Attached files
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EX-31.2 - EX-31.2 - GULFMARK OFFSHORE INC | h77056exv31w2.htm |
EX-32.2 - EX-32.2 - GULFMARK OFFSHORE INC | h77056exv32w2.htm |
EX-10.2 - EX-10.2 - GULFMARK OFFSHORE INC | h77056exv10w2.htm |
EX-32.1 - EX-32.1 - GULFMARK OFFSHORE INC | h77056exv32w1.htm |
EX-31.1 - EX-31.1 - GULFMARK OFFSHORE INC | h77056exv31w1.htm |
EX-10.1 - EX-10.1 - GULFMARK OFFSHORE INC | h77056exv10w1.htm |
EX-10.3 - EX-10.3 - GULFMARK OFFSHORE INC | h77056exv10w3.htm |
EXCEL - IDEA: XBRL DOCUMENT - GULFMARK OFFSHORE INC | Financial_Report.xls |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2010
GULFMARK OFFSHORE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
(State or other jurisdiction of incorporation)
001-33607
(Commission file number)
(Commission file number)
76-0526032
(I.R.S. Employer Identification No.)
(I.R.S. Employer Identification No.)
10111 Richmond Avenue, Suite 340, Houston, Texas | 77042 | |||
(Address of principal executive offices) | (Zip Code) |
(713) 963-9522
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 ý NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
YES ý NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check One):
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
YES o NO ý
Number of shares of Class A Common Stock, $0.01 par value,
outstanding as of October 26, 2010:
26,197,329
(Exhibit Index Located on Page 28)
GulfMark Offshore, Inc.
Index
Index
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(In thousands, except par value amount) | ||||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 87,941 | $ | 92,079 | ||||
Trade accounts receivable, net of allowance for doubtful accounts of $516 in
2010 and $334 in 2009 |
80,604 | 76,554 | ||||||
Other accounts receivable |
7,590 | 4,235 | ||||||
Prepaid expenses and other |
16,557 | 12,206 | ||||||
Total current assets |
192,692 | 185,074 | ||||||
Vessels and equipment at cost, net of accumulated depreciation of $268,908 in
2010 and $239,518 in 2009 |
1,202,595 | 1,164,067 | ||||||
Construction in progress |
3,422 | 40,349 | ||||||
Goodwill |
31,691 | 129,849 | ||||||
Fair value hedges |
- | 6,886 | ||||||
Intangibles, net of accumulated amortization of $6,487 in 2010 and $4,325 in 2009 |
28,111 | 30,273 | ||||||
Deferred costs and other assets |
16,077 | 9,161 | ||||||
Total assets |
$ | 1,474,588 | $ | 1,565,659 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 33,333 | $ | 33,333 | ||||
Accounts payable |
20,190 | 19,519 | ||||||
Income taxes payable |
4,948 | 4,815 | ||||||
Accrued personnel costs |
22,392 | 26,312 | ||||||
Accrued interest expense |
2,662 | 5,966 | ||||||
Other accrued liabilities |
10,871 | 7,088 | ||||||
Total current liabilities |
94,396 | 97,033 | ||||||
Long-term debt |
311,412 | 326,361 | ||||||
Long-term income taxes: |
||||||||
Deferred tax liabilities |
107,036 | 112,960 | ||||||
Other income taxes payable |
18,606 | 24,029 | ||||||
Fair value hedges |
- | 6,886 | ||||||
Cash flow hedges |
7,942 | 6,422 | ||||||
Other liabilities |
7,613 | 4,500 | ||||||
Stockholders equity: |
||||||||
Preferred stock, no par value; 2,000 authorized; no shares issued |
- | - | ||||||
Class A Common stock, $0.01 par value; 60,000 shares authorized; 26,215 and
25,906 shares issued and 25,959 and 25,697 shares outstanding, respectively;
Class B Common Stock $.01 par value; 60,000 shares authorized; no shares
issued |
258 | 255 | ||||||
Additional paid-in capital |
367,933 | 362,022 | ||||||
Retained earnings |
521,232 | 571,213 | ||||||
Accumulated other comprehensive income |
38,511 | 54,005 | ||||||
Treasury stock |
(7,202 | ) | (5,865 | ) | ||||
Deferred compensation expense |
6,851 | 5,838 | ||||||
Total stockholders equity |
927,583 | 987,468 | ||||||
Total liabilities and stockholders equity |
$ | 1,474,588 | $ | 1,565,659 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
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GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands except per share amounts) | ||||||||||||||||
Revenue |
$ | 94,479 | $ | 90,764 | $ | 271,912 | $ | 304,215 | ||||||||
Costs and expenses: |
||||||||||||||||
Direct operating expenses |
41,729 | 39,508 | 127,456 | 119,122 | ||||||||||||
Drydock expense |
7,242 | 6,398 | 20,365 | 11,278 | ||||||||||||
General and administrative expenses |
10,236 | 11,556 | 33,423 | 33,661 | ||||||||||||
Depreciation and amortization |
14,492 | 13,533 | 42,444 | 39,049 | ||||||||||||
(Gain) loss on sale and involuntary disposal of assets |
(5,201 | ) | 4 | (5,095 | ) | (5,497 | ) | |||||||||
Impairment charge |
- | - | 97,665 | 46,247 | ||||||||||||
Total costs and expenses |
68,498 | 70,999 | 316,258 | 243,860 | ||||||||||||
Operating income (loss) |
25,981 | 19,765 | (44,346 | ) | 60,355 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(5,807 | ) | (5,146 | ) | (15,858 | ) | (15,229 | ) | ||||||||
Interest income |
597 | 128 | 739 | 264 | ||||||||||||
Foreign currency gain (loss) and other |
(603 | ) | 532 | 158 | (884 | ) | ||||||||||
Total other expense |
(5,813 | ) | (4,486 | ) | (14,961 | ) | (15,849 | ) | ||||||||
Income (loss) before income taxes |
20,168 | 15,279 | (59,307 | ) | 44,506 | |||||||||||
Income tax (provision) benefit |
(961 | ) | (2,577 | ) | 9,326 | 17,340 | ||||||||||
Net income (loss) |
$ | 19,207 | $ | 12,702 | $ | (49,981 | ) | $ | 61,846 | |||||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | 0.75 | $ | 0.50 | $ | (1.96 | ) | $ | 2.46 | |||||||
Diluted |
$ | 0.75 | $ | 0.50 | $ | (1.96 | ) | $ | 2.44 | |||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
25,599 | 25,235 | 25,512 | 25,116 | ||||||||||||
Diluted |
25,737 | 25,485 | 25,512 | 25,343 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the Nine Months Ended September 30, 2010
Accumulated | Deferred | |||||||||||||||||||||||||||||||
Additional | Other | Compen- | Total | |||||||||||||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | sation | Stockholders | |||||||||||||||||||||||||||
Stock | Capital | Earnings | Income/(Loss) | Treasury Stock | Expense | Equity | ||||||||||||||||||||||||||
Share | ||||||||||||||||||||||||||||||||
Shares | Value | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 255 | $ | 362,022 | $ | 571,213 | $ | 54,005 | (209 | ) | $ | (5,865 | ) | $ | 5,838 | $ | 987,468 | |||||||||||||||
Net loss |
(49,981 | ) | (49,981 | ) | ||||||||||||||||||||||||||||
Issuance of common stock |
2 | 6,051 | 6,053 | |||||||||||||||||||||||||||||
Exercise of stock options |
1 | 1,068 | 1,069 | |||||||||||||||||||||||||||||
Deferred compensation plan |
(1,208 | ) | (47 | ) | (1,337 | ) | 1,013 | (1,532 | ) | |||||||||||||||||||||||
Unrealized loss on cash flow hedges |
(1,347 | ) | (1,347 | ) | ||||||||||||||||||||||||||||
Translation adjustment |
(14,147 | ) | (14,147 | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2010 |
$ | 258 | $ | 367,933 | $ | 521,232 | $ | 38,511 | (256 | ) | $ | (7,202 | ) | $ | 6,851 | $ | 927,583 | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
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GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (49,981 | ) | $ | 61,846 | |||
Adjustments to reconcile net income (loss) from operations to
net cash provided by operating activities: |
||||||||
Depreciation and amortization |
42,444 | 39,049 | ||||||
Gain on sale of assets |
(5,095 | ) | (5,497 | ) | ||||
Impairment charge |
97,665 | 46,247 | ||||||
Amortization of stock based compensation |
4,275 | 5,873 | ||||||
Amortization of deferred financing costs on debt |
1,199 | 528 | ||||||
Provision for doubtful accounts receivable, net of write-offs |
174 | 542 | ||||||
Deferred income tax benefit |
(4,363 | ) | (22,245 | ) | ||||
Foreign currency transaction (gain) loss |
(151 | ) | 1,361 | |||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
(7,799 | ) | 20,230 | |||||
Prepaids and other |
(2,765 | ) | (5,760 | ) | ||||
Accounts payable |
882 | 3,110 | ||||||
Accrued liabilities and other |
(19,125 | ) | (6,612 | ) | ||||
Net cash provided by operating activities |
57,360 | 138,672 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of vessels and equipment |
(65,452 | ) | (40,411 | ) | ||||
Proceeds from disposition of vessels and equipment |
19,582 | 8,893 | ||||||
Net cash used in investing activities |
(45,870 | ) | (31,518 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from debt |
51,000 | - | ||||||
Repayments of debt |
(66,000 | ) | (18,477 | ) | ||||
Debt refinancing cost |
(2,000 | ) | - | |||||
Proceeds from exercise of stock options |
1,069 | 694 | ||||||
Proceeds from issuance of stock |
537 | 588 | ||||||
Net cash used in financing activities |
(15,394 | ) | (17,195 | ) | ||||
Effect of exchange rate changes on cash |
(234 | ) | 7,383 | |||||
Net increase (decrease) in cash and cash equivalents |
(4,138 | ) | 97,342 | |||||
Cash and cash equivalents at beginning of the period |
92,079 | 100,761 | ||||||
Cash and cash equivalents at end of the period |
$ | 87,941 | $ | 198,103 | ||||
Supplemental cash flow information: |
||||||||
Interest paid, net of interest capitalized |
$ | 15,909 | $ | 18,032 | ||||
Income taxes paid, net |
$ | 4,001 | $ | 2,595 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Table of Contents
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
STATEMENTS
(1) GENERAL INFORMATION
The condensed consolidated financial statements of GulfMark Offshore, Inc. and its
subsidiaries included herein have been prepared by us without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission, or SEC. Unless otherwise
indicated, references to we, us, our and the Company refer collectively to GulfMark
Offshore, Inc., its subsidiaries and its predecessors. Certain information relating to our
organization and footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles, or U.S. GAAP, has been condensed or
omitted in this Form 10-Q pursuant to such rules and regulations. However, we believe that the
disclosures herein are adequate to make the information presented not misleading. The consolidated
balance sheet as of December 31, 2009, has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. It is recommended that these financial statements be read in
conjunction with our consolidated financial statements and notes thereto included in our
Form 10-K for the year ended December 31, 2009.
In the opinion of management, all adjustments, which include reclassification and normal
recurring adjustments necessary to present fairly the condensed consolidated financial statements
for the periods indicated have been made. All significant intercompany accounts have been
eliminated. Certain reclassifications of previously reported information may be made to conform
with current year presentation.
We provide offshore marine support and transportation services primarily to companies involved
in the offshore exploration and production of oil and natural gas. Our vessels transport materials,
supplies and personnel to offshore facilities, as well as move and position drilling structures.
The majority of our operations are conducted in the North Sea, offshore Southeast Asia and the
Americas. We also contract vessels into other regions to meet our customers requirements.
Basic Earnings Per Share, or EPS, is computed by dividing net income (loss) by the weighted
average number of shares of Class A Common Stock outstanding during the period. Diluted EPS is
computed using the treasury stock method for Class A Common Stock equivalents. The details of our
EPS calculation are as follows (in thousands, except per share amounts):
7
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Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||||||||||
Per Share | Per Share | |||||||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
Earnings per share, basic |
$ | 19,207 | 25,599 | $ | 0.75 | $ | 12,702 | 25,235 | $ | 0.50 | ||||||||||||||
Dilutive effect of common
stock options and unvested
restricted stock |
- | 138 | - | - | 250 | - | ||||||||||||||||||
Earnings per share, diluted |
$ | 19,207 | 25,737 | $ | 0.75 | $ | 12,702 | 25,485 | $ | 0.50 | ||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||||||||||
Per Share | Per Share | |||||||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
Earnings (loss)per share, basic |
$ | (49,981 | ) | 25,512 | $ | (1.96 | ) | $ | 61,846 | 25,116 | $ | 2.46 | ||||||||||||
Dilutive effect of common stock
options and unvested restricted
stock |
- | - | - | - | 227 | (0.02 | ) | |||||||||||||||||
Earnings (loss) per share, diluted |
$ | (49,981 | ) | 25,512 | $ | (1.96 | ) | $ | 61,846 | 25,343 | $ | 2.44 | ||||||||||||
(2) COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of related tax, are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net income (loss) |
$ | 19,207 | $ | 12,702 | $ | (49,981 | ) | $ | 61,846 | |||||||
Comprehensive income: |
||||||||||||||||
Unrealized gain (loss) on cash flow hedge |
(329 | ) | (158 | ) | (1,347 | ) | 1,848 | |||||||||
Foreign currency translation |
35,147 | 10,523 | (14,147 | ) | 64,434 | |||||||||||
Total comprehensive income (loss) |
$ | 54,025 | $ | 23,067 | $ | (65,475 | ) | $ | 128,128 | |||||||
Our accumulated other comprehensive income (loss) item relates primarily to our
cumulative foreign currency translation adjustments, and adjustments related to the cash flow
hedge.
(3) IMPAIRMENT CHARGE
Goodwill
At September 30, 2010, our goodwill consists of $31.7 million related to acquisitions in the
North Sea region. The determination of impairment of all long-lived assets, goodwill, and
intangibles is conducted when indicators of impairment are present and at least annually for
goodwill. Impairment testing for goodwill is performed on a reporting segment basis.
In the second quarter of 2010, we assessed our Americas region goodwill, which totaled $97.7
million prior to June 30, 2010, for impairment. In our assessment, we evaluated the impact
8
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on the segments fair value due to the recent events in the U.S. Gulf of Mexico relating to the
April 20, 2010 explosion and fire on a deepwater drilling rig, the resulting oil spill and the U.S.
Department of Interior moratorium on deepwater drilling. This moratorium was lifted on October 12,
2010, subject to new standards, requirements and regulations for offshore drilling. The
ramifications of the events in the Gulf of Mexico were not considered in our first quarter analysis
and disclosure, but were considered to have a material effect in our second quarter analysis.
Based on the factors discussed above, which were incorporated into our evaluations and testing
as prescribed under U.S. GAAP, we determined that an impairment of our Americas region goodwill
existed, and accordingly we recorded a $97.7 million impairment charge as of June 30, 2010,
reflecting all of our Americas region goodwill. The non-cash charge does not impact our liquidity
or debt covenant compliance.
Vessels Under Construction
In March 2009, we notified a shipyard building three of the vessels in our new build program
that they were in default under the construction contract. The default arose as a result of
non-performance under the terms of the contract caused by financial difficulties of the shipyard.
Construction on these vessels was stopped. We determined that we had a material impairment and
recognized a pre-tax charge of $46.2 million in the first quarter of 2009 pertaining to the
construction in progress related to this contract. That charge represented the full amount of our
investment in these vessels. The shipyard building the three vessels is in Chapter 11 bankruptcy
proceedings. We are pursuing our claims and remedies in the bankruptcy proceedings.
(4) FLEET EXPANSION AND RENEWAL PROGRAM
During 2010, we have taken delivery of three vessels that were under construction at December
31, 2009. As of October 27, 2010, we have one vessel that is being held for sale that is not
included in our fleet numbers and have no vessels under construction. In the second quarter of
2010, we sold one of our Americas vessels and recorded a $0.1 million loss. At the end of the third
quarter of 2010, we sold one of our North Sea vessels and recorded a $5.2 million gain. The
following table illustrates the details of the vessels added and disposed of since December 31,
2009.
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Year | Length | Month | ||||||||||||||||||||||||||
Vessel | Region | Type (1) | Built | (feet) | BHP (2) | DWT (3) | Delivered/Disposed | |||||||||||||||||||||
Vessel Additions Since December 31, 2009 | ||||||||||||||||||||||||||||
North Purpose |
N. Sea | PSV | 2010 | 284 | 10,600 | 4,850 | Feb-10 | |||||||||||||||||||||
Sea Valiant |
SEA | AHTS | 2010 | 230 | 10,000 | 2,150 | Jun-10 | |||||||||||||||||||||
Sea Victor |
SEA | AHTS | 2010 | 230 | 10,000 | 2,150 | Jul-10 | |||||||||||||||||||||
Vessel Disposals Since December 31, 2009 |
||||||||||||||||||||||||||||
Seapower |
Americas | SpV | 1974 | 222 | 7,040 | 1,205 | May-10 | |||||||||||||||||||||
North Traveller |
N. Sea | LgPSV | 1998 | 221 | 5,450 | 3,115 | Sep-10 |
1) | AHTS - Anchor handling, towing and supply vessel |
|
FSV - Fast supply vessel |
||
PSV - Platform supply vessel |
||
Lg PSV - Large platform supply vessel |
||
SpV - Specialty vessel, including towing and oil response |
||
SmAHTS - Small anchor handling, towing and supply vessel |
||
2) | BHP - Breakhorse power |
|
3) | DWT - Deadweight tons |
Interest is capitalized in connection with the construction of vessels. During the
three-month periods ended September 30, 2010 and 2009, $0.1 million and $0.7 million of interest,
respectively, was capitalized. During the nine month periods ended September 30, 2010 and 2009,
$1.4 million and $3.1 million, respectively, was capitalized.
(5) INCOME TAXES
We consider earnings of certain foreign subsidiaries to be permanently reinvested, and as
such, we have not provided for any U.S. federal or state income taxes on those earnings. Also, many
of our foreign subsidiaries are subject to foreign tax systems that provide significant tax
incentives to qualified shipping activities. These incentives result in statutory tax rates in
those foreign jurisdictions that are very low. Because of the significant difference in statutory
rates among the various taxing jurisdictions in which we operate, relatively small changes in
pre-tax profitability among those various jurisdictions can cause considerable variability in the
overall effective tax rate.
As previously disclosed, in February 2010 the Norwegian Supreme Court ruled unconstitutional
the 2007 legislation to begin taxing previously untaxed pre-2007 tonnage tax profits. This decision
was a change in tax law and, accordingly, we recorded a $15.0 million tax benefit, including a cash
refund of approximately $3.0 million, in our tax provision for the quarter ended March 31, 2010 to
reflect the elimination of this previously recorded income tax liability. As part of Norways
revised 2010 budget process, on June 25, 2010, new tax legislation regarding pre-2007 tonnage tax
profits was signed into law. Accordingly, in the second quarter of 2010 we recorded a $4.9 million
tax expense.
Our income tax provision for the first nine months of 2010 was a benefit of $9.3 million,
which includes the two special items noted above, and for the quarter ended September 30, 2010 was
an expense of $1.0 million. Before the two special items, our tax provision for the first nine
months of 2010 was an expense of $0.8 million. There were no special items in our tax provision for
the third quarter of 2010. Our low effective income tax rate for 2010 is the result of lower
profitability in the higher tax rate jurisdictions in which we operate.
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(6) COMMITMENTS & CONTINGENCIES
We have contingent liabilities and future claims for which we have made estimates of the
amount of the eventual cost to liquidate such liabilities or claims. These may involve threatened
or actual litigation where damages have not been specifically quantified, but we have made an
assessment of our exposure and recorded a provision in our accounts for the expected loss. Other
claims or liabilities, including those related to taxes in foreign jurisdictions or the
industry-wide, multi-employer, defined benefit pension fund, Merchant Officers Pension Fund in the
U.K., may be estimated based on our experience or estimated liabilities in these matters and, where
appropriate, the advice of outside counsel or other outside experts. Upon the ultimate resolution
of the uncertainties surrounding our estimates of contingent liabilities and future claims, our
future reported financial results would be impacted by the difference between our estimates and the
actual amounts paid to settle them. Our contingent liabilities are based on the most recent
information available to us regarding the nature of the exposure. In the recent past, our estimates
for contingent liabilities have been sufficient to cover the actual amount of our exposure.
(7) DERIVATIVE FINANCIAL INSTRUMENTS
Derivative instruments are accounted for at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use and designation of the derivative instrument. For
a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is
recognized in earnings in the period of change in fair value together with the offsetting gain or
loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective
portion of the derivatives gain or loss is initially reported as a component of Other
Comprehensive Income (OCI) and is subsequently recognized in earnings when the hedged exposure
affects earnings. The ineffective portion of the gain or loss is recognized in earnings. Gains and
losses from changes in fair values of derivatives that are not designated as hedges for accounting
purposes are recognized in earnings.
Using derivative instruments means assuming counterparty credit risk. Counterparty credit risk
relates to the loss we could incur if a counterparty were to default on a derivative contract. We
deal with investment grade counterparties and monitor the overall credit risk and exposure to
individual counterparties. We do not anticipate nonperformance by any counterparties. The amount of
counterparty credit exposure is the unrealized gains, if any, on such derivative contracts. We do
not require, nor do we post, collateral or security on such contracts.
Hedging Strategy
We are exposed to certain risks relating to our ongoing business operations. As a result, we
enter into derivative transactions to manage certain of these exposures that arise in the normal
course of business. The primary risks managed by using derivative instruments are foreign currency
exchange rate and interest rate risks. Fluctuations in these rates and prices can affect our
operating results and financial condition. We manage the exposure to these market risks through
operating and financing activities and through the use of derivative financial instruments. We do
not enter into derivative financial instruments for trading or speculative purposes.
We have periodically entered into forward foreign currency contracts that are designated as
fair value hedges and are highly effective, as the terms of the forward contracts are the same as
the purchase commitments under the related contract. Any gains or losses resulting from
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changes in fair value are recognized in earnings with an offsetting adjustment to income for
changes in the fair value of the hedged item such that there was no net impact in the consolidated
statements of operations. As of September 30, 2010, we have no open contracts.
We entered into an interest rate swap with the objective of reducing our exposure to interest
rate risk for $100.0 million of our $200.0 million Facility Agreement variable-rate debt. At
September 30, 2010, our interest rate derivative instruments have an outstanding notional amount of
$100.0 million and have been designated as cash flow hedges. The critical terms of this swap,
including reset dates and floating rate indices, match those of our underlying variable-rate debt
and no ineffectiveness has been recorded.
Early Hedge Settlement
During December 2009, we cash settled certain interest rate swaps prior to their scheduled
settlement dates. As a result of these transactions, we paid $6.4 million in cash, which
represented the fair value of these swaps at the date of settlement. Unrecognized losses of $2.3
million are recorded as of September 30, 2010 in accumulated OCI related to these interest rate
swaps. This balance will be amortized into interest expense through December 31, 2012 based on
forecasted payments as of the settlement date.
The following table quantifies the fair values, on a gross basis, of all our derivative
contracts and identifies the balance sheet location as of September 30, 2010 and December 31, 2009
(dollars in thousands):
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||||||||
September 30, 2010 | December 31, 2009 | September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||
Derivatives designed as hedging |
Balance Sheet | Balance Sheet | Balance Sheet | Balance Sheet | ||||||||||||||||||||||||||||
instruments |
Location | Fair Value | Location | Fair Value | Location | Fair Value | Location | Fair Value | ||||||||||||||||||||||||
Foreign exchange
contract |
Fair Value Hedges | $ | - | Fair Value Hedges | $ | 6,886 | Fair Value Hedges | $ | - | Fair Value Hedges | $ | 6,886 | ||||||||||||||||||||
Interest rate swaps |
- | - | Cash flow hedges | 7,942 | Cash flow hedges | 6,422 | ||||||||||||||||||||||||||
$ | - | $ | 6,886 | $ | 7,942 | $ | 13,308 | |||||||||||||||||||||||||
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The following tables quantify the amount of gain or loss recognized during the three and
nine months ended September 30, and identify the consolidated statements of operations location:
Location of Gain or Loss | Amount of Gain or Loss | |||||||||||
Derivatives in fair value | Recognized in Income on | Recognized in Income on | ||||||||||
hedging relationships | Derivative | Derivative | ||||||||||
2010 | 2009 | |||||||||||
(in thousands) | ||||||||||||
Foreign exchange contracts |
See note. | $ | - | $ | - |
Location of Gain or (Loss) | Amount of Gain or (Loss) | |||||||||||||||||||
Amount of Gain or (Loss) | Reclassified from | Reclassified from | ||||||||||||||||||
Derivatives in cash flow | Recognized in OCI on | Accumulated OCI into | Accumulated OCI into | |||||||||||||||||
hedging relationships | Derivative | Income | Income | |||||||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||
Interest rate swaps |
$ | (1,299 | ) | $ | (158 | ) | Interest expense | $ | (652 | ) | $ | (1,013 | ) | |||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||
Interest rate swaps |
$ | (4,501 | ) | $ | 1,848 | Interest expense | $ | (1,969 | ) | $ | (3,043 | ) |
(8) FAIR VALUE MEASUREMENTS
Each asset and liability required to be carried at fair value is classified under one of the
following criteria:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
Financial Instruments
At December 31, 2009, we maintained fair value hedges associated with firm contractual
commitments for future vessel payments denominated in a foreign currency. These forward contracts
were designated as fair value hedges and were highly effective, as the terms of the forward
contracts were the same as the purchase commitment under the new build contract. We recognized the
fair value of our derivative assets as a Level 2 valuation. We determined the fair value of our
financial instrument position based on the forward contract price and the foreign currency
exchange rate as of December 31, 2009. We took delivery of the new build vessel associated with
the contracts in the first quarter of 2010 and settled the contracts. At September 30, 2010, we
did not have any open fair value hedges.
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On December 17, 2009, we entered into a $200.0 million facility agreement. Concurrently, we
entered into an interest rate swap related to approximately $100.0 million of the Facility
Agreement indebtedness that has fixed the interest rate at 4.145%. The interest rate swap is
accounted for as cash flow hedge. We report changes in the fair value of the cash flow hedge in
accumulated OCI. The consolidated balance sheet contains the cash flow hedge within other long-term
liabilities, reflecting the fair value of the interest rate swap which was $7.9 million at
September 30, 2010. We expect to reclassify $3.3 million of deferred loss on the current interest
rate swap to interest expense during the next 12 months. We recognize the fair value of our
derivative swaps as a Level 2 valuation. We determined the fair value of our interest rate swap
based on the contractual fixed rate in the swap agreement and the forward curve of three month
LIBOR supplied by the bank as of September 30, 2010.
The following table presents information about our assets (liabilities) measured at fair value
on a recurring basis as of September 30, 2010, and indicates the fair value hierarchy we utilized
to determine such fair value (in millions).
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash Flow Hedges |
$ | - | $ | (7.9 | ) | $ | - | $ | (7.9 | ) | ||||||
(9) OPERATING SEGMENT INFORMATION
We operate three segments: the North Sea, Southeast Asia and the Americas, each of which is
considered a reportable segment under FASB ASC 280, Segment Reporting. Our management evaluates
segment performance primarily based on operating income. Cash and debt are managed centrally.
Because the regions do not manage those items, the gains and losses on foreign currency
remeasurements associated with these items are excluded from operating income. Our management
considers segment operating income to be a good indicator of each segments operating performance
from its continuing operations, as it represents the results of the ownership interest in
operations without regard to financing methods or capital structures. Each operating segments
operating income (loss) is summarized in the following table and detailed discussions below.
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Operating Income (Loss) by Operating Segment
Southeast | ||||||||||||||||||||
North Sea | Asia | Americas | Other | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Quarter Ended September 30, 2010 |
||||||||||||||||||||
Revenue |
$ | 38,340 | $ | 17,867 | $ | 38,272 | $ | - | $ | 94,479 | ||||||||||
Direct operating expenses |
19,105 | 3,204 | 19,420 | - | 41,729 | |||||||||||||||
Drydock expense |
3,614 | 488 | 3,140 | - | 7,242 | |||||||||||||||
General and administrative expenses |
2,485 | 633 | 1,533 | 5,585 | 10,236 | |||||||||||||||
Depreciation and amortization expense |
4,704 | 2,463 | 7,016 | 309 | 14,492 | |||||||||||||||
(Gain) loss on sale of assets |
(5,246 | ) | - | 45 | - | (5,201 | ) | |||||||||||||
Operating income (loss) |
$ | 13,678 | $ | 11,079 | $ | 7,118 | $ | (5,894 | ) | $ | 25,981 | |||||||||
Quarter Ended September 30, 2009 |
||||||||||||||||||||
Revenue |
$ | 40,722 | $ | 19,114 | $ | 30,928 | $ | - | $ | 90,764 | ||||||||||
Direct operating expenses |
19,150 | 2,469 | 17,889 | - | 39,508 | |||||||||||||||
Drydock expense |
2,833 | 1,040 | 2,525 | - | 6,398 | |||||||||||||||
General and administrative expenses |
2,822 | 520 | 2,296 | 5,918 | 11,556 | |||||||||||||||
Depreciation and amortization expense |
4,336 | 1,879 | 7,097 | 221 | 13,533 | |||||||||||||||
(Gain) loss on sale of assets |
3 | - | 1 | - | 4 | |||||||||||||||
Operating income (loss) |
$ | 11,578 | $ | 13,206 | $ | 1,120 | $ | (6,139 | ) | $ | 19,765 | |||||||||
Southeast | ||||||||||||||||||||
North Sea | Asia | Americas | Other | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Nine Months Ended September 30, 2010 |
||||||||||||||||||||
Revenue |
$ | 110,832 | $ | 50,535 | $ | 110,545 | $ | - | $ | 271,912 | ||||||||||
Direct operating expenses |
58,570 | 7,914 | 60,972 | - | 127,456 | |||||||||||||||
Drydock expense |
7,133 | 4,071 | 9,161 | - | 20,365 | |||||||||||||||
General and administrative expenses |
8,006 | 1,995 | 6,080 | 17,342 | 33,423 | |||||||||||||||
Depreciation and amortization expense |
13,988 | 6,464 | 21,228 | 764 | 42,444 | |||||||||||||||
(Gain) loss on sale of assets |
(5,246 | ) | - | 154 | (3 | ) | (5,095 | ) | ||||||||||||
Impairment charge |
- | - | 97,665 | - | 97,665 | |||||||||||||||
Operating income (loss) |
$ | 28,381 | $ | 30,091 | $ | (84,715 | ) | $ | (18,103 | ) | $ | (44,346 | ) | |||||||
Nine Months Ended September 30, 2009 |
||||||||||||||||||||
Revenue |
$ | 130,957 | $ | 56,300 | $ | 116,958 | $ | - | $ | 304,215 | ||||||||||
Direct operating expenses |
55,985 | 6,535 | 56,602 | - | 119,122 | |||||||||||||||
Drydock expense |
5,150 | 2,089 | 4,039 | - | 11,278 | |||||||||||||||
General and administrative expenses |
7,777 | 1,931 | 6,599 | 17,354 | 33,661 | |||||||||||||||
Depreciation and amortization expense |
12,557 | 5,141 | 20,745 | 606 | 39,049 | |||||||||||||||
(Gain) loss on sale of assets |
(4,055 | ) | (1,438 | ) | (4 | ) | - | (5,497 | ) | |||||||||||
Impairment charge |
- | - | 46,247 | - | 46,247 | |||||||||||||||
Operating income (loss) |
$ | 53,543 | $ | 42,042 | $ | (17,270 | ) | $ | (17,960 | ) | $ | 60,355 | ||||||||
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
We provide offshore marine support and transportation services primarily to companies involved
in the offshore exploration and production of oil and natural gas. Our vessels transport drilling
materials, supplies and personnel to offshore facilities, as well as move and position drilling
structures. The North Sea, offshore Southeast Asia, offshore West Africa, offshore Middle East,
offshore Brazil and the Gulf of Mexico are each major markets that employ a large number of
vessels. Vessel usage is also significant in other international markets, including offshore India,
offshore Australia, offshore Trinidad, the Persian Gulf and the Mediterranean Sea. The industry is
relatively fragmented, with more than 20 major participants and numerous small regional
competitors. We currently operate a fleet of 89 offshore support vessels in the following regions:
38 vessels in the North Sea, 15 vessels offshore Southeast Asia and 36 vessels in the Americas. We
have one vessel held for sale, which is not included in our fleet numbers. Our owned fleet is one
of the worlds youngest, largest and most geographically balanced, high specification offshore
support vessel fleets and our owned vessels (excluding specialty vessels) have an average age of
approximately seven years.
Our results of operations are directly impacted by the level of activity in worldwide offshore
oil and natural gas exploration, development and production. This activity is in turn influenced by
trends in oil and natural gas prices. Oil and natural gas prices are affected by a host of
geopolitical, regulatory and economic forces, including the fundamental principles of supply and
demand. Over the last few years commodity prices were at record highs, resulting in oil and natural
gas companies increasing exploration and development activities. However, as a result of the world
economic crisis, commodity prices declined and we experienced a reduction in the level of activity.
Although oil prices have recovered, natural gas prices remain lower and continue to affect our
activity levels.
On April 20, 2010, an explosion and fire on a deepwater U.S. Gulf of Mexico drilling rig
occurred that resulted in a U.S. Department of Interior moratorium on deepwater drilling on the
outer continental shelf. This moratorium was lifted on October 12, 2010, subject to new standards,
requirements and regulations for offshore drilling. The ramifications of these events had a
material impact on our outlook for the U.S. Gulf of Mexico operations and was a key factor in the
determination of our second quarter 2010 goodwill impairment.
The operations of our fleet may be subject to seasonal factors. Operations in the North Sea
are often at their highest levels from April to August, and at their lowest levels from November to
February. Operations in our other areas, although involving some seasonal factors, tend to remain
more consistent throughout the year. We have historically, to the extent possible, accomplished the
majority of our drydocks, which are maintenance and repairs designed to ensure compliance with
applicable regulations and maintaining certifications for our vessels with various international
classification societies, during these seasonal decreases in demand in order to minimize downtime
during our traditionally peak demand periods. When a vessel is drydocked, we incur not only the
drydocking cost but also the loss of revenue from the vessel during the drydock period. The demands
of the market, the expiration of existing contracts, the start of new contracts and the
availability allowed by our customers influence the timing of drydocks throughout the year. During
the first nine months of 2010, we completed 525 drydock days, compared to 377 drydock days
completed in the same period last year.
We provide management services to other vessel owners for a fee, which is included in revenue.
Charter revenues and vessel expenses of these managed vessels are not included in our
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operating results. These vessels are excluded for purposes of calculating fleet rates per day
worked and utilization in the applicable periods.
Our operating costs are primarily a function of fleet configuration. The most significant
direct operating costs are wages paid to vessel crews, maintenance and repairs, and marine
insurance. Generally, fluctuations in vessel utilization have little effect on direct operating
costs in the short term. As a result, direct operating costs as a percentage of revenues may vary
substantially due to changes in day rates and utilization.
In addition to direct operating costs, we incur fixed charges related to the depreciation of
our fleet and costs for routine drydock inspections.
Critical Accounting Policies
There have been no changes to the critical accounting policies used in our reporting of
results of operations and financial position. For a discussion of our critical accounting policies
see Managements Discussion and Analysis of Financial Condition and Results of Operations in our
Form 10-K for the year ended December 31, 2009.
Goodwill
At September 30, 2010, our goodwill consists of $31.7 million related to acquisitions in the
North Sea region. The determination of impairment of all long-lived assets, goodwill, and
intangibles is conducted when indicators of impairment are present and at least annually for
goodwill. Impairment testing for goodwill is performed on a reporting segment basis.
In the second quarter of 2010, we assessed our Americas region goodwill for impairment. In our assessment, we evaluated the impact on the
segments fair value due to the recent events in the U.S. Gulf of Mexico relating to the April 20,
2010 explosion and fire on a deepwater drilling rig, the resulting oil spill and the U.S.
Department of Interior moratorium on deepwater drilling. This moratorium was lifted on October 12,
2010, subject to new standards, requirements and regulations for offshore drilling. The
ramifications of the events in the Gulf of Mexico were not considered in our first quarter analysis
and disclosure, but were considered to have a material effect in our second quarter analysis.
Based on the factors discussed above, which were incorporated into our evaluations and testing
as prescribed under U.S. GAAP, we determined that an impairment of our Americas region goodwill
existed, and accordingly we recorded a $97.7 million impairment charge as of June 30, 2010,
reflecting all of our Americas region goodwill. The non-cash charge does not impact our liquidity
or debt covenant compliance.
Results of Operations
The table below sets forth, by region, the average day rates and utilization for our vessels
and the average number of vessels owned or chartered during the periods indicated. This fleet
generates substantially all of our revenues and operating profit. We use the information that
follows to evaluate the performance of our business.
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues by Region (000s) (a): |
||||||||||||||||
North Sea Based Fleet (c) |
$ | 38,340 | $ | 40,722 | $ | 110,832 | $ | 130,957 | ||||||||
Southeast Asia Based Fleet |
17,867 | 19,114 | 50,535 | 56,300 | ||||||||||||
Americas Based Fleet |
38,272 | 30,928 | 110,545 | 116,958 | ||||||||||||
Rates Per Day Worked (a) (b): |
||||||||||||||||
North Sea Based Fleet (c) |
$ | 17,637 | $ | 20,171 | $ | 16,965 | $ | 20,820 | ||||||||
Southeast Asia Based Fleet |
16,841 | 21,180 | 17,190 | 21,033 | ||||||||||||
Americas Based Fleet |
15,830 | 16,894 | 14,165 | 16,605 | ||||||||||||
Overall Utilization (a) (b): |
||||||||||||||||
North Sea Based Fleet |
91.6 | % | 90.5 | % | 93.5 | % | 89.3 | % | ||||||||
Southeast Asia Based Fleet |
85.2 | % | 85.8 | % | 87.0 | % | 88.9 | % | ||||||||
Americas Based Fleet |
76.0 | % | 57.3 | % | 82.5 | % | 76.2 | % | ||||||||
Average Owned/Chartered
Vessels (a) (d): |
||||||||||||||||
North Sea Based Fleet (c) |
25.7 | 24.0 | 25.1 | 25.0 | ||||||||||||
Southeast Asia Based Fleet |
13.9 | 11.7 | 12.7 | 11.3 | ||||||||||||
Americas Based Fleet |
35.0 | 35.8 | 35.4 | 34.6 | ||||||||||||
Total |
74.6 | 71.5 | 73.2 | 70.9 | ||||||||||||
(a) | Includes all owned or bareboat chartered vessels. |
|
(b) | Rate per day worked is defined as total charter revenues divided by number of days worked.
Utilization rate is defined as the total days worked divided by total days of availability in
the period. |
|
(c) | Revenues for vessels in the North Sea based fleet are primarily earned in Pound Sterling
(GBP), Norwegian Kroner (NOK) and Euros, and have been converted to U.S. Dollars (US$) at the
average exchange rate for the period. The average equivalent exchange rate per one US$ for the
periods indicated is as shown in Managements Discussion and Analysis of Financial Condition
and Results of Operations Currency Fluctuations and Inflation on page 22. |
|
(d) | Average number of vessels is calculated based on the aggregate number of vessel days
available during each period divided by the number of calendar days in such period. Includes
owned and bareboat vessels only, and is adjusted for vessel additions and dispositions
occurring during each period. |
Comparison of the Three Months Ended September 30, 2010 with the Three Months Ended September 30, 2009
For the quarter ended September 30, 2010, we had net income of $19.2 million, or $0.75 per
diluted share, on revenues of $94.5 million. For the same period in 2009, net income was $12.7
million, or $0.50 per diluted share on revenues of $90.8 million.
Our revenues for the quarter ended September 30, 2010, increased $3.7 million, or 4.1%,
compared to the third quarter of 2009. The increase in revenue was due mainly to higher capacity
and utilization offset by lower day rates. Revenue increased by $2.5 million as overall capacity
increased primarily as a result of the addition of two new builds in the North Sea and the full
quarter effect associated with the addition of a new build in Southeast Asia in 2009. In addition,
overall utilization increased from 73.1% in the third quarter of 2009 to 83.1% in the current year
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quarter positively affecting revenue by $6.2 million. These increases were offset by the
combination of the currency effect and the decrease in overall day rates from $19,077 in the third
quarter of 2009 to $16,710 in the current year quarter, which decreased revenue by $5.0 million.
Operating income increased by $6.2 million compared to the third quarter of 2009 due primarily
to the increase in revenue and the gain on sale of a vessel, offset by the increase in direct
operating costs due to the new vessel additions, and higher drydock expenses incurred on four Gulf
of Mexico vessels prior to relocating to Brazil.
North Sea
Revenues in the North Sea region decreased by $2.4 million, or 5.8%, to $38.3 million in the
third quarter of 2010. The combination of the strengthening of the U.S. Dollar and the decrease in
day rates from $20,171 in the third quarter of 2009 to $17,637 in the current year quarter,
contributed $4.4 million to the decrease in revenue. Although utilization increased from 90.5% in
the 2009 third quarter to 91.6% in the current year quarter, the overall mix of lower day rates and
utilization effect resulted in a decrease in revenue of $0.6 million. This was offset by increased
capacity from the addition of two new build vessels in late 2009 and early 2010, contributing $2.6
million to revenue compared to the prior year quarter. Operating income increased $2.1 million from
the prior year quarter due mainly to a $5.2 million gain on sale of a vessel at the end of the
third quarter, current year offset by higher drydock expense of $0.8 million.
Southeast Asia
Revenues for our Southeast Asia based fleet decreased by $1.2 million to $17.9 million in the
third quarter of 2010. The combination of currency effects and the decrease in day rates from
$21,180 in the third quarter of 2009 to $16,841 in the current year quarter contributed $3.8
million to the decrease in revenue. Utilization decreased slightly from 85.8% in the third quarter
of 2009 to 85.2% in the current year quarter due mainly to the new vessel additions that are
currently idle; however, revenue increased by $1.6 million as a result of the overall positive mix
of day rates and utilization. The increased capacity associated with the full quarter effect of the
addition of a new build vessel during the third quarter of 2009 also increased revenue by $1.0
million. Operating income was $11.1 million in the third quarter of 2010 compared to $13.2 million
in the same 2009 quarter. The decrease is due mainly to the decrease in revenue; in addition,
operating costs increased by $0.7 million and depreciation increased $0.6 million, primarily as a
result of two new build vessels added in 2010. Drydock costs decreased $0.6 million due to fewer
drydock days.
Americas
The Americas region revenues increased by $7.3 million, or 23.7%, to $38.3 million in the
third quarter of 2010. Utilization increased from 57.3% in the third quarter of 2009 to 76.0% in
the current year quarter; however, day rates decreased from $16,894 in the third quarter of 2009 to
$15,830 in the current year quarter. The mix of higher utilization with higher day rate vessels
increased revenue by $8.3 million. This was offset somewhat by the sale of a vessel earlier in
2009, which decreased capacity by $1.0 million. Operating income was $7.1 million in the third
quarter of 2010 compared to $1.1 million in the third quarter of 2009, an increase of $6.0 million.
The increase is due mainly to the increase in revenue offset by increased operating and drydock
expenses incurred on four Gulf of Mexico vessels prior to relocating to Brazil.
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Other
Other expenses in the third quarter of 2010 increased by $1.3 million compared to the prior
year quarter resulting primarily from the increase in foreign currency losses and an increase in
interest expense due to lower capitalized interest.
Tax Provision
Our tax provision for the third quarter of 2010 was $1.0 million, compared to $2.6 million in
the third quarter of 2009. The decrease resulted primarily from a lower effective tax rate in the
third quarter of 2010 based on the domestic tax impact of lower dividends recognized from our
foreign subsidiaries and reduced profits from our operations in higher tax jurisdictions.
Comparison of the Nine Months Ended September 30, 2010 with the Nine Months Ended September 30, 2009
For the nine months ended September 30, 2010, we had a net loss of $50.0 million, or $1.96 per
diluted share, on revenues of $271.9 million. During the same period in 2009, net income was $61.8
million, or $2.44 per diluted share, on revenues of $304.2 million. The 2010 net loss included a
$97.7 million goodwill impairment charge and the 2009 income was impacted by a $46.2 million
impairment charge related to a non-performance default on a construction contract.
Year-to-date revenues decreased 10.6% or $32.3 million year over year. Day rates decreased
from $18,961 in the nine months ended September 30, 2009, to $15,719 in the same period of 2010.
The combination of day rates and currency exchange rates resulted in a $46.2 million decrease in
revenue. Revenue was positively affected by the addition of one new build vessel delivered in 2010
and the full nine month effect of six new build vessels delivered during 2009. Two additional new
vessels were added to the fleet in 2010, but have not yet been chartered. The new build additions
were offset by the sale of one vessel in the second quarter of 2010 and one in the third quarter of
2010. These capacity changes resulted in a net increase in revenue of $12.8 million. Revenue also
benefited $1.1 million as utilization increased from 82.9% in the nine month period of 2009 to
87.0% in the same period of 2010.
Operating income, excluding the impairment charges of $97.7 million in 2010 and $46.2 million
in 2009, was $53.3 million in 2010 and $106.6 million in 2009. The decrease is primarily related to
the decrease in revenue coupled with increased direct operating cost, drydock and depreciation
expense resulting primarily from the new vessel additions.
North Sea
North Sea revenue decreased $20.1 million in 2010 compared to 2009. The effect of the
strengthening of the U.S. Dollar and the decrease in day rates from $20,820 in 2009 to $16,965 in
2010 contributed $24.2 million to the decrease in revenue. Capacity increased revenue by $4.7
million due primarily to the addition of two new build vessels in the first quarter of 2010.
Overall utilization increased from 89.3% in 2009 to 93.5% in the current year, but revenue
decreased $0.6 million as the utilization mix of vessels and with lower day rates was negative.
Operating income decreased by $25.2 million compared to 2009, resulting primarily from the decrease
in revenue coupled with the increase in operating, drydock and depreciation expenses from the new
vessel additions.
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Southeast Asia
Revenue for our Southeast Asia based fleet decreased by $5.8 million in the first nine months
of 2010 compared to the same 2009 period. Day rates decreased from $21,033 in 2009 to $17,190 in
2010, which negatively impacted revenue by $11.2 million. Capacity had a positive impact of $7.3
million on revenue as a result of the full period effect of two new build vessels added in 2009. In
addition, two new build vessels were added to the fleet in mid-2010, but have not yet been
chartered. Overall utilization decreased from 88.9% to 87.0%, representing $1.9 million in lower
revenue. Operating income decreased from $42.0 million in 2009 to $30.1 million in 2010 due to the
decrease in revenues and an increase in operating cost resulting from the new vessel additions, and
higher drydock expenses.
Americas
Our Americas region revenue decreased $6.4 million, from $117.0 million in 2009 to $110.5
million in 2010. Day rates decreased from $16,605 in 2009 to $14,165 in 2010, which negatively
impacted revenue by $10.8 million. Capacity had a positive impact of $0.8 million on revenue as a
result of the full period effect of three new build vessels added in 2009, offset by the sale of a
vessel in 2010. Overall utilization increased from 76.2% to 82.5%, resulting in $3.6 million of
higher revenue. Excluding the impairment charges in both years, operating income decreased $16.0
million from 2009 resulting from lower revenues and higher operating and drydock expenses. We
experienced 84 more drydock days in the first nine months of 2010 than in the same period of 2009,
due in part to the work performed on four Gulf of Mexico vessels prior to relocating to Brazil.
Other
In the nine months ended September 30, 2010, other expense totaled $15.0 million, a decrease
of $0.9 million from 2009. The decrease was due primarily to a net gain in foreign currency.
Tax Provision
Our tax provision for the nine months ended September 30, 2010, was a benefit of $9.3 million
compared to a benefit of $17.3 million in the same period in 2009. The difference is principally
due to the lower amounts of previously mentioned special or discrete tax items in 2010 compared to
2009. The remainder of the difference relates primarily to the domestic tax impact of lower
dividends in 2010 from our foreign subsidiaries.
Liquidity, Capital Resources and Financial Condition
Our ongoing liquidity requirements are generally associated with our need to service debt,
fund working capital, acquire or improve equipment and make other investments. Since inception, we
have been active in the acquisition of additional vessels through both the resale market and new
construction. Bank financing, equity capital and internally generated funds have historically
provided funding for these activities. Internally generated funds are directly related to fleet
activity and vessel day rates, which are generally dependent on the demand for our vessels which is
ultimately determined by the supply and demand of crude oil and natural gas.
Net working capital at September 30, 2010, was $98.3 million. Cash on hand at September 30,
2010, totaled $87.9 million. Net cash provided by operating activities was $18.0
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million for the three months ended September 30, 2010, cash provided by investing activities for
the same three months was $16.4 million, and cash provided by financing activities was $1.8
million. Total debt at September 30, 2010 was $344.7 million, and debt net of cash on hand was
$256.8 million. At September 30, 2010, we had $10.0 million drawn under our $175.0 million
revolving credit facility.
We anticipate that our current level of cash on hand, cash flows from operations and
availability under our credit facility will be adequate to repay our debts due and will provide
sufficient resources to finance our operating requirements. However, our ability to fund working
capital, capital expenditures and debt service in excess of cash on hand will be dependent on the
success of our operations. To the extent that existing sources are insufficient to meet those cash
requirements, we would seek other debt or equity financing; however, we can give no assurances that
such debt or equity financing would be available on acceptable terms.
Currency Fluctuations and Inflation
The majority of our operations are international; therefore we are exposed to currency
fluctuations and exchange rate risks. Charters for vessels in the North Sea fleet are primarily
denominated in Pound Sterling (GBP) with a portion denominated in Norwegian Kroner (NOK) and Euros.
In most cases and when possible our operating costs are denominated in the same currency as charter
hire in order to reduce the risk of currency fluctuations. For the periods indicated, the average
equivalent exchange rates per one U.S. Dollar (US$) were:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
1 US$= | 1 US$= | |||||||||||||||
GBP |
0.645 | 0.609 | 0.652 | 0.648 | ||||||||||||
NOK |
6.156 | 6.106 | 6.074 | 6.468 | ||||||||||||
Euro |
0.774 | 0.699 | 0.760 | 0.732 |
Reflected in the accompanying balance sheet as of September 30, 2010, is $42.4 million in
accumulated other comprehensive income that fluctuates based on differences in foreign currency
exchange rates as of each balance sheet date. Also included in accumulated other comprehensive
income is a loss of $3.9 million related to the cash flow hedges. Changes in other comprehensive
income are primarily non-cash items that are attributable to investments in vessels and dollar
based capitalization between our parent company and our foreign subsidiaries.
After evaluating the U.S. Dollar debt, we have determined that it is in our best interest not
to use any financial instruments to hedge the exposure of our revenue and costs of operations to
currency fluctuations under present conditions. Our decision is based on a number of factors,
including among others:
| the cost of using hedging instruments in relation to the risks of currency
fluctuations, |
||
| the propensity for adjustments in currency denominated vessel day rates over time to
compensate for changes in the purchasing power of the currency as measured in U.S.
Dollars, |
||
| the level of U.S. Dollar denominated borrowings available to us, and |
||
| the conditions in our U.S. Dollar generating regional markets. |
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One or more of these factors may change; in response, we may choose to use financial
instruments to hedge risks of currency fluctuations with regards to our revenue and costs of
operations. We periodically enter into forward currency contracts to specifically hedge the foreign
currency exposure related to firm contractual commitments in the form of future vessel payments.
These hedging relationships were formally documented at inception and the contracts have been and
continue to be highly effective. As a result, by design, there is an exact offset between the gain
or loss exposure in the related underlying contractual commitment. At December 31, 2009, we had
forward currency contracts on two vessels under construction. As of February 2010, we had taken
delivery of the new build vessels and had terminated the associated foreign currency contracts.
We also have an interest rate swap agreement for a portion of the Facility Agreement that has
fixed the interest rate at 4.145% on $100.0 million of the Facility. The interest rate swap is
accounted for as a cash flow hedge. We report changes in the fair value of the cash flow hedges in
accumulated other comprehensive income. The consolidated balance sheet also contains cash flow
hedges, in the liability section reflecting the fair value of the interest rate swaps, which was
$7.9 million at September 30, 2010. For the nine months ended September 30, 2010 a loss of $2.0
million has been reclassified from other comprehensive income to interest expense. We expect to
reclassify $3.3 million of deferred loss on the interest rate swaps to interest expense during the
next 12 months, based on current interest rates.
To date, general inflationary trends have not had a material effect on our operating revenues
or expenses.
Off-Balance Sheet Arrangements
We have evaluated our off-balance sheet arrangements, and have concluded that we do not have
any material relationships with unconsolidated entities or financial partnerships that have been
established for the purpose of facilitating off-balance sheet arrangements (as that term is defined
in Item 303(a)(4)(ii) of Regulations S-K). Based on this evaluation we believe that no disclosures
relating to off-balance sheet arrangements are required.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements and other statements that are not
historical facts concerning, among other things, market conditions, the demand for marine and
transportation support services and future capital expenditures. These statements are subject to
certain risks, uncertainties and assumptions, including, without limitation:
| operational risk, |
||
| catastrophic or adverse sea or weather conditions, |
||
| dependence on the oil and gas industry, |
||
| volatility in oil and natural gas prices, |
||
| delay or cost overruns on construction projects or insolvency of the shipbuilders, |
||
| lack of shipyard or equipment availability, |
||
| ongoing capital expenditure requirements, |
||
| uncertainties surrounding environmental and governmental laws and regulations, |
||
| uncertainties and risks relating to or caused by the April 2010 explosion and fire
on a deepwater U.S. Gulf of Mexico drilling rig, the resulting losses and the effects
of regulations associated with the lifting of the moratorium on deepwater drilling, |
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| risks relating to compliance with the Jones Act, |
||
| risks relating to leverage, |
||
| risks of foreign operations, |
||
| risk of war, sabotage, piracy or terrorism, |
||
| assumptions concerning competition, |
||
| risks of currency fluctuations, and |
||
| other matters. |
These statements are based on certain assumptions and analyses made by us in light of our
experience and perception of historical trends, current conditions, expected future developments
and other factors we believe are appropriate under the circumstances. Such statements are subject
to risks and uncertainties, including the risk factors discussed above and those discussed in our
Form 10-K for the year ended December 31, 2009, filed with the SEC, general economic and business
conditions, the business opportunities that may be presented to and pursued by us, changes in law
or regulations and other factors, many of which are beyond our control.
We cannot assure you that we have accurately identified and properly weighed all of the
factors that affect market conditions and demand for our vessels, that the information on which we
have relied is accurate or complete, that our analysis of the market and demand for our vessels is
correct, or that the strategy based on that analysis will be successful.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Sensitivity
Our financial instruments that are potentially sensitive to changes in interest rates include
our 7.75% Senior Notes. As of September 30, 2010, the fair value of these notes, based on quoted
market prices, was approximately $163.4 million compared to a carrying amount of $159.7 million.
Exchange Rate Sensitivity
We operate in a number of international areas and are involved in transactions denominated in
currencies other than U.S. Dollars, which exposes us to foreign currency exchange risk. At various
times we may utilize forward exchange contracts, local currency borrowings and the payment
structure of customer contracts to selectively hedge exposure to exchange rate fluctuations in
connection with monetary assets, liabilities and cash flows denominated in certain foreign
currency. We do not hold or issue forward exchange contracts or other derivative financial
instruments for speculative purposes.
Other information required under Part I, Item 3 is set forth in Managements Discussion and
Analysis of Financial Condition and Results of Operations and is incorporated herein.
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ITEM 4. | CONTROLS AND PROCEDURES |
(a) Evaluation of disclosure controls and procedures.
Based on their evaluation of our disclosure controls and procedures as of the end of the
period covered by this report, our Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures are effective for the period covered by the
report, ensuring that the information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms.
(b) Evaluation of internal controls and procedures.
As of December 31, 2009, our management determined that our internal controls over financial
reporting were effective. Our assessment of the effectiveness of our internal controls over
financial reporting as of December 31, 2009, has been audited by UHY LLP, an independent public
accounting firm, as stated in our Form 10-K for the year ended December 31, 2009 filed with the
SEC.
There were no changes in our internal controls over financial reporting that occurred during
the period covered by this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. | RISK FACTORS |
The following risk factor changed since the Company previously disclosed the risk factor in
Item 1A in the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed
with the Securities and Exchange Commission on July 29, 2010.
Recent Events in the U.S. Gulf of Mexico Have Adversely Impacted and Are Likely to Continue to
Adversely Impact Our Operations and Financial Condition.
On April 20, 2010, an explosion and fire on a deepwater U.S. Gulf of Mexico drilling rig
resulted in 11 deaths, multiple personal injuries, significant property damage and the release of
hydrocarbons that resulted in significant pollution and contamination. In May 2010, the U.S.
Department of Interior issued a memorandum imposing a temporary moratorium on deepwater drilling on
the outer continental shelf. This moratorium was lifted on October 12, 2010, subject, however, to
new standards, requirements and regulations that must be complied with before drilling can
commence. Additionally, the President has appointed a commission that is studying the causes of the
catastrophe for the purpose of recommending to the President what legislative or regulatory
measures should be taken in order to minimize the possibility of a recurrence of a disastrous oil
spill.
The catastrophe and moratorium have significantly and adversely disrupted oil and gas
exploration and development activities in the U.S. Gulf of Mexico. It remains uncertain what impact
the incident may have on the regulation of offshore oil and gas exploration and development
activity, the cost or availability of insurance coverage to cover the risks of such operations, or
what actions may be taken by our customers, governmental agencies, or other industry participants
in response to the incident. In addition, we cannot predict whether any
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possible changes in regulations would affect only deepwater drilling or all operations in the
U.S. Gulf of Mexico or would also affect drilling and operations in other regions around the world
in which we operate. At this time, various bills are being considered by Congress which, if
enacted, could either significantly increase the costs of conducting oil and gas drilling and
exploration activities in the U.S. Gulf of Mexico, or potentially drive a substantial portion of
drilling and operation activity out of the U.S. Gulf of Mexico. There is uncertainty as to whether
Congress will repeal the $75.0 million limitation for non-reclamation liability under the Oil
Pollution Act of 1990 and revise penalties for pollution liabilities, broaden liability under the
Jones Act and Death on the High Seas Act, and restrict certain rights to limit liability of a
vessel owner under the Limitations of Liability Act of 1851. Significant changes in these laws
could have a material adverse effect on our business.
The disruption in oil and gas exploration activities from the moratorium had a material
adverse impact on our U.S. Gulf of Mexico drilling support operations in the second and third
quarters of 2010; even with the lifting of the moratorium, we expect further adverse impact to
continue through the fourth quarter of 2010 and into 2011. Announced and anticipated changes in
laws and regulations regarding offshore oil and gas exploration and development activities, the
cost or availability of insurance, and decisions by customers, governmental agencies, or other
industry participants could further reduce demand for our services or increase our costs of
operations. This could further increase the adverse impact on our financial condition and operating
results, but we cannot reasonably or reliably estimate to what extent such changes will occur, when
they will occur, or how severely they will impact us.
We currently have a portion of our U.S. fleet involved in the clean-up efforts in the Gulf of
Mexico, and these vessels continue to be released into a more restricted and more competitive
market in the U.S. Gulf of Mexico. We may attempt to relocate these vessels to other locations in
the Americas if more profitable opportunities arise outside the U.S. Gulf of Mexico; however, no
assurance can be given that our vessels can be relocated outside the U.S. Gulf of Mexico, or can
relocate more profitably than in the U.S. Gulf of Mexico. As a result of the incident in the U.S.
Gulf of Mexico and the subsequent issues regarding drilling in the region, our competitors could
redeploy their vessels into other regions in which we operate, which would increase the competition
in that area, potentially resulting in lowered profit margins. In addition, our customers may seek
to renegotiate the terms of their contracts or avoid their obligations under the contracts, both of
which could adversely affect our business, financial condition and results of operations.
On July 14, 2010, we were named as one of several vessel owner/operator defendants, among
other defendants, in litigation pertaining to firefighting and other vessel activities associated
with the April catastrophe. On October 12, 2010, we were dismissed from this litigation. Although
we have no knowledge of any other litigation or claims against us relating to the recent events in
the U.S. Gulf of Mexico, no assurance can be given that we will not be involved in other litigation
or claims in the future or that they will not have a material adverse effect on our financial
condition or results of operation.
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ITEM 6. | EXHIBITS |
Exhibits
See Exhibit Index for list of Exhibits filed herewith.
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.
GulfMark Offshore, Inc. | ||||||
(Registrant) | ||||||
By: | /s/ Quintin V. Kneen | |||||
Quintin V. Kneen | ||||||
Executive Vice President & Chief Financial Officer |
Date: October 27, 2010
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INDEX TO EXHIBITS
Filed Herewith or | ||||
Incorporated by Reference | ||||
from the | ||||
Exhibits | Description | Following Documents | ||
3.1
|
Certificate of Incorporation, as amended | Exhibit 3.1 to our current report on Form 8-K filed on February 24, 2010 | ||
3.2
|
Bylaws, as amended | Exhibit 3.2 to our current report on Form 8-K filed on February 24, 2010 | ||
4.1
|
Description of GulfMark Offshore, Inc. Common Stock | Exhibit 4.1 to our current report on Form 8-K filed on February 24, 2010 | ||
4.2
|
Form of U.S. Citizen Stock Certificates | Exhibit 4.2 to our current report on Form 8-K filed on February 24, 2010 | ||
4.3
|
Form of Non-U.S. Citizen Stock Certificates | Exhibit 4.3 to our current report on Form 8-K filed on February 24, 2010 | ||
4.4
|
Indenture, dated as of July 21, 2004, between GulfMark Offshore, Inc., as the Company, and U.S. Bank National Association, as Trustee, including a form of the Companys 7.75% Senior Notes due 2014 | Exhibit 4.4 to our quarterly report on Form 10-Q for the quarter ended September 30, 2004 | ||
4.5
|
First Supplemental Indenture, dated as of February 24, 2010, between GulfMark Offshore, Inc. (f/k/a New GulfMark Offshore, Inc.), as the Company and U.S. Bank Association, as Trustee, for the Companys 7.75% Senior Notes due 2014 | Exhibit 10.1 to our current report on Form 8-K filed on February 24, 2010 | ||
4.6
|
Form of Debt Securities Indenture (Including Form of Note for Debt Securities) | Exhibit 4.7 to our Post-Effective Amendment No. 2/A to our Registration Statement on Form S-3 filed on May 14, 2010. | ||
4.7
|
See Exhibit No. 3.1 for provisions of the Certificate of Incorporation and Exhibit 3.2 for provisions of the Bylaws defining the rights of the holders of Common Stock | Exhibits 3.1 and 3.2 to our current report on Form 8-K filed on February 24, 2010 | ||
10.1
|
Executive Nonqualified Excess Plan Document | Filed herewith | ||
10.2
|
Executive Nonqualified Excess Plan Adoption Agreement, amended effective January 1, 2010 | Filed herewith | ||
10.3
|
Form of the Executive Nonqualified Excess Plan and Nonqualified Plan Participation Agreement | Filed herewith | ||
31.1
|
Section 302 Certification for B.A. Streeter | Filed herewith |
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31.2
|
Section 302 Certification for Q.V. Kneen | Filed herewith | ||
32.1
|
Section 906 Certification furnished for B.A. Streeter | Filed herewith | ||
32.2
|
Section 906 Certification furnished for Q. V. Kneen | Filed herewith | ||
101
|
The following materials from GulfMark Offshore, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders Equity (iv) Condensed Consolidated Statement of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. | Filed herewith |
29