperature insulation products.
In July 1993, the Company purchased Oil Industry Engineering, Inc., a designer and fabricator of subsea control systems, which now operates as the Oceaneering Intervention Engineering division ("OIE"). In March 1994, the Company purchased the operating subsidiaries of Multiflex International Inc., a manufacturer of subsea control umbilical cables, which now operates as the Oceaneering Multiflex division ("Multiflex"). Together with the Company's existing OPS division, these acquisitions form the basis of the Company's continuing expansion in the offshore field development business.
In November 1995, the Company was awarded a contract with a major oil company for the provision of an FPSO. The Company converted a 268,000 dwt tanker and delivered the unit to its first operational location offshore West Africa in August 1996. The customer exercised an option to purchase the unit in December 1996 and the Company is currently continuing to manage the vessel and to supervise major modifications to increase the production capacity of the unit.
The Company intends to continue its strategy of acquiring, as opportunities arise, additional assets or businesses, either directly through merger, consolidation or purchase, or indirectly through joint ventures. The Company is also applying its skills and technology in further developing business unrelated to the oil and gas industry and performing services for government agencies and firms in the telecommunications, aerospace, and civil engineering and construction industries. The Company is continually seeking opportunities for business combinations to improve its market position or expand into related service lines.
Unless the context indicates otherwise, references to years indicate fiscal year.
Financial Information about Industry Segments
The Company's business segments are Oilfield Marine Services, Offshore Field Development and Advanced Technologies. The table containing revenues, operating income, identifiable assets, capital expenditures, and depreciation and amortization by business segment for the years ended March 31, 1998, 1997 and 1996 is incorporated herein by reference from Note 6 of the Notes to Consolidated Financial Statements.
Description of Business
OILFIELD MARINE SERVICES
The Company's Oilfield Marine Services business consists of underwater intervention and above-water inspection, maintenance and repair. These services may be provided to customers on an integrated basis.
Underwater Intervention Services. The Company provides underwater support services for all phases of offshore oil and gas operations - exploration, development and production. During the exploration phase, the Company provides positioning, placement and monitoring of subsea exploration equipment, collects data on seafloor characteristics at proposed drilling sites and assists with the navigational positioning of drilling rigs. During the development phase, the Company assists with the installation of production platforms and the connection of subsea pipelines. During the production phase, the Company inspects, maintains and repairs offshore platforms, pipelines and subsea equipment.
Underwater intervention services are performed by ROVs or divers. ROVs are used at depths or in situations in which diving would be uneconomical or infeasible. The Company believes that it operates the largest and most technically advanced fleet of work class ROVs in the world, with over 25% market share. ROVs are used for a variety of underwater tasks including drill support, installation and construction support, pipeline inspections and surveys, and subsea production facility installation, operation and maintenance. An ROV may be outfitted with manipulators, sonar, television cameras, specialized tooling packages and other equipment or features to facilitate the performance of specific underwater tasks. The Company currently owns more than 80 work class ROVs and is the industry leader in providing ROV services on deepwater wells which are the most technically demanding.
Prior to 1996, the Company purchased most of its ROVs from third-party manufacturers although it designed and built specialized systems in house. In response to increased demand for more powerful systems capable of operating in deeper water, the Company expanded its production capabilities and established a dedicated facility to design and build ROVs to meet the continued expansion of the ROV fleet. Over 30 systems have been delivered and all new ROVs entering the Company's fleet are now produced at this facility.
When a project requires manned intervention, the Company uses divers or Atmospheric Diving Systems ("ADS") technology. An ADS encloses the operator in a one-atmosphere (surface pressure) diving suit and is suitable for use in water depths to 2,300 feet. The Company does not use divers (as distinguished from ADS operators) to perform functions in water depths greater than 1,000 feet.
The Company also provides a range of survey and navigational positioning services for the oil and gas industry, as well as ocean search and recovery projects. Applications include surface positioning for rig moves and the installation of pipelines and platforms, subsea positioning and acoustics, geophysical surveys, deep tow surveys and pipeline surveys.
Underwater services using all of these techniques are performed from drilling rigs, platforms, barges and vessels.
Above-Water Inspection Services. Through its Solus Schall division ("Solus Schall"), the Company offers a wide range of inspection services to customers required to obtain third party inspections to satisfy contractual structural specifications and requirements, internal safety standards or regulatory requirements. The Company focuses on the inspection of pipelines and onshore fabrication of offshore facilities for the oil and gas industry. Certain of Solus Schall's pipeline inspection activities are performed through the use of specialized X-ray crawlers, which travel independently inside pipelines, stopping to perform radiographic inspection of welds. Solus Schall derives the majority of its revenues from foreign operations.
OFFSHORE FIELD DEVELOPMENT
Mobile Offshore Production Systems. The Company established OPS as a division during 1989 to provide subsea intervention services and the engineering, procurement, construction, installation and operation of mobile offshore production systems ("MOPS") to customers for marginal and remote field production and extended well testing. The Company has been awarded several contracts pertaining to MOPS activities and subsea workover and maintenance needs, including deepwater extended well testing in the Gulf of Mexico and has served as prime contractor on an extended well testing project in the North Sea. The Company's first FPSO, the OCEAN PRODUCER, has been operating offshore West Africa since December 1991. In December 1997, the Company purchased a production barge which is under contract offshore Indonesia. The Company continues to operate the FPSO ZAFIRO PRODUCER under a management agreement and is managing a major upgrade of the vessel. The ZAFIRO PRODUCER, which was acquired in 1996 and converted to an FPSO, was delivered to its first location offshore West Africa in August 1996 to begin operations under a three-year contract with a major oil company. The customer had an option to purchase the unit and exercised this option in December 1996. Additionally, the Company owns four out-of-service offshore rigs and a tanker capable of conversion to MOPS units.
Subsea Products. OIE, Multiflex and the Pipeline Repair Systems unit of the Company comprise the Subsea Products division which complements the activities of OPS. OIE provides subsea intervention services, design and fabrication of ROV interface tooling, including ROV replaceable and ROV operable valves, and design and fabrication of subsea control systems.
Multiflex, with facilities in Houston, Texas and Edinburgh, Scotland, produces subsea control umbilical cables which are used for the remote operation of subsea installations and equipment and typically incorporate both electrical and hydraulic control lines.
ADVANCED TECHNOLOGIES
The Company's Advanced Technologies ("ADTECH") business segment provides underwater intervention, topside inspection, and engineering services to meet a variety of non-oilfield industrial requirements, including ship husbandry, search and recovery, subsea telecommunications cable installation, maintenance and repair, civil works projects and commercial theme park animation. This is accomplished in part by extending the use of existing assets and technology developed in oilfield operations to new applications.
ADTECH performs work for customers having specialized requirements underwater or in other environments. ADTECH provides deep ocean search and recovery services for governmental bodies, including the U.S. Navy. In other services for the Navy, ADTECH provides various engineering and underwater services ranging from aircraft salvage and recovery operations to inspection and maintenance of the Navy's fleet of surface ships and submarines. The Company also maintains and operates deepwater cable lay and maintenance vehicles for Tyco Submarine Systems Ltd.
ADTECH designs and operates ROVs that are rated for work in water depths to 25,000 feet. The Company's ROVs are equipped with umbilical cords containing fiber optics which allow for improved communications with the surface. Other specialized equipment owned by the Company includes ROV cable lay and maintenance equipment rated to 5,000 feet and deep tow, side scan sonar systems rated for use in 20,000 feet. The Company's deep tow systems have been used to locate aircraft in water depths to 14,700 feet.
ADTECH also designs and develops specialized tools and builds ROV systems to customer specifications for use in deepwater and hazardous environments.
As part of ADTECH, Oceaneering Space Systems ("OSS") directs the Company's efforts towards applying undersea technology and experience in the space industry. The Company has worked with the National Aeronautics and Space Administration ("NASA") and NASA subcontractors on a variety of projects including portable life-support systems, decompression techniques, tools and robotic systems, and standards and guidelines to ensure robotic compatibility for space station equipment and payloads. OSS was expanded in 1994 by the purchase of the assets of ILC. ILC had supported NASA by producing space shuttle crew support equipment, including the design, development and fabrication of spacecraft extravehicular and intravehicular hardware and soft goods, air crew life-support equipment, mechanical and electromechanical devices and high temperature insulation. These activities have continued. The activities of OSS are substantially dependent on continued government funding for space programs.
MARKETING
Oilfield Marine Services. The Company markets its services primarily to international and foreign national oil and gas companies. It also provides services as a subcontractor to companies operating as prime contractors. Contracts are typically awarded on a competitive bid basis and are for the most part short-term.
Offshore Field Development. The Company markets both its mobile offshore production systems and subsea products primarily to international and foreign national oil and gas companies, utilizing the Company's existing administrative structure to identify potential business opportunities. MOPS are offered for extended well testing, early production and development of marginal fields and prospects in areas lacking pipelines and processing infrastructure. Contracts are typically awarded on a competitive basis, generally for periods of one or more years. The Company owns two MOPS units and operates a third. Further equipment will be added as profitable opportunities arise. The Company also owns equipment which is capable of conversion to MOPS. The Company believes that Multiflex enables it to identify market opportunities at an earlier stage as umbilical design is typically part of the initial planning phase in field development. The Company is able to offer an integrated service consisting of design, engineering, project management and provision of hardware.
Advanced Technologies. The Company markets its marine services and related engineering services to government agencies, major defense contractors, NASA subcontractors and to telecommunications, construction and other industrial customers outside the energy sector. The Company also markets to insurance companies, salvage associations and other customers who have requirements for specialized operations in deep water.
Major Customers. Five principal customers of the Company accounted for approximately 26%, 33% and 29% of the Company's consolidated revenues in 1998, 1997 and 1996, respectively. No single customer accounted for more than 10% of the Company's consolidated revenues in 1998 or 1996. The Mobil Corporation group of companies accounted for more than 10% of the Company's revenues in 1997. Also see Note 6 of the Notes to Consolidated Financial Statements.
COMPETITION
The Company's businesses are highly competitive.
Oilfield Marine Services. The Company believes that it is one of five companies that provides underwater services on a worldwide basis. The Company competes for contracts with the other four worldwide companies and with numerous companies operating locally in various areas. Competition for underwater services historically has been based on the type of underwater equipment available, location of or ability to deploy such equipment, quality of service and price. The relative importance of these factors can vary from year to year based on market conditions. The ability to develop improved equipment and techniques and to attract and retain skilled personnel is also an important competitive factor in the Company's markets. The number of the Company's competitors is inversely correlated with water depth, as less sophisticated equipment and technology is required in shallow water. With respect to projects that require less sophisticated equipment or diving techniques, small companies have sometimes been able to bid for contracts at prices uneconomic to the Company.
The Company believes that its ability to provide a wide range of underwater services, including technological applications in deeper water on a worldwide basis, should enable it to compete effectively in the oilfield exploration and development market. Oil and gas exploration and development expenditures fluctuate from year to year. In particular, budgetary approval for more expensive drilling and production in deeper water or harsh environments, areas in which the Company believes it has a competitive advantage, may be postponed or suspended. In some areas, the ability of the Company to obtain contracts depends upon its ability to charter vessels for use as work platforms. The Company will occasionally bid jointly with vessel owners for service contracts.
The worldwide inspection market consists of a wide range of inspection and certification requirements in many industries. Solus Schall competes in only selected portions of this market. The Company believes that its broad geographic sales and operational coverage, long history of operations, technical reputation, application of X-ray crawler pipeline radiography and accreditation to international quality standards enable it to compete effectively in its selected inspection services market segments.
Frequently, oil and gas companies utilize prequalification procedures that reduce the number of prospective bidders for their projects. In certain countries, political considerations tend to favor local contractors.
Offshore Field Development. The Company believes that it is well positioned to compete in the offshore field development market through its ability to identify and offer optimum solutions, supply equipment, provide capital on a limited basis and utilize the expertise in associated subsea technology and offshore construction and operations gained through its extensive operational experience worldwide. The Company is one of many companies that offer leased MOPS units.
Although there are several competitors offering either specialized products or operating in limited geographic areas, the Company believes that it is one of two companies that compete on a worldwide basis for the provision of subsea control umbilical cables.
Advanced Technologies. The Company believes that its specialized ROV assets and experience in deep water operations give it a competitive advantage in obtaining contracts in water depths greater than 5,000 feet. The number of the Company's competitors is inversely correlated with water depth, due to the advanced technical knowledge and sophisticated equipment required for deep water operations.
Engineering services is a very broad market with a large number of competitors. The Company competes in specialized areas in which it can combine its extensive program management experience, engineering services and the capability to continue the development of conceptual project designs into the manufacture of prototype equipment.
The Company also utilizes the administrative structure of the Oilfield Marine Services business to identify opportunities in foreign countries and to provide additional local support for non-oil and gas customers.
SEASONALITY, BACKLOG AND RESEARCH AND DEVELOPMENT
A material amount of the Company's revenues is generated by contracts for marine services in the Gulf of Mexico and North Sea, which are usually seasonal from April through November. However, the Company's exit from the diving sector in the North Sea in early 1998 and the substantial number of multi-year ROV contracts which have been entered into since 1997 should reduce the seasonality of the Company's Oilfield Marine Services operations. Revenues in the Offshore Field Development and Advanced Technologies segments are generally not seasonal.
The amounts of backlog orders believed to be firm for Oilfield Marine Services as of March 31, 1998 and 1997 were $180 million and $154 million, respectively. Of these amounts, $59 million and $65 million, respectively, were not expected to be performed within the year following such respective dates. At March 31, 1998 and 1997, the Company had approximately $51 million and $64 million, respectively, in backlog for Offshore Field Development. Of these amounts, $10 million and $33 million, respectively, were not expected to be performed within the year following such respective dates. At March 31, 1998 and 1997, the Company had approximately $37 million and $31 million, respectively, in backlog for Advanced Technologies. Of these amounts, $2 million of the 1998 backlog was not expected to be performed within the following year.
No material portion of the Company's business is subject to renegotiation of profits or termination of contracts by the United States government.
The Company's research and development expenditures were approximately $4 million, $4 million and $6 million during 1998, 1997 and 1996, respectively. These amounts do not include, nor is the Company able to determine, the expenditures by others in connection with joint research activities in which the Company participated or expenditures by the Company in connection with research conducted during the course of performing its operations.
REGULATION
The Company's operations are subject to various types of governmental regulation. The Company's operations are affected from time to time and in varying degrees by foreign and domestic political developments and foreign, federal and local laws and regulations. In particular, oil and gas production operations and economics are affected by tax, environmental and other laws relating to the petroleum industry, by changes in such laws and by constantly changing administrative regulations. Such developments may directly or indirectly affect the Company's operations and those of its customers.
Compliance with federal, state and local provisions regulating the discharge of materials into the environment or relating to the protection of the environment has not had a material impact on the Company's capital expenditures, earnings or competitive position.
In connection with its foreign operations, the Company is required in some countries to obtain licenses or permits in order to bid on contracts or otherwise to conduct business operations. Some foreign countries require that the Company enter into a joint venture or similar business arrangement with local individuals or businesses in order to conduct business. While not a formal requirement, within the Oilfield Marine Services segment, Oceaneering's quality management systems covering the full range of subsea and topside services offered in the United Kingdom are certified to the British Standard BS EN ISO 9001:1994 and the Norwegian office is certified to the Norwegian Standard NS EN ISO 9001:1994, both of which are the equivalent of ISO 9001. The quality management systems of both the OIE and Multiflex units of the Offshore Field Development segment are certified to ISO 9001 for their products and services. The quality systems of the Space Systems and Oceaneering Technologies units of the Advanced Technologies segment are certified to ISO 9001.
RISKS AND INSURANCE
The Company's operations are subject to all the risks normally incident to offshore exploration, development and production, including claims under U.S. maritime laws. These risks could result in damage to or loss of property, suspension of operations and injury to or death of personnel. The Company insures its real and personal property and equipment. The Company's vessels are insured against damage or loss, including war and pollution risks. The Company also carries workers' compensation, maritime employer's liability, general liability, including third party pollution, and other insurance customary in its businesses. All insurance is carried at levels of coverage and deductibles which the Company considers financially prudent. On some contracts, the Company may have certain exposures for loss or damage to the customer's facilities or for unexpected weather delays, which the Company may cover by special insurance when it deems advisable. Due to the costs for limited coverage and, in the Company's opinion, limited exposure, the Company does not ordinarily carry professional liability insurance. In some jurisdictions, legal pleadings in personal injury actions may include a claim for an amount of punitive damages which may not be covered by insurance.
The primary industry that the Company serves, oil and gas, is a cyclical industry and remains volatile, resulting in potentially large fluctuations in demand for the Company's primary services, which could result in significant changes in the Company's revenues and profits. Although the oil and gas industry continues to be the Company's principal market, the Company also performs services for government agencies, and firms in the telecommunications, aerospace, and civil engineering and construction industries.
The Company operates primarily as a services company under dayrate contracts. However, the Company also owns certain specialized capital assets, which if not fully utilized could have a negative effect on cash resources as a result of continuing fixed operating costs and reduced revenues.
A significant part of the Company's operations is conducted outside the United States. For the years ended March 31, 1998, 1997 and 1996, foreign operations accounted for 51%, 58% and 58% of the Company's revenues, respectively.
Foreign operations are subject to additional political and economic uncertainties, including the possibility of repudiation of contracts and confiscation of property, fluctuations in currency exchange rates, limitations on repatriation of earnings and foreign exchange controls. Typically, the Company is able to limit the currency risks by arranging compensation in United States dollars or freely convertible currency and, to the extent possible, limiting acceptance of blocked currency to amounts which match its expense requirements in local currencies.
Certain of the countries in which the Company operates have enacted exchange controls to regulate foreign currency exchange. Exchange controls in some of the countries in which the Company operates provide for conversion of local currency into foreign currency for payment of debts, equipment rentals, technology transfer, technical assistance and other fees or repatriation of capital. Transfers of profits and dividends can be restricted or limited by exchange controls.
EMPLOYEES
As of March 31, 1998, the Company had approximately 2,600 employees. The Company's work force varies seasonally and peaks during the summer months. Approximately 3% of the Company's employees are represented by unions. The Company considers its relations with its employees to be satisfactory.
Foreign and Domestic Operations and Export Sales
The table presenting revenues, profitability and assets attributable to each of Oceaneering's geographic areas for the years 1998, 1997 and 1996 is incorporated herein by reference from Note 6 of the Notes to Consolidated Financial Statements.
Item 2.
Item 2. PROPERTIES.
See Item 1 - "Business - Description of Business - Oilfield Marine Services, Offshore Field Development and Advanced Technologies" for a description of equipment used in providing the Company's services.
Oceaneering maintains office, shop and yard facilities in various parts of the world. In these locations, the Company typically leases office facilities to house its administrative and engineering staff, shops equipped for fabrication, testing, repair and maintenance activities and warehouses and yard areas for storage and mobilization of equipment to work sites. The largest facilities are located in Morgan City, Louisiana and consist of approximately 600,000 total square feet of open and covered storage space and offices, of which 218,000 square feet are owned by the Company and the remainder is leased. The Company owns and leases property in Singapore of approximately 28,700 square feet, of which 16,200 square feet are owned. The Company leases 31,000 square feet of office space and 42,800 square feet of yard area in Aberdeen, Scotland. Other major leased properties include approximately 24,600 square feet in Dubai, United Arab Emirates, and 37,000 square feet in Port Harcourt, Nigeria. These properties are used primarily by the Oilfield Marine Services business segment of the Company. Leased properties utilized primarily by the Offshore Field Development segment consist of approximately 400,000 square feet of workshop and office space in Houston, Texas and manufacturing facilities in Houston, Texas and Edinburgh, Scotland, of 96,000 square feet and 70,000 square feet, respectively. In addition, the Company owns manufacturing facilities in Magnolia, Texas of 65,000 square feet. The Advanced Technologies business segment leases approximately 116,000 square feet in Upper Marlboro, Maryland, which includes 86,000 square feet of offices and workshops, and approximately 50,000 square feet of offices and workshops in Houston, Texas.
Item 3.
Item 3. LEGAL PROCEEDINGS.
In the ordinary course of business, Oceaneering encounters actions for damages alleging personal injury under the general maritime laws of the United States, including the Jones Act, for alleged negligence. The Company reports actions for personal injury to its insurance carriers and believes that the settlement or disposition of such suits will not have a material effect on its financial position or results of operations. The information set forth under "Commitments and Contingencies - Litigation" in Note 5 of the Notes to Consolidated Financial Statements is incorporated herein by reference.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended March 31, 1998.
Item 4a. EXECUTIVE OFFICERS OF THE REGISTRANT.
Executive Officers. The following is information with respect to the executive officers of Oceaneering International, Inc., as of June 1, 1998: OFFICER EMPLOYEE NAME AGE POSITIONS SINCE SINCE
John R. Huff 52 Chairman of the Board, 1986 1986 President and Chief Executive Officer
T. Jay Collins 51 Executive Vice President - 1993 1993 Oilfield Marine Services
Marvin J. Migura 47 Senior Vice President and 1995 1995 Chief Financial Officer
Bruce L. Crager 45 Senior Vice President - 1988 1988 Production Systems
M. Kevin McEvoy 47 Vice President - Integrated Services 1990 1979
George R. 50 Vice President, General 1988 1988 Haubenreich, Jr. Counsel and Secretary
Richard V. Chidlow 54 Controller and Chief 1990 1987 Accounting Officer
Each executive officer serves at the discretion of the Chief Executive Officer and the Board of Directors and is subject to reelection or reappointment each year after the annual meeting of shareholders.
Oceaneering does not know of any arrangement or understanding between any of the above persons and any other person or persons pursuant to which he was selected or appointed as an officer.
Family Relationships. There are no family relationships between any director or executive officer.
Business Experience. John R. Huff has been a director, President and Chief Executive Officer of the Company since 1986. He was elected Chairman of the Board in August 1990. Prior to joining the Company in 1986, he served from 1980 until 1986 as Chairman and President of Western Oceanic Inc., the offshore drilling subsidiary of The Western Company of North America ("Western Oceanic"). He is a director of BJ Services Company, Suncor Energy Inc. and Triton Energy Limited.
T. Jay Collins, Executive Vice President, joined the Company in October 1993 as Senior Vice President and Chief Financial Officer. In May 1995, he was appointed Executive Vice President - Oilfield Marine Services. From 1986 to 1992 he was with Teleco Oilfield Services, Inc., most recently as Executive Vice President of Finance and Administration and previously as Senior Vice President of Operations. Prior to Teleco, he spent twelve years with Sonat, Inc., serving as Senior Vice President of Finance at Sonat Offshore Drilling and President of Houston Systems Manufacturing. He is a director of Friede Goldman International Inc.
Marvin J. Migura, Senior Vice President and Chief Financial Officer, joined the Company in May 1995. From 1975 to 1994 he held various financial positions with Zapata Corporation, then a diversified energy services company, most recently as Senior Vice President and Chief Financial Officer from 1987 to 1994.
Bruce L. Crager, Senior Vice President, joined the Company in 1988 as Vice President - Offshore Production Systems. Since 1994, he also has had responsibility for various subsea product groups. He was appointed Senior Vice President - Production Systems in May 1997. From 1983 until 1988 he held various positions, including General Manager, with Hughes Offshore which merged with Vetco Gray during this period. Prior to that time he spent three years with Seaflo Systems and five years with The Offshore Company.
M. Kevin McEvoy, Vice President, joined the Company in 1984 when Solus Ocean Systems, Inc. ("SOSI") was acquired. Since 1984, he has held various senior management positions in each of the Company's operating groups and geographic areas. He was appointed Vice President - Integrated Services in May 1997. Prior to joining SOSI, he spent four years in the U.S. Navy as a salvage and diving officer.
George R. Haubenreich, Jr., Vice President, General Counsel and Secretary, joined the Company in 1988. From 1979 until joining the Company, he held various legal positions with The Coastal Corporation, a diversified energy company, his last being Senior Staff Counsel. From 1974 until 1979, he was an attorney with Exxon Company, U.S.A.
Richard V. Chidlow, Controller and Chief Accounting Officer, joined the Company in 1987 as Controller for the Americas Region. From 1988 until 1990, he was Controller for the Europe, Africa and Asia group in Aberdeen, and was appointed to his present position in 1990. From 1975 until joining the Company he held various positions with Western Oceanic, his last being Manager of Accounting.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Oceaneering's Common Stock is listed on the New York Stock Exchange (symbol OII). The following table sets forth, for the periods indicated, the high and low sales prices for Oceaneering's Common Stock as reported on the New York Stock Exchange (consolidated transaction reporting system):
Fiscal 1998 Fiscal 1997
High Low High Low For the quarter ended:
June 30 $18-7/8 $14 $17 $13-5/8 September 30 24-7/8 18-5/16 18-3/8 14-1/2 December 31 27-5/16 17-3/16 19-1/4 13-3/4 March 31 20-3/16 15-3/16 18-1/2 15
On May 29, 1998, Oceaneering had 575 holders of record of its Common Stock, par value $0.25. On that date, the closing sales price of the shares, as quoted on the New York Stock Exchange, was $21-1/2.
Oceaneering has made no Common Stock dividend payments since 1977. Its present bank credit agreement restricts aggregate dividends to 50% of cumulative net earnings from December 31, 1994.
Item 6.
Item 6. SELECTED FINANCIAL DATA.
Results of Operations:
Years Ended March 31, 1998 1997 1996 1995 1994 (in thousands, except per share figures)
Revenues $358,121 $368,773 $289,506 $239,936 $229,760 Cost of services(a) 282,830 290,801 234,731 190,772 177,199 Gross margin 75,291 77,972 54,775 49,164 52,561 Selling, general and administrative expenses 39,009 36,363 34,589 36,410 31,631 Income from operations $ 36,282 $ 41,609 $ 20,186 $ 12,754 $ 20,930 Net income applicable to common stock $ 22,001 $ 19,445 $ 12,357 $ 5,496 $ 14,931 Diluted earnings per share 0.93 0.81 0.53 0.23 0.62 Depreciation and amortization(b) 23,176 32,687 20,567 16,232 12,196 Capital expenditures 94,413 79,599 57,171 32,057 36,730
Other Financial Data: As of March 31, 1998 1997 1996 1995 1994 (in thousands, except ratios)
Working capital ratio 1.52 1.55 1.62 1.44 1.74 Cash and cash equivalents $ 9,064 $ 23,034 $ 9,351 $ 12,865 $ 26,486 Working capital 44,890 52,962 42,427 23,106 34,425 Total assets 316,543 268,255 256,096 187,752 171,993 Long-term debt 54,626 -- 48,000 9,472 171 Total debt 54,919 -- 48,183 9,590 295 Shareholders' equity 160,322 156,334 127,098 115,140 113,353
(a) 1997 includes a $25,047 gain on the disposition of FPSO, a $7,980 impairment adjustment and a $7,980 provision for special drydocking.
(b) 1997 includes a $7,980 impairment adjustment.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
All statements in this Form 10-K, other than statements of historical facts, including, without limitation, statements regarding the Company's 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. The Company utilizes a variety of internal and external data and management judgment in order to develop such forward-looking information. Although the Company believes 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 industry in which the Company operates, it can give no assurance that such expectations will prove to have been correct. Accordingly, evaluation of future prospects of the Company must be made with caution when relying on forward-looking information.
Liquidity and Capital Resources
The Company considers its liquidity and capital resources adequate to support its core business and internally generated growth initiatives. At March 31, 1998, the Company had working capital of $45 million, including $7.6 million of unrestricted cash. Additionally, the Company had $26 million of its $80 million credit facility available and $40 million was unused under uncommitted lines of credit. The Company is in the process of arranging $100 million of fixed-rate long-term debt.
The Company is constructing two multi-service support vessels and is continuing to expand its fleet of ROVs for use in the Oilfield Marine Services segment. In the Offshore Field Development segment, the Company has also purchased equipment for use in production systems projects and additional subsea product manufacturing facilities are planned.
The Company expects operating cash flow to meet its ongoing annual cash requirements, including debt service. Net income plus depreciation and amortization (commonly referred to as Cash Flow from Operations) was $45 million for 1998 compared to $52 million and $33 million for 1997 and 1996, respectively.
Working capital at the end of 1998 was $45 million which compared to $53 million at the end of 1997 and $42 million at the end of 1996. The increased cash flow and higher working capital in 1997 was a result of the disposition of the FPSO ZAFIRO PRODUCER.
Capital expenditures for the years ended March 31, 1998, 1997 and 1996 were $94 million, $80 million and $57 million, respectively.
Capital expenditures in 1998 consisted of additions to the Company's fleet of ROVs, construction costs for the two dynamically-positioned ("DP") multi-service support vessels in progress, the purchase of a production barge operating in Southeast Asia, a tanker for possible future conversion to production systems use, two out-of-service mobile drilling platforms for potential conversion to production systems or alternative service, and expenditures on leasehold improvements related to the relocation and consolidation of Company office and workshop facilities in the U.S.
Capital expenditures in 1997 included $38 million to complete the conversion of the ZAFIRO PRODUCER. Other expenditures consisted of additions to the Company's fleet of ROVs and the purchase of two support vessels. Capital expenditures for 1996 included $30 million of acquisition and conversion costs of the FPSO ZAFIRO PRODUCER, completion of upgrades on two DP vessels and additions to the Company's fleet of ROVs.
Commitments for capital expenditures at the close of 1998 were approximately $40 million for completion of multi-service support vessel construction and subsea product manufacturing facilities expansion.
In 1996, the Company was awarded a contract by a major oil company to provide an FPSO under a dayrate lease arrangement with an initial term of three years which commenced on delivery of the FPSO in August 1996. The Company purchased and converted an existing 268,000 dwt crude oil tanker into the FPSO ZAFIRO PRODUCER at a capital cost of $68 million. The contract provided the customer with the option to purchase the vessel and terminate the lease at any time during the initial three- year period and the customer exercised its purchase option in December 1996. The Company utilized part of the proceeds to repay the debt which had been incurred in conversion of the vessel.
In April 1997, the Company approved a plan to purchase up to a maximum of 3 million shares of its Common Stock and 1.4 million shares were purchased under this plan in 1998 at a total cost of $23 million. The Company expects to fund any additional purchases from existing resources and operating cash flows.
At March 31, 1998, the Company had long-term debt of $55 million which was equivalent to a 34% debt to equity ratio. The debt was incurred in the funding of capital expenditures and treasury stock purchases. As a result of the disposition of the FPSO ZAFIRO PRODUCER, the Company fully repaid its long-term debt in December 1996 and had no long-term debt at March 31, 1997. The ratio of the Company's debt to total capitalization will vary from time to time depending primarily upon the level of capital spending.
Because of its significant foreign operations, the Company is exposed to currency fluctuations and exchange risks. The Company generally minimizes these risks primarily through matching, to the extent possible, revenues and expenses in the various currencies in which it operates. However, due to the weakness in certain Asian currencies during 1998, the Company recognized $1.0 million of losses as Other Expense. Cumulative translation adjustments as of March 31, 1998, relate primarily to the Company's permanent investment in and loans to its United Kingdom subsidiary. Inflation has not had a material effect on the Company in the past two years and no such effect is expected in the near future.
See Item 1 - "Business - Description of Business - Risks and Insurance."
Results of Operations
Revenues were $358 million for 1998 compared to $369 million for 1997 and $290 million for 1996. Gross margins were $75 million for 1998 compared to $78 million for 1997 and $55 million for 1996. Gross margin for 1997 included a gain on disposal of the FPSO ZAFIRO PRODUCER of $25 million. As a percentage of revenue, gross margin for 1998 was 21%, compared to 21% for 1997 and 19% for 1996. Gross margins as a percentage of revenues vary depending upon the mix of the type of contracts (for example, subcontractor cost components) and may not be indicative of business trends. Net income in 1998 was $22.0 million, an increase of 13% over net income of $19.4 million in 1997, which was over 50% higher than the $12.4 million reported for 1996.
Information on the Company's business segments is shown in Note 6 of the Notes to Consolidated Financial Statements.
Oilfield Marine Services.
Revenues for the Oilfield Marine Services segment for 1998 were $182 million compared to $176 million in 1997 and $132 million in 1996. Income from operations for 1998 increased substantially to $16.3 million compared to $1.9 million in 1997 and a loss of $400,000 in 1996.
During 1997, in response to continued increasing demand to support deepwater drilling and identified future construction and production maintenance work, the Company extended its ROV fleet expansion program begun in 1996 by announcing plans for over 30 additional new ROVs. These new vehicles are designed for use around the world in water depths to 10,000 feet and in severe weather conditions. This expansion program was further extended in 1998 with the announcement of plans to construct an additional 25 new ROVs.
In 1997, the Company also decided to discontinue offering diving services in the North Sea. Based on a review of actual and expected operating results, the Company concluded that there would be a greater return in focusing on other business lines in the North Sea area. An agreement was reached in March 1997 to sell its North Sea diving assets, including a diving support vessel ("DSV"). The sale closed in April 1997 and the sales proceeds approximated the net book value of the assets sold. Diving services continue to be offered by the Company in other areas.
The table below sets out revenues and profitability for the Oilfield Marine Services segment for 1998, 1997 and 1996.
For the Years Ended March 31, 1998 1997 1996 (in thousands, except percentages)
Revenues $ 181,800 $176,395 $132,064 Gross Margin 40,064 24,139 21,154 Gross Margin % 22% 14% 16%
Operating Income (loss) 16,263 1,853 (369) Operating Income (loss) % 9% 1% 0%
For 1998, increased revenues in the U.S. were partially offset by lower revenues in the North Sea, which was impacted by the Company's exit from the diving business, resulting in an overall 3% increase in revenues. Gross margins increased to 22% in 1998 compared to 14% in 1997. Gross margins in 1997 were reduced by an impairment adjustment of $8.0 million which was made to reduce the carrying value of a DSV. Excluding the impairment adjustment, gross margin was 18% in 1997. The increase for 1998 reflected continued strong demand for ROV services. Additionally, diving profits improved on lower revenues.
Revenues increased 34% in 1997 compared to 1996, reflecting increased activity in all operating areas. Revenues and gross margin contribution from the ROV fleet increased as requirements for vehicles to support exploration and development drilling activities from floating drilling rigs increased and units were added to the fleet.
Revenues and gross margin for 1996 benefitted by $1.1 million from the settlement of a contract dispute which had been provided for in 1995. This adjustment increased gross margin percentage in 1996 by 1%.
Offshore Field Development.
This segment includes FPSO ownership and operations, engineering, design and project management services for other MOPS-related work, and subsea products.
The table below sets out revenues and profitability for this segment for 1998, 1997 and 1996.
For the Years Ended March 31, 1998 1997 1996 (in thousands, except percentages)
Revenues $90,508 $101,028 $80,855 Gain on disposition of FPSO -- 25,047 -- Gross Margin 15,981 36,861 21,758 Gross Margin % 18% 36% 27%
Operating Income 7,595 30,242 15,567 Operating Income % 8% 30% 19%
Revenues and margins for 1998 were lower than 1997 as a result of the sale of the FPSO ZAFIRO PRODUCER, partially offset by higher project management revenues and product sales. Revenues and margins for 1997 include the results of operations for the ZAFIRO PRODUCER prior to its purchase by the customer. During 1997 the Company completed conversion of a 268,000 dwt tanker into an FPSO, the ZAFIRO PRODUCER, which was delivered to a customer offshore West Africa in August 1996 under a three-year contract. The customer had an option to purchase the vessel at any time during the three-year contract period and elected to do so in December 1996. The Company recognized a gain of $25.0 million on the disposition of this asset. The Company is continuing to operate the vessel under a management agreement and is managing major upgrades to the vessel.
In December 1997, the Company purchased a production barge which is contracted for work offshore Indonesia until October 1999. The Company also owns a tanker and four out-of-service mobile drilling platforms which are being marketed for production systems or other alternative use.
The Company's first FPSO, OCEAN PRODUCER, continued to work offshore West Africa under a four-year contract expiring in January 2000. During 1997, the Company determined that substantial repairs would be necessary to maintain the unit in operating condition in compliance with regulatory requirements. These repairs required a special drydocking which was performed in 1998. The Company recorded an $8.0 million provision in 1997 which reduced gross margin by 8%.
Results for 1996 also included a $2.7 million gain on the involuntary conversion of the semisubmersible rig, OCEAN DEVELOPER, which sank in August 1995 while under tow.
The Company expects to continue to invest in other MOPS assets as profitable opportunities arise.
Advanced Technologies.
The table below sets out revenues and profitability for this segment for 1998, 1997 and 1996.
For the Years Ended March 31, 1998 1997 1996 (in thousands, except percentages)
Revenues $85,813 $91,350 $76,587 Gross Margin 19,246 16,972 11,863 Gross Margin % 22% 19% 15%
Operating Income 12,424 9,514 4,988 Operating Income % 14% 10% 7%
Revenues for 1998 declined as a result of lower telecommunications and civil projects compared to 1997, partially offset by higher engineering services activity. Gross margins improved in 1998 compared to 1997 reflecting improved profitability on search and recovery operations and higher demand for engineering services.
Revenues for search and recovery operations for 1997 were higher than for 1996 as a result of increased activity in U.S. Navy support although gross margin percentage was lower as a result of a higher component of reimbursable costs. Subsea telecommunications cable burial activities had higher revenues in 1997 than in 1996 and improved gross margins.
Other.
Interest income declined in 1998 compared to 1997 as a result of lower cash balances available for investment. Interest expense declined in 1998 as a result of lower average borrowings and lower interest rates. Interest income and interest expense for 1997 did not change significantly from 1996. Interest expense is net of capitalized interest of $800,000 for 1998, $1.1 million for 1997 and $300,000 for 1996.
The Company's effective tax rate was 38%, 53% and 38% in 1998, 1997 and 1996, respectively. The rate for 1997 was higher as a result of provisions made for asset impairment and a special drydocking in its United Kingdom subsidiary, where the Company derives no tax benefit as it already has net operating loss carryforwards ("NOLs").
Year 2000.
The Year 2000 problem is the result of computer programs which were written using two digits rather than four to define the applicable year. Programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. The Company has conducted a review of its computer systems to identify potential problem areas. Much of the cost of compliance is included in regular system and equipment upgrades which are planned or are in progress. The Company does not expect the cost of compliance to have a material effect on its financial position, results of operations or liquidity. However, there is no assurance that the systems of other companies on which the Company relies will be converted timely and will not have an adverse effect on the Company.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
In this report, the consolidated financial statements and supplementary data of the Company appear in Part IV, Item 14 and are hereby incorporated by reference. See Index to Financial Statements and Schedules.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information with respect to the directors and nominees for election to the Board of Directors of Oceaneering International, Inc., is incorporated by reference from Oceaneering International, Inc.'s definitive proxy statement to be filed on or before July 29, 1998, pursuant to Regulation 14A under the Securities Exchange Act of 1934. The information with respect to the executive officers of Oceaneering International, Inc., is provided under Item 4a of Part I of this Annual Report on Form 10-K.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference from the proxy statement described in Item 10 above.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference from the proxy statement described in Item 10 above.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference from the proxy statement described in Item 10 above.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report.
1. Financial Statements. (i) Report of Independent Public Accountants (ii) Consolidated Balance Sheets (iii) Consolidated Statements of Income (iv) Consolidated Statements of Cash Flows (v) Consolidated Statements of Shareholders' Equity (vi) Notes to Consolidated Financial Statements
2. Exhibits: Registration or File Form or Exhibit Exhibit Number Report Date Number
3 Articles of Incorporation and By-laws *3.01 Certificate of Incorporation, as amended 0-8418 10-K March 1988 3(a) *3.02 By-laws, as amended 0-8418 10-K March 1987 3(b) *3.03 Amendment to Certificate of Incorporation 33-36872 S-8 Sept. 1990 4(b) *3.04 Amendment to By-laws 0-8418 10-K March 1991 3(d) *3.05 Amendment to By-laws 1-10945 8-K Nov. 1992 2 4 Instruments defining the rights of security holders, including indentures *4.01 Specimen of Common Stock Certificate 1-10945 10-K March 1993 4(a) *4.02 Shareholder Rights Agreement dated November 20, 1992 1-10945 8-K Nov. 1992 1 *4.03 Bank Credit Agreement dated April 12, 1995 1-10945 10-K March 1995 4.04 *4.04 Amended and Restated Bank Credit Agreement dated June 12, 1996 1-10945 10-K March 1996 4.05 4.05 Extension Agreement dated April 12, 1998 related to Exhibit 4.04 10 Material contracts *10.01+ 1981 Incentive Stock Option Plan, as amended 2-80506 S-8 Sept. 1987 28(e) *10.02+ Oceaneering Retirement Investment Plan, as amended 1-10945 10-K March 1996 10.02 *10.03+ Employment Agreement dated August 15, 1986 between John R. Huff and Registrant 0-8418 10-K March 1987 10(l) *10.04+ Addendum to Employment Agreement dated February 22, 1996 between John R. Huff and Registrant 1-10945 10-K March 1997 10.04 *10.05+ 1987 Incentive and Non- Qualified Stock Option Plan 33-16469 S-1 Sept. 1987 10(o) *10.06+ Oceaneering International, Inc. Special Incentive Plan 33-16469 S-1 Sept. 1987 10(n) *10.07+ Senior Executive Severance Plan, as amended 0-8418 10-K March 1989 10(k) *10.08+ Supplemental Senior Executive Severance Agreements, as amended 0-8418 10-K March 1989 10(l) *10.09+ Oceaneering International, Inc. Executive Retirement Plan, as amended 1-10945 10-K March 1995 10.08 *10.10+ 1990 Long-Term Incentive Plan 33-36872 S-8 Sept. 1990 4(f) *10.11+ 1990 Nonemployee Directors Stock Option Plan 33-36872 S-8 Sept. 1990 4(g) *10.12+ Indemnification Agreement between Registrant and its Directors 0-8418 10-Q Sept. 1991 10(a) *10.13+ 1991 Executive Incentive Agreements 0-8418 10-K March 1992 10(p) *10.14+ 1993 Restricted Stock Award Incentive Agreements 1-10945 10-K March 1994 10(q) *10.15+ 1993 Restricted Stock Award Incentive Agreement 1-10945 10-K March 1996 10.16 10.16+ 1998 Bonus Award Plan *10.17+ Amendment No. 1 to the Oceaneering Retirement Investment Plan 1-10945 10-Q Sept. 1996 10.01 *10.18+ 1996 Incentive Plan of Oceaneering International, Inc. 1-10945 10-Q Sept. 1996 10.02 *10.19+ 1996 Restricted Stock Award Incentive Agreements between Registrant and Executive Officers dated August 23, 1996. 1-10945 10-Q Sept. 1996 10.03 *10.20+ 1997 Bonus Restricted Stock Award Agreements between Registrant and Executive Officers dated April 22, 1997. 1-10945 10-K March 1997 10.20 21 Subsidiaries of the Registrant 23 Consent of Independent Public Accountants 24 Powers of Attorney 27 Financial Data Schedule
* Indicates exhibit previously filed with the Securities and Exchange Commission as indicated and incorporated herein by reference.
+ Indicates management contract or compensatory plan or arrangement required to be filed as an Exhibit to this form pursuant to Item 14(c) of this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
The registrant filed no reports on Form 8-K during the last quarter of the period covered by this report. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 19, 1998 By: //s//JOHN R. HUFF John R. Huff President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
//s// JOHN R. HUFF President, Principal June 19, 1998 John R. Huff Executive Officer, Director
//s// MARVIN J. MIGURA Senior Vice President, June 19, 1998 Marvin J. Migura Principal Financial Officer
//s// RICHARD V. CHIDLOW Controller, Principal June 19, 1998 Richard V. Chidlow Accounting Officer
CHARLES B. EVANS* Director DAVID S. HOOKER* Director D. MICHAEL HUGHES* Director HARRIS J. PAPPAS* Director
*By: //s// GEORGE R. HAUBENREICH, JR. June 19, 1998 George R. Haubenreich, Jr. Attorney-in-Fact
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data
Index to Schedules
The schedules have been omitted because of the absence of the condition under which they are required or because the required information is included in the financial statements or related footnotes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oceaneering International, Inc.:
We have audited the accompanying consolidated balance sheets of Oceaneering International, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Oceaneering International, Inc. and subsidiaries as of March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas May 15, 1998
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS
March 31, 1998 March 31, 1997 CURRENT ASSETS:
Cash and cash equivalents $ 9,064 $ 23,034
Accounts receivable, net of allowances for doubtful accounts of $240 and $962 114,923 120,095
Prepaid expenses and other 7,077 5,678 ------- ------- Total current assets 131,064 148,807 ------- ------- PROPERTY AND EQUIPMENT, at cost:
Marine services equipment 221,311 198,798 Mobile offshore production equipment 52,856 31,231 Other 44,542 32,915 ------- ------- 318,709 262,944 Less accumulated depreciation 149,874 161,053 ------- ------- Net property and equipment 168,835 101,891 ------- ------- INVESTMENTS AND OTHER ASSETS:
Goodwill, net of amortization of $4,490 and $3,502 10,414 11,402
Other 6,230 6,155 -------- -------- TOTAL ASSETS $316,543 $268,255 ======== ========
The accompanying Notes are an integral part of these Consolidated Financial Statements.
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, 1998 March 31, 1997 CURRENT LIABILITIES:
Accounts payable $ 26,071 $ 27,432 Accrued liabilities 51,385 58,183 Income taxes payable 8,425 10,230 Current portion of long-term debt 293 -- ------- ------- Total current liabilities 86,174 95,845 ------- -------
LONG-TERM DEBT, NET OF CURRENT PORTION 54,626 --
OTHER LONG-TERM LIABILITIES 15,421 16,076
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.25; 90,000,000 shares authorized; 24,017,046 shares issued 6,004 6,004
Additional paid-in capital 81,442 81,153
Treasury stock; 1,075,303 and 110,017 shares at cost (17,634) (986)
Retained earnings 98,002 76,001
Cumulative translation adjustments (7,492) (5,838) ------- ------- Total shareholders' equity 160,322 156,334 ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $316,543 $268,255 ======== ========
The accompanying Notes are an integral part of these Consolidated Financial Statements.
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
For the Years Ended March 31, 1998 1997 1996
REVENUES $358,121 $368,773 $289,506
GAIN ON DISPOSITION OF FPSO -- 25,047 --
COST OF SERVICES 282,830 299,888 234,731
IMPAIRMENT ADJUSTMENT AND PROVISION FOR SPECIAL DRYDOCKING -- 15,960 --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 39,009 36,363 34,589 ------- ------- ------- Income from operations 36,282 41,609 20,186
INTEREST INCOME 877 1,358 1,774
INTEREST EXPENSE, NET (637) (2,048) (2,286)
OTHER INCOME (EXPENSE), NET (886) (15) 286
MINORITY INTERESTS (41) 390 (108) ------- ------- ------- Income before income taxes 35,595 41,294 19,852
PROVISION FOR INCOME TAXES (13,594) (21,849) (7,495) ------- ------- ------- NET INCOME $ 22,001 $ 19,445 $ 12,357 ======= ======= =======
Basic Earnings per Share $ 0.95 $ 0.82 $ 0.53 Diluted Earnings per Share $ 0.93 $ 0.81 $ 0.53
Weighted average number of common shares 23,233 23,651 23,120 Incremental shares from stock options 313 303 138 Weighted average number of common shares and equivalents 23,546 23,954 23,258
The accompanying Notes are an integral part of these Consolidated Financial Statements.
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Years Ended March 31, 1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $22,001 $19,445 $ 12,357
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on dispositions of property and equipment -- (29,605) -- Depreciation and amortization 23,176 24,707 20,567 Impairment adjustment -- 7,980 -- Currency translation adjustments and other 5,090 1,718 1,308 Decrease (increase) in accounts receivable 5,172 (23,704) (38,031) Increase in prepaid expenses and other current assets (1,399) (945) (120) Increase in other assets ( 85) (271) (512) Increase (decrease) in accounts payable (1,068) 1,825 10,379 Increase (decrease) in accrued liabilities (6,798) 22,360 6,023 Increase (decrease) in income taxes payable ( 792) 3,826 (1,125) Increase (decrease) in other long-term liabilities ( 655) 3,126 2,542 ------ ------ ------ Total adjustments to net income 22,641 11,017 1,031 ------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 44,642 30,462 13,388
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (94,413) (79,599) (57,171) Dispositions of property and equipment -- 108,253 -- Increase in investments -- (926) --
NET CASH (USED IN) PROVIDED BY ------- ------ ------- INVESTING ACTIVITIES (94,413) 27,728 (57,171) ------- ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 54,626 33,000 38,600 Payments on long-term debt -- (81,000) (72) Proceeds from issuance of common stock 4,515 3,493 1,741 Purchases of treasury stock (23,340) -- -- ------ ------ ------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 35,801 (44,507) 40,269 ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,970) 13,683 (3,514)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 23,034 9,351 12,865 ------ ------ ------ CASH AND CASH EQUIVALENTS - END OF YEAR $ 9,064 $23,034 $ 9,351 ====== ====== ======
The accompanying Notes are an integral part of these Consolidated Financial Statements.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF MAJOR ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Oceaneering International, Inc., and its 50% or more owned and controlled subsidiaries (the "Company"). The Company accounts for its investments in unconsolidated affiliated companies under the equity method. All significant intercompany accounts and transactions have been eliminated.
Unless the context indicates otherwise, references to years indicate fiscal year.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and highly liquid investments with original maturities of three months or fewer from the date of the investment. At March 31, 1998 and 1997 approximately $1.5 million of the Company's cash was restricted and is deposited in interest bearing accounts as security in connection with legal proceedings.
Depreciation and Amortization
The Company provides for depreciation of Property and Equipment primarily on the straight-line method over estimated useful lives of 3 to 12 years for marine services equipment, 10 years for mobile offshore production equipment and 3 to 25 years for buildings, improvements and other equipment.
The costs of repair and maintenance of Property and Equipment are charged to operations as incurred, while the costs of improvements are capitalized. Upon the disposition of property and equipment, the related cost and accumulated depreciation accounts are relieved and the resulting gain or loss is included as an adjustment to cost of services.
Goodwill arising from business acquisitions is amortized on the straight-line method over 15 years.
Management periodically and upon the occurrence of a triggering event, reviews the realizability of goodwill and other long-term assets and makes any appropriate impairment adjustments and disclosures required by generally accepted accounting principles.
Effective 1997, the Company adopted Statement of Financial Accounting Standards Board standard number ("SFAS") 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as required. SFAS 121 requires that certain long-lived assets be reviewed for impairment whenever events indicate that the carrying amount of an asset may not be recoverable and that an impairment loss be recognized under certain circumstances in the amount by which the carrying value exceeds the fair value of the asset. Initially, the adoption did not have a material effect on the Company's results of operations or financial position.
During the third quarter of fiscal 1997 it became apparent that operating results for the Company's diving support vessel ("DSV") operating in the North Sea were below expectations. The vessel was originally acquired as a construction support vessel but changing market conditions necessitated utilizing the vessel in an inspection and maintenance mode at lower margins. After review of the first full work season the Company concluded that the manner in which the vessel was being used had changed significantly from its originally intended purpose and the recoverability of the carrying amount of the asset should be assessed. The Company determined that an impairment loss of $8.0 million should be recorded. The amount was determined by comparing the carrying value of the vessel with the net present value of the expected cash flows from the vessel over its remaining life. The impairment adjustment was recorded and included in the Company's Oilfield Marine Services business segment. Subsequently, the vessel along with the other assets used in the North Sea diving operations were sold and the sales proceeds approximated net book value.
Revenue Recognition
The Company's revenues are primarily derived from billings under contracts that provide for specific time, material and equipment charges, which are accrued daily and billed monthly. Significant lump-sum contracts are accounted for using the percentage-of-completion method. Revenues on contracts with a substantial element of research and development are recognized to the extent of cost until such time as the probable final profitability can be determined. Anticipated losses on contracts, if any, are recorded in the period that such losses are first determinable.
Income Taxes
The Company accounts for income taxes according to SFAS 109, "Accounting for Income Taxes".
Foreign Currency Translation
All balance sheet asset and liability accounts of foreign subsidiaries are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Adjustments arising from these translations are accumulated in a separate account within Shareholders' Equity. All income statement accounts are translated at average exchange rates during the year.
Earnings Per Share
The Company has computed earnings per share in accordance with Financial Accounting Standards Board standard number ("SFAS") 128, "Earnings Per Share", which became effective in the third quarter of 1998. Prior periods comparative figures have been re-stated.
Other Long-Term Liabilities
At March 31, 1998 and 1997 other long-term liabilities include $7.2 million and $8.0 million, respectively, for self-insurance reserves not expected to be paid out in the following year and $7.2 and $7.8 million, respectively, for deferred income taxes.
Reclassifications
Certain amounts from prior years have been reclassified to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Property and Equipment
In 1997, a major oil company customer exercised its option to purchase the Floating Production, Storage and Offloading system ("FPSO"), ZAFIRO PRODUCER. Upon disposition, the related property and equipment cost and accumulated depreciation accounts were relieved and the resulting gain of $25 million was included in the Company's consolidated statement of income as Gain on Disposition of FPSO.
During the fourth quarter of 1997, the Company reached an agreement to sell the assets of its North Sea diving business including its DSV operating in the North Sea, various saturation and air diving systems and related equipment. Proceeds of $15 million, which were received after the year end, were included in accounts receivable at the end of 1997. Sales proceeds approximated net book value and impact on net income was not material.
New accounting pronouncements
The Financial Accounting Standards Board has issued SFAS 130, "Reporting Comprehensive Income", and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 130 establishes standards for reporting and display of comprehensive income and its components. The primary component of other comprehensive income for the Company is the foreign currency translation adjustment accounted for under SFAS 52. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in interim and annual financial statements. The Company will adopt SFAS 130 and SFAS 131 in 1999, as required.
2. INCOME TAXES
The Company and its domestic subsidiaries, including acquired companies from the respective dates of acquisition, file a consolidated U.S. federal income tax return. The Company conducts its international operations in a number of locations which have varying codes and regulations with regard to income and other taxes, some of which are subject to interpretation. Income taxes are provided at the appropriate tax rates in accordance with the Company's interpretation of the respective tax regulations after review and consultation with its internal tax department, tax consultants and, in some cases, legal counsel in the various jurisdictions. Management believes that adequate provisions have been made for all taxes which will ultimately be payable.
Deferred income taxes are provided for temporary differences in the recognition of income and expenses for financial and tax reporting purposes. The Company's policy is to provide for deferred U.S. income taxes on unrepatriated foreign income only to the extent such income is not to be invested indefinitely in the related foreign entity.
The provisions for income taxes for the years ended March 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996 (in thousands)
U.S. federal and state $11,721 $15,886 $5,443 Foreign 1,873 5,963 2,052 ------ ------ ----- Total provision $13,594 $21,849 $7,495 ------ ------ -----
Current $13,548 $17,731 $6,448 Deferred 46 4,118 1,047 ------ ------ ----- Total provision $13,594 $21,849 $7,495 ------ ------ -----
Cash taxes paid $14,340 $14,119 $7,465 ------ ------ -----
As of March 31, 1998, the Company had net operating loss carryforwards ("NOLs") of approximately $29 million which are available to reduce future United Kingdom Corporation Tax which would otherwise be payable.
As of March 31, 1998 and 1997, the Company's worldwide deferred tax assets and liabilities and related valuation reserves were as follows:
March 31, 1998 1997 (in thousands)
Gross deferred tax assets $14,832 $14,302 Valuation allowance (11,441) (10,319) ------ ------ Net deferred tax assets $ 3,391 $ 3,983 ------ ------
Deferred tax liabilities $ 7,238 $ 7,784 ------ ------
The Company's deferred tax assets consist of NOLs in its United Kingdom subsidiary, which have no expiration date, and insurance claim reserves for which a tax deduction has not yet been allowed. Deferred tax liabilities consist of depreciation and amortization and provisions for income of foreign subsidiaries expected to be repatriated.
The Company has established a valuation allowance for deferred tax assets after taking into account factors that are likely to affect the Company's ability to utilize the tax assets. In particular, the Company conducts its business through several foreign subsidiaries and, although the Company expects its consolidated operations to be profitable, there is no assurance that profits will be earned in entities or jurisdictions which have NOLs available. Since April 1, 1994, changes in the valuation allowance primarily relate to the expected utilization of foreign NOLs and realization of foreign tax credits.
Income taxes, computed by applying the federal statutory income tax rate to income before income taxes and minority interests, are reconciled to the actual provisions for income taxes as follows:
For the Years Ended March 31, 1998 1997 1996 (in thousands)
Computed U.S. statutory expense $12,473 $14,316 $ 6,986 Change in valuation allowances 1,122 136 1,039 Withholding taxes and foreign earnings taxed at rates different from U.S. statutory rates (467) 5,696 -- State and local taxes and other, net 466 1,701 (530) ------ ------ ------ Total provision for income taxes $13,594 $21,849 $ 7,495 ------ ------ ------
The provision for 1997 includes the effect of provisions made for asset impairment and special drydocking in its United Kingdom subsidiary, where the Company derives no tax benefit as it already has NOLs.
3. DEBT
Credit Agreement
On April 12, 1995, the Company and a group of banks signed a credit agreement in the amount of $75 million (the "Credit Agreement"). As a result of amendments, the present amount of and availability under this agreement is $80 million. There is a commitment fee of 0.225% per annum on the unused portion of the banks' commitment. At March 31, 1998 and 1997, there was $54 million and $0, respectively, of debt outstanding under this agreement.
Under the Credit Agreement, the Company has the option to borrow dollars through Euro-Dollar loans at the London Interbank Offered Rate ("LIBOR") plus 5/8%, certificate of deposit loans at the reserve adjusted certificate of deposit rate plus 3/4%, or base rate loans at the agent bank's prime rate. The agreement contains certain restrictive covenants relative to consolidated debt, tangible net worth and fixed charge coverage. Loans under the agreement are unsecured. Under the agreement, dividends may not exceed 50% of cumulative consolidated net income from December 31, 1994.
The Company has uncommitted credit agreements with banks totaling $48 million for use for borrowings and letters of credit. As of March 31, 1998, the Company had approximately $8 million in letters of credit outstanding under these agreements.
Cash interest payments of $1.2 million, $3.6 million and $2.2 million were made in 1998, 1997 and 1996, respectively. Interest charges of $800,000 in 1998, $1.1 million in 1997 and $300,000 in 1996 were capitalized as part of construction in progress.
4. EMPLOYEE BENEFIT PLANS AND STOCKHOLDER RIGHTS PLAN
Retirement Investment Plans
The Company has three separate employee retirement investment plans which cover its full-time employees. The Oceaneering Retirement Investment Plan is a deferred compensation plan in which domestic employees may participate by deferring a portion of their gross monthly salary and directing the Company to contribute the deferred amount to the plan. The Company matches a portion of the deferred compensation. The Company's contributions to the plan were $1,960,000, $1,780,000 and $1,294,000 for the plan years ended December 31, 1997, 1996 and 1995, respectively. The second plan is the Oceaneering International Services Pension Scheme for employees in the United Kingdom. During 1998, another plan for such employees, the Personal Pension Plan, was converted to a Contracted in Money Purchase Scheme within the Oceaneering International Services Pension Scheme. Under the combined plan, employees may contribute a portion of their gross monthly salary. The Company also contributes a portion of the participants' gross monthly salary. The plan assets exceed vested benefits and are not material to the assets of the Company. Company contributions to this plan for the years ended March 31, 1998, 1997 and 1996 were $160,000, $202,000 and $172,000, respectively.
During the first quarter of 1998, the third plan was the Oceaneering International, Inc. Executive Retirement Plan, which covered selected key management employees and executives of the Company. The participants in this plan contributed a portion of their gross monthly salary and the Company matched 100% of that contribution. Company expense related to this plan during the years ended March 31, 1998, 1997 and 1996, was $576,000, $457,000 and $362,000, respectively. Effective June 30, 1997, the plan was terminated and replaced by a Supplemental Executive Retirement Plan. This plan also covers selected key management employees and executives of the Company as approved by the Compensation Committee of the Company's Board of Directors ("Compensation Committee"). The Company accrues a portion of the participants' gross monthly salary and the amounts accrued are treated as if they are invested in one or more investment vehicles pursuant to this plan. Company expense related to this plan during the year ended March 31, 1998 was $668,000.
Incentive and Stock Option Plans
The Company has in effect shareholder approved nonemployee director stock option and incentive plans. Under the 1990 Nonemployee Director Stock Option Plan ("Nonemployee Director Plan"), options to purchase up to an aggregate of 100,000 shares of the Company's Common Stock may be granted to nonemployee directors of the Company. Each director of the Company is automatically granted an option to purchase 2,000 shares of Common Stock on the date the director becomes a nonemployee director of the Company and each year thereafter at an exercise price per share equal to 50% of the fair market value of a share of Common Stock on the date the option is granted. The options granted are not exercisable until the later to occur of six months from the date of grant or the date the optionee has completed two years of service as a director of the Company. Expense is recorded related to these options which have an exercise price less than fair market value on the date the option is granted. Expense in 1998, 1997 and 1996 was not material.
In August 1996 the shareholders of the Company approved a 1996 Incentive Plan under which a total of 1,165,000 shares of Common Stock of the Company were made available for awards to employees and other persons (excluding nonemployee directors) having an important business relationship or affiliation with the Company. The 1996 Incentive Plan and a similar shareholder approved 1990 Incentive Plan ("Incentive Plans") are administered by the Compensation Committee, which determines the type or types of award(s) to be made to each participant and sets forth in the related award agreement the terms, conditions and limitations applicable to each award. The Compensation Committee may grant stock options, stock appreciation rights, stock and cash awards. Options are normally granted at not less than fair market value of the optioned shares at the date of grant. Options outstanding are exercisable over a period of five or ten years after the date of grant or five years after the date of vesting at the rate of 20% per year for three years beginning one year after grant and 40% at the end of the fourth year, or 25% per year for four years beginning one year after grant.
The Company also has in effect one other stock plan under which options to purchase have been issued to employees and other persons affiliated with the Company. Since approval of the 1990 Incentive Plan, no further grants or awards under this stock plan have been made or can be made or granted. This stock plan is also administered by the Compensation Committee. Options were granted at not less than the fair market value of the optioned shares at the date of grant. Options outstanding under this plan which were granted in 1990, are exercisable over a ten-year term with vesting at the rate of 20% per year for three years beginning one year after the date of grant and 40% at the end of the fourth year.
During 1996 and 1997, the Compensation Committee granted to certain key executives of the Company restricted Common Stock of the Company designed (i) to make a material portion of their potential future compensation contingent on performance of the Company's Common Stock and (ii) to retain their employ with the Company. These grants are subject to earning requirements on the basis of a percentage change between the price of the Common Stock of the Company versus the average of the Common Stock price of a peer group of companies over a three-year time period. Up to one-third of the total grant made in 1997 may be earned each year depending upon the Company's cumulative Common Stock performance, with any amount earned subject to vesting in four equal installments over a three or four year period conditional upon continued employment. At the time of each vesting, a participant receives a tax assistance payment which the participant must reimburse the Company if the vested Common Stock is sold by the participant within three years after the vesting date. In 1998, no such restricted stock grants were made. As of March 31, 1998, the entire grant made in 1996 has been earned, subject to vesting requirements, and one-third of the grant made in 1997 was earned, subject to vesting requirements. As of March 31, 1998, a total of 373,250 shares of restricted stock was outstanding under these and former, similar grants, of which 177,250 shares were earned, subject to vesting requirements. In April 1997 certain key executives also elected to receive restricted Common Stock of the Company totaling 44,968 shares with a grant date fair value of $14.63 per share, subject to similar vesting requirements and tax assistance payments, in lieu of cash for all or part of their 1997 bonus award. The numbers and weighted average grant date fair value of restricted stock granted during 1997 and 1996 were 312,000 and $17.00, and 7,000 and $10.38, respectively.
The Company accounts for stock options issued under plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these stock options been determined consistent with SFAS 123 "Accounting for Stock-Based Compensation", the Company's pro forma net income and diluted earnings per share for 1998, 1997 and 1996 would have been $21,373,000, $19,170,000 and $12,357,000 respectively, and $0.92, $0.80 and $0.53, respectively. Because the SFAS 123 method of accounting has not been applied to options issued prior to April 1 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
Information regarding these option plans for 1998, 1997 and 1996 is as follows: Shares under Weighted Average Option Exercise Price
Balance at March 31, 1995 1,422,080 12.07 Granted 68,500 9.63 Exercised (66,500) 8.17 Forfeited (69,250) 11.88 Balance at March 31, 1996 1,354,830 10.82 Granted 304,300 15.60 Exercised (270,950) 8.84 Forfeited (40,800) 11.29 Balance at March 31, 1997 1,347,380 12.23 Granted 390,700 18.64 Exercised (367,140) 10.51 Forfeited (87,600) 14.20 Balance at March 31, 1998 1,283,340 14.61
The weighted average fair value of options granted in 1998 and 1997 was $9.20 and $8.73, respectively. No significant grants were made in 1996. The fair value of the stock options granted in 1998 and 1997 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
1998 1997
Risk-free interest rate 6.42% 6.67% Expected dividend yield 0% 0% Expected life 6 years 6 years Expected volatility 38.48% 47.97%.
Options outstanding at March 31, 1998 is composed of the following:
Outstanding Exercisable ------------------------------------ -------------------
Range of Number of Weighted Weighted Number of Weighted Exercise shares at Average Average Shares at Average Prices March 31, Remaining Exercise March 31, Exercise 1998 Contractual Price 1998 Price Life (years) - -------- --------- ------------ -------- --------- -------- $4.72- 11.97 446,600 6.02 $10.60 291,500 $10.15 $12.06- 15.75 297,450 5.27 14.23 197,250 13.95 $15.81- 20.34 539,290 5.34 18.02 52,320 15.88
At March 31, 1998, there were 511,300 shares under these plans available for grant, of which 469,000 could be used for awarding stock options, stock appreciation rights, stock and cash awards to employees.
Stockholder Rights Plan
On November 20, 1992, the Company's Board of Directors adopted a Stockholder Rights Plan and, in accordance with such Plan, declared a dividend of one preferred share purchase right for each outstanding share of Company common stock. The Plan will cause substantial dilution to a party that attempts to acquire the Company in a manner or on terms not approved by the Board of Directors, except pursuant to an offer conditioned on a substantial number of rights being acquired.
The rights, which do not have voting rights and are not entitled to dividends until such time as they become exercisable, expire in December 2002.
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
At March 31, 1998, the Company occupied several facilities under noncancellable operating leases expiring at various dates through 2065. Future minimum rentals under these leases are as follows:
(in thousands) 1999 $ 3,366 2000 3,057 2001 2,715 2002 1,952 2003 1,498 Thereafter 13,060 ------ Total Lease Commitments $25,648 ------
Rental expense, which includes hire of vessels, specialized equipment and real estate rental, was approximately $19 million, $25 million and $19 million for the years ended March 31, 1998, 1997 and 1996, respectively.
Insurance
The Company self-insures for workers' compensation, maritime employer's liability and comprehensive general liability claims to levels it considers financially prudent and carries insurance after the initial claim levels, which can be by occurrence or in the aggregate, are met by the Company. The Company determines the level of accruals by reviewing its historical experience and current year claim activity; accruals are not recorded on a present value basis. Each claim is reviewed with insurance adjusters and specific reserves are established for all known liabilities. An additional reserve for incidents incurred but not reported to the Company is established for each year using management estimates and based on prior experience. Management believes that adequate accruals have been established for expected liabilities arising from such obligations.
Litigation
Various actions and claims are pending against the Company, most of which are covered by insurance. In the opinion of management, the ultimate liability, if any, which may result from these actions and claims will not materially affect the financial position or results of operations of the Company.
Letters of Credit
The Company had $8.0 million and $7.3 million in letters of credit outstanding as of March 31, 1998 and 1997, respectively, as guarantees in force for various performance and bid bonds which are usually for a period of one year or the duration of the contract.
Financial Instruments and Risk Concentration
Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, bank borrowings and accounts receivable. The carrying value of cash and cash equivalents and bank borrowings approximates fair value due to the short maturity of those instruments. Accounts receivable are generated from a broad and diverse group of customers primarily from within the energy industry, which is the Company's major source of revenues. The Company maintains an allowance for doubtful accounts based upon expected collectibility.
6. OPERATIONS BY BUSINESS SEGMENT AND GEOGRAPHIC AREA
Business Segment Information
The Company supplies a comprehensive range of integrated technical services to a wide array of industries and is one of the world's largest underwater services contractors. The Company's Oilfield Marine Services business consists of underwater intervention and above-water inspection, maintenance and repair. The Company's Offshore Field Development business includes the engineering, procurement, construction and installation of mobile offshore production systems, subsea intervention services and the production of subsea control umbilical cables. The Company's Advanced Technologies business provides project management, engineering services and equipment for applications in harsh environments, primarily in non-oilfield markets.
The following summarizes certain financial data by business segment:
For the Years Ended March 31, 1998 1997 1996 (in thousands) Revenues
Oilfield Marine Services $181,800 $176,395 $132,064 Offshore Field Development 90,508 101,028 80,855 Advanced Technologies 85,813 91,350 76,587 Total $358,121 $368,773 $289,506
Income from Operations
Oilfield Marine Services $ 16,263 $ 1,853 $ (369) Offshore Field Development 7,595 30,242 15,567 Advanced Technologies 12,424 9,514 4,988 Total $ 36,282 $ 41,609 $ 20,186
Identifiable Assets
Oilfield Marine Services $155,456 $135,375 $102,776 Offshore Field Development 114,306 74,455 103,538 Advanced Technologies 30,180 28,135 32,466 Total $299,942 $237,965 $238,780
Capital Expenditures
Oilfield Marine Services $ 53,352 $ 32,951 $ 21,868 Offshore Field Development 33,168 42,696 32,531 Advanced Technologies 7,893 3,952 2,772 Total $ 94,413 $ 79,599 $ 57,171
Depreciation and Amortization Expenses
Oilfield Marine Services $ 13,640 $ 20,682 $ 10,996 Offshore Field Development 6,140 7,510 5,127 Advanced Technologies 3,396 4,495 4,444 Total $ 23,176 $ 32,687 $ 20,567
Income from operations for each business segment is determined before interest income or expense, other expense, minority interests and the provision for income taxes. An allocation of these items is not considered practical. All assets specifically identified with a particular business segment have been segregated. Cash and cash equivalents, prepaid expenses and other current assets, investments and certain other assets have not been allocated to particular business segments. Income from operations for 1997 for Oilfield Marine Services is after charging an impairment adjustment of $7,980 which is included in depreciation and amortization expense. Income from operations for Offshore Field Development for 1997 includes a $25,047 gain on disposition of an FPSO and an $7,980 provision for a special drydocking.
No individual customer accounted for more than 10% of revenues in 1998 or 1996. Revenues of approximately $44 million in 1997 were from the Mobil Corporation group of companies.
Geographic Operating Areas
Financial data by geographic area is summarized as follows:
For the Years Ended March 31, 1998 1997 1996 (in thousands) Revenues United States $173,878 $154,613 $122,561 Europe 57,029 74,488 53,289 Africa 60,180 62,863 39,747 Asia 39,631 50,036 48,642 Other 27,403 26,773 25,267 TOTAL $358,121 $368,773 $289,506
Income before Income Taxes and Minority Interests United States $ 14,685 $ 3,327 $ 1,756 Europe 3,184 (4,818) (164) Africa 5,117 29,976 9,519 Asia 3,696 5,923 2,842 Other 8,954 6,496 6,007 TOTAL $ 35,636 $ 40,904 $ 19,960
Total Assets United States $191,967 $133,728 $152,859 Europe 42,135 68,512 51,521 Africa 40,268 39,589 29,733 Asia 34,162 17,429 12,185 Other 8,011 8,997 9,798 TOTAL $316,543 $268,255 $256,096
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following: March 31, 1998 1997 (in thousands)
Payroll and related costs $19,042 $17,831 Accrued job costs 18,159 28,886 Other 14,184 11,466
TOTAL ACCRUED LIABILITIES $51,385 $58,183
SELECTED QUARTERLY FINANCIAL DATA (in thousands, except per share data) (unaudited)
Year Ended March 31, 1998 Quarter Ended
June 30 Sept. 30 Dec. 31 Mar. 31 Total
Revenues $95,163 $90,578 $86,234 $86,146 $358,121 Gross profit 18,933 20,632 18,285 17,441 75,291 Income from operations 9,656 11,052 8,488 7,086 36,282 Net income 5,964 6,714 4,995 4,328 22,001 Diluted earnings per share $ 0.25 $ 0.28 $ 0.21 $ 0.19 $ 0.93 Weighted average number of common shares and equivalents 23,494 23,812 23,748 23,130 23,546
Year Ended March 31, 1997 Quarter Ended
June 30 Sept. 30 Dec. 31 Mar. 31 Total
Revenues $80,535 $96,764 $94,117 $97,357 $368,773 Gain on disposition of FPSO -- -- 25,047 -- 25,047 Gross profit 14,850 16,824 30,364 15,934 77,972 Income from operations 5,942 8,508 21,440 5,719 41,609 Net income 3,747 5,080 6,740 3,878 19,445 Diluted earnings per share $ 0.16 $ 0.21 $ 0.28 $ 0.16 $ 0.81 Weighted average number of common shares and equivalents 23,595 23,896 24,142 24,183 23,954
EXHIBIT INDEX
Registration or File Form or Exhibit Exhibit Number Report Date Number
3 Articles of Incorporation
3 Articles of Incorporation and By-laws *3.01 Certificate of Incorporation, as amended 0-8418 10-K March 1988 3(a) *3.02 By-laws, as amended 0-8418 10-K March 1987 3(b) *3.03 Amendment to Certificate of Incorporation 33-36872 S-8 Sept. 1990 4(b) *3.04 Amendment to By-laws 0-8418 10-K March 1991 3(d) *3.05 Amendment to By-laws 1-10945 8-K Nov. 1992 2 4 Instruments defining the rights of security holders, including indentures *4.01 Specimen of Common Stock Certificate 1-10945 10-K March 1993 4(a) *4.02 Shareholder Rights Agreement dated November 20, 1992 1-10945 8-K Nov. 1992 1 *4.03 Bank Credit Agreement dated April 12, 1995 1-10945 10-K March 1995 4.04 *4.04 Amended and Restated Bank Credit Agreement dated June 12, 1996 1-10945 10-K March 1996 4.05 4.05 Extension Agreement dated April 12, 1998 related to Exhibit 4.04 10 Material contracts *10.01+ 1981 Incentive Stock Option Plan, as amended 2-80506 S-8 Sept. 1987 28(e) *10.02+ Oceaneering Retirement Investment Plan, as amended 1-10945 10-K March 1996 10.02 *10.03+ Employment Agreement dated August 15, 1986 between John R. Huff and Registrant 0-8418 10-K March 1987 10(l) *10.04+ Addendum to Employment Agreement dated February 22, 1996 between John R. Huff and Registrant 1-10945 10-K March 1997 10.04 *10.05+ 1987 Incentive and Non- Qualified Stock Option Plan 33-16469 S-1 Sept. 1987 10(o) *10.06+ Oceaneering International, Inc. Special Incentive Plan 33-16469 S-1 Sept. 1987 10(n) *10.07+ Senior Executive Severance Plan, as amended 0-8418 10-K March 1989 10(k) *10.08+ Supplemental Senior Executive Severance Agreements, as amended 0-8418 10-K March 1989 10(l) *10.09+ Oceaneering International, Inc. Executive Retirement Plan, as amended 1-10945 10-K March 1995 10.08 *10.10+ 1990 Long-Term Incentive Plan 33-36872 S-8 Sept. 1990 4(f) *10.11+ 1990 Nonemployee Directors Stock Option Plan 33-36872 S-8 Sept. 1990 4(g) *10.12+ Indemnification Agreement between Registrant and its Directors 0-8418 10-Q Sept. 1991 10(a) *10.13+ 1991 Executive Incentive Agreements 0-8418 10-K March 1992 10(p) *10.14+ 1993 Restricted Stock Award Incentive Agreements 1-10945 10-K March 1994 10(q) *10.15+ 1993 Restricted Stock Award Incentive Agreement 1-10945 10-K March 1996 10.16 10.16+ 1998 Bonus Award Plan *10.17+ Amendment No. 1 to the Oceaneering Retirement Investment Plan 1-10945 10-Q Sept. 1996 10.01 *10.18+ 1996 Incentive Plan of Oceaneering International, Inc. 1-10945 10-Q Sept. 1996 10.02 *10.19+ 1996 Restricted Stock Award Incentive Agreements between Registrant and Executive Officers dated August 23, 1996. 1-10945 10-Q Sept. 1996 10.03 *10.20+ 1997 Bonus Restricted Stock Award Agreements between Registrant and Executive Officers dated April 22, 1997. 1-10945 10-K March 1997 10.20 21 Subsidiaries of the Registrant 23 Consent of Independent Public Accountants 24 Powers of Attorney 27 Financial Data Schedule
* Indicates exhibit previously filed with the Securities and Exchange Commission as indicated and incorporated herein by reference.
+ Indicates management contract or compensatory plan or arrangement required to be filed as an Exhibit to this form pursuant to Item 14(c) of this Annual Report on Form 10-K.