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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 June 30, 2012

 

 

GULFMARK OFFSHORE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State or other jurisdiction of incorporation)

001-33607

(Commission file number)

76-0526032

(I.R.S. Employer Identification No.)

 

10111 Richmond Avenue, Suite 340, Houston, Texas   77042
(Address of principal executive offices)   (Zip Code)

(713) 963-9522

(Registrant's 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  x    NO  ¨

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  x    NO  ¨

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   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Number of shares of Class A Common Stock, $0.01 par value, outstanding as of July 23, 2012: 26,942,828.

(Exhibit Index Located on Page 30)

 

 

 


Table of Contents

GulfMark Offshore, Inc.

Index

 

          Page
Number
 

Part I.

   Financial Information   
   Item 1    Financial Statements      3   
      Unaudited Condensed Consolidated Balance Sheets      3   
      Unaudited Condensed Consolidated Statements of Operations      4   
      Unaudited Condensed Consolidated Statements of Comprehensive Income      5   
      Unaudited Condensed Consolidated Statement of Stockholders’ Equity      6   
      Unaudited Condensed Consolidated Statements of Cash Flows      7   
      Notes to the Unaudited Condensed Consolidated Financial Statements      8   
   Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations      19   
   Item 3    Quantitative and Qualitative Disclosures About Market Risk      27   
   Item 4    Controls and Procedures      28   

Part II.

   Other Information   
   Item 6    Exhibits      29   
   Signatures      29   
   Exhibit Index      30   

 

2


Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

      June 30,
2012
    December 31,
2011
 
     (In thousands, except par value amounts)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 146,463      $ 128,817   

Trade accounts receivable, net of allowance for doubtful accounts of $285 and $198, respectively

     86,748        85,214   

Other accounts receivable

     7,125        6,314   

Prepaid expenses and other current assets

     24,640        21,197   
  

 

 

   

 

 

 

Total current assets

     264,976        241,542   
  

 

 

   

 

 

 

Vessels, equipment, and other fixed assets at cost, net of accumulated depreciation of $354,885 and $329,299, respectively

     1,123,260        1,143,441   

Construction in progress

     91,772        37,107   

Goodwill

     31,251        31,153   

Intangibles, net of accumulated amortization of $11,533 and $10,030, respectively

     23,065        24,569   

Deferred costs and other assets

     27,332        21,987   
  

 

 

   

 

 

 

Total assets

   $ 1,561,656      $ 1,499,799   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

Current liabilities:

    

Current portion of long-term debt

   $ —        $ 1,667   

Accounts payable

     16,860        14,475   

Income and other taxes payable

     5,686        5,568   

Accrued personnel costs

     20,889        23,059   

Accrued interest expense

     5,912        5,777   

Fair value of derivative

     1,885        3,530   

Other accrued liabilities

     10,997        8,565   
  

 

 

   

 

 

 

Total current liabilities

     62,229        62,641   
  

 

 

   

 

 

 

Long-term debt

     346,712        305,830   

Long-term income taxes:

    

Deferred tax liabilities

     106,294        105,131   

Other income taxes payable

     21,447        22,769   

Other liabilities

     6,758        6,568   

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; 26,943 and 26,631 shares issued and 26,943 and 26,617 outstanding, respectively; Class B Common Stock $0.01 par value; 60,000 shares authorized; no shares issued

     266        262   

Additional paid-in capital

     385,883        379,673   

Retained earnings

     597,557        586,402   

Accumulated other comprehensive income

     34,510        31,105   

Treasury stock, at cost

     (9,447     (8,968

Deferred compensation expense

     9,447        8,386   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,018,216        996,860   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,561,656      $ 1,499,799   
  

 

 

   

 

 

 

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 June 30,     Six Months Ended June 30,  
      2012     2011     2012     2011  
     (In thousands, except per share amounts)  

Revenue

   $ 104,884      $ 96,911      $ 192,319      $ 178,200   

Costs and expenses:

        

Direct operating expenses

     48,846        46,908        97,655        91,225   

Drydock expense

     7,639        3,683        13,835        10,207   

General and administrative expenses

     11,996        10,910        24,112        22,333   

Depreciation and amortization

     14,850        14,982        29,879        29,658   

(Gain) loss on sale of assets

     (3,676     —          (4,825     10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     79,655        76,483        160,656        153,433   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     25,229        20,428        31,663        24,767   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest expense

     (4,840     (5,630     (13,705     (11,357

Interest income

     87        119        165        184   

Loss on extinguishment of debt

     (1,711     —          (3,641     —     

Foreign currency gain (loss) and other

     (1,551     73        (1,013     17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (8,015     (5,438     (18,194     (11,156
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     17,214        14,990        13,469        13,611   

Income tax provision

     (3,150     (1,699     (2,314     (1,487
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 14,064      $ 13,291      $ 11,155      $ 12,124   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.53      $ 0.51      $ 0.43      $ 0.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.53      $ 0.51      $ 0.42      $ 0.46   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     26,243        25,829        26,120        25,754   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     26,261        25,949        26,155        25,885   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

      Three Months Ended June 30,      Six Months Ended June 30,  
     2012     2011      2012      2011  
     (In thousands)      (In thousands)  

Net income

   $ 14,064      $ 13,291       $ 11,155       $ 12,124   

Comprehensive income:

          

Gain on cash flow hedge(1)

     73        161         1,226         668   

Foreign currency gain (loss)

     (17,264     6,596         2,179         24,683   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss)

   $ (3,127   $ 20,048       $ 14,560       $ 37,475   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) 

Net of income tax expense of $0.2 million and $0.1 million for the three months ended June 30, 2012 and 2011, respectively, and $1.5 million and $0.2 million for the six months ended June 30, 2012 and 2011, respectively.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


Table of Contents

GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2012

(In thousands)

 

      Common
Stock
     Additional
Paid - In
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Income
     Treasury Stock     Deferred
Compen
- sation
Expense
     Total
Stockholders’
Equity
 
                                 Shares     Share
Value
              

Balance at December 31, 2011

   $ 262       $ 379,673       $ 586,402       $ 31,105         (295   $ (8,968   $ 8,386       $ 996,860   

Net income

     —           —           11,155         —           —          —          —           11,155   

Issuance of common stock

     2         3,784         —           —           —          —          —           3,786   

Exercise of stock options

     2         2,396         —           —           —          —          —           2,398   

Deferred compensation plan

     —           30         —           —           2        (479     1,061         612   

Gain on cash flow hedge, net of tax

     —           —           —           1,226         —          —          —           1,226   

Translation adjustment

     —           —           —           2,179         —          —          —           2,179   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2012

   $ 266       $ 385,883       $ 597,557       $ 34,510         (293   $ (9,447   $ 9,447       $ 1,018,216   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended
June 30,
 
     2012     2011  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 11,155      $ 12,124   

Adjustments to reconcile net income from operations to net cash provided by operations:

    

Depreciation and amortization

     29,879        29,658   

Gain on sale of assets

     (4,825     10   

Amortization of stock-based compensation

     3,377        2,908   

Amortization of deferred financing costs

     2,076        834   

Loss on extinguishment of debt

     1,368        —     

Provision for doubtful accounts receivable, net of write-offs

     87        (192

Deferred income tax (benefit) provision

     690        (1,053

Foreign currency transaction (gain) loss

     995        (314

Change in operating assets and liabilities:

    

Accounts receivable

     (2,523     (16,623

Prepaids and other

     (3,411     (1,866

Accounts payable

     2,345        5,665   

Other accrued liabilities and other

     2,764        (6,109
  

 

 

   

 

 

 

Net cash provided by operating activities

     43,977        25,042   

Cash flows from investing activities:

    

Purchases of vessels, equipment and other fixed assets

     (80,869     (4,934

Proceeds from disposition of vessels and equipment

     23,475        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (57,394     (4,934

Cash flows from financing activities:

    

Proceeds from issue of 6.375% Senior Notes

     300,000        —     

Repayment of 7.75% Senior Notes

     (160,000     —     

Repayments of secured credit facility

     (101,667     (16,666

Borrowings under revolving loan facility, net

     974        10,000   

Debt issuance costs

     (9,036     —     

Debt extinguishment cost

     (2,274     —     

Proceeds from exercise of stock options

     2,398        911   

Proceeds from issuance of stock

     406        338   
  

 

 

   

 

 

 

Net cash provided by financing activities

     30,801        (5,417

Effect of exchange rate changes on cash

     262        2,057   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     17,646        16,748   

Cash and cash equivalents at beginning of the period

     128,817        97,195   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 146,463      $ 113,943   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid, net of interest capitalized

   $ 8,544      $ 9,693   

Income taxes paid, net

     2,962        3,320   

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(1) GENERAL INFORMATION

Organization and Nature of Operations

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, 2011, 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, 2011.

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:

 

8


Table of Contents

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (In thousands)     (In thousands)  

Income:

    

Net income attributable to common stockholders

   $ 14,064      $ 13,291      $ 11,155      $ 12,124   

Undistributed income allocated to participating securities

     (28     (121     (46     (141
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic

     14,036        13,170        11,109        11,983   
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed income allocated to participating securities

     28        121        46        141   

Undistributed income reallocated to participating securities

     (28     (120     (46     (140
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 14,036      $ 13,171      $ 11,109      $ 11,984   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares:

        

Basic

        

Weighted-average common shares outstanding

     26,243        25,829        26,120        25,754   

Dilutive effect of stock options and restricted stock awards

     18        120        36        131   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     26,261        25,949        26,155        25,885   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income per common share:

        

Basic

   $ 0.53      $ 0.51      $ 0.43      $ 0.47   

Diluted

   $ 0.53      $ 0.51      $ 0.42      $ 0.46   

(2) VESSEL ACQUISITIONS AND DISPOSITIONS

As of July 24, 2012, 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 fair value. However, we will continue to assess the value on a quarterly basis and make the proper adjustment, if needed.

In January 2012, we purchased a vessel for operation in the Americas region for a total price of $22.5 million, and we sold one of our Americas vessels and recorded a gain of $1.1 million. In May 2012, we sold two of our Americas vessels and recorded a combined gain of approximately $3.7 million.

In the third quarter of 2011, our Board of Directors approved the initiation of a new-build construction program. We began the program in the North Sea region where we contracted with three shipyards to build a total of six new platform supply vessels. The estimated total cost of these initial six vessels is $228.0 million. In addition, in late 2011, we exercised an option with one of the shipyards to build an additional vessel at an estimated cost of $60.0 million. 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.

In June 2012, we signed an agreement with a U.S. shipyard to build two U.S. flagged platform supply vessels (“PSV”) for the U.S. Gulf of Mexico. The vessels will be 271 foot dynamic positioning (“DP2”) capability multi-service PSV’s. The estimated total cost of these two vessels is approximately $72.0 million with expected deliveries in the third and fourth quarters of 2013. In July 2012, we signed agreements with another U.S. shipyard to build an additional two U.S. flagged vessels. The vessels will be 286 foot DP2 capability multi-service PSV’s. The total cost of these two vessels is estimated at $96.0 million.

 

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Table of Contents

The following tables illustrate the details of the vessels under construction, the vessels acquired, the vessels disposed of and the vessels classified as held for sale as indicated.

 

Construction Yard

   Region      Type(1)      Expected
Delivery
     Length
(feet)
     BHP(2)      DWT(3)      Expected
Cost
 
                                               (millions)  

Remontowa

     North Sea         LgPSV         Q2 2013         291         9120         5100       $ 37.0   

Remontowa

     North Sea         LgPSV         Q3 2013         291         9120         5100       $ 37.0   

Remontowa

     North Sea         LgPSV         Q3 2013         260         9120         4000       $ 34.0   

Rosetti Marino

     North Sea         LgPSV         Q4 2013         246         7483         3000       $ 31.0   

Rosetti Marino

     North Sea         LgPSV         Q1 2014         246         7483         3000       $ 31.0   

Simek

     North Sea         LgPSV         Q2 2013         304         11265         4700       $ 58.0   

Simek

     North Sea         LgPSV         Q4 2013         304         11265         4700       $ 60.0   

Thoma-Sea

     Americas         LgPSV         Q3 2013         271         5364         3500       $ 36.0   

Thoma-Sea

     Americas         LgPSV         Q4 2013         271         5364         3500       $ 36.0   

BAE Systems

     Americas         LgPSV         Q4 2014         286         8160         5300       $ 48.0   

BAE Systems

     Americas         LgPSV         Q1 2015         286         8160         5300       $ 48.0   

Note: Expected cost may differ from previous periods due to foreign currency fluctuations

 

(1) 

LgPSV - Large Platform Supply Vessel

PSV - Platform Supply Vessel

SpV - Specialty Vessel

Crew - Crewboat

(2) 

BHP - Brake Horsepower

(3) 

DWT - Deadweight Tons

 

Vessels Acquired Since December 31, 2011

 

Vessel

   Region      Type(1)      Year
Built
     Length
(feet)
     BHP(2)      DWT(3)      Cost  
                                               (millions)  

Thomas Wainwright

     Americas         PSV         2010         242         4,200         2,700       $ 22.5   

Vessels Disposed of Since December 31, 2011

 

Vessel

   Region      Type(1)      Year
Built
     Length
(feet)
     BHP(2)      DWT(3)      Month
Disposed
 

Bluefin

     Americas         Crew         2008         165         7,200         337         Jan-12   

Sailfish

     Americas         Crew         2007         176         7,200         307         May-12   

Swordfish

     Americas         Crew         2009         176         7,200         307         May-12   

 

Vessels Held for Sale (Laid Up)

 

Vessel

   Region      Type(1)      Year
Built
     Length
(feet)
     BHP(2)      DWT(3)  

Clwyd Supporter

     N. Sea         SpV         1984         266         10,700         1,350   

Interest is capitalized in connection with the construction of vessels. During the three and six month periods ended June 30, 2012, $1.0 million and $1.8 million of interest, respectively, was capitalized. We did not capitalize any interest during the three or six month periods ended June 30, 2011.

 

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(3) LONG-TERM DEBT

Our long-term debt at June 30, 2012 and December 31, 2011 consisted of the following:

 

      June 30,
2012
     December 31,
2011
 
     (In thousands)  

Senior Notes Due 2022

   $ 300,000       $ —     

Senior Notes Due 2014

     —           160,000   

Facility Agreement

     40,000         141,667   

Secured Reducing Revolving Loan Facility

     6,712         6,000   
  

 

 

    

 

 

 
     346,712         307,667   
  

 

 

    

 

 

 

Less: Current maturities of long-term debt

     —           (1,667

Debt discount, net

     —           (170
  

 

 

    

 

 

 

Total

   $ 346,712       $ 305,830   
  

 

 

    

 

 

 

The following is a summary of scheduled debt maturities by year:

 

Year

   Debt Maturity  
     (In thousands)  

2012

  

2013

     6,712   

2014

     40,000   

2015

     —     

2016

     —     

Thereafter

     300,000   
  

 

 

 

Total

   $ 346,712   
  

 

 

 

Senior Notes – Due 2022

On March 12, 2012, we issued $300.0 million aggregate principal amount of 6.375% senior notes (“Senior Notes”) due 2022. The Senior Notes pay interest semi-annually on March 15 and September 15, commencing September 15, 2012. Prior to March 15, 2017, we may redeem some or all of the Senior Notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. The make-whole premium is based on U.S. treasuries plus 50 basis points. On and after March 15, 2017, we may redeem some or all of the Senior Notes at the redemption prices (expressed as percentages of principal amount) equal to 103.188% for the twelve-month period beginning March 15, 2017, 102.125% for the twelve-month period beginning March 15, 2018, 101.063% for the twelve-month period beginning March 15, 2019 and 100.000% beginning March 15, 2020, plus accrued and unpaid interest to the redemption date. In conjunction with the Senior Note offering, we incurred $7.6 million in debt issuance cost which is included in our balance sheet under deferred costs and other assets and will be amortized into interest cost over the life of the Senior Notes.

At June 30, 2012, the fair value of the new Senior Notes, based on quoted market prices, was approximately $302.3 million, compared to a carrying amount of $300.0 million.

 

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Facility Agreement

On December 17, 2009, one of our wholly-owned subsidiaries (the “Borrower”) entered into a $200.0 million facility agreement (as amended, the “Facility Agreement”) with The Royal Bank of Scotland plc (“RBS”). The Facility Agreement was to mature on December 31, 2012, with amounts borrowed repayable in quarterly installments of $8.3 million and a final installment of $108.3 million, but, on January 26, 2012, we entered into a financing agreement with RBS to amend the Facility Agreement primarily to extend the maturity to July 1, 2014 and to adjust principal payments. Under the amended agreement, we are not required to make principal payments until maturity. Loans under the Facility Agreement bear interest at the three month LIBOR rate, plus a margin of 2.5% per annum. The Facility Agreement is secured by certain vessels and all of the shares of common stock of the Borrower have been pledged to the agent, on behalf of the lender, as security for the Facility Agreement. In the first quarter of 2012, we incurred $1.4 million of cost associated with the amendment. This cost was capitalized in our balance sheet under deferred costs and other assets and was to be amortized into interest cost over the life of the Facility Agreement. The repayment in March 2012 of $100.0 million of the $140.0 million then outstanding under the Facility Agreement increased the amortization of the costs to expense.

We used a portion of the net proceeds of the new Senior Notes to repay $100.0 million of the indebtedness outstanding related to the Facility Agreement. At June 30, 2012, we were in compliance with all covenants, and had $40.0 million borrowed under the facility. At June 30, 2012, the fair value of borrowings under this facility is considered to approximate book value as the interest is at market rates.

Senior Notes – Due 2014

On July 21, 2004, we issued $160.0 million aggregate principal amount of 7.75% senior notes (the “Old Notes”) due July 2014. On February 27, 2012, we commenced a tender offer to purchase all of our outstanding Old Notes. In conjunction with the tender offer, we solicited consents to eliminate most of the covenants, certain events of default applicable to the Old Notes and certain other provisions contained in the indenture governing the Old Notes. On March 12, 2012, we funded the tender offer with $80.3 million of the proceeds of the new Senior Notes. On April 2, 2012, we redeemed the remainder of the Old Notes with $79.7 million. At June 30, 2012, we had no amount outstanding on the Old Notes.

The consideration for each $1,000 principal amount of Old Notes validly tendered under the terms of the tender offer was $1,015.50, which included a consent payment of $15.00. Holders also received accrued and unpaid interest from the last interest payment on the applicable Old Notes up to, but not including, the applicable settlement date for all of such Notes that we accepted for purchase in the tender offer. The tender offer expired March 12, 2012.

Pursuant to a notice of conditional redemption issued on March 1, 2012, all Old Notes outstanding after the consummation of the tender offer were redeemed on April 2, 2012, at a redemption price of $1,012.92 per $1,000 principal amount of Old Notes, plus accrued and unpaid interest up to, but not including, the redemption date.

 

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Secured Reducing Revolving Loan Facility

We currently have a $175.0 million (of which $138.3 million was available for borrowing at June 30, 2012) Secured Reducing Revolving Loan Facility with a syndicate of financial institutions led by Den Norske Bank, as agent. The facility matures in 2013 and the maximum availability reduces in increments of $15.0 million every six months beginning in December 2011, with a final reduction of $130.0 million in June 2013. Security for the facility is provided by first priority mortgages on certain vessels. The interest rate ranges from LIBOR plus a margin of 0.7% to 0.9% depending on our EBITDA coverage ratio. The Secured Reducing Revolving Loan Facility is subject to financial covenants. At June 30, 2012, we were in compliance with all covenants and had $6.7 million drawn under this facility.

(4) INCOME TAXES

Our estimated annual effective tax rate, adjusted for discrete tax items, is applied to interim periods’ pretax income. 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 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.

(5) COMMITMENTS AND 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.

In late 2011, we were 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 notified nor assessed with this tax by the Brazilian state. No accrual has been recorded as of June 30, 2012 for any liabilities associated with a possible future assessment. We cannot predict whether any such tax assessment may be made in the future.

 

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(6) 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 derivative’s 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 related to payments under our new-build vessel construction programs and are highly effective, as the terms of the forward contracts are the same as the purchase commitments under the related contracts. Any gains or losses resulting from changes in fair value are recognized in construction-in-progress related to the vessel under construction. As of June 30, 2012, we had open foreign currency forward contracts hedging British Pound exposure to 67 million in Euro denominated contract payments due at varying times from October 2012 through July 2013.

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. The swap was designated as a cash flow hedge. The terms of this swap, including reset dates and floating rate indices, matched those of our underlying variable-rate debt and no ineffectiveness was recorded in prior periods.

On February 27, 2012, we announced our intent to issue the new Senior Notes with a fixed interest rate, the proceeds of which would be used to pay down amounts outstanding under the Old Notes and the Facility Agreement and as a result we no longer have forecasted interest

 

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payments that qualify for hedge accounting. When a cash flow hedge ceases to qualify for hedge accounting, any amounts remaining in accumulated OCI are released and charged or credited to the underlying expense, in this case interest expense. At June 30, 2012, we had paid down $100.0 million of the $140.0 million outstanding under the Facility Agreement with proceeds from the new Senior Notes. We allocated a proportionate amount of the accumulated change in the fair value of the interest rate swaps recorded in accumulated OCI to the remaining $40.0 million of Facility Agreement debt. This balance is being amortized to interest expense over the remaining life of the interest rate swap which matures December 31, 2012. We have determined that, based upon current market conditions and other factors, liquidation of the interest rate swap is not economically beneficial at this time and additional future losses are limited. Accordingly, we have elected to retain and hold this interest rate swap at this time. Since it no longer qualifies as a cash flow hedge, it is considered a derivative with no hedging designation. Changes in fair value of the swap are included in earnings in the period of the change. For the three months and six months ended June 30, 2012, insignificant losses were recorded related to this derivative.

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 the contracts at the date of settlement. The forecasted payments associated with these settled swaps are related to the Facility Agreement. For reasons discussed above, we reclassified $0.3 million from accumulated OCI as the forecasted transaction was reduced below $100.0 million to $40.0 million. Insignificant unrecognized losses are recorded as of June 30, 2012 in accumulated OCI related to these interest rate swap contracts. This balance will be amortized into interest expense through December 31, 2012 when the interest rate swap expires 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 June 30, 2012 and December 31, 2011 (dollars in thousands):

 

     Asset Derivatives     

Liability Derivatives

 
     June 30, 2012      December 31, 2011     

June 30, 2012

    

December 31, 2011

 
Derivatives designed as
hedging instruments
   Balance
Sheet
Location
   Fair Value      Balance
Sheet
Location
   Fair Value     

Balance Sheet Location

   Fair Value     

Balance Sheet Location

   Fair Value  

Interest rate swap

      $ —            $ —        

Fair value of derivative

   $ 1,885      

Fair value of derivative

   $ 3,530   

Foreign currency forwards

      $ —            $ —        

Foreign currency forwards

     251          $ —     
     

 

 

       

 

 

       

 

 

       

 

 

 
      $ —            $ —            $ 2,136          $ 3,530   
     

 

 

       

 

 

       

 

 

       

 

 

 

 

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The following tables quantify the amount of gain or loss recognized during the quarters ended June 30, and identify the consolidated statement of operations location:

 

                 Location of Loss      Amount of Loss  
     Amount of Loss     Reclassified from      Reclassified from  
Derivatives in cash flow    Recognized in OCI on     Accumulated OCI into      Accumulated OCI into  

hedging relationships

   Derivative     Income      Income  
     Six Months Ended June 30,            Six Months Ended June 30,  
     2012     2011            2012     2011  
     (in thousands)            (in thousands)  

Interest rate swaps

   $ (176   $ (676     Interest expense       $ (2,908   $ (1,540
     Three Months Ended June 30,            Three Months Ended June 30,  
     2012     2011            2012     2011  
     (in thousands)            (in thousands)  

Interest rate swaps

   $ —        $ (578     Interest expense       $ (225   $ (787

Changes in the fair values of our derivative instruments with no hedging designation (both assets and liabilities) are reflected in current earnings.

(7) 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 was entered into to fix the LIBOR interest rate component on $100.0 million of the outstanding balance on the Facility Agreement. The fixed rate component of the swap was set at 4.145% and was accounted for as a cash flow hedge. In conjunction with the issuance of the new Senior Notes in the first quarter of 2012 and the concurrent repayment of $100.0 million of the Facility Agreement debt, we de-designated hedge accounting for this swap. The consolidated balance sheet contains the derivative value within short term liabilities, reflecting the fair value of the interest rate swap which was $1.9 million at June 30, 2012. For the three and six month periods ended June 30, 2012, $0.2 and $0.6 million related to this interest rate swap was reclassified from other comprehensive income to interest expense, respectively. We also reclassified an additional $1.8 million from accumulated OCI to interest expense as a result of de-designating hedge accounting during the first quarter of 2012. We expect to reclassify the remaining $0.5 million of accumulated OCI related to the interest rate swap to interest expense during the next 6 months. We recognize the fair value of our derivative swap 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 June 30, 2012.

At June 30, 2012, we had open fair value hedges associated with firm contractual commitments for future vessel payments denominated in a foreign currency. These forward contracts are designated as fair value hedges and are highly effective. We recognize the fair value of our derivative liability as a Level 2 valuation. The fair value at June 30, 2012 was $0.3 million.

 

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The following table presents information about our assets (liabilities) measured at fair value on a recurring basis as of June 30, 2012, and indicates the fair value hierarchy we utilized to determine such fair value (in millions).

 

     Level 1      Level 2     Level 3      Total  

Cash Flow Hedge

   $ —         $ (1.9   $ —         $ (1.9

Fair Value Hedge

   $ —         $ (0.3   $ —         $ (0.3

Asset Held For Sale

   $ —         $ 1.8      $ —         $ 1.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents information about our assets (liabilities) measured at fair value on a recurring basis as of December 31, 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 Hedge

   $ —         $ (3.5   $ —         $ (3.5

Asset Held For Sale

   $ —         $ 1.8      $ —         $ 1.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

(8) NEW ACCOUNTING PRONOUNCEMENTS

In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11"). Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). U.S. GAAP allows companies the option to present net in their balance sheets derivatives that are subject to a legally enforceable netting arrangement with the same party where rights of set-off are only available in the event of default or bankruptcy. The amendments to the FASB Accounting Standards Codification in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of ASU 2011-11 will not have a material impact on our consolidated financial statements.

(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 segment’s 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 segment’s 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 June 30, 2012

           

Revenue

   $ 45,376       $ 15,041      $ 44,467      $ —        $ 104,884   

Direct operating expenses

     20,659         4,747        23,440        —          48,846   

Drydock expense

     2,233         (161     5,567        —          7,639   

General and administrative expenses

     3,388         789        2,518        5,301        11,996   

Depreciation and amortization expense

     4,749         2,680        6,851        570        14,850   

Gain on sale of assets

     —           —          (3,676     —          (3,676
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 14,347       $ 6,986      $ 9,767      $ (5,871   $ 25,229   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended June 30, 2011

           

Revenue

   $ 43,836       $ 15,678      $ 37,397      $ —        $ 96,911   

Direct operating expenses

     20,727         2,887        23,294        —          46,908   

Drydock expense

     2,371         1,755        (443     —          3,683   

General and administrative expenses

     2,689         761        1,930        5,530        10,910   

Depreciation and amortization expense

     4,970         2,431        7,132        449        14,982   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 13,079       $ 7,844      $ 5,484      $ (5,979   $ 20,428   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

            Southeast                     
     North Sea      Asia      Americas     Other     Total  
     (In thousands)  

Six Months Ended June 30, 2012

            

Revenue

   $ 83,039       $ 29,266       $ 80,014      $ —        $ 192,319   

Direct operating expenses

     40,679         8,550         48,426        —          97,655   

Drydock expense

     5,784         2,129         5,922        —          13,835   

General and administrative expenses

     7,055         1,562         5,119        10,376        24,112   

Depreciation and amortization expense

     9,510         5,190         14,029        1,150        29,879   

Gain on sale of assets

     —           —           (4,825     —          (4,825
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 20,011       $ 11,835       $ 11,343      $ (11,526   $ 31,663   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2011

            

Revenue

   $ 79,235       $ 31,213       $ 67,752      $ —        $ 178,200   

Direct operating expenses

     41,441         5,749         44,035        —          91,225   

Drydock expense

     5,441         1,940         2,826        —          10,207   

General and administrative expenses

     5,923         1,435         4,199        10,776        22,333   

Depreciation and amortization expense

     9,757         4,882         14,238        781        29,658   

Loss on sale of assets

     —           —           10        —          10   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 16,673       $ 17,207       $ 2,444      $ (11,557   $ 24,767   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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ITEM 2. MANAGEMENT'S 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, to our present number of 87 active vessels, through strategic acquisitions and the new construction of technologically advanced vessels, partially offset by dispositions of certain older, less profitable vessels. At July 24, 2012, our active fleet includes 71 owned vessels and 16 managed vessels.

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 six months of 2012, we completed 317 drydock days, compared to 319 drydock days completed in the same period last year.

 

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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 Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2011.

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.

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Revenues by Region (000’s) (a):

        

North Sea Based Fleet (c)

   $ 45,376      $ 43,836      $ 83,039      $ 79,235   

Southeast Asia Based Fleet

     15,041        15,678        29,266        31,213   

Americas Based Fleet

     44,467        37,397        80,014        67,752   

Rates Per Day Worked (a) (b):

        

North Sea Based Fleet (c)

   $ 21,231      $ 20,014      $ 20,318      $ 18,951   

Southeast Asia Based Fleet

     14,110        15,228        14,219        15,238   

Americas Based Fleet

     16,761        14,217        16,239        14,207   

Overall Utilization (a) (b):

        

North Sea Based Fleet

     93.0     94.1     90.4     90.6

Southeast Asia Based Fleet

     80.5     83.0     79.3     83.1

Americas Based Fleet

     90.2     84.3     81.9     77.4

Average Owned Vessels (a) (d):

        

North Sea Based Fleet (c)

     24.0        25.0        24.0        25.0   

Southeast Asia Based Fleet

     15.0        14.0        14.7        14.0   

Americas Based Fleet

     32.7        35.0        33.5        35.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     71.7        74.0        72.2        74.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Owned 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. See Currency Fluctuations and Inflation below for exchange rates.
(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.

 

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Comparison of the Three Months Ended June 30, 2012 with the Three Months Ended June 30, 2011

For the quarter ended June 30, 2012, net income was $14.1 million, or $0.53 per diluted share on revenues of $104.9 million. For the same 2011 period, net income was $13.3 million, or $0.51 per diluted share on revenues of $96.9 million.

Our revenues for the quarter ended June 30, 2012 increased $8.0 million or 8.2% compared to the second quarter of 2011. An increase in average day rates from $16,508 in the second quarter of 2011 to $17,821 in the current year quarter increased revenue by $11.3 million, which was offset by currency effects that negatively impacted revenue by $1.8 million. Increased capacity during the quarter contributed an additional $0.3 million. Overall utilization increased from 87.4% in the prior year quarter to 89.1% in the current year quarter, however due to the mix of days worked associated with vessels with lower day rates revenue was negatively impacted by $1.8 million.

Operating income for the period was $25.2 million compared to $20.4 million for the prior year quarter. The increase is due primarily to the increase in revenue, offset by higher direct operating cost and higher drydock expense. Adding to the increase in quarterly income was the gain on sale related to two vessels of approximately $3.7 million. General and administrative expense was higher than the 2011 quarter by $1.1 million, due mainly to an increase in salaries and benefits and higher professional fees.

North Sea

Revenues in the North Sea region increased by $1.5 million, or 3.5%, to $45.4 million in the second quarter of 2012 compared to the same period of 2011. Approximately $4.7 million of the increase was a result of increased dayrates from $20,014 in 2011 to $21,231 in the current year quarter. The strengthening of the U.S. Dollar decreased revenue by $1.7 million. In addition utilization rates decreased slightly from 94.1% in the second quarter of 2011 to 93.0% in the current year quarter, which decreased revenue by $0.5 million. Capacity also had a negative impact to revenue of $1.0 million, resulting from the effect of a sale of a vessel in 2011. Operating income increased by $1.3 million compared to the prior year quarter due to the increase in revenue. Drydock and direct operating expenses in the second quarter of 2012 were essentially unchanged from the prior year quarter. General and administrative expense increased by $0.7 million due to mainly higher salaries and benefits.

Southeast Asia

Revenues for our Southeast Asia region decreased from the prior year quarter by $0.6 million, or 4.1%, to $15.0 million. The decrease was primarily attributable to a decrease in day rates from $15,228 in the prior year quarter to $14,110 in the current quarter, which reduced revenue by $0.3 million. Utilization for the second quarter of 2012 decreased from 83.0% to 80.5% in the current quarter reducing revenue by $1.8 million. Capacity increased revenue by $1.5 million as a result of the arrival of one vessel from our Americas region in the current quarter. Operating income for the region was $7.0 million in the second quarter of 2012 compared to $7.8 million in the prior year quarter. The decrease is due mainly to the decline in revenue coupled with an increase in direct operating expense due to the costs associated with mobilizing the vessel from our Americas region. This is offset by a decrease in drydock expense due to fewer drydock days incurred during the current year quarter. General and administrative expense was slightly higher from the prior year quarter.

 

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Americas

Revenues in the Americas region increased by $7.1 million, or 18.9%, to $44.5 million in the second quarter of 2012 compared to the same prior year quarter. Day rates increased from $14,217 in 2011 to $16,761 in the current quarter, which increased revenue by $6.7 million. Utilization for the second quarter of 2012 increased from 84.3% to 90.2% increasing revenue by $2.6 million. Capacity decreased revenue by $2.2 million as a result of the departure of one vessel to our Southeast Asia region and the net effect of vessel purchases and sales in the second quarter of 2012. Operating income for the region was $9.8 million in the second quarter of 2012 compared to $5.5 million in the prior year quarter. The increase is due mainly to the increase in revenue coupled with the gain on the sale of two vessels in the region. This increase was offset by an increase in drydock expense due to more drydock days incurred during the current year quarter. General and administrative expense increased by $0.6 million from the prior year quarter due mainly to higher salaries, benefits and professional fees.

Other

Other expenses in the second quarter of 2012 increased by $2.6 million compared to the prior year quarter. The increase was due primarily to the $1.7 million loss on the early extinguishment of the Old Notes and foreign currency losses of $1.6 million offset by the decrease in interest expense resulting from higher capitalized interest.

Income Taxes

Our effective tax rate for the second quarter of 2012 was 15.8% excluding unusual items. This compares to an 8.4% effective tax rate in the second quarter of 2011, excluding unusual items. The change in the effective tax rate from the prior year was primarily attributable to a change in the mix of earnings between our higher and lower tax jurisdictions.

Comparison of the Six Months Ended June 30, 2012 with the Six Months Ended June 30, 2011

For the six months ended June 30, 2012 net income was $11.2 million, or $0.42 per diluted share on revenues of $192.3 million. During the same period in 2011, net income was $12.1 million or $0.46 per diluted share, on revenues of $178.2 million.

Revenue increased $14.1 million period over period due mainly to higher dayrates of $17,308 in 2012 compared to $16,153 in 2011 which had a positive impact to revenue of $15.9 million. Capacity also had a positive impact to revenue of $1.1 million as we incurred one more work day in the year and the net effect of the purchase and sale of vessels. The strengthening of the U.S. Dollar negatively impacted revenue by $2.3 million. Average utilization rates increased overall from 83% in 2011 to 84.2% in 2012, however due to the mix of days worked associated with vessels with lower day rates the effect reduced revenue by $0.6 million.

Operating income for the six-month period ended June 30, 2012 was $31.7 million compared to $24.8 million in 2011. The increase is primarily due to increased revenue and a $4.8 million gain on three vessel sales, offset by higher direct operating expenses and drydock expense. General and administrative expense was higher by $1.8 million than the 2011 period due primarily to higher salaries and benefits.

 

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North Sea

North Sea revenue increased by $3.8 million, or 4.8%, in the first six months of 2012 compared to 2011. The increase in average day rates from $18,951 in 2011 to $20,318 in 2012, offset by the currency effects of the strengthening U.S. Dollar, contributed $5.0 million to the increase in revenue. In addition, average utilization rates decreased from 90.6% in 2011 to 90.4% in 2012, however the impact to revenue was positive by $0.4 million due to the mix of days worked associated with vessels with higher day rates. A reduction in capacity due to the 2011 vessel sale decreased revenue by $1.6 million compared to the prior period. Operating income increased by $3.3 million resulting primarily from the increased revenue coupled with the decrease in direct operating expenses and depreciation expense. Drydock expense increased by $0.3 million from the 2011 period due to higher drydock costs per day. General and administrative expense was higher by $1.1 million than the 2011 period due mainly to higher salaries and benefits.

Southeast Asia

Revenue for our Southeast Asia based fleet decreased by $1.9 million, or 6.2%, from $31.2 million in the first six months of 2011 to $29.3 million in 2012. The decrease was attributable to a decrease in average day rates from $15,238 in 2011 to $14,219 in 2012, which decreased revenue by $1.1 million. Utilization also decreased from 83.1% in 2011 to 79.3% in the current year, negatively impacting revenue by $2.4 million. The increase in fleet size as a result of the arrival of one vessel from the Americas region in 2012 positively contributed $1.6 million to revenue. Operating income decreased from $17.2 million in 2011 to $11.8 million this year. The decrease resulted mainly from the lower revenues coupled with higher direct operating and depreciation expense due to the arrival of the additional vessel, and higher drydock costs, as a result of higher drydock costs per day. General and administrative expense increased slightly from the 2011 period, due mainly to higher salaries and benefits.

Americas

Our Americas region revenue increased $12.3 million, or 18.1%, from $67.8 million in 2011 to $80.0 million in 2012. The increase was due mainly to the increase in average day rates from $14,207 in 2011 to $16,239 in 2012, contributing $9.9 million to revenue. Utilization also increased from 77.4% to 81.9% in the current year resulting in a $6.1 million increase in revenues. Capacity negatively impacted revenue by $3.7 million due to the departure of one vessel to our Southeast Asia region in the first quarter, partially offset by the net effect of a vessel purchase and vessel sales in the year. Operating income of $11.3 million increased $8.9 million from the 2011 period. The increase is due primarily to the increase in revenue coupled with the gains recognized from the sale of three vessels in the region during 2012. This was offset by higher direct operating expenses, mainly crew salaries and benefits and higher drydock expense as a result of more drydock days. General and administrative expense also increased by $0.9 million due primarily to the increase in salaries and benefits.

Other

In the six months ended June 30, 2012, other expenses totaled $18.2 million, an increase of $7.0 million from 2011. The increase was due primarily to the $3.6 million loss on the early extinguishment of the Old Notes and increased interest expense of $2.3 million due mainly to the acceleration of recognition of our unrealized losses in OCI related to interest rate swaps into earnings partially offset by higher capitalized interest. Foreign currency losses were higher by $1.0 million compared to the prior year period.

 

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Income Taxes

Our effective tax rate for the first half of 2012 was 16.8% excluding unusual items. This compares to an 8.3% effective tax rate for the first six months of 2011. The change in the effective tax rate from the prior year was primarily attributable to a change in the mix of earnings between our higher and lower tax jurisdictions.

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 first quarter of 2012, we issued $300.0 million of 6.375% Senior Notes due in 2022. The Senior Notes will pay interest on March 15 and September 15. The proceeds from this debt issuance were used to pay down borrowings under the Old Notes and the Facility Agreement. The issuance of Senior Notes has allowed us to extend a substantial portion of our debt maturities for ten years and to require only interest payments in the interim.

In the third quarter of 2011, our Board of Directors approved the initiation of a new-build construction program. We began the program in the North Sea region where we contracted with three shipyards to build a total of six new platform supply vessels (“PSV”). In late 2011, we exercised an option with one of the shipyards to build an additional PSV. The estimated cost of these seven PSV’s is $288.0 million. In June 2012, we signed an agreement with a U.S. shipyard to build two U.S. flagged PSVs for the U.S. Gulf of Mexico. In July 2012, we signed agreements with another U.S. shipyard to build an additional two U.S. flagged PSV’s. The estimated total cost of these four PSV’s is approximately $168.0 million.

We are required to make expenditures for the certification and maintenance of our vessels. We expect our drydocking expenditures to be approximately $29.0 million in 2012, of which we have expensed $13.8 million in the first half of 2012.

Net working capital at June 30, 2012, was $202.7 million. Net cash provided by operating activities was $32.6 million for the three months ended June 30, 2012. Net cash used in investing activities was $28.1 million. Net cash used in financing activities was $79.1 million.

Net cash provided by operating activities was $44.0 million for the six months ended June 30, 2012. Net cash used in investing activities was $57.4 million. Net cash provided by financing activities was $30.8 million.

At June 30, 2012, we had approximately $ 146.5 million of cash on hand and $6.7 million drawn under our Secured Reducing Revolving Loan Facility, $40.0 million outstanding under our Facility Agreement and $300.0 million outstanding on our newly issued Senior Notes. At June 30, 2012, we had approximately $138.3 million of borrowing capacity under our Secured Reducing Revolving Credit Facility.

 

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As of June 30, 2012, approximately 84% 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, 2011 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 a portion of 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 anticipate that cash on hand, future cash flow from operations for 2012, and access to our revolving credit facility will be adequate to fund our new-build construction program, to repay our debts due and payable during such period, to complete scheduled drydockings, to make normal recurring capital additions and improvements and to meet operating and working capital requirements. This expectation, however, is dependent upon the success of our operations.

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 43.3% of our total consolidated revenue and $14.3 million in operating income for the three months ended June 30, 2012, and 43.2% of our total consolidated revenue and $20.0 million in operating income for the six months ended June 30, 2012. Charters in our Americas fleet can be denominated in Brazilian Reais (BRL) and charters in our Southeast Asia fleet can be denominated in Singapore Dollars (SGD). In the second quarter of 2012, the exchange rates of GBP, NOK, Euros, BRL and SGD against the U.S. Dollar averaged as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  
     1 US$=      1 US$=  

GBP

     0.632         0.613         0.634         0.618   

NOK

     5.892         5.437         5.838         5.577   

Euro

     0.790         0.695         0.771         0.712   

BRL

     1.958         1.594         1.857         1.630   

SGD

     1.264         1.216         1.264         1.258   

 

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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 June 2012, we entered into forward currency contracts to specifically hedge the foreign currency exposure related to firm contractual commitments in the form of future payments for the construction of new vessels. As a result, by design, there was exact offset between the gain or loss exposure in the related underlying contractual commitment. There was a $0.3 million outstanding liability on these contracts at June 30, 2012. We do not use foreign currency forward contracts for trading or speculative purposes.

Reflected in the accompanying consolidated balance sheet at June 30, 2012, is $34.5 million in accumulated OCI primarily relating to the change in exchange rates at June 30, 2012 in comparison with the exchange rates when we invested capital in these markets. Accumulated OCI related to the changes in foreign currency exchange rates was $34.6 million at June 30, 2012 and also included a loss of $0.1 million related to our cash flow hedges. Changes in accumulated OCI 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.

 

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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.

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, 2011, 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 6.375% Senior Notes and the Facility Agreement. At June 30, 2012, the fair value of the Senior Notes, based on quoted market prices, was approximately $302.3 million, compared to a carrying amount of $300.0 million. The fair value of amounts outstanding under the Facility Agreement was its carrying value, or $40.0 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

 

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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 Management's 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 SEC’s rules and forms.

 

(b) Evaluation of internal controls and procedures.

As of December 31, 2011, 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, 2011, has been audited by KPMG LLP, an independent public accounting firm, as stated in our Form 10-K for the year ended December 31, 2011 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.

 

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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/ Samuel R. Rubio
  Samuel R. Rubio
 

Senior Vice President - Controller and

Chief Accounting Officer

Date: July 24, 2012

 

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INDEX TO EXHIBITS

 

Exhibits

    

Description

  

Filed Herewith or

Incorporated by Reference

from the

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 Company’s 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 Company’s 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       Indenture, dated as of March 12, 2012, between GulfMark Offshore, Inc., as issuer, and U.S. Bank National Association, as trustee, including a form of the Company’s 6.375% Senior Notes due 2022    Exhibit 4.1 to our current report on Form 8-K filed on March 12, 2012
  4.8       Second Supplemental Indenture, dated as of March 12, 2012, by and among GulfMark Offshore, Inc. and U.S. Bank National Association, as trustee, for the Company’s 7.75% Senior Notes due 2014    Exhibit 4.2 to our current report on Form 8-K filed on March 12, 2012
  4.9       $300 Million GulfMark Offshore, Inc. 6.375% Senior Notes due 2022 Registration Rights Agreement dated as of March 12, 2012, by among GulfMark Offshore, Inc., Credit Suisse Securities (USA) LLC, Wells Fargo Securities, LLC and RBS Securities Inc.    Exhibit 4.3 to our current report on Form 8-K filed on March 12, 2012

 

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  4.10       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
  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
  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 June 30, 2012, 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 Statement of Cash Flows and (v) Notes to Unaudited Consolidated Condensed Financial Statements, tagged as blocks of text.    Filed herewith

 

31