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OII > SEC Filings for OII > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for OCEANEERING INTERNATIONAL INC

Form 10-Q for OCEANEERING INTERNATIONAL INC


30-Apr-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Certain statements we make in this quarterly report on Form 10-Q are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements regarding our expectations about:

second quarter of 2014 and the full year of 2014 operating results and earnings per share, and the contributions from our segments to those results (including anticipated margin and utilization information and the equity earnings from unconsolidated affiliates);

demand growth and business activity levels;

our plans for future operations (including planned additions to our remotely operated vehicle ("ROV") fleet, our intent regarding the new multiservice subsea support vessel scheduled for delivery in 2016, and other capital expenditures);

our future cash flows;

the adequacy of our liquidity and capital resources;

our expectations regarding shares repurchased under our share repurchase plan;

our anticipated tax rates and underlying assumptions;

seasonality; and

industry conditions.

These forward-looking statements are subject to various risks, uncertainties and assumptions, including those we have referred to under the headings "Risk Factors" and "Cautionary Statement Concerning Forward-Looking Statements" in Part I of our annual report on Form 10-K for the year ended December 31, 2013. Although we believe that the expectations reflected in such forward-looking statements are reasonable, because of the inherent limitations in the forecasting process, as well as the relatively volatile nature of the industries in which we operate, we can give no assurance that those expectations will prove to have been correct. Accordingly, evaluation of our future prospects must be made with caution when relying on forward-looking information.

The following discussion should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our annual report on Form 10-K for the year ended December 31, 2013.

Executive Overview

We expect our 2014 diluted earnings per share to be in the range of $3.90 to $4.10, as compared to our 2013 diluted earnings per share of $3.42, with continued global demand growth for our services and products to support deepwater drilling, field development, and inspection, maintenance and repair activities. We believe our operating income will be higher in 2014 than 2013 for each of our Oilfield business operating segments, notably:

ROVs on greater service demand to support drilling and vessel-based projects;

Subsea Products on higher demand for all our major product lines; and

Subsea Projects on a growth in deepwater intervention service activity.

We expect to add approximately 30 to 35 ROVs in 2014, including the 14 we added in the first quarter.

We forecast our second quarter 2014 diluted earnings per share to be in the range of $0.97 to $1.01. For the second quarter, we anticipate operating income increases over the first quarter from each of our operating business segments, particularly Subsea Products from increased demand for tooling and subsea work systems.

We generate approximately 90% of our revenue and substantially all of our operating income before Unallocated Expenses from our services and products provided to the oil and gas industry, particularly in the deepwater sector of the offshore market. Consequently, the level of our customers' capital spending on deepwater exploration and development has a significant impact on the demand for many of our services and products.


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Critical Accounting Policies and Estimates

For information about our Critical Accounting Policies and Estimates, please refer to the discussion in our annual report on Form 10-K for the year ended December 31, 2013 under the heading "Critical Accounting Policies and Estimates" in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

We consider our liquidity and capital resources to be adequate to support our existing operations and capital commitments. At March 31, 2014, we had working capital of $761 million, including $106 million of cash and cash equivalents. Additionally, we had $210 million of borrowing capacity available under our revolving credit facility. We believe our cash provided from operating activities will exceed our capital expenditures and dividend payments in 2014.

Our capital expenditures were $104 million during the first quarter of 2014, as compared to $94 million during the corresponding quarter of last year. Of the $104 million, $57 million was invested in our ROV segment and $30 million was invested in our Subsea Products segment. We added 14 new ROVs to our fleet during the quarter ended March 31, 2014 and retired four, resulting in a total of 314 ROVs in our ROV segment fleet. We plan to add approximately 16 to 21 more new ROVs during the rest of 2014. Our capital expenditures in the quarter ended March 31, 2013 included $70 million invested in our ROV segment. We estimate our capital expenditures for 2014 will be approximately $450 million, with approximately $225 million for upgrading and adding vehicles to our ROV fleet, $120 million for enhancing our Subsea Products capabilities and $65 million for Subsea Projects, largely for construction progress payments for the new multiservice subsea support vessel discussed below, which is scheduled for delivery by the end of the first quarter of 2016.

We have chartered a multiservice subsea support vessel, the Ocean Intervention III, for a term that extends to January 2015, with annual extension options for up to two additional years. The Ocean Intervention III is working under our contract for field support vessel services offshore Angola. We have chartered the multiservice subsea support vessel Bourbon Oceanteam 101 to February 2015, with annual extension options for up to two additional years, to work on the same contract. Each of those vessels has been outfitted with two of our high specification work-class ROVs.

We also chartered an additional multiservice subsea support vessel, the Olympic Intervention IV, for an initial five-year term that ended in July 2013, with one two-year and three one-year extension options. We have extended the charter to July 2016 by exercising a one-year option and a two-year option. We have outfitted this vessel with two of our high specification work-class ROVs, and we are using this vessel to perform subsea hardware installation and inspection, maintenance and repair projects in the U.S. Gulf of Mexico.

In October 2012, we entered into a five-year charter with five one-year extension options for the use of the Cade Candies, a Jones Act-compliant multiservice subsea support vessel. The charter commenced during March 2013. We have renamed the vessel Ocean Alliance and have outfitted the vessel with two of our high specification work-class ROVs. We are using this vessel in the U.S. Gulf of Mexico to perform subsea hardware installation and inspection, maintenance and repair projects.

In December 2013, we commenced a three-year charter for the Normand Flower, a multiservice subsea support vessel. We have made modifications to the vessel, including reconfiguration to accommodate two of our high specification work-class ROVs. We are using the vessel in the U.S. Gulf of Mexico to perform subsea hardware installation and inspection, maintenance and repair projects. We have options to extend the charter for up to three additional years.

During the third quarter of 2013, we signed an agreement with a shipyard for the construction of a new multiservice subsea support vessel. We expect delivery of that vessel by the end of the first quarter of 2016. Our cash payments for the vessel will be spread over the construction period. We intend for the vessel to be Jones Act-compliant. We expect the vessel to have an overall length of 353 feet, a Class 2 dynamic positioning system, accommodations for 110 personnel, a helideck, a 250 ton active heave-compensated crane, and a working moonpool. We expect to outfit the vessel with two of our high specification work-class ROVs. The vessel will also be equipped with a satellite communications system capable of transmitting streaming video for real-time work observation by shore personnel. We anticipate the vessel will be used to augment our ability to provide subsea


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hardware installation and inspection, maintenance and repair services in the ultra-deep waters of the U.S. Gulf of Mexico.

At March 31, 2014, we had $90 million of long-term debt outstanding and $210 million available on our revolving credit facility provided under a credit agreement with a group of banks (the "Credit Agreement"). The Credit Agreement provides for a five-year, $300 million revolving credit facility, and is scheduled to expire in January 2017. Subject to certain conditions, the aggregate commitments under the facility may be increased by up to $200 million by obtaining additional commitments from existing and/or new lenders. Borrowings under the facility may be used for working capital and general corporate purposes. Revolving borrowings under the facility bear interest at an adjusted base rate or the Eurodollar Rate (as defined in the agreement), at our option, plus an applicable margin. Depending on our debt to capitalization ratio, the applicable margin varies: (1) in the case of adjusted base rate advances, from 0.125% to 0.750%; and (2) in the case of eurodollar advances, from 1.125% to 1.750%. The adjusted base rate is the greater of (1) the per annum rate established by the administrative agent as its prime rate, (2) the federal funds rate plus 0.50% and (3) the one-month Eurodollar Rate plus 1%.

The Credit Agreement contains various covenants that we believe are customary for agreements of this nature, including, but not limited to, restrictions on the ability of each of our restricted subsidiaries to incur unsecured debt, as well as restrictions on our ability and the ability of each of our restricted subsidiaries to incur secured debt, grant liens, make certain investments, make distributions, merge or consolidate, sell assets, enter into transactions with affiliates and enter into certain restrictive agreements. We are also subject to an interest coverage ratio and a debt to capitalization ratio. The Credit Agreement includes customary events and consequences of default.

Our principal source of cash from operating activities is our net income, adjusted for the non-cash effects of depreciation and amortization, deferred income taxes and noncash compensation under our share-based compensation plans. Our $82 million and $121 million of cash provided from operating activities in the quarters ended March 31, 2014 and 2013, respectively, were principally affected by cash increases (decreases) of:

$(16) million and $48 million, respectively, from changes in accounts receivable;

$4 million and $(24) million, respectively, from changes in inventory; and

$(40) million and $(25) million, respectively, from changes in current liabilities.

The cash provided through the change in accounts receivable in 2013 was the result of better collections from customers and lower revenue than the immediately preceding quarter. Our average collection time from customers was higher in the quarter ended March 31, 2014 than that of the immediately preceding quarter, resulting in the cash decrease from changes in accounts receivable in 2014. The increase in inventory levels in 2013 reflected our preparations to meet the requirements of our higher Subsea Products backlog. The decreases in cash related to changes in current liabilities reflect payments we generally make in the first quarter of each year associated with prior year accrued employee bonuses and payments for employee vestings under long-term incentive plans.

In the quarter ended March 31, 2014, we used $101 million of cash in investing activities. The cash used in investing activities related to the capital expenditures described above. We generated $34 million from financing activities, which included net borrowings under our revolving credit facility of $90 million less uses of cash for repurchases of 500,000 shares of treasury stock for $35 million and the payment of cash dividends of $24 million. In the quarter ended March 31, 2013, we used $93 million of cash in investing activities. The cash used in investing activities was used for the capital expenditures described above. In the quarter ended March 31, 2013, we used $20 million of cash in financing activities, which included net payments of $4.0 million related to our revolving credit facility and the payment of cash dividends of $19 million.

We have not guaranteed any debt not reflected on our consolidated balance sheet, and we do not have any off-balance sheet arrangements, as defined by SEC rules.

In February 2010, our Board of Directors approved a plan to repurchase up to 12 million shares of our common stock. Under this plan, we had repurchased 3.6 million shares of our common stock for $122 million through March 31, 2014. We repurchased 500,000 shares during the quarter ended March 31, 2014 for $35 million. We account for the shares we hold in treasury under the cost method, at average cost. The timing and amount of any future repurchases will be determined by our management. We expect that any additional shares repurchased under the plan will be held as treasury stock for future use. The plan does not obligate us to repurchase any particular number of shares.


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We had been paying a quarterly cash dividend of $0.22 per share to our common shareholders since the second quarter of 2013. In April 2014, our Board of Directors increased our dividend to $0.27 per share, commencing with the dividend to be paid in June 2014.

Results of Operations

We operate in five business segments. The segments are contained within two
businesses - services and products provided to the oil and gas industry
("Oilfield") and all other services and products ("Advanced Technologies"). Our
Unallocated Expenses are those not associated with a specific business segment.

Consolidated revenue and profitability information is as follows:

                                          Three Months Ended
(dollars in thousands)     Mar 31, 2014      Mar 31, 2013      Dec 31, 2013
Revenue                   $     840,201     $     718,552     $     894,798
Gross Margin                    189,491           160,375           197,805
Gross Margin %                       23 %              22 %              22 %
Operating Income                132,862           108,290           136,753
Operating Income %                   16 %              15 %              15 %

We generate a material amount of our consolidated revenue from contracts for services in the U.S. Gulf of Mexico in our Subsea Projects segment, which is usually more active from April through October, as compared to the rest of the year. The European operations of our Asset Integrity segment are also seasonally more active in the second and third quarters. Revenue in our ROV segment is subject to seasonal variations in demand, with our first quarter generally being the low quarter of the year. The level of our ROV seasonality primarily depends on the number of ROVs we have engaged in vessel-based subsea infrastructure inspection, maintenance, repair and installation, which is more seasonal than drilling support. Revenue in each of our Subsea Products and Advanced Technologies segments has generally not been seasonal.


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Oilfield

The following table sets forth the revenues and margins for our Oilfield
business segments for the periods indicated. In the ROV section of the table
that follows, "Days available" includes all days from the first day that
an ROV is placed into service until the ROV is retired. All days during this
period are considered available days, including periods when an ROV is
undergoing maintenance or repairs. Our ROVs do not have scheduled maintenance or
repair that requires significant time when the ROVs are not available
for utilization.
                                              Three Months Ended
(dollars in thousands)         Mar 31, 2014      Mar 31, 2013      Dec 31, 2013
Remotely Operated Vehicles
   Revenue                    $     255,819     $     229,628     $     254,958
   Gross Margin                      87,190            76,154            86,504
   Operating Income                  76,740            65,835            72,209
   Operating Income %                    30 %              29 %              28 %
   Days available                    27,851            26,215            27,535
   Days utilized                     23,869            21,704            23,868
   Utilization                           86 %              83 %              87 %

Subsea Products
   Revenue                          260,010           214,005           292,100
   Gross Margin                      75,129            62,345            85,576
   Operating Income                  54,516            42,779            64,474
   Operating Income %                    21 %              20 %              22 %
   Backlog at end of period         894,000           776,000           906,000

Subsea Projects
   Revenue                          138,190            88,455           159,658
   Gross Margin                      24,409            14,921            31,854
   Operating Income                  20,537            11,620            27,555
   Operating Income %                    15 %              13 %              17 %

Asset Integrity
   Revenue                          124,159           114,849           123,673
   Gross Margin                      21,866            19,039            17,194
   Operating Income                  14,085            12,339             9,892
   Operating Income %                    11 %              11 %               8 %

Total Oilfield
   Revenue                    $     778,178     $     646,937     $     830,389
   Gross Margin                     208,594           172,459           221,128
   Operating Income                 165,878           132,573           174,130
   Operating Income %                    21 %              20 %              21 %

In general, our Oilfield business focuses on supplying services and products to the deepwater sector of the offshore market. We are the world's largest provider of ROV services, and this business segment typically is the largest contributor to our Oilfield business operating income.

Our ROV segment revenue reflects the utilization percentages, fleet sizes and average pricing of the respective periods. Our operating income increased in the quarter ended March 31, 2014 compared to the corresponding


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quarter of the prior year from higher demand in most of our operating areas, most notably in the U.S. Gulf of Mexico and offshore Africa and Southeast Asia. Our ROV operating income was higher than the immediately preceding quarter, principally due to the $3.3 million charge we incurred in the immediately preceding quarter to record an allowance for doubtful accounts related to a customer in Brazil that filed for restructuring under Brazilian bankruptcy law. We expect our full-year 2014 ROV operating income to exceed that of 2013, due to increases in fleet size and days on hire. We expect to add approximately 30 to 35 ROVs in 2014, including the 14 we added in the first quarter. We retired four ROVs in the quarter ended March 31, 2014, and we currently expect to retire, on average, 4% to 5% of our fleet on an annual basis. Compared to 2013, in 2014 we expect ROV operating income to increase on greater demand for both drilling and vessel-based services. In 2014, we anticipate having total fleet utilization of approximately 85%, and having a segment operating margin of 29% to 30%.

Compared to the corresponding quarter of 2013, our Subsea Products operating income in the first quarter of 2014 improved on increased demand for subsea hardware and increased umbilical throughput. Our Subsea Products revenue and operating income were lower than the immediately preceding quarter due to project timing. Our Subsea Products backlog was $894 million at March 31, 2014 compared to $906 million at December 31, 2013. We believe Subsea Products operating income will be higher in 2014 compared to 2013 from improved results in all our major product lines. We expect our 2014 operating margin for Subsea Products to be in the range of 19% to 21%.

Our Subsea Projects revenue and operating income was higher in the quarter ended March 31, 2014 than the corresponding quarter of the prior year due to: (1) installation activity, the availability of the Normand Flower from December 2013, and increased use of the Ocean Alliance in the U.S. Gulf of Mexico, and
(2) additional deepwater vessel activity offshore Angola. Our revenue and operating income for Subsea Projects decreased compared to the immediately preceding quarter on lower demand offshore Angola and weaker results in Australia. We expect higher Subsea Projects operating income in 2014 compared to 2013 on growth in deepwater service activity.

For the quarter ended March 31, 2014, our Asset Integrity revenue and operating income improved over the corresponding quarter of the prior year from higher service demand in the Middle East and the Caspian Sea area. Asset Integrity operating income in the quarter ended March 31, 2014 was higher than that of the immediately preceding quarter, as we recognized additional expenses in the immediately preceding quarter for asset writeoffs and to accrue for past service obligations related to employees of AGR Field Operations Holdings AS and subsidiaries, which we acquired in December 2011. In 2014, we expect Asset Integrity to generate higher operating income than 2013 on increased service revenue in most of the geographic areas in which we operate, with a slight improvement in operating margin.

Advanced Technologies

Revenue and margin information was as follows:
                                         Three Months Ended
(dollars in thousands)     Mar 31, 2014     Mar 31, 2013     Dec 31, 2013
Revenue                   $     62,023     $     71,615     $     64,409
Gross Margin                     7,727           13,308            5,153
Operating Income                 2,955            8,676             (287 )
Operating Income %                   5 %             12 %              - %

Advanced Technologies operating income in the quarter ended March 31, 2014 decreased from the corresponding quarter of the prior year due to reductions in theme park project work and U.S. Navy submarine maintenance and engineering service activity. Advanced Technologies operating income for the first quarter of 2014 was higher than that of the immediately preceding quarter on increases in U.S. Navy and NASA work and better execution on entertainment projects. For 2014, we expect Advanced Technologies operating income to approximate that of 2013.


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Unallocated Expenses

Our Unallocated Expenses, i.e., those not associated with a specific business segment, within gross profit consist of expenses related to our incentive and deferred compensation plans, including restricted stock units, performance units and bonuses, as well as other general expenses. Our Unallocated Expenses within operating income consist of those expenses within gross profit plus general and administrative expenses related to corporate functions.

The following table sets forth our Unallocated Expenses for the periods indicated.

                                             Three Months Ended
(dollars in thousands)         Mar 31, 2014     Mar 31, 2013     Dec 31, 2013
Gross margin expenses         $     26,830     $     25,392     $     28,476
Operating income expenses           35,971           32,959           37,090
% of revenue                             4 %              5 %              4 %

The increase in operating expenses in the quarter ended March 31, 2014 compared to the corresponding quarter of the prior year were due to higher incentive compensation expenses. For 2014, we expect our unallocated expenses to increase at a slightly lower rate than our revenue growth.

Other

The following table sets forth our significant financial statement items below
the income from operations line.

                                                                        Three Months Ended
(in thousands)                                           Mar 31, 2014      Mar 31, 2013      Dec 31, 2013
Interest income                                        $          79      $        190     $         82
Interest expense                                                (411 )            (763 )            (27 )
Equity earnings (losses) of unconsolidated
affiliates                                                       (36 )             161               24
Other income (expense), net                                      294             1,390             (433 )
Provision for income taxes                                    41,563            34,419           42,966

In addition to interest on borrowings, interest expense includes fees for lender commitments under our revolving credit agreement and fees for standby letters of credit and bank guarantees that banks issue on our behalf for performance bonds, bid bonds and self-insurance requirements.

Our equity earnings (losses) of unconsolidated affiliates consists of earnings (losses) from our 50% equity interest in Medusa Spar LLC, which owns a 75% interest in the Medusa Spar production platform in the U.S. Gulf of Mexico. Medusa Spar LLC earns revenue on a tariff basis on oil and gas production throughput processed by the platform from the Medusa field and other surrounding areas. We expect our equity earnings of unconsolidated affiliates to decrease in 2014 from that of 2013 due to production declines from the existing connected wells.

During the quarter ended March 31, 2013, other income (expense), net largely related to foreign currency gains, primarily related to Norway and the United Kingdom as the U.S. dollar strengthened relative to the Norwegian kroner and U.K pound sterling.

The provisions for income taxes were related to U.S. income taxes that we provided at estimated annual effective rates using assumptions as to earnings and other factors that would affect the tax provision for the remainder of the year, and to the operations of foreign branches and subsidiaries that were subject to local income and withholding taxes. We anticipate our effective tax rate for 2014 will be 31.3%. The primary difference between our current 2014 estimated effective tax rate of 31.3% and the federal statutory tax rate of 35% reflects our intention to indefinitely reinvest in certain of our international operations. Therefore, we do not provide for U.S. taxes on that portion of our foreign earnings.


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