UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2003
OR
For the transition period from to
Commission File Number 1-10945
OCEANEERING INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
11911 FM 529
Houston, Texas
(713) 329-4500
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yesx No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at November 10, 2003
Common Stock, $.25 Par Value
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
OCEANEERING INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
Sept. 30,
2003
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $4,457 and $2,763
Prepaid expenses and other
Total current assets
Property and Equipment, at cost
Less: accumulated depreciation
Net property and equipment
Goodwill
Other Assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued liabilities
Income taxes payable
Current portion of long-term debt
Total current liabilities
Long-term Debt, net of current portion
Other Long-term Liabilities
Commitments and Contingencies
Shareholders’ Equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Revenue
Cost of Services and Products
Gross margin
Selling, General and Administrative Expenses
Income from operations
Interest Income
Interest Expense
Equity Earnings (Losses) of Unconsolidated Affiliates
Other Income (Expense), Net
Income before income taxes
Provision for Income Taxes
Net Income
Basic Earnings per Share
Diluted Earnings per Share
Weighted average number of common shares
Incremental shares from stock options and restricted stock
Weighted average number of common shares and equivalents
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Non-cash compensation and other
Increase (decrease) in cash from:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Current liabilities
Other long-term liabilities
Total adjustments to net income
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Business acquisitions
Purchases of property and equipment and other
Net Cash Used in Investing Activities
Cash Flows from Financing Activities:
Net proceeds (payments) on revolving credit and other long-term debt, net of financing costs
Payments of term loan
Proceeds from issuance of common stock
Purchases of treasury stock
Net Cash Used in Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents—Beginning of Period
Cash and Cash Equivalents—End of Period
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have prepared these unaudited consolidated financial statements pursuant to instructions for the Quarterly Report on Form 10-Q required to be filed with the Securities and Exchange Commission. These financial statements do not include all information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles. These financial statements reflect all adjustments that we believe are necessary to present fairly our financial position at September 30, 2003 and our results of operations and cash flows for the periods presented. All such adjustments are of a normal and recurring nature. The financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2002. The results for interim periods are not necessarily indicative of annual results. 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 us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Stock Options
In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. As permitted under SFAS No. 123, we continue to use the intrinsic value method of accounting established by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to account for our stock-based compensation programs. Accordingly, we do not recognize any compensation expense when the exercise price of an employee stock option is equal to the market price per share of our common stock on the grant date. The following illustrates the pro forma effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123:
Net Income:
As reported
Pro forma additional compensation expense determined under fair value methods for all awards, net of income tax benefit
Pro forma
Reported earnings per common share:
Basic
Diluted
Pro forma earnings per common share:
For purposes of these pro forma disclosures, we estimate the fair value of each option grant as of the date of grant using a Black-Scholes option pricing model. The estimated fair value of the options is amortized to pro forma expense over the options’ expected average lives.
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New Reporting Requirements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period during which the asset was placed in service. Our adoption of SFAS No. 143 as of January 1, 2003 has not had a material effect on our consolidated financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements and clarifies that a guarantor is required, at the inception of the guarantee, to recognize a liability for the fair value of an obligation undertaken in issuing the guarantee. The recognition and measurement provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002. We have not had a material impact on our consolidated financial position or results of operations from FIN 45.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, which is effective for variable interest entities created after January 31, 2003, and for the first interim period ending after December 15, 2003. FIN 46 addresses consolidation by business enterprises of variable interest entities where:
While we are assessing the impact FIN 46 might have on equity investments we entered into before January 31, 2003, we have not had and do not expect to have a material impact on our consolidated financial position or results of operations from FIN 46.
Our prepaid expenses and other current assets consisted of the following:
Spare parts for remotely operated vehicles
Inventories, primarily raw materials
Deferred taxes
Other
Total
Our long-term debt consisted of the following:
6.72% Senior Notes
Revolving credit facility
Term Loan
Long-term Debt
Less: current portion
In July 2003, we repaid the Term Loan with the proceeds of a new four-year revolving credit facility that matures in July 2007. The new revolving credit facility has terms and conditions similar to the prior revolving credit agreement.
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The following table reflects the scheduled maturities of our long-term debt as of September 30, 2003.
Remainder of 2003
2004
2005
2006
2007
Thereafter
Our shareholders’ equity consisted of the following:
Common Stock, par value $0.25; 90,000,000 shares authorized; 24,813,289 shares issued
Additional paid-in capital
Unearned compensation
Treasury stock; 537,270 and 316,351 shares, at average cost
Retained earnings
Other comprehensive income (loss)
Total shareholders’ equity
We paid cash taxes of $13.4 million and $10.5 million during the nine-month periods ended September 30, 2003 and 2002, respectively.
We supply a comprehensive range of technical services and specialty products to customers in a variety of industries. Our Oil and Gas business consists of five business segments: Remotely Operated Vehicles (“ROVs”); Subsea Products; Subsea Projects; Mobile Offshore Production Systems; and Inspection. Our Advanced Technologies business is a separate segment that provides project management, engineering services and equipment for applications outside the oil and gas industry. Unallocated expenses are those not associated with a specific business segment. These consist of expenses related to our incentive and deferred compensation plans, including restricted stock and bonuses, as well as other general expenses.
Before 2003, our Subsea Projects segment, which consists of our subsea installation, maintenance and repair services utilizing our Gulf of Mexico vessels, including our Ocean Intervention-class vessels, and our specialized diving group, and our Inspection segment, which consists of non-destructive testing and inspection services, were reported together as our Other Services segment. In January 2003, we completed the acquisition of OIS International Inspection plc, which approximately tripled the size of our inspection and non-destructive testing operations. As a result, we are now reporting Inspection as a separate segment. We have reclassified our prior periods to conform with the current classifications.
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Other than as we explained above, there are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from those used in our consolidated financial statements for the year ended December 31, 2002. The following summarizes certain financial data by business segment:
For the
Three Months Ended
Nine Months Ended
Oil and Gas
ROVs
Subsea Products
Subsea Projects
Mobile Offshore Production Systems
Inspection
Total Oil and Gas
Advanced Technologies
Gross Margins
Unallocated Expenses
Comprehensive income is the total of net income and all non-owner changes in equity. The amounts of comprehensive income for the three- and nine-month periods ended September 30, 2003 and 2002 are as follows:
Three Months EndedSeptember 30,
September 30,
Net Income per Consolidated Statements of Income
Foreign Currency Translation Gains
Change in Fair Value of Interest Rate Hedge
Change in Minimum Pension Liability Adjustment
Comprehensive Income
Amounts comprising other elements of comprehensive income in Shareholders’ Equity are as follows:
Accumulated Net Foreign Currency Translation Adjustments
Fair Value of Interest Rate Hedge
Minimum Pension Liability Adjustment
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In January 2003, we acquired OIS International Inspection plc, an international provider of inspection and non-destructive testing services, for approximately $30 million. In April 2003, we acquired Nauticos Corporation, a provider of marine products and services support to government and commercial customers, and Reflange, Inc., a manufacturer of patented metal seal piping connectors and a supplier of on-site machining services, for approximately $8 million and $5 million, respectively. In September 2003, we acquired Rotator AS, a designer and manufacturer of subsea control valves, topside control valves, subsea chemical injection valves and specialty control panels, for approximately $14 million. The acquisitions were accounted for using the purchase method of accounting, with the purchase price being allocated to the net assets acquired based on their fair market values at the date of acquisition. We have made the purchase price allocations based on estimates using information currently available to us, and the allocations are subject to change when final asset and liability valuations are obtained. Our current estimate of goodwill associated with these four acquisitions is $21 million. These acquisitions were not material; therefore, we have not included pro forma information. The results of operations of OIS International Inspection plc, Nauticos Corporation, Reflange, Inc. and Rotator AS are included in our consolidated statements of income from the respective dates of acquisition.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
All statements in this Form 10-Q, other than statements of historical facts, including, without limitation, statements regarding our business strategy, plans for future operations and industry conditions, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks, uncertainties and assumptions, including those we have referred to under the headings “Business—Risks and Insurance” and “Cautionary Statement Concerning Forward-Looking Statements” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2002. Although we believe that the expectations reflected in such forward-looking statements are reasonable, because of the inherent limitations in the forecasting process, as well as the relatively volatile nature of the industries in which we operate, we can give no assurance that those expectations will prove to be correct. Accordingly, evaluation of our future prospects must be made with caution when relying on forward-looking information.
Critical Accounting Policies and Estimates
We have based the following discussion and analysis of our financial condition and results of operation on our consolidated financial statements, which we have prepared in conformity with accounting principles generally accepted in the United States. These principles require us to make various estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods we present. We base our estimates on historical experience, available information and other assumptions we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates; however, our actual results may differ from these estimates under different assumptions or conditions. The following discussion summarizes the accounting policies we believe (1) require our management’s most difficult, subjective or complex judgments and (2) are the most critical to our reporting of results of operations and financial position.
Revenue Recognition. We recognize our revenues according to the type of contract involved. On a daily basis, we recognize our revenues from billings under contracts that provide for specific time, material and equipment charges, which we bill periodically, ranging from weekly to monthly. We account for significant lump-sum contracts, which we enter into mainly in our Subsea Products and Advanced Technologies segments, and occasionally in our Subsea Projects segment, using the percentage-of-completion method. Under this method, we recognize estimated contract revenue based on costs incurred to date as a percentage of total estimated costs. Changes in the expected cost of materials and labor, productivity, scheduling and other factors affect the total estimated costs. Additionally, external factors, including weather or other factors outside of our control, may also affect the progress and estimated cost of a project’s completion and, therefore, the timing of income and revenue recognition. We routinely review estimates related to our contracts and reflect revisions to profitability in earnings immediately. If a current estimate of total contract costs indicates an ultimate loss on a contract, we recognize the projected loss in full when we determine it. Although we are continually striving to improve our ability to estimate our contract costs and profitability, adjustments to overall contract costs may be significant in future periods. We recognize the remainder of our revenues as we deliver the goods and services.
Long-lived Assets. We evaluate our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be appropriate. We base these evaluations on a comparison of the assets’ fair values, which are generally based on forecasts of cash flows associated with the assets, or fair market value of the assets, to the carrying amounts of the assets. Any impairment is recorded as the amount, if any, by which the carrying amounts exceed the fair values. Our expectations regarding future sales and undiscounted cash flows are highly subjective, cover extended periods of time and depend on a number of factors outside our control, such as changes in general economic conditions, laws and regulations. Accordingly, these expectations could differ significantly from year to year.
We expense the costs of repair and maintenance as we incur them, except for drydocking costs associated with our larger vessels. We estimate and accrue these drydock costs over a period of time in advance of future drydockings. We recognize differences between the estimates and actual costs incurred in the income statement.
Loss Contingencies. We self-insure for workers’ compensation, maritime employer’s liability and comprehensive general liability claims to levels we consider financially prudent and carry insurance for exposures beyond the self-insurance levels, which can be by occurrence or in the aggregate. We determine the level of accruals by reviewing our historical experience and current year claim activity. We do not record accruals on a present-value basis. We review each claim with insurance adjusters and establish specific reserves for known liabilities. We establish an additional reserve for incidents incurred but not reported to us for each year using our estimates and based on prior experience. We believe we have established adequate accruals for uninsured expected liabilities arising from those obligations. However, it is possible that future earnings could be affected by changes in our estimates relating to these matters.
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We are involved in various claims and actions against us, most of which are covered by insurance. We believe that our ultimate liability, if any, that may result from these claims and actions will not materially affect our financial position, cash flows or results of operations.
For a summary of our major accounting policies, please read note 1 to our consolidated financial statements contained in this Form 10-Q and note 1 to our consolidated financial statements contained in our Form 10-K for the year ended December 31, 2002.
Liquidity and Capital Resources
We consider our liquidity and capital resources adequate to support our operations and capital commitments. At September 30, 2003, we had working capital of $120 million, including $21 million of cash and cash equivalents. Additionally, we had $85 million of borrowing capacity available under our revolving credit facility.
Our capital expenditures were $88 million during the nine months ended September 30, 2003, as compared to $21 million during the corresponding period of last year. Capital expenditures in the current year consisted primarily of the acquisitions of OIS International Inspection plc, Nauticos Corporation, Reflange, Inc. and Rotator AS. Prior-year capital expenditures consisted primarily of expenditures relating to the addition of units to our fleet of ROVs to replace older units we retired.
We had no material commitments for capital expenditures at September 30, 2003.
At September 30, 2003, we had long-term debt of $115 million and a 25% debt-to-total capitalization ratio. We have $100 million of Senior Notes outstanding, to be repaid from 2006 through 2010. We have a $100 million revolving credit facility that expires in July 2007. The revolving credit facility has short-term interest rates that float with market rates, plus applicable spreads. We have no off-balance sheet debt and have not guaranteed any debt that is not reflected on our consolidated balance sheets.
In the nine-month period ended September 30, 2003, our cash and cash equivalents decreased $45 million. We generated $51 million in cash from operating activities, used $87 million of cash in investing activities and used $9 million of cash in financing activities. The cash used in investing activities consisted primarily of business acquisitions and the cash used in financing activities was attributable to repurchases of our common stock totaling $13 million.
Results of Operations
We operate in six business segments. The segments are contained within two businesses—services and products provided to the oil and gas industry (“Oil and Gas”) and all other services and products (“Advanced Technologies”). Before 2003, our Subsea Projects segment, which consists of our subsea installation, maintenance and repair services utilizing our Gulf of Mexico vessels, including our two Ocean Intervention class vessels, and our specialized diving group, and our Inspection segment, which consists of inspection and non-destructive testing services, were reported together as our Other Services segment. In January 2003, we completed the acquisition of OIS International Inspection plc, which approximately tripled the size of our inspection and non-destructive testing operations. As a result, we are now reporting Inspection as a separate segment. We have reclassified our prior periods to conform with the current classifications.
Consolidated revenue and margin information is as follows:
Gross margin %
Operating margin %
In our financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2002, we restated periods through September 30, 2002 to correct errors related to our accounting for, among other things, restricted stock expense, Brazilian currency translation and the timing of certain employee benefit accruals. The following discussion addresses those financial results as restated. For a discussion of the restatement, see note 2 to the consolidated financial statements contained in our Form 10-K.
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Our Oil and Gas business results are influenced by the level of capital spending by oil and gas companies in the offshore sector, particularly in deepwater, that is, at water depths of 1,000 feet or more. In 2002, we saw a decrease in deepwater exploration activity, particularly in the Gulf of Mexico. As a result, the increase in ROV drill support services that we had expected to begin in the second half of 2002 did not materialize. In addition, we have also noted continuing delays in the development of deepwater prospects around the world, as evidenced by the decline in our Subsea Products backlog from $61 million at December 31, 2001 to $17 million at September 30, 2003. Based on the number of subsea tree orders and our outstanding bids, we anticipate our backlog will increase by December 31, 2003, with a subsequent increase in activity in 2004.
We generate a material amount of our consolidated revenue from contracts for marine services and inspection and non-destructive testing services in the Gulf of Mexico and the North Sea, which are usually more active from April through November compared to the rest of the year. Revenues in our Mobile Offshore Production Systems, Subsea Products and Advanced Technologies segments are generally not seasonal.
The table below sets forth our revenues and gross margins for our Oil and Gas business for the periods indicated.
Work class utilization %
For the quarter ended September 30, 2003, our ROV segment revenues and margins increased from higher utilization and higher dayrates than those in the corresponding period of 2002, as a decline in deepwater drill support was more than offset by an increase in construction activity. Margin percentage remained flat due to higher operating expenses associated with construction support activities. Revenue, gross margin and gross margin percentage were in line with the quarter ended June 30, 2003. For the nine-month period ended September 30, 2003, our revenue increased on slightly higher utilization, as increased construction support activity more than offset a decline in deepwater drill support, while gross margin and gross margin percentage decreased due to higher operating expenses associated with construction support activity. For the balance of 2003, we expect our ROV results to be consistent with those achieved in the quarter ended September 30, 2003.
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For the quarter ended September 30, 2003, our Subsea Products revenue increased compared to the corresponding period of 2002, as activity from our production control systems, pipeline repair systems and ROV tooling groups more than offset a decline in revenue from umbilicals. The revenues of Reflange and Rotator from their respective dates of acquisition are included in this group and accounted for approximately half of the increase. Margins were lower from our U.K. umbilical plant operations and research and development costs. For the nine months ended September 30, 2003, revenues and gross margins were lower than the corresponding period of 2002 due to reduced activity at our U.K. and Brazil umbilical plants. Subsea Products gross margin for the nine months ended September 30, 2003 was positively impacted by $1.3 million due to the successful completion of a project at a lower cost than previously estimated. While our outlook for the Subsea Products segment is highly positive based on the projected growth in subsea wellhead completions, we anticipate this segment’s results for the fourth quarter of 2003 to be consistent with those achieved in the quarter ended September 30, 2003.
For our Subsea Projects segment, an increase in offshore activity in the Gulf of Mexico contributed to the increase in gross margins for the three-month period ended September 30, 2003 as compared to the corresponding period of the prior year, reversing the trend that existed for the first half of the year. The margins in the nine-month period ended September 30, 2003 were favorably impacted by reductions in cost estimates totaling $1.9 million. We adjusted the cost estimates due to the favorable completion of an installation project and the settlement of a personal injury claim. Additionally, gross margin for the nine months ended September 30, 2003 decreased from the gross margin for the nine months ended September 30, 2002, which included a contribution from a significant engineering and specialized diving contract. We anticipate that this segment’s results in the fourth quarter of 2003 will be lower than those of the third quarter of 2003, as a result of seasonality and the scheduled drydocking of one of our Ocean Intervention-class vessels.
Our Mobile Offshore Production Systems gross margins were lower than those in the corresponding periods of 2002. During the second quarter of 2002, our customer exercised its option to extend the Ocean Legendcontract for an additional two years. As a result, our revenue and margin on this contract decreased by approximately $19,000 per day from mid-May 2002.
Our Inspection revenues and gross margins increased substantially as compared to the corresponding periods of 2002 as a result of our acquisition of OIS International Inspection plc in January 2003. Gross margin percentage increased in the third quarter of 2003 as we continue to improve the efficiencies of the combined organizations. We anticipate a seasonal decline in this segment’s results in the fourth quarter of 2003 from the levels of the quarter ended September 30, 2003.
Revenue and gross margin information is as follows:
Advanced Technologies revenues and margins increased in the nine months ended September 30, 2003 as compared to the corresponding period of 2002 from improved revenues and margins in our entertainment, marine services and space divisions, partially offset by lower levels of activities from our telecommunications cable ROV services. We anticipate quarterly results for the fourth quarter of 2003 to be slightly lower than the average of the first three quarters.
Our unallocated expenses are those not associated with a specific business segment. These consist of expenses related to our incentive and deferred compensation plans, including restricted stock and bonuses, as well as general expenses. Our unallocated expenses were $4.7 million, $3.2 million and $4.7 million for the three months ended September 30, 2003, September 30, 2002 and June 30, 2003, respectively. Our unallocated expenses were $13.1 million and $12.6 million for the nine months ended September 30, 2003 and 2002, respectively. The compensation plan expenses increased in the 2003 periods as compared to the corresponding periods of 2002 as a result of increased restricted stock expense, which was attributable to the implementation of our 2002 restricted stock plan in September 2002.
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Selling, general and administrative expenses increased 14% and 16% in the three- and nine-month periods ended September 30, 2003 over the corresponding periods in 2002 due to the additional expenses relating to OIS International Inspection plc, which we acquired in January 2003.
Our equity in the losses of our telecommunications joint venture was $231,000 and $810,000 for the three- and nine-month periods ended September 30, 2003, compared to $687,000 and $724,000 for the three- and nine-month periods ended September 30, 2002. Due to the current condition of the telecommunications market, this venture is currently inactive and the single vessel used in the venture is being marketed for oilfield and other uses.
During the third quarter of 2003, we terminated the interest rate hedge we had associated with a term loan that we repaid early. This resulted in a slight increase in interest expense as compared to the third quarter of 2002, despite a slightly lower debt level. Interest expense for the nine-month period ended September 30, 2003 decreased compared to the corresponding period in the prior year due to lower debt levels. Our debt had been incurred to fund the acquisition of additional equipment, including the Ocean Legend, and the expansion of our Subsea Products production capacity. We did not capitalize any interest during the three- or nine-month periods ended September 30, 2003 or September 30, 2002.
The provisions for income taxes were related to U.S. income taxes that we provided at estimated annual effective rates using assumptions as to earnings and other factors that would affect the tax calculation for the remainder of the year and to the operations of foreign branches and subsidiaries that were subject to local income and withholding taxes. We anticipate our effective tax rate for 2003 to be 35%. For the nine months ended September 30, 2002, our anticipated effective annual tax rate for 2002 was 29%. The lower rate was attained because we favorably resolved certain foreign tax positions related to operations we sold in 2000 and we were able to realize foreign tax credits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are currently exposed to certain market risks arising from transactions we have entered into in the normal course of business. These risks relate to interest rate changes and fluctuations in foreign exchange rates. We do not believe these risks are material. We have not entered into any market risk-sensitive instruments for trading purposes. We manage our exposure to interest rate changes through the use of a combination of fixed and floating rate debt. See note 3 of notes to the consolidated financial statements contained in this report and note 4 of notes to consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2002 for a description of our long-term debt agreements, interest rates and maturities. We believe that significant interest rate changes will not have a material near-term impact on our future earnings or cash flows. Because we operate in various oil and gas exploration and production regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar. The functional currency for many of our international operations is the applicable local currency. We manage our exposure to changes in foreign exchange rates primarily through arranging compensation in U.S. dollars or freely convertible currency and, to the extent possible, by limiting compensation received in other currencies to amounts necessary to meet obligations denominated in those currencies. We use the exchange rates in effect as of the balance sheet date to translate assets and liabilities as to which the functional currency is the local currency, resulting in translation adjustments that we reflect as accumulated other comprehensive income or loss in the shareholders’ equity section of our consolidated balance sheets. We recorded a $3.4 million adjustment to our equity accounts for the nine-month period ended September 30, 2003 to reflect the net impact of the weakening of the U.S. dollar against various foreign currencies for locations where the functional currency is not the U.S. dollar.
Our Subsea Products business in Brazil conducts much of its operations in U.S. dollars, which is its functional currency. We recorded $1.9 million of foreign currency losses in our consolidated statement of income for 2002 related to our operations in Brazil. Foreign currency losses were $25,000 and $1,310,000 for the three-month periods ended September 30, 2003 and 2002, respectively, and $545,000 and $1,982,000 for the nine-month periods ended September 30, 2003 and 2002, respectively.
Item 4. Controls and Procedures.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2003 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
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There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
ReportDate
*3.01
*3.02
31.01
31.02
32.01
32.02
Date
Description
August 12, 2003
September 4, 2003
September 16, 2003
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: November 13, 2003
By:
/s/ JOHN R. HUFF
John R. Huff
Chairman and Chief Executive Officer
/s/ MARVIN J. MIGURA
Marvin J. Migura
Senior Vice President and Chief Financial Officer
/s/ JOHN L. ZACHARY
John L. Zachary
Controller and Chief Accounting Officer
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Index to Exhibits
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