Summary of Results (in thousands, except per share amounts) Three Months Ended Mar. 31, Dec. 31, 2004 2003 2003 Revenue $166,628 $140,669 $162,065 Gross Margin $ 25,634 $ 24,163 $ 28,023 Operating Income $ 8,957 $ 11,457 $ 11,747 Net Income $ 4,830 $ 6,035 $ 6,142 Diluted Earnings Per Share $ 0.19 $ 0.25 $ 0.25 Weighted Average Number of Diluted Shares 25,378 24,500 24,539
Quarterly net income declined both year-over-year and sequentially, primarily as a result of the $1.8 million pre-tax non-recurring terminated transaction costs included in general and administrative expenses.
John Huff, Chairman and Chief Executive Officer, stated, "Results for the first quarter exceeded our expectations as we achieved higher than anticipated results from our ROV and Subsea Products business operations.
"The highlight of the quarter was consummation of the Stolt ROV drill support fleet acquisition in mid-February. The acquisition enabled us to report higher than anticipated financial results from our ROV business and is expected to have a considerable positive impact on our ROV operating results for the entire year. The acquired ROVs increased our work class fleet size from 125 to 159 vehicles, or by 27%. We now estimate we own 36% of the industry's work class ROV fleet. The acquisition increased our international market presence and has leveraged us to an anticipated future recovery in the floating drilling rig demand.
"Subsea Products had a better than expected quarter on the strength of higher sales and profit performance by our Oceaneering Intervention Engineering group, particularly for pipeline repair and production controls related hardware. At the end of March, our products backlog was $41.0 million. We believe we are on track to achieve a major profit improvement by these operations for the year. Our new steel tube cabling machine is now operational in Brazil and we are on schedule to have our Panama City, FL umbilical facility operational in the fourth quarter.
"Our investment in the Medusa Spar, finalized in late December 2003, added a new dimension to our mobile offshore production business. Financial results from this operation are reported as equity income from unconsolidated affiliates, which during the quarter contributed $1.1 million. The third Medusa well commenced production in mid-March and three more are scheduled to be producing by the end of the third quarter of this year. Consequently we expect the quarterly profit contribution from this operation to increase over the next two quarters.
"We believe our balance sheet is in great shape and we have considerable financial wherewithal. At the end of the quarter, our debt to capitalization was 29% and we had $200 million of our revolving credit facility available for use to continue to grow our earnings power. We remain committed to use our financial strength to make accretive investments that will expand and augment our existing operations.
"Looking forward, our 2004 EPS outlook remains at approximately $1.60. This is predicated on a continued increase in Subsea Products profit from acquisitions made in 2003 and additional umbilical sales, an improvement in profit contribution from ROVs as a result of the Stolt acquisition, and the expected earnings contribution from our Medusa Spar investment. For the second quarter, we estimate EPS of $0.40 to $0.45 as a result of sequential quarterly profit increases by each of our oilfield segments. We expect earnings in the second half of 2004 to show substantial improvement over the first half.
"Our preliminary earnings assessment for 2005 is to achieve additional EPS growth of 25%, to approximately $2.00 per share, exclusive of the effects of any future acquisitions. This is based on our expectations of improving market demand for our services and products, driven by increased subsea completion activity and floating drilling rig use."
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