The company's management information system treats each vessel as a profit center. For ease of understanding 1998 financial results, the accompanying chart groups CDI revenues into services provided by the DP fleet, traditional subsea services on the OCS and salvage services (with the latter combining derrick barge and ERT operations).
Revenues of just under $152 million represent a $42.5 million increase over 1997. The entire variance came from the DP fleet as our three core vessels (the Uncle John, Witch Queen and Balmoral Sea) increased their revenue contribution by $26 million. In addition, the two new vessels (Sea Sorceress and Merlin) contributed $10 million of the increase. The balance of $8 million was added as a result of chartering two Coflexip vessels, the Marianos during the first quarter and the Constructor in the second. The more technically advanced features of the DP fleet resulted in our functioning as the prime contractor on an increasing proportion of work for oil company customers; i.e., Chevron, Shell, Amerada Hess and Sonat represented four of our top five customers in 1998. A year ago 26% of consolidated revenues came in support of just two pipelay companies, J. Ray McDermott and Allseas. Revenues of the DSVs that operate on the OCS increased 12% to a record $40 million as we worked on a number of pipelines tying new Deepwater production into the Shelf infrastructure. ERT revenues decreased by almost $4 million as the average gas price declined by 18% on just under 5 bcf of equivalent production.
Gross profit margins climbed almost two points to an all-time high of 32.4%. The company reports gross profit on a fully absorbed basis; i.e., after depreciation of the vessels, amortization of oil and gas properties, offshore insurance premiums, and the cost of the operations support base.
CDI is a performance driven company and we are particularly proud of the focus and execution of project management and offshore personnel reflected in the 1998 financial results. The record level of gross profit was achieved even though ERT margins declined by over 20 points given lower natural gas prices. The 1998 performance of our three core DP vessels was so outstanding that we recovered their total capital investment in just over two years. Gross profit generated by assets which work on the OCS increased 28% as offshore performance was exceptional and shortages of experienced divers led to strong demand and rates. The cost of the Morgan City operations base remained constant at 5% of revenues even though we moved to a much larger facility and began implementing a new supply chain management system that should produce operating efficiencies in 1999 and beyond.
Selling, general and administrative (SG&A) expenses increased by $4.6 million, or 41% with roughly half the increase due to higher levels of incentive compensation. Employees earned cash bonuses of approximately $4 million as 1998 gross profit and earnings per share targets were exceeded by 29% and 22%, respectively. In both years SG&A remained constant at 10% of revenues.
Aquatica, Inc. had an outstanding year with roughly 55 dive teams and two DSVs as customers responded favorably to a "hands on" style unique in today's offshore industry. Margins were strong and in fact better than expected as the previously dominant competitor basically exited the market.
Invested excess cash balances produced net interest income of $1.1 million in contrast to $200,000 of interest expense in the prior year.
While taxes are provided at the 35% statutory rate, $4.5 million of the $13 million provision for federal taxes was not paid out in cash during 1998 due to timing differences and the company's research and development efforts.
Net income of $24.1 million increased 67% over prior year and was almost three times the $8.4 million earned just two years ago in 1996. We take pride being part of a technology-driven, asset intensive business delivering net income which is 16% of revenues. Diluted earnings per share were $1.61 in contrast to $1.09 in 1997 with the variation between years effected by the new shares issued in the July 1997 IPO. Shareholder equity stood at $114 million at December 31, 1998, in contrast to $22 million at the end of 1995, the year our Deepwater strategy was put in place.
Net cash provided by operating activities of $35.7 million fully funded $15 million of capital expenditures and the $5 million investment in Aquatica, taking working capital to a record $46 million at year-end. A key component of the improved cash generation was a $1 million decline in accounts receivable at year-end 1998 even though revenues grew 39% over the prior year as we did a better job of invoicing and collection. Cash provided by operating activities has been such that the company has not had to borrow money since the July 1997 IPO.
Cash balances on hand and funds generated from operating activities should enable the company to meet planned 1999 capital expenditures without drawing on the revolving credit facility. Half of the cost of the new Q4000 is expected to be shared by an equity partner with most of the funding required coming in the years 2000 and 2001. We have purchased the thrusters and completed engineering for the conversion of the Sea Sorceress to full DP; however, this $30 to $35 million capital expenditure will not be undertaken until commodity prices and market conditions improve.
The severe decline in commodity prices resulted in the utilization of offshore mobile rigs dropping to approximately 70% in the second half of 1998 and into the low 60% range early in 1999. This compares to almost full utilization in the two years through June 1998. Should this period of low oil and gas prices and rig utilization persist, marine construction activities in 1999 could be significantly lower than recent years and the company's operating results could suffer accordingly.
Previous | Return to Annual Report Main page | Next
