Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - GULFMARK OFFSHORE INC | Financial_Report.xls |
EX-32.1 - EX-32.1 - GULFMARK OFFSHORE INC | h84349exv32w1.htm |
EX-32.2 - EX-32.2 - GULFMARK OFFSHORE INC | h84349exv32w2.htm |
EX-10.1 - EX-10.1 - GULFMARK OFFSHORE INC | h84349exv10w1.htm |
EX-31.1 - EX-31.1 - GULFMARK OFFSHORE INC | h84349exv31w1.htm |
EX-31.2 - EX-31.2 - GULFMARK OFFSHORE INC | h84349exv31w2.htm |
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
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2011
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 þ 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 þ 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.
Large accelerated filer þ
|
Accelerated filer o | Non-accelerated filer o | 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 þ
Number of shares of Class A Common Stock, $0.01 par value, outstanding as of October 19, 2011:
26,552,640
(Exhibit Index Located on Page 27)
GulfMark Offshore, Inc.
Index
Index
2
Table of Contents
PART 1. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands, except par value amount) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 112,966 | $ | 97,195 | ||||
Trade accounts receivable, net of allowance for doubtful accounts of $154 and $283, respectively |
80,677 | 66,714 | ||||||
Other accounts receivable |
10,488 | 10,326 | ||||||
Prepaid expenses and other |
16,443 | 16,645 | ||||||
Total current assets |
220,574 | 190,880 | ||||||
Vessels, equipment, and other fixed assets at cost, net of accumulated depreciation of $320,945 and
$282,395, respectively |
1,150,994 | 1,191,280 | ||||||
Construction in progress |
11,111 | 2,920 | ||||||
Goodwill |
31,767 | 31,987 | ||||||
Intangibles, net of accumulated amortization of $9,370 and $7,208, respectively |
25,228 | 27,390 | ||||||
Deferred costs and other assets |
23,774 | 19,993 | ||||||
Total assets |
$ | 1,463,448 | $ | 1,464,450 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 33,333 | $ | 33,333 | ||||
Accounts payable |
16,273 | 15,130 | ||||||
Income and other taxes payable |
4,418 | 4,066 | ||||||
Accrued personnel costs |
22,134 | 23,417 | ||||||
Accrued interest expense |
2,648 | 5,757 | ||||||
Other accrued liabilities |
7,270 | 7,676 | ||||||
Total current liabilities |
86,076 | 89,379 | ||||||
Long-term debt |
268,146 | 293,095 | ||||||
Long-term income taxes: |
||||||||
Deferred tax liabilities |
102,845 | 102,509 | ||||||
Other income taxes payable |
21,285 | 19,400 | ||||||
Cash flow hedge |
4,577 | 6,807 | ||||||
Other liabilities |
6,718 | 7,303 | ||||||
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; 26,553 and 26,269 shares issued
and 26,533 and 26,013 outstanding, respectively; Class B Common Stock $0.01 per value; 60,000
shares authorized; no shares issued |
262 | 259 | ||||||
Additional paid-in capital |
376,747 | 370,218 | ||||||
Retained earnings |
562,757 | 536,468 | ||||||
Accumulated other comprehensive income |
34,918 | 39,137 | ||||||
Treasury stock, at cost |
(8,985 | ) | (7,228 | ) | ||||
Deferred compensation expense |
8,102 | 7,103 | ||||||
Total stockholders equity |
973,801 | 945,957 | ||||||
Total liabilities and stockholders equity |
$ | 1,463,448 | $ | 1,464,450 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands except per share amounts) | ||||||||||||||||
Revenue |
$ | 103,778 | $ | 94,479 | $ | 281,978 | $ | 271,912 | ||||||||
Costs and expenses: |
||||||||||||||||
Direct operating expenses |
48,103 | 41,729 | 139,328 | 127,456 | ||||||||||||
Drydock expense |
5,726 | 7,242 | 15,933 | 20,365 | ||||||||||||
General and administrative expenses |
11,859 | 10,236 | 34,192 | 33,423 | ||||||||||||
Depreciation and amortization |
14,896 | 14,492 | 44,554 | 42,444 | ||||||||||||
(Gain) loss on sale of assets |
| (5,201 | ) | 10 | (5,095 | ) | ||||||||||
Impairment charge |
| | | 97,665 | ||||||||||||
Total costs and expenses |
80,584 | 68,498 | 234,017 | 316,258 | ||||||||||||
Operating income (loss) |
23,194 | 25,981 | 47,961 | (44,346 | ) | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(5,757 | ) | (5,807 | ) | (17,114 | ) | (15,858 | ) | ||||||||
Interest income |
195 | 597 | 379 | 739 | ||||||||||||
Foreign currency gain (loss) and other |
(2,803 | ) | (603 | ) | (2,786 | ) | 158 | |||||||||
Total other expense |
(8,365 | ) | (5,813 | ) | (19,521 | ) | (14,961 | ) | ||||||||
Income (loss) before income taxes |
14,829 | 20,168 | 28,440 | (59,307 | ) | |||||||||||
Income tax (provision) benefit |
(664 | ) | (961 | ) | (2,151 | ) | 9,326 | |||||||||
Net income (loss) |
$ | 14,165 | $ | 19,207 | $ | 26,289 | $ | (49,981 | ) | |||||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | 0.54 | $ | 0.74 | $ | 1.01 | $ | (1.96 | ) | |||||||
Diluted |
$ | 0.54 | $ | 0.73 | $ | 1.00 | $ | (1.96 | ) | |||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
25,869 | 25,599 | 25,793 | 25,512 | ||||||||||||
Diluted |
25,989 | 25,737 | 25,922 | 25,512 | ||||||||||||
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Table of Contents
GULFMARK OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the Nine Months Ended September 30, 2011
Deferred | ||||||||||||||||||||||||||||||||
Additional | Accumulated Other | Compen- | Total | |||||||||||||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | sation | Stockholders | |||||||||||||||||||||||||||
Stock | Capital | Earnings | Income | Treasury Stock | Expense | Equity | ||||||||||||||||||||||||||
Share | ||||||||||||||||||||||||||||||||
Shares | Value | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 259 | $ | 370,218 | $ | 536,468 | $ | 39,137 | (256 | ) | $ | (7,228 | ) | $ | 7,103 | $ | 945,957 | |||||||||||||||
Net income |
| | 26,289 | | | | | 26,289 | ||||||||||||||||||||||||
Issuance of common stock |
2 | 5,029 | | | | | | 5,031 | ||||||||||||||||||||||||
Exercise of stock options |
1 | 1,469 | | | | | | 1,470 | ||||||||||||||||||||||||
Deferred compensation plan |
| 31 | | | (39 | ) | (1,757 | ) | 999 | (727 | ) | |||||||||||||||||||||
Unrealized gain on cash flow
hedge |
| | | 1,246 | | | | 1,246 | ||||||||||||||||||||||||
Translation adjustment |
| | | (5,465 | ) | | | | (5,465 | ) | ||||||||||||||||||||||
Balance at September 30, 2011 |
$ | 262 | $ | 376,747 | $ | 562,757 | $ | 34,918 | (295 | ) | $ | (8,985 | ) | $ | 8,102 | $ | 973,801 | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Table of Contents
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 26,289 | $ | (49,981 | ) | |||
Adjustments to reconcile net income (loss) from operations to
net cash provided by operations: |
||||||||
Depreciation and amortization |
44,554 | 42,444 | ||||||
(Gain) loss on sale of assets |
10 | (5,095 | ) | |||||
Impairment charge |
| 97,665 | ||||||
Stock based compensation |
4,556 | 4,275 | ||||||
Deferred financing costs |
1,260 | 1,199 | ||||||
Provision for doubtful accounts receivable, net of write-offs |
(133 | ) | 174 | |||||
Deferred income tax benefit |
(314 | ) | (4,363 | ) | ||||
Foreign currency transaction (gain) loss |
2,433 | (151 | ) | |||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
(15,541 | ) | (7,799 | ) | ||||
Prepaids and other |
(383 | ) | (2,765 | ) | ||||
Accounts payable |
1,040 | 882 | ||||||
Other accrued liabilities and other |
(9,576 | ) | (19,125 | ) | ||||
Net cash provided by operating activities |
54,195 | 57,360 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of vessels, equipment and other fixed assets |
(15,002 | ) | (65,452 | ) | ||||
Proceeds from disposition of vessels and equipment |
| 19,582 | ||||||
Net cash used in investing activities |
(15,002 | ) | (45,870 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from borrowings |
10,000 | 51,000 | ||||||
Repayments of debt |
(35,000 | ) | (66,000 | ) | ||||
Debt refinancing cost |
| (2,000 | ) | |||||
Proceeds from exercise of stock options |
911 | 1,069 | ||||||
Proceeds from issuance of stock |
521 | 537 | ||||||
Net cash used in financing activities |
(23,568 | ) | (15,394 | ) | ||||
Effect of exchange rate changes on cash |
146 | (234 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
15,771 | (4,138 | ) | |||||
Cash and cash equivalents at beginning of the period |
97,195 | 92,079 | ||||||
Cash and cash equivalents at end of the period |
$ | 112,966 | $ | 87,941 | ||||
Supplemental cash flow information: |
||||||||
Interest paid, net of interest capitalized |
$ | 19,218 | $ | 15,909 | ||||
Income taxes paid, net |
$ | 4,485 | $ | 4,001 | ||||
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
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL 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. and its subsidiaries and 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, 2010, 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, 2010.
In the opinion of management, all adjustments, which include reclassification and normal
recurring adjustments necessary to present fairly the unaudited 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 operate our vessels in other regions to meet our customers
requirements.
Earnings Per Share
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 reconciliation
between basic and diluted earnings per share from income or loss attributable to Class A Common
Stock stockholders, including allocation to participating securities, is as follows:
7
Table of Contents
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Income (loss): |
||||||||||||||||
Net income (loss) attributable
to common stockholders |
$ | 14,165 | $ | 19,207 | $ | 26,289 | $ | (49,981 | ) | |||||||
Undistributed income allocated
to participating securities |
(100 | ) | (305 | ) | (268 | ) | | |||||||||
Basic |
14,065 | 18,902 | 26,021 | (49,981 | ) | |||||||||||
Undistributed income allocated
to participating securities |
100 | 305 | 268 | | ||||||||||||
Undistributed income
reallocated to participating
securities |
(100 | ) | (303 | ) | (267 | ) | | |||||||||
Diluted |
$ | 14,065 | $ | 18,904 | $ | 26,022 | $ | (49,981 | ) | |||||||
Shares: |
||||||||||||||||
Basic |
||||||||||||||||
Weighted-average common shares
outstanding |
25,869 | 25,599 | 25,793 | 25,512 | ||||||||||||
Dilutive effect of stock
options and restricted stock
awards |
120 | 138 | 129 | | ||||||||||||
Diluted |
25,989 | 25,737 | 25,922 | 25,512 | ||||||||||||
Income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.54 | $ | 0.74 | $ | 1.01 | $ | (1.96 | ) | |||||||
Diluted |
$ | 0.54 | $ | 0.73 | $ | 1.00 | $ | (1.96 | ) |
(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, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net income (loss) |
$ | 14,165 | $ | 19,207 | $ | 26,289 | $ | (49,981 | ) | |||||||
Comprehensive income: |
||||||||||||||||
Unrealized gain (loss) on cash flow hedge |
578 | (329 | ) | 1,246 | (1,347 | ) | ||||||||||
Foreign currency translation |
(30,148 | ) | 35,147 | (5,465 | ) | (14,147 | ) | |||||||||
Total comprehensive income (loss) |
$ | (15,405 | ) | $ | 54,025 | $ | 22,070 | $ | (65,475 | ) | ||||||
Our accumulated other comprehensive income (loss) item relates primarily to our
cumulative foreign currency translation adjustments, and adjustments related to the cash flow
hedge.
8
Table of Contents
(3) IMPAIRMENT CHARGE
Goodwill
Our goodwill consists of $31.8 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 unit basis.
On July 1, 2008, we acquired a 100% ownership interest in a company that operated a large U.S.
Gulf of Mexico vessel fleet for $554.7 million, which included $97.7 million of goodwill. We
included this acquisition in our Americas segment. 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 of events in the U.S. Gulf of Mexico, which included 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. We determined, based on our evaluations and testing as
prescribed under U.S. GAAP, that an impairment of our Americas region goodwill existed. As a
result, we recorded a $97.7 million impairment charge as of June 30, 2010, reflecting all of our
Americas region goodwill. The non-cash charge did not impact our liquidity or debt covenant
compliance.
(4) VESSEL ACQUISITIONS AND DISPOSITIONS
As of October 20, 2011, we have one vessel that is being held for sale that is not included in
our fleet numbers. We have assessed the value of the vessel during this quarter and at this time
we believe that it is recorded at its appropriate value. However, we will continue to assess the
value on a quarterly basis and make the proper adjustment, if needed.
Interest is capitalized in connection with the construction of vessels. We did not capitalize
any interest during the three or nine month periods ended September 30, 2011. During the three and
nine month periods ended September 30, 2010, $0.1 million and $1.4 million of interest,
respectively, was capitalized.
In the third quarter of 2011, we entered into agreements with three shipyards to construct six
new platform supply vessels. Remontowa Shipbuilding SA (Remontowa), a Polish company, was
contracted to build three vessels, Rosetti Marino S.p.A. (Rosetti Marino), an Italian company,
was contracted to build two vessels and Simek A/S (Simek), a Norwegian company, was contracted to
build one vessel. The estimated total cost of the six new-build vessels is $245.0 million. The
Remontowa and Rosetti Marino contracts are denominated in Euros and the Simek contract is
denominated in Norwegian Kroner. The first of these vessels is scheduled to be delivered in the
second quarter of 2013 and the last is scheduled to be delivered in the first quarter of 2014. All
six vessels are expected to operate in the North Sea market.
9
Table of Contents
The following table details our new build program:
Construction | Expected | Length | Expected | |||||||||||||||||||
Yard | Region | Type(1) | Delivery | (feet) | BHP(2) | DWT(3) | Cost | |||||||||||||||
(millions) | ||||||||||||||||||||||
Remontowa
|
North Sea | LgPSV | Q2 2013 | 291 | 9120 | 5100 | $ | 41.0 | ||||||||||||||
Remontowa
|
North Sea | LgPSV | Q3 2013 | 291 | 9120 | 5100 | $ | 41.1 | ||||||||||||||
Remontowa
|
North Sea | LgPSV | Q3 2013 | 260 | 9120 | 4000 | $ | 37.7 | ||||||||||||||
Rosetti Marino
|
North Sea | LgPSV | Q4 2013 | 246 | 7483 | 3000 | $ | 32.1 | ||||||||||||||
Rosetti Marino
|
North Sea | LgPSV | Q2 2014 | 246 | 7483 | 3000 | $ | 32.1 | ||||||||||||||
Simek
|
North Sea | LgPSV | Q2 2013 | 304 | 11265 | 4700 | $ | 60.9 |
(1) | LgPSV Large Platform Supply Vessel. | |
(2) | BHP Breakhorse Power | |
(3) | DWT Deadweight Tons |
In
October 2011, we entered into an agreement to sell a vessel from our
North Sea fleet for approximately $2.9 million. We expect to record a
gain of approximately $2.0 million on the sale which is expected to
close on October 21, 2011.
(5) INCOME TAXES
Our estimated annual effective tax rate, adjusted for unusual tax items, is applied to interim
periods pretax income (loss). Except for a portion of the current years foreign earnings, which
have been remitted to the U.S., we consider earnings of our foreign subsidiaries to be permanently
reinvested, and as such, we have not provided for any U.S. federal or state income taxes on these
permanently reinvested earnings.
In recent years we repatriated cash from our foreign subsidiaries from current year foreign
earnings and recognized U.S. tax expense, net of available credits, on those occasions. The
incremental tax rate associated with these repatriations is approximately 30% with no U.S. cash tax
requirement due to utilization of U.S. net operating losses.
(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 these liabilities or claims. These liabilities and claims
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, may be estimated based on our experience 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 will be impacted by the difference, if any, between our estimates and
the actual amounts paid to settle the liabilities. In addition to estimates related to litigation
and tax liabilities, other examples of liabilities requiring estimates of future exposure include
contingencies arising out of acquisitions and divestitures. Our contingent liabilities are based
on the most recent information available to us regarding the nature of the exposure. Such
exposures change from period to period based upon updated relevant facts and circumstances, which
can cause our estimates to change. In the recent past, our estimates for contingent liabilities
have been sufficient to cover the actual amount of our exposure. We do not believe that the
outcome of these matters will have a material adverse effect on our business, financial condition,
or results of operations.
We have
recently been made aware that a Brazilian state in which we have
operated vessels has asserted that certain companies could be
assessed for state import taxes with respect to vessels that have
operated within Brazilian coastal waters. We have neither been
formally assessed nor threatened with this tax. No accrual has been
recorded as of September 30, 2011 for any liabilities associated with
a possible future assessment. We cant predict whether any such
tax assessment may be made in the future.
10
Table of Contents
(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 current
period results of operations. Gains and losses from changes in fair values of derivatives that are
not designated as hedges for accounting purposes are recognized in current period results of
operations.
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 periodically enter into foreign currency forward contracts which 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 changes in fair
value are recognized in income with an offsetting adjustment to income for changes in the fair
value of the hedged item such that there is no net impact in the consolidated statements of
operations. As of September 30, 2011, we had no open foreign currency forward 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, 2011, our interest rate derivative instrument has an outstanding notional amount of
$100.0 million and is designated as a cash flow hedge. The 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 swap contracts 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 contracts at the date of settlement. Unrecognized losses
of
11
Table of Contents
$0.7 million are recorded as of September 30, 2011 in accumulated OCI related to these
interest rate swap contracts. 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, 2011 and December 31, 2010
(dollars in thousands):
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||||||||
September 30, 2011 | December 31, 2010 | September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||
Balance | Balance | Balance | Balance | |||||||||||||||||||||||||||||
Derivatives designed as | Sheet | Fair | Sheet | Fair | Sheet | Fair | Sheet | Fair | ||||||||||||||||||||||||
hedging instruments | Location | Value | Location | Value | Location | Value | Location | Value | ||||||||||||||||||||||||
Interest rate swaps |
$ | | $ | | Cash flow hedges | $ | 4,577 | Cash flow hedges | $ | 6,807 | ||||||||||||||||||||||
$ | | $ | | $ | 4,577 | $ | 6,807 | |||||||||||||||||||||||||
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) | |||||||||||||||||||
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 | |||||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||
Interest rate contracts |
$ | (697 | ) | $ | (4,501 | ) | Interest expense | $ | (2,385 | ) | $ | (1,969 | ) |
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||
Interest rate contracts |
$ | (21 | ) | $ | (1,299 | ) | Interest expense | $ | (846 | ) | $ | (652 | ) |
(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. |
We have a fixed-for-floating interest rate swap agreement that has the effect of fixing the
LIBOR interest rate component on $100.0 million of the outstanding balance on our $200.0 million
Facility Agreement. The fixed rate component of the swap is set at 4.145% and the swap matures with
the Facility Agreement on December 31, 2012. The interest rate swap is accounted
12
Table of Contents
for as a cash flow
hedge. The consolidated balance sheet discloses the cash flow hedge in the
liability section, reflecting the fair value of the interest rate swap which was $4.6 million at
September 30, 2011. For the three and nine month periods ended September 30, 2011, $0.6 and $1.3
million related to this interest rate swap was reclassified from other comprehensive income to
interest expense, respectively. We expect to reclassify $1.6 million of deferred losses related to
this interest rate swap and the previously settled 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, 2011.
The following table presents information about our assets (liabilities) measured at fair value
on a recurring basis as of September 30, 2011 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 |
$ | | $ | 4.6 | $ | | $ | 4.6 | ||||||||
The following table presents information about our assets (liabilities) measured at fair
value on a recurring basis as of December 31, 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 |
$ | | $ | 6.8 | $ | | $ | 6.8 | ||||||||
(9) NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (ASU 2011-04). ASU 2011-04
changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value
and for disclosing information about fair value measurements to ensure consistency between U.S.
GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04 also expands the
disclosures for fair value measurements that are estimated using significant unobservable (Level 3)
inputs. This new guidance is to be applied prospectively. ASU 2011-04 will be effective for interim
and annual periods beginning after Dec. 15, 2011, with early adoption permitted. We believe that
the adoption of this standard will not materially expand our consolidated financial statement
footnote disclosures.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (ASC Topic 220):
Presentation of Comprehensive Income (ASU 2011-05), which amends current comprehensive income
guidance. This ASU eliminates the option to present the components of other comprehensive income
as part of the statement of shareholders equity. Instead, we must report comprehensive income in
either a single continuous statement of comprehensive income which contains two sections, net
income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05
will be effective for interim and annual periods beginning after Dec. 15, 2011, with early adoption
permitted. The adoption of ASU 2011-05 will not have a material impact on our consolidated
financial statements.
13
Table of Contents
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (ASU
2011-08), which amends the guidance in ASC 350-20, Intangibles Goodwill and Other Goodwill.
Under ASU 2011-08, entities have the option of performing a qualitative assessment before
calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair
value of the reporting unit is determined, based on qualitative factors, to be more likely than not
less than the carrying amount of the reporting unit, then entities are required to perform the
two-step goodwill impairment test. ASU 2011-08 is effective for fiscal years beginning after
December 15, 2011, with early adoption permitted. We adopted ASU 2011-08 in the third quarter of
2011 with no material impact on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-09, Compensation Retirement Benefits
Multiemployer Plans (Subtopic 715-80) (ASU 2011-09). ASU 2011-09 requires that employers provide
additional separate disclosures for multiemployer pension plans and multiemployer other
postretirement benefit plans. The additional quantitative and qualitative disclosures will provide
users with more detailed information about an employers involvement in multiemployer pension
plans. ASU 2011-09 will be effective for fiscal years ending after December 15, 2011, with early
adoption permitted. We are currently evaluating the effect that ASU 2011-09 will have on our
consolidated financial statements.
(10) 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.
14
Table of Contents
Operating Income (Loss) by Operating segment
North | Southeast | |||||||||||||||||||||
Sea | Asia | Americas | Other | Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||
Quarter Ended September 30, 2011 |
||||||||||||||||||||||
Revenue |
$ | 49,176 | $ | 16,660 | $ | 37,942 | $ | | $ | 103,778 | ||||||||||||
Direct operating expenses |
20,999 | 3,409 | 23,695 | | 48,103 | |||||||||||||||||
Drydock expense |
2,999 | 2,023 | 704 | | 5,726 | |||||||||||||||||
General and administrative expenses |
3,195 | 762 | 2,005 | 5,897 | 11,859 | |||||||||||||||||
Depreciation and amortization expense |
4,924 | 2,427 | 7,078 | 467 | 14,896 | |||||||||||||||||
(Gain) loss on sale of assets |
| | | | | |||||||||||||||||
Operating income (loss) |
$ | 17,059 | $ | 8,039 | $ | 4,460 | $ | (6,364 | ) | $ | 23,194 | |||||||||||
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 | |||||||||||
North | Southeast | |||||||||||||||||||||
Sea | Asia | Americas | Other | Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||
Nine Months Ended September 30, 2011 |
||||||||||||||||||||||
Revenue |
$ | 128,411 | $ | 47,873 | $ | 105,694 | $ | | $ | 281,978 | ||||||||||||
Direct operating expenses |
62,440 | 9,158 | 67,730 | | 139,328 | |||||||||||||||||
Drydock expense |
8,440 | 3,963 | 3,530 | | 15,933 | |||||||||||||||||
General and administrative expenses |
9,118 | 2,197 | 6,204 | 16,673 | 34,192 | |||||||||||||||||
Depreciation and amortization expense |
14,681 | 7,309 | 21,316 | 1,248 | 44,554 | |||||||||||||||||
(Gain) loss on sale of assets |
| | 10 | | 10 | |||||||||||||||||
Impairment charge |
| | | | | |||||||||||||||||
Operating income (loss) |
$ | 33,732 | $ | 25,246 | $ | 6,904 | $ | (17,921 | ) | $ | 47,961 | |||||||||||
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 | ) | |||||||||
15
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
We provide marine support and transportation services 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. A
substantial portion of our operations are international. Our fleet has grown in both size and
capability, from an original 11 vessels in 1990 to our present number of 89 active vessels, through
strategic acquisitions and the new construction of technologically advanced vessels, partially
offset by dispositions of certain older, less profitable vessels. At October 20, 2011, our active
fleet includes 74 owned vessels and 15 managed vessels. This vessel
count does not include the effect of the sale of a North Sea vessel
expected to close on October 21, 2011.
Our results of operations are affected primarily by day rates, fleet utilization and the
number and type of vessels in our fleet. Utilization and day rates, in turn, are influenced
principally by the demand for vessel services from the offshore exploration and production sectors
of the oil and natural gas industry. The supply of vessels to meet this fluctuating demand is
related directly to the perception of future activity in both the drilling and production phases of
the oil and natural gas industry as well as the availability of capital to build new vessels to
meet the changing market requirements. From time to time, we bareboat charter vessels with revenue
and operating expenses reported in the same income and expense categories as our owned vessels. The
chartered vessels, however, incur bareboat charter fees instead of depreciation expense. Bareboat
charter fees are generally higher than the depreciation expense on owned vessels of similar age and
specification. The operating income realized from these vessels is therefore adversely affected by
the higher costs associated with the bareboat charter fees. These vessels are included in
calculating fleet day rates and utilization in the applicable periods.
We also provide management services to other vessel owners for a fee. We do not include
charter revenue and vessel expenses of these vessels in our operating results; however, management
fees are included in operating revenue. These vessels are excluded for purposes of calculating
fleet rates per day worked and utilization in the applicable periods.
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.
Our operating costs are primarily a function of fleet configuration. The most significant
direct operating cost is wages paid to vessel crews, followed by maintenance and repairs and
insurance. Generally, fluctuations in vessel utilization have little effect on direct operating
costs in the short term and, as a result, direct operating costs as a percentage of revenue may
vary substantially due to changes in day rates and utilization.
In addition to direct operating costs, we incur fixed charges related to (i) the depreciation
of our fleet, (ii) costs for routine drydock inspections, (iii) modifications designed to ensure
compliance with applicable regulations, and (iv) maintaining certifications for our vessels with
various international classification societies. The number of drydockings and other repairs
undertaken in a given period generally determines our maintenance and repair expenses. The demands
of the market, the expiration of existing contracts, the start of new contracts, seasonal factors
and customer preferences influence the timing of drydocks. During the first nine months
of 2011, we completed 433 drydock days, compared to 525 drydock days completed in the same
period last year.
16
Table of Contents
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, 2010.
Goodwill
Our goodwill consists of $31.8 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 unit basis.
On July 1, 2008, we acquired a 100% ownership interest in a company that operated a large U.S.
Gulf of Mexico vessel fleet for $554.7 million, which included $97.7 million of goodwill. We
included this acquisition in our Americas segment. 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 of events in the U.S. Gulf of Mexico, which included 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. We determined, based on our evaluations and testing as
prescribed under U.S. GAAP, that an impairment of our Americas region goodwill existed. As a
result, we recorded a $97.7 million impairment charge as of June 30, 2010, reflecting all of our
Americas region goodwill. The non-cash charge did 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.
17
Table of Contents
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues by Region (000s) (a): |
||||||||||||||||
North Sea Based Fleet (c) |
$ | 49,176 | $ | 38,340 | $ | 128,411 | $ | 110,832 | ||||||||
Southeast Asia Based Fleet |
16,660 | 17,867 | 47,873 | 50,535 | ||||||||||||
Americas Based Fleet |
37,942 | 38,272 | 105,694 | 110,545 | ||||||||||||
Rates Per Day Worked (a) (b): |
||||||||||||||||
North Sea Based Fleet (c) |
$ | 21,358 | $ | 17,637 | $ | 19,796 | $ | 16,965 | ||||||||
Southeast Asia Based Fleet |
15,063 | 16,841 | 15,177 | 17,190 | ||||||||||||
Americas Based Fleet |
14,766 | 15,830 | 14,401 | 14,165 | ||||||||||||
Overall Utilization (a) (b): |
||||||||||||||||
North Sea Based Fleet |
96.5 | % | 91.6 | % | 92.6 | % | 93.5 | % | ||||||||
Southeast Asia Based Fleet |
87.9 | % | 85.2 | % | 84.7 | % | 87.0 | % | ||||||||
Americas Based Fleet |
81.5 | % | 76.0 | % | 78.8 | % | 82.5 | % | ||||||||
Average Owned/Chartered Vessels (a) (d): |
||||||||||||||||
North Sea Based Fleet (c) |
25.0 | 25.7 | 25.0 | 25.1 | ||||||||||||
Southeast Asia Based Fleet |
14.0 | 13.9 | 14.0 | 12.7 | ||||||||||||
Americas Based Fleet |
35.0 | 35.0 | 35.0 | 35.4 | ||||||||||||
Total |
74.0 | 74.6 | 74.0 | 73.2 | ||||||||||||
(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, 2011 with the Three Months Ended September
30, 2010
For the quarter ended September 30, 2011, net income was $14.2 million, or $0.54 per diluted
share on revenues of $103.8 million. For the same 2010 period, net income was $19.2 million, or
$0.73 per diluted share on revenues of $94.5 million.
Our revenues for the quarter ended September 30, 2011 increased $9.3 million or 9.8% compared
to the same quarter of 2010. The increase in revenue was due mainly to a combination of currency
effects and day rates, which contributed $6.6 million to revenue. In addition, an increase in
utilization from 83% in the prior year quarter to 88% in the current year quarter contributed $4.4
million for the quarter. The increase was partially offset by a decrease in capacity due to the
sale of a vessel at the end of the prior year quarter, which negatively impacted revenue by $1.7
million.
18
Table of Contents
Operating income for the third quarter of 2011 was $23.2 million compared to $26.0
million for the prior year quarter. The increase in revenue and the decrease in drydock expense was
offset by the increase in direct operating cost resulting from higher fuel and consumable expense
and higher crew salaries and benefits. General and administrative costs were also higher due to
higher salaries and professional fees.
North Sea
Revenues in the North Sea region increased by $10.8 million, or 28%, to $49.2 million in the
third quarter of 2011 compared to the same period of 2010. Approximately $10.6 million of the
increase was a result of a combination of currency effects and increased day rates. Day rates
increased from $17,637 in the prior year quarter to $21,358 in the third quarter of 2011.
Utilization rates increased from 92% in the third quarter of 2010 to 97% in the current year
quarter, also contributing $2.0 million to the increase in revenue. The overall revenue increase
was partially offset by decreased capacity as a result of the sale of a vessel during 2010, which
negatively impacted revenue by $1.8 million. Operating income increased by $3.4 million compared to
the prior year quarter due to the increase in revenue and the gain on asset sale. Offsetting this
was the increase in direct operating expenses, due mainly to higher salaries and benefits. Drydock
expense decreased by $0.6 million as we experienced 30 fewer drydock days. General and
administrative expense increased by $0.7 million from the prior year quarter due to increased
salaries and professional fees.
Southeast Asia
Revenues for our Southeast Asia based fleet decreased from the prior year quarter by $1.2
million, or 7%, to $16.7 million. The decrease was primarily attributable to a decrease in day
rates from $16,841 in the prior year quarter to $15,063 in the current quarter, which reduced
revenue by $1.7 million. Utilization for the third quarter of 2011 increased from 85% to 88% in the
current quarter increasing revenue by $0.4 million. Capacity increased revenue by $0.1 million as a
result of the addition of a new vessel during the third quarter of 2010. Operating income for
Southeast Asia was $8.0 million in the third quarter of 2011 compared to $11.1 million in the prior
year quarter. The decrease is due mainly to the decrease in revenue coupled with a $1.5 million
increase in drydock expense and a $0.2 million increase in direct operating expense. General and
administrative expense increased slightly from the prior year quarter.
Americas
Revenues in the Americas region decreased by $0.3 million, or 1%, to $37.9 million in the
third quarter of 2011 compared to the same prior year quarter. Utilization increased from 76% in
the third quarter of 2010 to 82% in the current year quarter which increased revenue by $2.0
million. The combination of day rates and currency effects negatively impacted revenue by $2.3
million as average day rates decreased from $15,830 in the third quarter of 2010 to $14,766 in the
current year quarter. Operating income was $4.5 million in the third quarter of 2011, a decrease of
$2.7 million from the prior year quarter. The decrease in operating income is due mainly to a $4.3
million increase in direct operating costs resulting from higher crew salaries and benefits and
higher operating fees mainly in the Brazil sub-region. Drydock expense decreased by $2.4 million
compared to the prior year quarter. General and administrative expense was higher than the prior
year quarter by $0.5 million, due to higher salaries and benefits.
19
Table of Contents
Other
Other expenses in the third quarter of 2011 increased by $2.6 million compared to the prior
year quarter, resulting primarily from the $2.2 million negative effect of foreign currency
fluctuations coupled with lower interest income of $0.4 million.
Income Taxes
Our effective tax rate for the third quarter of 2011 was 7.6% excluding unusual items. This
compares to a 6.4% effective tax rate in the third quarter of 2010, excluding unusual items. The
change in the effective tax rate from the prior year was primarily attributable to inclusion of the
U.S. tax impact for remitting a portion of our 2011 foreign earnings.
Comparison
of the Nine Months Ended September 30, 2011 with the Nine Months Ended September 30, 2010
For the nine months ended September 30, 2011 net income was $26.3 million, or $1.00 per
diluted share, on revenues of $282.0 million. During the same period in 2010, we had a net loss of
$50.0 million, or $1.96 per diluted share, on revenues of $271.9 million. The 2010 net loss
included a $97.7 million goodwill impairment charge.
Revenues increased $10.1 million period over period due to higher day rates and positive
currency effects offset by lower average utilization rates.
Operating income for the nine-month period ended September 30, 2011 was $48.0 million compared
to $53.3 million in 2010, absent the goodwill impairment charge. The decrease is primarily due to
increased direct operating and depreciation expenses and lower gains on asset sales, offset by
lower drydock expense and higher revenues in 2011. General and administrative expense was also
higher than the 2010 period due primarily to higher salaries and professional fees.
North Sea
North Sea revenue increased by $17.6 million, or 16%, in the first nine months of 2011
compared to 2010. The effect of the weakening U.S. Dollar increased revenue by $8.1 million. The
increase in average day rates from $16,965 in 2010 to $19,796 in 2011, also contributed $12.1
million to the increase in revenue. This was partially offset by a decrease in average utilization
rates from 94% in 2010 to 93% in 2011, and a reduction in capacity due to a sale of a vessel in
2010, which together decreased revenue by $2.6 million. Operating income increased by $5.4 million
resulting primarily from increased revenue. The increase in revenue is offset by an increase in
direct operating expenses of $3.9 million resulting from higher crew salaries and wages. Drydock
expense also increased by $1.3 million from 2010 due to an increase in drydock days. General and
administrative expense was higher than the 2010 period due mainly to an increase in salaries and
professional fees.
Southeast Asia
Revenues for our Southeast Asia based fleet decreased by $2.7 million, or 5%, from $50.5
million in the first nine months of 2010 to $47.9 million in the same 2011 period. The decrease was
primarily attributable to a decrease in average day rates, offset by an increase in capacity and
utilization. Day rates decreased from $17,190 in 2010 to $15,177 in 2011, which
20
Table of Contents
decreased revenue
by $6.8 million. The increase in fleet size as a result of two vessel deliveries in 2010
contributed $3.1 million to revenue. Utilization decreased from 87% in 2010 to 85% in
the current year, however the mix of days worked associated with higher day rate vessels resulted
in a $1.0 million increase in revenue. Operating income decreased from $30.1 million in 2010 to
$25.2 million in the current year as a result of the lower revenues coupled with higher direct
operating and depreciation expenses as a result of the new vessel additions. The decrease was
offset by lower drydock costs, as a result of fewer drydock days. General and administrative
expense increased slightly from the 2010 period.
Americas
Our Americas region revenue decreased $4.9 million, or 4%, from $110.6 million in 2010 to
$105.7 million in 2011. Utilization decreased from 83% to 79% resulting in an $8.9 million decrease
in revenues. The lower utilization was a direct result of tightened regulations in the U.S. Gulf of
Mexico. Capacity effect also contributed $1.4 million to the decrease in revenue as a result of one
vessel sale during 2010. An increase in day rates from $14,165 in 2010 to $14,401 in 2011, coupled
with the foreign currency impact, increased revenue by $5.4 million. Operating income was $6.9
million during the first nine months of 2011 compared to $13.0 million in 2010, excluding the
goodwill impairment charge. The decrease is due primarily to the decrease in revenue coupled with
higher direct operating cost resulting from higher crew salaries and operating fees in Brazil.
Drydock costs decreased $5.6 million as a result of significantly lower drydock costs per day.
General and administrative expense also increased by $0.1 million.
Other
In the nine months ended September 30, 2011, other expenses totaled $19.5 million, an increase
of $4.6 million from 2010. The increase was due primarily to higher interest expense due to lower
capitalized interest, combined with a $2.9 million negative effect of foreign currency fluctuations
and lower interest income of $0.4 million.
Income Taxes
Our effective tax rate for the first nine months of 2011 was 7.9% excluding unusual items.
This compares to a 3.1% effective tax rate for the first nine months of 2010, excluding unusual
items. The change in the effective tax rate from the prior year was primarily attributable to
inclusion of the U.S. tax impact for remitting a portion of our 2011 foreign earnings.
Liquidity, Capital Resources and Financial Condition
Our ongoing liquidity requirements are generally associated with our need to service debt,
fund working capital, maintain our fleet, finance the construction of new vessels and acquire or
improve equipment or vessels. We plan to continue to be 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 upon the demand for our vessels which is ultimately determined by the supply and demand
for offshore drilling for crude oil and natural gas.
In the third quarter of 2011, we announced the initiation of a new vessel construction
program, adding six new platform supply vessels to our existing fleet. The total cost of these six
vessels is anticipated to be $245.0 million dollars for the next three years. We expect to fund
21
Table of Contents
construction of these vessels with cash on hand and cash flow generated from operations.
Anticipated cash commitments for this program over the next three calendar years are $30.0
million during the remainder of 2011, $81.0 million during 2012 and $121.0 million during
2013. We anticipate announcing the addition of new vessels to this program over the next few
quarters.
Interest expense at current rates under our existing debt arrangements, assuming no additional
borrowings, is expected to approximate $23.0 million for 2011. Minimum repayments under our
existing debt arrangements will be $33.3 million for 2011. These amounts are anticipated to be paid
from a combination of cash on hand, cash from operations and additional borrowings.
In addition, we are required to make expenditures for the certification and maintenance of our
vessels. We expect our drydocking expenditures to be $16.7 million in 2011.
Net working capital at September 30, 2011, was $134.5 million, including $113.0 million in
cash. Net cash provided by operating activities was $29.2 million for the three months ended
September 30, 2011. For the quarter ended September 30, 2011, net cash used in investing
activities was $10.1 million, and net cash used in financing activities was $18.2 million.
At September 30, 2011, we had approximately $113.0 million of cash on hand and no amounts
drawn under our $175.0 million Revolving Loan Facility, $141.7 million borrowed under our Facility
Agreement, and $160.0 million outstanding under our Senior Notes.
As of September 30, 2011, substantially all of our cash and cash equivalents were held by our
foreign subsidiaries. It is our intention to permanently reinvest all of our earnings generated
outside the U.S. prior to December 31, 2010 that through that date had not been remitted
(unremitted earnings), and as such we have not provided for U.S. income tax expense on these
unremitted earnings.
In recent years we repatriated cash from our foreign subsidiaries from current year foreign
earnings and recognized U.S. tax expense, net of available credits, on those occasions. The
incremental tax rate associated with these repatriations is approximately 30% with no U.S. cash tax
requirement due to utilization of U.S. net operating losses.
If any portion of the unremitted earnings were ever foreseen to not be permanently reinvested
outside the U.S., or if we elect to repatriate additional current year foreign earnings, U.S.
income tax expense would be required to be recognized and that expense could be material. Although
subject to certain limitations, our U.S. net operating loss carryforwards and foreign tax credit
carryforwards could be used to reduce a portion or all of the U.S. cash tax requirements of any
such future foreign cash repatriations.
We believe that cash on hand, future cash flow from operations and unused borrowing capacity
will be adequate to fund our debt payments, to fund the initial stages of our new build program, to
complete scheduled drydockings, to make normal recurring capital additions and improvements and to
meet other operating and working capital requirements. This expectation, however, is dependent upon
the success of our operations.
22
Table of Contents
Currency Fluctuations and Inflation
A majority of our operations are international; therefore we are exposed to currency
fluctuations and exchange rate risks. In areas where currency risks are potentially high, we
normally accept only a small percentage of charter hire in local currency, with the remainder paid
in U.S. Dollars. Operating costs are substantially denominated in the same currency as charter hire
in order to reduce the risk of currency fluctuations. Charters for vessels in our North Sea fleet
are primarily denominated in Pounds Sterling (GBP), with a portion denominated in Norwegian Kroner
(NOK) or Euros. The North Sea fleet generated 47.4% of our total consolidated revenue and $17.1
million in operating income for the three months ended September 30, 2011, and 45.5% of our total
consolidated revenue and $33.7 million in operating income for the nine months ended September 30,
2011.
In
the third quarter of 2011, the exchange rates of currencies that
comprise most of our exposure against the U.S.
Dollar averaged as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
1 US$= | 1 US$= | |||||||||||||||
GBP |
0.621 | 0.645 | 0.619 | 0.652 | ||||||||||||
NOK |
5.497 | 6.156 | 5.550 | 6.074 | ||||||||||||
Euro |
0.707 | 0.774 | 0.711 | 0.760 | ||||||||||||
Brazilian
Real (BRL) |
1.629 | 1.749 | 1.630 | 1.781 | ||||||||||||
Singapore
Dollar (SGD) |
1.225 | 1.356 | 1.247 | 1.383 |
Our outstanding debt is denominated in U.S. Dollars, but a substantial portion of our
revenue is generated in currencies other than the U.S. Dollar. We have evaluated these conditions
and have determined that it is not in our best interest to use any financial instruments to hedge
this exposure under present conditions. Our strategy is in part based on a number of factors
including the following:
| the cost of using hedging instruments in relation to the risks of currency fluctuations; | ||
| the propensity for adjustments in these foreign currency denominated vessel day rates over time to compensate for changes in the purchasing power of these currencies 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. |
One or more of these factors may change and, in response, we may begin to use financial
instruments to hedge risks of currency fluctuations. We will from time to time hedge known
liabilities denominated in foreign currencies to reduce the effects of exchange rate fluctuations
on our financial results, such as a fair value hedge associated with the construction of vessels.
In this regard, in 2007, we entered into forward currency contracts to specifically hedge the
foreign currency exposure related to firm contractual commitments in the form of future vessel
payments. As a result, by design, there was exact offset between the gain or loss exposure in the
related underlying contractual commitment. These contracts expired in early 2010 and there are no
outstanding contracts at September 30, 2011. See Part I, Items 1 and 2 Business and
23
Table of Contents
Properties
New Vessel Construction, Acquisition and Divestiture Program, and Drydocking Obligations of our
Form 10-K for the year ended December 31, 2010 for more details. We do not use foreign currency
forward contracts for trading or speculative purposes.
Reflected in the accompanying consolidated balance sheet at September 30, 2011, is $34.9
million in accumulated other comprehensive income primarily relating to the change in exchange
rates at September 30, 2011 in comparison with the exchange rates when we invested capital in these
markets. Accumulated other comprehensive income related to the changes in foreign currency exchange
rates was $37.0 million at September 30, 2011. Also included in accumulated other comprehensive
income was a loss of $2.1 million related to our cash flow hedges. Changes in the other
comprehensive income are non-cash items that are primarily attributable to investments in vessels
and U.S. Dollar based capitalization between our parent company and our foreign subsidiaries. The
current year activity reflects the changes in the U.S. Dollar compared to the functional currencies
of our major operating subsidiaries, particularly in the U.K. and Norway.
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 Regulation 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 natural 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 government regulation, | ||
| uncertainties surrounding deep water permitting and exploration and development activities, | ||
| 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. |
24
Table of Contents
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, 2010, 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 which affect market conditions and demand for our vessels, that the information upon 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, 2011, the fair value of these notes, based on quoted
market prices, was approximately $157.1 million compared to a carrying amount of $159.8 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
currencies. We do not hold or issue forward exchange contracts or other derivative financial
instruments for speculative purposes.
Other information required under Item 3 has been incorporated into Managements Discussion and
Analysis of Financial Condition and Results of Operations and is incorporated herein.
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.
25
Table of Contents
(b) Evaluation of internal controls and procedures.
As of December 31, 2010, 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, 2010, has been audited by UHY LLP, an independent public
accounting firm, as stated in our Form 10-K for the year ended December 31, 2010 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 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 and Chief Financial Officer |
||||
Date: October 20, 2011
26
Table of Contents
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
|
Form of Notice of Stock Award and Stock Award Agreement (2011 Non-Employee Director Share Incentive Plan) | Filed herewith | ||
31.1
|
Section 302 Certification for B.A. Streeter | Filed herewith | ||
31.2
|
Section 302 Certification for Q.V. Kneen | Filed herewith | ||
32.1
|
Section 906 Certification furnished for B.A. Streeter | Filed herewith |
27
Table of Contents
Filed Herewith or | ||||
Incorporated by Reference | ||||
from the | ||||
Exhibits | Description | Following Documents | ||
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, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated Statements of Stockholders Equity, (iv) Unaudited Condensed Consolidated Statements of Cash Flows and (v) Notes to Unaudited Consolidated Condensed Financial Statements, tagged as blocks of text. | Filed herewith |
28