Notes to Consolidated Financial Statements (unaudited)
Organization
We are a marine contractor that provides manned diving, pipelay and pipe burial, platform installation and platform salvage services to a diverse customer base in the offshore oil and natural gas industry. We offer our customers these complementary services on an integrated basis for more complex offshore projects, which maximizes efficiencies for our customers and enhances the utilization of our fleet. Our headquarters are located in Houston, Texas.
Our global footprint encompasses operations on the Gulf of Mexico Outer Continental Shelf (or “OCS”), and in the Northeastern U.S., Latin America, Australia, China, Southeast Asia, West Africa, the Middle East and the Mediterranean. We own a diversified fleet of surface and saturation diving support vessels and construction barges.
Preparation of Interim Financial Statements
These interim consolidated financial statements are unaudited and have been prepared pursuant to instructions for quarterly reporting required to be filed with the Securities and Exchange Commission (or “SEC”) and do not include all information and notes normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (or “GAAP”).
The accompanying consolidated financial statements have been prepared in conformity with GAAP, and our application of GAAP for purposes of preparing the accompanying consolidated financial statements is consistent in all material respects with the manner applied to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2011 (our “2011 Form 10-K”). The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements and the related disclosures. Actual results may differ from our estimates. Management has reflected all adjustments (which were normal recurring adjustments unless otherwise disclosed herein) that it believes are necessary for a fair presentation of the consolidated balance sheets, results of operations and cash flows, as applicable.
Our balance sheet as of December 31, 2011 included herein has been derived from the audited balance sheet as of December 31, 2011 included in our 2011 Form 10-K. These consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto included in our 2011 Form 10-K, which contains a summary of our significant accounting policies and estimates and other disclosures. Additionally, our statement of cash flows for prior periods include reclassifications that were made to conform to current period presentation and did not impact our reported net income (loss) or equity. Interim results should not be taken as indicative of the results that may be expected for any other interim period or the year ending December 31, 2012.
Subsequent Events
We conducted our subsequent events review through the date these interim consolidated financial statements were filed with the SEC. See note 12 for a discussion of subsequent events.
Seasonality
As a marine contractor with significant operations in the Gulf of Mexico, our vessel utilization is typically lower during the winter and early spring due to unfavorable weather conditions in the Gulf of Mexico.
Significant Accounting Policies and Estimates
There have been no material changes or developments to the significant accounting policies or estimates discussed in our 2011 Form 10-K or accounting pronouncements issued or adopted, except as described below.
Derivative Instruments and Hedging Activities
Contracts in Entity's Own Equity
We have issued convertible debt which is indexed to, and can be settled in, shares of our common stock. We assess the initial classification of these instruments based on whether they meet the necessary conditions for equity classification. For instruments that do not meet equity classification, we record them as a liability. We reassess this classification at each balance sheet date.
Fair Value Measurements
Convertible Debt and Conversion Feature
The estimated fair value of our convertible debt, which falls within level 3 of the fair value hierarchy, is determined based on similar debt instruments that do not contain a conversion feature. The estimated fair value of the derivative liability for the conversion feature is computed using a binomial lattice model using our historical volatility over the term corresponding to the remaining contractual term of the debt and observed spreads of similar debt instruments that do not include a conversion feature.
Recently Adopted Accounting Standards
In June 2011, the Financial Accounting Standards Board (or “FASB”) issued Accounting Standards Update (or “ASU”) 2011-05,
Presentation of Comprehensive Income
. ASU 2011-05 eliminates the option of presenting comprehensive income as a component of the Consolidated Statement of Equity and instead requires comprehensive income to be presented as a component of the Consolidated Statement of Operations or in a separate Consolidated Statement of Comprehensive Income immediately following the Consolidated Statement of Operations. We adopted ASU 2011-05 on January 1, 2012, and are presenting our comprehensive income (loss) in a separate Consolidated Statement of Comprehensive Income (Loss) in this quarterly report on Form 10-Q.
We do not believe that any other recently issued accounting pronouncements, if adopted, would have a material impact on our financial statements.
2.
|
Details of Certain Accounts
|
Included in accounts receivable at September 30, 2012 and December 31, 2011 was $5.2 million owed from a customer in Southeast Asia which was overdue and has not been collected due to our customer’s involvement in certain customs issues with a local government. We are not involved in these issues and this receivable has not been disputed by either our customer or the end client. We have recently won an arbitration award of the entire amount due, and we continue to believe that we will ultimately collect this receivable from either our customer or directly from the end client.
Other current assets consisted of the following as of September 30, 2012 and December 31, 2011 (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Insurance claims to be reimbursed
|
|
$
|
111
|
|
|
$
|
226
|
|
Prepaid job costs
|
|
|
8,938
|
|
|
|
3,298
|
|
Prepaid insurance
|
|
|
5,553
|
|
|
|
3,597
|
|
Prepaid other
|
|
|
1,342
|
|
|
|
1,887
|
|
Other receivables
|
|
|
1,279
|
|
|
|
2,853
|
|
Assets held for sale
(1)
|
|
|
22,959
|
|
|
|
14,771
|
|
Supplies and spare parts inventory
|
|
|
1,335
|
|
|
|
1,528
|
|
Other
|
|
|
3
|
|
|
|
4,322
|
|
|
|
$
|
41,520
|
|
|
$
|
32,482
|
|
|
|
(1)
|
As part of a restructuring plan to reduce costs and repay debt in response to a challenging U.S. Gulf of Mexico market, during the third quarter 2012 we entered into a plan to sell various non-core vessels, property and equipment. The amount recorded in assets held for sale at September 30, 2012 includes four dive support vessels, two construction barges, four portable saturation systems and one facility. We expect to sell these assets over the next twelve months using brokers to assist with the marketing effort. In conjunction with placing these assets as held for sale, we recorded a $21.2 million impairment charge during the third quarter 2012 related to the adjustment of the carrying value of these assets to their estimated fair value.
Included in assets held for sale at December 31, 2011, was our Singapore facility and a dive support vessel located in Southeast Asia. Due to the highly competitive nature of the Southeast Asia market and the increased marine construction capacity now available in that area, we elected to market these assets for sale to reduce our cost and operational presence in that region. We completed the sale of the dive support vessel in the first quarter 2012 for net proceeds of $9.9 million. We completed the sale of our Singapore facility at the end of the second quarter for net proceeds of $6.4 million. We used the total net proceeds of $16.3 million from these sales to prepay a portion of our term loan as required by our credit facility during the second quarter 2012.
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Other long-term assets, net, consisted of the following as of September 30, 2012 and December 31, 2011 (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Intangible assets with definite lives, net
|
|
$
|
771
|
|
|
$
|
1,630
|
|
Deferred financing costs, net
|
|
|
10,456
|
|
|
|
8,684
|
|
Equipment deposits and other
|
|
|
329
|
|
|
|
1,153
|
|
|
|
$
|
11,556
|
|
|
$
|
11,467
|
|
Accrued liabilities consisted of the following as of September 30, 2012 and December 31, 2011 (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Accrued payroll and related benefits
|
|
$
|
9,182
|
|
|
$
|
3,831
|
|
Unearned revenue
|
|
|
3
|
|
|
|
567
|
|
Insurance claims to be reimbursed
|
|
|
109
|
|
|
|
224
|
|
Accrued insurance
|
|
|
7,314
|
|
|
|
7,281
|
|
Interest rate swap
|
|
|
506
|
|
|
|
344
|
|
Accrued taxes other than income
|
|
|
3,467
|
|
|
|
2,845
|
|
Accrued interest
|
|
|
996
|
|
|
|
591
|
|
Other
|
|
|
6,274
|
|
|
|
4,185
|
|
|
|
$
|
27,851
|
|
|
$
|
19,868
|
|
Long-term debt consisted of the following as of September 30, 2012 and December 31, 2011 (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Revolving credit loans due 2016
|
|
$
|
32,900
|
|
|
$
|
—
|
|
Term loan due 2016
|
|
|
43,356
|
|
|
|
150,000
|
|
Convertible notes due 2017, net of unamortized discount of $23,682
|
|
|
62,568
|
|
|
|
—
|
|
Total debt
|
|
|
138,824
|
|
|
|
150,000
|
|
Less current portion
|
|
|
(3,672
|
)
|
|
|
(6,000
|
)
|
Long-term debt
|
|
$
|
135,152
|
|
|
$
|
144,000
|
|
Senior Secured Credit Facility
We have a senior secured credit facility with certain financial institutions, which matures on April 26, 2016, consisting of a variable-interest term loan and a $150 million variable-interest revolving credit facility (“Credit Agreement”). In addition to making required quarterly principal payments, we prepaid $16.3 million of the term loan during the second quarter 2012 with the net proceeds from the sale of a dive support vessel and our Singapore facility and prepaid $4.8 million of the term loan during the third quarter 2012 with the net proceeds from the sale of one of our domestic facilities. Additionally, on July 18, 2012, we issued $86.25 million aggregate principal amount of 5.0% senior convertible notes due 2017 (the “Notes”) and used the net proceeds of approximately $83.0 million to prepay a significant portion of the outstanding principal under the term loan. See discussion of the Notes below. At September 30, 2012, we had an outstanding principal balance under the term loan of $43.4 million. Based on this remaining balance, the quarterly principal payments will be $0.6 million until June 30, 2013 when such payments will increase to $1.2 million for the duration of the remaining term of the Credit Agreement. A final payment on the term loan of approximately $28 million will be due at maturity on April 26, 2016. Pursuant to the terms of the Credit Agreement, the required quarterly principal payments may be reduced based on the pro-rata prepayment of the term loan.
Additionally, as of September 30, 2012, we had $32.9 million outstanding under our revolving credit facility and $18.0 million of issued and outstanding letters of credit under our revolving credit facility. Outstanding warranty and bid bonds at September 30, 2012 were $2.6 million. The availability under our revolving credit facility is reduced by outstanding borrowings and letters of credit, and can be limited by our consolidated leverage (debt to earnings before interest, income taxes and depreciation and amortization (or “EBITDA”) as defined in the Credit Agreement) ratio covenant at each quarter end and by our collateral coverage sublimit. However, our revolver is not restricted during the year provided we are in compliance with existing financial covenants. At September 30, 2012, based on a 4.25x consolidated leverage covenant for this quarterly determination date, we had $7.2 million available for borrowing under the revolving credit facility. However, with the waiver we received subsequent to September 30, 2012 discussed below, we had no restrictions on accessing the full capacity of the revolver of $99.1 million.
Effective July 9, 2012, we amended our Credit Agreement to, (i) allow us to issue convertible senior notes in an aggregate principal amount not to exceed $100 million, that may be converted into cash, common stock or a combination of cash and common stock, so long as (a) any such notes mature at least six months after expiration of the Credit Agreement, (b) such notes are not required to be prepaid prior to their stated maturity (other than as specifically permitted), (c) the covenants governing such notes, taken as a whole, are no more restrictive than the Credit Agreement covenants, and (d) all of the net proceeds of such notes are used to prepay outstanding amounts under the Credit Agreement; (ii) exclude the unsecured indebtedness evidenced by any convertible senior notes from the definition of “Consolidated Funded Indebtedness” (as defined in the Credit Agreement), which then results in the exclusion of such unsecured indebtedness from the calculation of the consolidated leverage ratio; (iii) require us to maintain a threshold of $25 million in liquidity (defined to include unused capacity under the revolving loan portion of the Credit Agreement and immediately available cash held in deposit accounts of any loan party) in certain circumstances where cash payments are made on any convertible senior notes as a result of any conversion of such notes into cash, in whole or in part; (iv) remove the requirement that we maintain a consolidated fixed charge coverage ratio for the fiscal quarter ended June 30, 2012 of not less than 1.25x; and (v) remove the requirement that we maintain a consolidated leverage ratio for the fiscal quarter ended June 30, 2012 of not more than 5.75x.
Subsequent to September 30, 2012, we entered into a further amendment to our Credit Agreement that, among other things, waives the consolidated leverage ratio covenant for the third quarter 2012 and increases the consolidated leverage ratio covenant for the fourth quarter 2012 from 4.00x to 5.00x. See note 12 for further discussion.
At September 30, 2012, we were in compliance with all debt covenants contained in our Credit Agreement, even without the waiver received for the third quarter 2012. The credit facility is secured by vessel mortgages on all of our vessels (except for the
Sea Horizon
), a pledge of all of the stock of all of our domestic subsidiaries and 66% of the stock of three of our foreign subsidiaries, and a security interest in, among other things, all of our equipment, inventory, accounts receivable and general tangible assets. Additionally, we expect to be in compliance with all debt covenants contained in our Credit Agreement for the December 31, 2012 quarterly determination date.
Convertible Notes
On July 18, 2012, we issued $86.25 million aggregate principal amount (which includes $11.25 million to cover over-allotments) of 5.0% convertible senior notes due 2017 at a price equal to 100% of the principal amount. We received approximately $83.0 million of net proceeds, after deducting the initial purchasers’ commissions and transaction expenses. We used all of the net proceeds to repay a substantial portion of the term loan under our senior secured credit facility. In connection with the issuance of the Notes, we paid and capitalized approximately $3.5 million of loan fees which will be amortized to interest expense over the term of the Notes.
The Notes bear interest at a rate of 5.0% per year, payable semi-annually in arrears on January 15 and July 15 of each year, commencing January 15, 2013. The Notes mature on July 15, 2017. The Notes are our general unsecured and unsubordinated obligations, and are guaranteed by certain of our wholly-owned domestic subsidiaries. The Notes rank senior in right of payment to any of our future indebtedness that is expressly subordinated in right of payment to the Notes, rank equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated, and are effectively subordinated in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all existing and future indebtedness and liabilities of our subsidiaries. The Notes are governed by an indenture dated July 18, 2012 with The Bank of New York Mellon Trust Company, N.A.
We may not redeem the Notes prior to the maturity date. Prior to April 15, 2017, holders may not convert their Notes (all or a portion thereof) except under certain circumstances. These circumstances, as set forth in the indenture governing the Notes, relate to
(i) the price of our common stock; (ii) the price of the Notes; or (iii) upon the occurrence of specified corporate events.
On and after April 15, 2017 until the maturity date, holders may convert all or a portion of their Notes at any time. Upon conversion of a Note, we will pay or deliver, at our election, cash, shares of our common stock or a combination thereof, based on an initial conversion rate of 445.6328 shares of our common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $2.24 per share of our common stock and represents an approximately 20% premium over the closing sale price of our common stock on July 12, 2012, which was $1.87 per share). Upon the occurrence of certain fundamental changes, holders of the Notes will have the right to require us to purchase all or a portion of their Notes for cash at a price equal to 100% of the principal amount of such Notes, plus any accrued and unpaid interest.
Upon the occurrence of certain significant corporate transactions, holders who convert their Notes in connection with a change of control may be entitled to a make-whole premium in the form of an increase in the conversion rate.
Additionally, the Notes contain certain events of default as set forth in the indenture.
As of September 30, 2012, none of the conditions allowing holders of the Notes to convert, or requiring us to repurchase the Notes, had been met.
Our intent is to repay the principal amount of the Notes in cash and the conversion feature in shares of our common stock.
Neither the Notes nor the shares of our common stock, if any, issuable upon conversion of the Notes have been registered under the U.S. Securities Act of 1933, as amended, or the securities laws of any other jurisdiction. We do not intend to file a shelf registration statement for the resale of the Notes or the shares, if any, issuable upon conversion of the Notes. We will, however, pay additional interest under specified circumstances.
New York Stock Exchange (“NYSE”) rules limit the number of shares of our common stock that we may issue upon conversion of the Notes. We may not elect to issue shares of common stock upon conversion of the Notes to the extent such election would result in the issuance of more than 19.99% of our common stock outstanding immediately before the issuance of the Notes until we receive stockholder approval for such issuance. The number of shares of our common stock that would be needed upon a full conversion of the Notes was greater than 19.99% of the total number of shares of our common stock outstanding at the issuance date of the Notes. In the event of a conversion of the Notes prior to our obtaining stockholder approval of the issuance of shares of our common stock in excess of the NYSE 19.99% limitation, we will be required to pay cash to converting holders in lieu of delivering any shares of our common stock that would be in excess of such limitation.
We determined at the time of issuance that the conversion feature of the Notes did not meet all the criteria for equity classification based on the settlement terms of the Notes.
The conversion feature is recognized as a derivative liability and is presented under long-term debt in the accompanying consolidated balance sheet.
The initial value allocated to the derivative liability was $24.6 million of the $86.25 million principal amount of the Notes, which also represents the amount of the debt discount to be amortized through interest expense using the effective interest method through the maturity of the Notes. Accordingly, the effective interest rate used to amortize the debt discount on the Notes is 13.3%. During each reporting period, the derivative liability is marked to fair value through interest expense. As of September 30, 2012, the derivative liability had a fair value of $16.2 million. The adjustment to fair value during the third quarter 2012 was $8.4 million, and reflects the decrease in our stock price during the period.
If we obtain stockholder approval for the issuance of common stock in excess of the 19.99% limitation allowing the conversion of the Notes to be settled in full with shares of our common stock, we will reasses the classification of the conversion feature.
Because it is our intent to settle the principal portion of the Notes in cash, we will use the treasury stock method in calculating the diluted earnings per share effect for the variable number of shares that would be issued upon conversion to settle the conversion feature. The Notes were anti-dilutive for the three and nine month periods ended September 30, 2012.
As of September 30, 2012 and December 31, 2011, we had $5.5 million and $4.1 million, respectively, recorded as a long-term liability for uncertain tax benefits, interest and penalty.
Our effective tax benefit rate was 39.9% and 32.8% for the three and nine months ended September 30, 2012, respectively, compared to an effective tax benefit rate of 13.5% and 24.6% for the three and nine months ended September 30, 2011, respectively. The effective tax benefit rate for the three and nine months ended September 30, 2012 differs from the statutory rate primarily due to the mix of pre-tax profit or loss between U.S. and international taxing jurisdictions with varying statutory rates. The effective tax benefit rate for the three and nine months ended September 30, 2011 differs from the statutory rate primarily due to a one time change in the management structure of certain foreign operations and the transfer pricing agreements between the U.S. and certain foreign subsidiaries.
Our income tax benefit for the three and nine months ended September 30, 2012 and 2011 was computed by applying estimated annual effective tax rates to income before income taxes for the interim period.
Tax Assessments
During the third quarter 2012, we received a final favorable ruling on a tax assessment that was brought against Horizon Offshore, Inc. (or “Horizon”), a company we acquired in the fourth quarter 2007. During the fourth quarter 2006, Horizon received a tax assessment related to its fiscal 2001 operations from the Servicio de Administracion Tributaria (or “SAT”), the Mexican taxing authority. We disputed the assessment and accordingly did not record a liability for the assessment in our consolidated financial statements. On February 21, 2012, the Mexican tax court decided to set aside the tax assessment and declare it null and void. SAT appealed this decision and the Mexican Circuit Court issued its non-appealable decision on July 11, 2012, upholding the tax court’s decision.
While we believe our recorded assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and tax litigation is inherently uncertain. As a result, our assessments involve a series of complex judgments about future events and rely heavily on estimates and assumptions.
5.
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Derivative Instruments and Hedging Activities
|
Cash Flow Hedge
We use derivative financial instruments to hedge the impact of market price risk exposure primarily due to variable interest rate exposure related to our debt. To reduce the impact of these risks on earnings and to increase the predictability of our cash flows, we enter into interest rate swaps from time to time.
To reduce the potentially adverse impact of changes in interest rates on our variable rate term loan, in May 2011, we entered into a twelve-month interest rate swap with a notional amount of $100 million that converts a portion of our anticipated variable-rate interest payments under our term loan to fixed-rate interest payments of 0.82%. This interest rate swap began to settle in December 2011 and will expire in December 2012. In August 2011, we entered into a second twelve-month interest rate swap with a notional amount of $100 million that converts the same portion of our anticipated variable-rate interest payments under our term loan to fixed-rate interest payments of 0.585%. This interest rate swap will begin to settle in December 2012 and will expire in December 2013.
These interest rate swap instruments initially qualified as cash flow hedges under hedge accounting. From time to time, there may be economic sharing among more than one counterparty related to our interest rate swaps. In early July 2012, we de-designated a portion of the cash flow hedge due to the repayment of the underlying debt. Accordingly, we reclassified $0.2 million of the accumulated other comprehensive income through earnings. We began recording prospective changes in the fair value of the ineffective portion through current earnings from the date of de-designation. The remaining portion of the cash flow hedge remains effective.
At September 30, 2012, the interest rate swap instruments had a negative fair value of $0.5 million, which is recorded as a current liability. We reclassify any unrealized loss from our interest rate swap into earnings upon settlement. For the three and nine months ended September 30, 2012 we recorded less than $0.1 million and $0.1 million, respectively, of after-tax unrealized gains from our interest rate swap in other comprehensive income (loss). The estimated net amount of the loss that is reported in accumulated other comprehensive income (loss) as of September 30, 2012 that is expected to be reclassified into earnings within the next 12 months is $0.3 million. For the three and nine months ended September 30, 2012, we reclassified $0.1 million and $0.4 million, respectively, of after-tax unrealized losses into interest expense, net, in our consolidated statement of operations related to all settled cash flow hedges.
Changes in the fair value of an interest rate swap are deferred to the extent it is effective and are recorded as a component of accumulated other comprehensive income (loss) until the anticipated interest payments occur and are recognized in interest expense. The ineffective portion of an interest rate swap, if any, will be recognized immediately in earnings.
We formally document all relations between hedging instruments and hedged items, as well as our risk management objectives, strategies for undertaking various hedge transactions and our methods for assessing and testing correlation and hedge effectiveness. We also assess, both at inception of the hedge and on an on-going basis, whether the derivatives that are used in our hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Changes in the assumptions used could impact whether the fair value change in an interest rate swap is charged to earnings or accumulated other comprehensive income (loss).
Conversion Feature of Convertible Debt
We determined at the time of issuance that the conversion feature of the Notes did not meet all the criteria for equity classification based on the settlement terms of the Notes; thus the conversion feature has been recognized as a derivative liability. The initial value allocated to the derivative liability at issuance of the Notes on July 18, 2012 was $24.6 million. Changes in the fair value of the derivative liability are recognized in earnings. At September 30, 2012, the fair value of the derivative liability was $16.2 million. T
he marked-to-market adjustment of the fair value of our derivative liability for the three months ended September 30, 2012 was $8.4 million.
6.
|
Fair Value Measurements
|
The fair values of our cash and cash equivalents, accounts receivable, accounts payable, and certain other current assets and current liabilities approximate their carrying value due to their short-term maturities. The fair value of our variable rate debt under our senior secured credit facility was calculated using a market approach based upon Level 3 inputs including interest rate margins reflecting current market conditions. The fair value approximates the carrying value due to the variable nature of the underlying interest rates.
Fair Value Measurements of Convertible Debt and Conversion Feature
The fair value of the Notes, which fall within Level 3 of the fair value hierarchy, is determined based on similar debt instruments that do not contain a conversion feature. At September 30, 2012, the Notes were trading at 95.5% of par value based on limited quotations, and include a value associated with the conversion feature of the Notes. The Notes had a fair value of $66.1 million at September 30, 2012. The estimated fair value of the derivative liability for the conversion feature is computed using a binomial lattice model. The main inputs and assumptions into the binomial lattice model are our stock price at the end of the period, expected volatility, credit spreads and the risk-free interest rate. These inputs and assumptions are determined based on current market data and are not viewed as having significant sensitivity, except for expected volatility.
The conversion feature is presented under long-term debt in the accompanying consolidated balance sheet.
The fair value measurement for the derivative liability of our convertible debt was as follows (in thousands):
|
Fair Value Measurements at Reporting Date Using
|
|
As of September 30, 2012:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Long term liabilities
|
|
|
|
|
|
|
|
|
|
Derivative liability for conversion feature of convertible debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,238
|
|
Fair Value Measurements of Interest Rate Swaps
We measure our interest rate swaps on a recurring basis using an income approach where expected future cash flows are converted to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models). The fair value measurements for the interest rate swaps were as follows (in thousands):
|
Fair Value Measurements at Reporting Date Using
|
|
As of September 30, 2012:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Current accrued liabilities
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
506
|
|
|
$
|
—
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
As of December 31, 2011:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Current accrued liabilities
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
344
|
|
|
$
|
—
|
|
Fair Value Measurements on a Non-recurring Basis
For the nine months ended September 30, 2012, we recorded a $21.2 million impairment charge related to the adjustment of the carrying value for certain assets we classified as held for sale during the third quarter 2012 to reduce them to fair value and a $1.4 million impairment charge related to a non-core asset to reduce the fair value to zero during the first quarter 2012. The fair value of these assets at September 30, 2012 was $23.0 million and the measurements were based on Level 3 inputs and included expected proceeds from potential buyers and market based appraisals. We did not have any other fair value adjustments for assets and liabilities measured at fair value on a
non-recurring basis during the three or nine months ended September 30, 2012.
For the three months ended September 30, 2011, we recorded an impairment expense related to certain fixed assets. After recording the impairment expense, the fair values of the impaired fixed assets held for use and held for sale were reduced to $18.6 million and $11.5 million, respectively. The fair value of these assets was determined using the income valuation approach, market based appraisals and estimated scrap value. The following table provides additional information related to the fixed assets that were impaired in the current period and measured at fair value on a non-recurring basis at September 30, 2011 (in thousands):
|
|
September 30,
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
2011
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Surface diving
|
|
$
|
4,258
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,258
|
|
Saturation diving
|
|
|
17,436
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,436
|
|
Construction barges
|
|
|
8,436
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,436
|
|
|
|
$
|
30,130
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,130
|
|
7.
|
Commitments and Contingencies
|
Insurance
We incur maritime employers’ liability, workers’ compensation and other insurance claims in the normal course of business, which management believes are covered by insurance. We analyze each claim for potential exposure and estimate the ultimate liability of each claim. Amounts due from insurance companies, above the applicable deductible limits, are reflected in other current assets in the consolidated balance sheets. Such amounts were $0.1 million and $0.2 million as of September 30, 2012 and December 31, 2011, respectively. We have not historically incurred significant losses as a result of claims denied by our insurance carriers.
Litigation and Claims
We are involved in various legal proceedings, primarily involving claims for personal injury under the general maritime laws of the U.S. and the Jones Act as a result of alleged negligence. In addition, we from time to time become subject to other claims, such as contract disputes, in the normal course of business. Although these matters have the potential of significant additional liability, we believe the outcome of all such matters and proceedings will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Sale-Leaseback Transaction
In September 2012, we completed a sale-leaseback transaction of one of our domestic facilities to an unrelated third party for net proceeds of $4.8 million, which were used to repay a portion of our term debt. The carrying value of the facility sold was $4.0 million.
The lease has been classified as an operating lease and has a term of ten years. We realized a gain on the sale of $0.8 million, which has been deferred and is being recognized on a straight-line basis over the term of the lease.
Basic earnings (loss) per share (or “EPS”) is computed by dividing net income (loss) attributable to Cal Dive by the weighted-average shares of outstanding common stock. The calculation of diluted EPS is similar to basic EPS, except the denominator includes dilutive common stock equivalents using the treasury stock and the “as if converted” method. The components of basic and diluted EPS for common shares for the three and nine months ended September 30, 2012 and 2011 were as follows (in thousands, except per share amounts):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to Cal Dive
|
|
$
|
(15,933
|
)
|
|
$
|
(34,367
|
)
|
|
$
|
(45,937
|
)
|
|
$
|
(58,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
92,688
|
|
|
|
91,673
|
|
|
|
92,710
|
|
|
|
91,689
|
|
Dilutive outstanding securities
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted-average shares outstanding
|
|
|
92,688
|
|
|
|
91,673
|
|
|
|
92,710
|
|
|
|
91,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.50
|
)
|
|
$
|
(0.63
|
)
|
|
|
(1)
|
Approximately 3.0 million shares of unvested restricted stock have been excluded from the computation of basic and diluted earnings per share as the effect would be anti-dilutive. Additionally, our convertible debt is only dilutive to the extent we generate net income and the average stock price during the period is greater than the conversion price of the Notes.
|
9.
|
Performance Share Units
|
In December 2011, 2010 and 2009, we granted to certain of our officers a total of 700,576, 488,323 and 403,206 performance share units, respectively, which constitute restricted stock units under an incentive plan adopted by us in December 2006. The performance share units vest 100% following the end of a three-year performance period. During the first nine months of 2012, 179,110 performance share units granted were forfeited back to the plan. During 2011, 158,211 performance share units granted were forfeited back to the plan. During 2010, 51,036 performance share units granted were forfeited back to the plan. Each performance share unit represents a contingent right to receive the cash value of one share of our common stock dependent upon our total shareholder return relative to a peer group of companies over a three-year performance period. The awards are payable in cash unless the compensation committee determines to pay in stock. A maximum of 200% of the number of performance share units granted may be earned if performance at the maximum level is achieved.
The fair value of the performance share units is remeasured at each reporting period until the awards are settled. At September 30, 2012, the aggregate fair value of total awards granted was $1.1 million. The fair value is calculated using a Monte-Carlo simulation model which incorporates the historical performance, volatility and correlation of our stock price with our peer group. At September 30, 2012 and December 31, 2011, the performance share unit liability, reflected in accrued liabilities in the consolidated balance sheets, was $0.3 million and $0.1 million, respectively.
Total (benefit) expense recognized for the performance share units for the three and nine months ended September 30, 2012 was ($0.5) million and $0.2 million, respectively, based on the current estimated fair value discussed above. The amount and timing of the recognition of additional expense or benefit will be dependent on the estimated fair value at each quarterly reporting date. Any increases or decreases in the fair value may not occur ratably over the remaining performance periods; therefore share-based compensation expense related to the performance share units could vary significantly in future periods.
10.
|
Variable Interest Entities
|
During 2011, we entered into an agreement with Petrolog International, Ltd. to form the joint venture Petrolog Cal Dive West Africa, Ltd. to provide offshore installation and support services for companies operating in the offshore oil and gas industry in the West Africa region. Cal Dive owns a 60% interest in the joint venture and the remaining 40% is owned by Petrolog. Due to our financial support of the joint venture, we have determined it to be a variable interest entity of which we are the primary beneficiary. We consolidate the entity in our financial statements.
For the three and nine months ended September 30, 2012, the joint venture generated revenues of $13.8 million and $14.4 million, respectively, and recorded a net loss of $0.4 million and $7.4 million, respectively. No revenue or net income was recognized for the three and nine months ended September 30, 2011. At September 30, 2012, there were approximately $16.7 million of assets and $24.1 million of liabilities in the joint venture. There are no restrictions on the use of assets and liabilities associated with the joint venture. Also, creditors of the joint venture have no recourse against Cal Dive.
11.
|
Business Segment Information
|
We have one reportable segment, Marine Contracting. We perform a portion of our marine contracting services in foreign waters. We derived revenues from foreign locations of $72.2 million and $149.3 million for the three and nine months ended September 30, 2012, respectively, and $34.8 million and $129.6 million for the three and nine months ended September 30, 2011, respectively. The remainder of our revenues was generated in the U.S. Gulf of Mexico and other U.S. waters. Net property and equipment in foreign locations was $198.1 million and $164.9 million at September 30, 2012 and December 31, 2011, respectively.
Effective November 2, 2012, we entered into an amendment to our Credit Agreement to; (i)
remove the requirement that we maintain a consolidated leverage ratio for the fiscal quarter ended September 30, 2012 of not more than 4.25x; (ii) increase the maximum permitted consolidated leverage ratio for the fiscal quarter ended December 31, 2012 to not more than 5.00x; and (iii) increase the amount permitted under sale-leaseback transactions to $15 million per year. As part of the amendment, the size of the revolving credit facility under the Credit Agreement will be permanently reduced to $125 million on November 30, 2012.