e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-21086
Global Industries, Ltd.
(Exact name of registrant as specified in its charter)
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| Louisiana
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72-1212563 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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| 8000 Global Drive |
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| Carlyss, Louisiana
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70665 |
| (Address of principal executive offices)
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(Zip Code) |
(337) 583-5000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large Accelerated Filer þ
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Accelerated Filer o
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Non-Accelerated Filer o
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Smaller reporting Company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the Registrant’s Common Stock outstanding as of November 5, 2008, was
112,060,779.
PART
I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Global Industries, Ltd.
We have reviewed the accompanying condensed consolidated balance sheet of Global Industries, Ltd.
and subsidiaries (the “Company”) as of September 30, 2008, and the related condensed consolidated
statements of operations for the three-month and nine-month periods ended September 30, 2008 and
2007, and cash flows for the nine-month periods ended September 30, 2008 and 2007. These interim
financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with standards of
the Public Company Accounting Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet of Global Industries, Ltd. and subsidiaries
as of December 31, 2007, and the related consolidated statements of operations, shareholders’
equity, and cash flows for the year then ended (not presented herein); and in our report dated
February 22, 2008, we expressed an unqualified opinion on those consolidated financial statements
and included an explanatory paragraph regarding the adoption of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, on January 1, 2006. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December 31, 2007 is fairly
stated, in all material respects, in relation to the consolidated balance sheet from which it has
been derived.
DELOITTE & TOUCHE LLP
November 7, 2008
Houston, Texas
3
GLOBAL INDUSTRIES, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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September 30 |
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December 31 |
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2008 |
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2007 |
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(Unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
406,248 |
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$ |
723,450 |
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Restricted cash |
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|
1,137 |
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|
1,121 |
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Marketable securities |
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300 |
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99,935 |
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Accounts receivable — net of allowance of
$6,141 for 2008 and $1,278 for 2007 |
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159,162 |
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167,469 |
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Unbilled work on uncompleted contracts |
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128,676 |
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106,716 |
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Contract costs incurred not yet recognized |
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4,139 |
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10,821 |
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Deferred income taxes |
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31,147 |
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3,827 |
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Assets held for sale |
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2,133 |
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1,002 |
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Prepaid expenses and other |
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49,061 |
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27,875 |
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Total current assets |
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782,003 |
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1,142,216 |
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Property and Equipment, net |
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570,077 |
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349,549 |
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Other Assets |
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Marketable securities |
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41,468 |
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— |
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Accounts receivable — long-term |
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21,308 |
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9,315 |
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Deferred charges, net |
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78,541 |
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43,045 |
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Goodwill |
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37,388 |
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37,388 |
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Other |
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4,579 |
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8,285 |
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Total other assets |
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183,284 |
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98,033 |
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Total |
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$ |
1,535,364 |
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$ |
1,589,798 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities |
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Current maturities of long-term debt |
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$ |
3,960 |
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$ |
3,960 |
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Accounts payable |
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203,335 |
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169,034 |
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Employee-related liabilities |
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27,181 |
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28,366 |
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Income taxes payable |
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38,950 |
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39,683 |
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Accrued interest payable |
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2,119 |
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5,827 |
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Advance billings on uncompleted contracts |
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11,447 |
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36,691 |
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Accrued anticipated contract losses |
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51,370 |
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— |
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Other accrued liabilities |
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14,944 |
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15,638 |
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Total current liabilities |
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353,306 |
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299,199 |
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Long-Term Debt |
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386,380 |
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390,340 |
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Deferred Income Taxes |
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27,205 |
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35,617 |
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Other Liabilities |
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13,822 |
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11,050 |
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Commitments and Contingencies |
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— |
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— |
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Shareholders’ Equity |
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Common stock, $0.01 par value, authorized 150,000 shares and issued
119,251 and 118,001 shares, respectively |
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1,193 |
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1,180 |
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Additional paid-in capital |
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441,158 |
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418,366 |
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Retained earnings |
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425,769 |
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515,206 |
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Treasury stock at cost, 6,129 in 2008 and 2,904 in 2007 |
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(105,027 |
) |
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(77,257 |
) |
Accumulated other comprehensive loss |
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(8,442 |
) |
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(3,903 |
) |
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Total shareholders’ equity |
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754,651 |
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853,592 |
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Total |
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$ |
1,535,364 |
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$ |
1,589,798 |
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See Notes to Condensed Consolidated Financial Statements.
4
GLOBAL INDUSTRIES, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30 |
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September 30 |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues |
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$ |
218,551 |
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$ |
203,536 |
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$ |
820,559 |
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$ |
729,485 |
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Cost of operations |
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258,736 |
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146,714 |
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795,881 |
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505,056 |
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Anticipated contract losses |
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48,673 |
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— |
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51,370 |
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— |
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Gross profit (loss) |
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(88,858 |
) |
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56,822 |
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(26,692 |
) |
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224,429 |
|
Loss (gain) on asset disposals and impairments |
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1,640 |
|
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|
(9 |
) |
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(372 |
) |
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(1,317 |
) |
Selling, general and administrative expenses |
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25,439 |
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20,749 |
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73,439 |
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58,777 |
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Operating income (loss) |
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(115,937 |
) |
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36,082 |
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(99,759 |
) |
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166,969 |
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Interest income |
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2,476 |
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8,450 |
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12,709 |
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19,260 |
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Interest expense |
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(4,148 |
) |
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(3,718 |
) |
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(9,974 |
) |
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(8,491 |
) |
Other income (expense), net |
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(234 |
) |
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2,327 |
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(1,866 |
) |
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2,933 |
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Income (loss) before taxes |
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(117,843 |
) |
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|
43,141 |
|
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(98,890 |
) |
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180,671 |
|
Income tax expense (benefits) |
|
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(15,056 |
) |
|
|
11,666 |
|
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(9,453 |
) |
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53,611 |
|
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Net income (loss) |
|
$ |
(102,787 |
) |
|
$ |
31,475 |
|
|
$ |
(89,437 |
) |
|
$ |
127,060 |
|
|
|
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Earnings (Loss) Per Common Share |
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Basic |
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$ |
(0.90 |
) |
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$ |
0.27 |
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$ |
(0.78 |
) |
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$ |
1.09 |
|
Diluted |
|
$ |
(0.90 |
) |
|
$ |
0.27 |
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|
$ |
(0.78 |
) |
|
$ |
1.08 |
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Weighted Average Common Shares Outstanding |
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Basic |
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114,493 |
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|
115,715 |
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|
114,135 |
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|
116,503 |
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Diluted |
|
|
114,493 |
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|
|
117,292 |
|
|
|
114,135 |
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|
118,108 |
|
See Notes to Condensed Consolidated Financial Statements.
5
GLOBAL INDUSTRIES, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended |
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September 30 |
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2008 |
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2007 |
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Cash Flows From Operating Activities |
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Net income (loss) |
|
$ |
(89,437 |
) |
|
$ |
127,060 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
|
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|
|
|
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Depreciation and non-stock-based amortization |
|
|
37,941 |
|
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|
32,100 |
|
Stock-based compensation expense |
|
|
10,179 |
|
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|
13,081 |
|
Provision for doubtful accounts |
|
|
5,368 |
|
|
|
(2,668 |
) |
Loss on asset impairment |
|
|
1,557 |
|
|
|
— |
|
Gain on sale or disposal of property and equipment |
|
|
(1,929 |
) |
|
|
(1,317 |
) |
Derivative (gain) loss |
|
|
613 |
|
|
|
(612 |
) |
Deferred income taxes |
|
|
(33,842 |
) |
|
|
(6,253 |
) |
Excess tax benefits from stock-based compensation |
|
|
(4,019 |
) |
|
|
(3,499 |
) |
Changes in operating assets and liabilities |
|
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|
|
|
|
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Receivables, unbilled work, and contract costs |
|
|
(27,795 |
) |
|
|
52,286 |
|
Prepaid expenses and other |
|
|
(23,389 |
) |
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|
3,337 |
|
Accounts payable, employee-related liabilities and other accrued liabilities |
|
|
50,306 |
|
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|
15,720 |
|
Deferred dry dock costs incurred |
|
|
(47,419 |
) |
|
|
(18,371 |
) |
|
|
|
|
|
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|
Net cash provided by (used in) operating activities |
|
|
(121,866 |
) |
|
|
210,864 |
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|
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|
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Cash Flows From Investing Activities |
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Proceeds from sale of assets |
|
|
6,476 |
|
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|
3,665 |
|
Additions to property and equipment |
|
|
(240,113 |
) |
|
|
(48,568 |
) |
Sale of marketable securities |
|
|
106,804 |
|
|
|
135,720 |
|
Purchase of marketable securities |
|
|
(49,296 |
) |
|
|
(236,525 |
) |
Additions to restricted cash |
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|
(16 |
) |
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|
(38 |
) |
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Net cash used in investing activities |
|
|
(176,145 |
) |
|
|
(145,746 |
) |
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Cash Flows From Financing Activities |
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Repayment of long-term debt |
|
|
(3,960 |
) |
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|
(3,960 |
) |
Proceeds from long-term debt |
|
|
— |
|
|
|
325,000 |
|
Proceeds from sale of common stock, net |
|
|
8,607 |
|
|
|
15,932 |
|
Repurchase of common stock |
|
|
(27,770 |
) |
|
|
(76,214 |
) |
Additions to deferred charges |
|
|
(87 |
) |
|
|
(6,928 |
) |
Excess tax benefits from stock-based compensation |
|
|
4,019 |
|
|
|
3,499 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(19,191 |
) |
|
|
257,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
(317,202 |
) |
|
|
322,447 |
|
Beginning of period |
|
|
723,450 |
|
|
|
352,178 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
406,248 |
|
|
$ |
674,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures |
|
|
|
|
|
|
|
|
Interest Paid |
|
$ |
10,203 |
|
|
$ |
5,676 |
|
Income Taxes Paid |
|
$ |
37,865 |
|
|
$ |
61,149 |
|
See Notes to Condensed Consolidated Financial Statements.
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
1. |
General |
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Basis of Presentation |
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The accompanying unaudited Condensed Consolidated Financial Statements include the accounts
of Global Industries, Ltd. and its subsidiaries (“Company,” “we,” “us,” or “our”). |
| |
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|
In the opinion of management of the Company, all adjustments (such adjustments consisting of
a normal and recurring nature) necessary for a fair presentation of the operating results
for the interim periods presented have been included in the unaudited Condensed Consolidated
Financial Statements. Operating results for the period ended September 30, 2008, are not
necessarily indicative of the results that may be expected for the year ending December 31,
2008. These financial statements should be read in conjunction with our audited
Consolidated Financial Statements and related notes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2007. |
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Reclassifications |
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|
During the second quarter of 2008, we began separately disclosing interest income on the
accompanying Condensed Consolidated Statement of Operations. This reclassification had no
impact on net income for these periods. |
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|
During the third quarter of 2008, we began separately disclosing accrued anticipated
contract losses on our Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Operations. |
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|
Recent Accounting Pronouncements |
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|
SFAS 157. In September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS
157”), which defines fair value, establishes a framework for measuring fair value and
enhances disclosures about instruments carried at fair value, but does not change existing
guidance as to whether or not an instrument is carried at fair value. In February 2008, the
FASB issued FASB Staff Positions (“FSP”) SFAS 157-2, Effective Date for FASB Statement 157.
This FSP permits the delayed application of SFAS 157 for all non-recurring fair value
measurements of non-financial assets and non-financial liabilities until fiscal years
beginning after November 15, 2008. In October 2008, the FASB issued FSP FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
(“FSP FAS 157-3”). This FSP clarifies the application of SFAS 157 when the market for a
financial asset is not active. FSP FAS 157-3 was effective on issuance and used to evaluate
the fair value of auction rate securities as of September 30, 2008. The Company adopted
SFAS 157, as amended, on a prospective basis beginning January 1, 2008, for its financial
assets and liabilities and will adopt this statement for its non-financial assets and
liabilities, which consists of goodwill and assets held for sale, on January 1, 2009. We do
not believe the adoption of SFAS No. 157 for our nonfinancial assets and liabilities will
have a material impact on our consolidated financial statements. See further discussion
about the implementation of SFAS 157 in Note 5. |
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| |
|
SFAS 161. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires specific disclosures
regarding the location and amounts of derivative instruments in the Company’s financial
statements, how derivative instruments and related hedged items are accounted for, and how
derivative instruments and related hedged items affect the Company’s financial position,
financial performance, and cash flows. SFAS 161 is effective for financial statements
issued, and for fiscal years and interim periods, beginning after November 15, 2008. We will
adopt the new disclosure requirements of SFAS 161 in the first quarter 2009. |
| |
| |
|
FSP FAS 142-3. In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful
Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 requires companies estimating the
useful life of a recognized intangible asset to consider their historical experience in
renewing or extending similar arrangements or, in the absence of historical experience, to
consider assumptions that market participants would use about renewal or extension as
adjusted for the entity-specific factors in SFAS No. 142, Goodwill and Other Intangible
Assets. FSP FAS 142-3 will be effective for the Company beginning January 1, 2009.
Management is currently assessing the effect of this pronouncement on the Company’s
consolidated financial statements. |
7
| |
|
FSP APB 14-1. In May 2008, the FASB issued FSP APB No. 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),
(“FSP APB 14-1”) which will change the accounting for our 2.75% Senior Convertible
Debentures due 2027. The FSP will require cash settled convertible debt to be separated
into debt and equity components at issuance and a value to be assigned to each. The value
assigned to the debt component will be the estimated fair value of similar bonds without the
conversion feature. The difference between the bond cash proceeds and this estimated fair
value will be recorded as a debt discount and amortized to interest expense over the life of
the bond. Although FSP APB 14-1 will have no impact on the Company’s actual past or future
cash flows, it will require the Company to record a material increase in non-cash interest
expense as the debt discount is amortized. FSP APB 14-1 will become effective for the
Company beginning January 1, 2009 and applied retrospectively to all periods presented. The
Company is continuing to evaluate the impact of adopting FSP APB 14-1 on the consolidated
financial statements, but expects that the implementation of this FSP will have a
significant effect on previously reported and future non-cash interest expense. |
| |
| |
|
FSP EITF 03-6-1. In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities, (“FSP
EITF 03-6-1”). This FSP addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and, therefore, need to be
included in computing earnings per share under the two-class method described in SFAS No.
128, Earnings Per Share. This FSP shall be applied retrospectively for financial statements
issued for fiscal years beginning after December 15, 2008. The Company is currently
evaluating the impact, if any, of adopting FSP EITF 03-6-1. |
| |
| 2. |
|
Restricted Cash |
| |
| |
|
Restricted cash represents cash deposits for the purpose of providing a banking institution
cash collateral for ongoing short-term foreign exchange contracts. There is no contractual
obligation or agreement to have the cash restricted for a period longer than one to five
days; therefore, restricted cash is classified as a current asset on the accompanying
Condensed Consolidated Balance Sheets. See also Note 9. |
| |
| 3. |
|
Marketable Securities |
| |
| |
|
As of September 30, 2008, the Company held $42.7 million at par value in auction rate
securities which are variable rate bonds tied to short-term interest rates with maturities
up to 31 years. Auction rate securities have interest rate resets through a Dutch auction at
predetermined short intervals. Interest rates generally reset every 7-35 days. The coupon
interest rate for these securities ranged from 3.2% to 13.9%, on a tax exempt basis, for the
quarter ended September 30, 2008. |
| |
| |
|
The Company’s investments in auction rate securities were issued by municipalities and state
education agencies. The auction rate securities issued by state education agencies represent
pools of student loans for which repayment is substantially guaranteed by the U.S.
government under the Federal Family Education Loan Program (“FFELP”). All of the Company’s
investments in auction rate securities have at least a double A rating. As of September 30,
2008, the par value of auction rate securities issued by state education agencies was $30.0
million and the par value of auction rate securities issued by municipalities was $12.7
million. |
| |
| |
|
Recent auctions for the Company’s auction rate securities have failed. An auction failure,
which is not a default in the underlying debt instrument, occurs when there are more sellers
than buyers at a scheduled interest rate auction date. This results in a lack of liquidity
for these securities, even though debt service continued to occur. When auctions fail, the
interest rate is adjusted according to the provisions of the related security agreement,
which generally results in an interest rate higher than the interest rate the issuer pays in
connection with successful auctions. During the nine months ended September 30, 2008, the
Company continued to earn and receive scheduled interest on these securities. |
| |
| |
|
Based on a lack of current market liquidity and the Company’s ability and intent to continue
holding its auction rate securities until they can be sold or redeemed at par value or
mature, the Company classifies these securities as non-current. |
| |
| |
|
The Company’s investments in auction rate securities are classified as available for sale
and are carried at fair value with any unrealized gains and losses recorded in other
comprehensive income. The Company concluded the fair value of the auction rate securities
classified as non-current at September 30, 2008 was $41.5 million, a decline of $0.9 million
from par value. The decline in fair value has been assessed by the Company as temporary and
has been |
8
| |
|
recorded as an unrealized loss in accumulated other comprehensive income, net of tax of $0.2
million. The Company will continue to monitor the market for auction rate securities and
consider its impact, if any, on fair value of the remaining investment through disposition. |
| |
| |
|
Subsequent to September 30, 2008, the Company received a settlement offer from UBS Financial
Services, Inc. (“UBS”) related to the $30.0 million in par value of auction rate securities
issued by state education agencies. UBS is offering the Company nontransferable rights to
sell these auction rate securities at par value to UBS at any time during the period of June
30, 2010 through July 2, 2012. The Company is currently evaluating the merits and terms of
this proposed agreement. |
9
| 4. |
|
Derivatives |
| |
| |
|
The Company uses forward contracts to manage its exposure in foreign currency rates. The
Company’s outstanding forward foreign currency contracts are used to hedge cash flows for
forecasted purchase commitments denominated in Norwegian Kroners. The Norwegian Kroner
forward contracts are accounted as cash flow hedges with unrealized gains and losses
recorded in other comprehensive income. As of September 30, 2008 and December 31, 2007,
there was $1.2 million and $5.1 million of unrealized gains, net of tax, in accumulated
other comprehensive income. As of September 30, 2008, approximately $0.9 million of the
unrealized gains are expected to be realized in earnings during the next twelve months. |
| |
| 5. |
|
Fair Value of Financial Instruments |
| |
| |
|
Under SFAS 157, fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability (i.e. exit price) in an orderly transaction between market
participants at the measurement date. SFAS 157 establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when available.
The hierarchy for inputs is categorized into three levels based on the reliability of inputs
as follows:
|
Level 1 — Observable inputs such as quoted prices in active markets.
Level 2 — Inputs (other than quoted prices in active markets) that are either
directly or indirectly observable.
Level 3 — Unobservable inputs which requires management’s best estimate of what
market participants would use in pricing the asset or liability.
| |
|
Assets measured at fair value on a recurring basis are categorized in the table below based
upon the lowest level of significant input to the valuations. |
Fair Value Measurements at September 30, 2008
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Description |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Cash equivalents |
|
$ |
290,018 |
|
|
$ |
290,018 |
|
|
$ |
— |
|
|
$ |
— |
|
Marketable securities |
|
|
41,768 |
|
|
|
— |
|
|
|
— |
|
|
|
41,768 |
|
Derivative contracts |
|
|
1,838 |
|
|
|
— |
|
|
|
1,838 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
333,624 |
|
|
$ |
290,018 |
|
|
$ |
1,838 |
|
|
$ |
41,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Financial instruments classified as Level 3 in the fair value hierarchy represent auction
rate securities in which management has used at least one significant unobservable input in
the valuation model. The following tables present a reconciliation of activity for such
securities: |
Changes in Level 3 Financial Instruments
| |
|
|
|
|
|
|
|
|
| |
|
Three Months
Ended |
|
|
Nine Months
Ended |
|
| |
|
September 30 |
|
|
September 30 |
|
| |
|
(In thousands) |
|
Beginning Balance |
|
$ |
41,968 |
|
|
$ |
48,800 |
|
Purchases, issuances, and settlements |
|
|
(200 |
) |
|
|
(13,250 |
) |
Unrealized gain (loss) |
|
|
— |
|
|
|
(907 |
) |
Transfers in and/or (out) of Level 3 |
|
|
— |
|
|
|
7,125 |
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
41,768 |
|
|
$ |
41,768 |
|
|
|
|
|
|
|
|
10
| 6. |
|
Receivables |
| |
| |
|
Receivables are presented in the following balance sheet accounts: (1) accounts receivable,
(2) accounts receivable — long-term, (3) unbilled work on uncompleted contracts, and
(4) contract costs incurred not yet recognized. The balance of accounts receivable -
long-term at September 30, 2008 and December 31, 2007 represents amounts related to
retainage which were not expected to be collected within the next twelve months. The
balance of unbilled work on uncompleted contracts includes (a) amounts receivable from
customers for work that has not yet been billed pursuant to contractually specified
milestone billing requirements and (b) revenue accruals. |
| |
| |
|
The claims and unapproved change orders included in our receivables amounted to $44.4
million at September 30, 2008 and $46.0 million at December 31, 2007. |
Costs and Estimated Earnings on Uncompleted Contracts
| |
|
|
|
|
|
|
|
|
| |
|
September 30 |
|
|
December 31 |
|
| |
|
2008 |
|
|
2007 |
|
| |
|
(In thousands) |
|
Costs incurred on uncompleted contracts |
|
$ |
704,052 |
|
|
$ |
838,856 |
|
Estimated earnings |
|
|
2,658 |
|
|
|
322,089 |
|
|
|
|
|
|
|
|
Costs and estimated earnings on uncompleted contracts |
|
|
706,710 |
|
|
|
1,160,945 |
|
Less: Billings to date |
|
|
(603,888 |
) |
|
|
(1,091,255 |
) |
|
|
|
|
|
|
|
|
|
|
102,822 |
|
|
|
69,690 |
|
Plus: Accrued revenue |
|
|
24,296 |
|
|
|
8,371 |
|
Less: Advance billings on uncompleted contracts |
|
|
(9,889 |
) |
|
|
(8,036 |
) |
|
|
|
|
|
|
|
|
|
$ |
117,229 |
|
|
$ |
70,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in accompanying balance sheets under the
following captions: |
|
|
|
|
|
|
|
|
Unbilled work on uncompleted contracts |
|
$ |
128,676 |
|
|
$ |
106,716 |
|
Advance billings on uncompleted contracts |
|
|
(11,447 |
) |
|
|
(36,691 |
) |
|
|
|
|
|
|
|
|
|
$ |
117,229 |
|
|
$ |
70,025 |
|
|
|
|
|
|
|
|
| 7. |
|
Property and Equipment |
| |
| |
|
The components of property and equipment, at cost, and the related accumulated depreciation
are as follows: |
| |
|
|
|
|
|
|
|
|
| |
|
September 30 |
|
|
December 31 |
|
| |
|
2008 |
|
|
2007 |
|
| |
|
(In thousands) |
|
Land |
|
$ |
6,322 |
|
|
$ |
6,322 |
|
Facilities and equipment |
|
|
181,223 |
|
|
|
155,676 |
|
Marine vessels |
|
|
539,455 |
|
|
|
428,021 |
|
Construction in progress |
|
|
172,882 |
|
|
|
68,757 |
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
899,882 |
|
|
|
658,776 |
|
Less: Accumulated depreciation |
|
|
(329,805 |
) |
|
|
(309,227 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
570,077 |
|
|
$ |
349,549 |
|
|
|
|
|
|
|
|
| |
|
Expenditures for property and equipment that substantially increase the useful lives of
existing assets are capitalized at cost and depreciated. Routine expenditures for repairs
and maintenance are expensed as incurred. Except for major construction vessels that are
depreciated on the units-of-production (“UOP”) method over estimated vessel operating days,
depreciation is provided utilizing the straight-line method over the estimated useful lives
of the assets. The UOP method is based on vessel utilization days and more closely
correlates depreciation expense to vessel revenue. In addition, the UOP method provides for
a minimum depreciation floor in periods with nominal vessel use. In general, if we applied
only a straight-line depreciation method instead of the UOP method, less depreciation
expense would be recorded in periods of high utilization and revenues, and more depreciation
expense would be recorded in periods of low vessel utilization and revenues.
|
11
| 8. |
|
Deferred Dry Docking Costs |
| |
| |
|
The Company utilizes the deferral method to capitalize vessel dry docking costs and to
amortize the costs to the next dry docking. Such capitalized costs include regulatory
required steel replacement, direct costs for vessel mobilization and demobilization and
rental of dry docking facilities and services. Crew costs may also be capitalized when
employees perform all or a part of the required dry docking. Any repair and maintenance
costs incurred during the dry docking period are expensed as incurred. |
| |
| |
|
The below table presents a roll forward of dry docking costs incurred and amortization for
all periods presented: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30 |
|
|
September 30 |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net book value at beginning of period |
|
$ |
66,940 |
|
|
$ |
17,715 |
|
|
$ |
30,735 |
|
|
$ |
13,673 |
|
Additions for the period |
|
|
5,310 |
|
|
|
9,009 |
|
|
|
47,419 |
|
|
|
18,371 |
|
Amortization expense for the period |
|
|
(4,741 |
) |
|
|
(2,892 |
) |
|
|
(10,645 |
) |
|
|
(8,212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value at end of period |
|
$ |
67,509 |
|
|
$ |
23,832 |
|
|
$ |
67,509 |
|
|
$ |
23,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9. |
|
Long-Term Debt |
| |
| |
|
The components of long-term debt are as follows: |
| |
|
|
|
|
|
|
|
|
| |
|
September 30 |
|
|
December 31 |
|
| |
|
2008 |
|
|
2007 |
|
| |
|
(In thousands) |
|
Senior Convertible Debentures due 2027, 2.75% |
|
$ |
325,000 |
|
|
$ |
325,000 |
|
Title XI Bonds due 2025, 7.71% |
|
|
65,340 |
|
|
|
69,300 |
|
Revolving Credit Facility |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
390,340 |
|
|
|
394,300 |
|
Less: Current maturities |
|
|
(3,960 |
) |
|
|
(3,960 |
) |
|
|
|
|
|
|
|
Long-term debt less current maturities |
|
$ |
386,380 |
|
|
$ |
390,340 |
|
|
|
|
|
|
|
|
| |
|
The Company may redeem all or a part of the debentures any time on or after August 1, 2014,
for cash at a price equal to 100% of the principal amount of the debentures being redeemed
plus accrued and unpaid interest. The holders of the debentures may require the Company to
repurchase all or a part of their debentures for cash on August 1, 2017 and August 1, 2022
at a price equal to 100% of the principal amount of the debentures being redeemed plus
accrued or unpaid interest, or upon the occurrence of certain types of fundamental changes. |
| |
| |
|
As a result of operating performance, the Company did not meet the existing minimum fixed
charge coverage ratio covenant in the Third Amended and Restated Credit Agreement (the
“Revolving Credit Facility”) as of September 30, 2008. As of October 31, 2008, the Company
had no borrowing against the facility and $100.2 million in
letters of credit outstanding thereunder.
On November 7, 2008, the financial institutions participating in the Revolving Credit
Facility waived compliance with the covenant condition. In consideration of this waiver, the Company and
the participating financial institutions have amended the Revolving Credit Facility to: |
| |
• |
|
temporarily cash-collateralize letters of credit and bank guarantees; |
| |
| |
• |
|
temporarily waive compliance with certain financial covenants; |
| |
| |
• |
|
temporarily prohibit share repurchases; and |
| |
| |
• |
|
temporarily maintain unencumbered liquidity of $100 million. |
| |
|
The length of the interim cash-collateralization period will depend on the Company’s future
financial performance. For the remaining duration of the Revolving Credit Facility after the
cash-collateralization period, this facility has been further amended to: |
12
| |
• |
|
allow for a new starting point in measuring financial performance; and |
| |
| |
• |
|
permit borrowings and/or the issuance of letters of credit and bank guarantees
based on a rate premium over prime rate ranging from 1.50% to 3.00% or London
Interbank Offered Rate (“LIBOR”) ranging from 2.00% to 3.50% based upon certain
financial ratios. |
| |
|
While the interim cash-collateralization requirement is in effect, no borrowings, letters of
credit or bank guarantees unsecured by cash are available to the Company under the Revolving
Credit Facility. All cash collateral will be classified in the Condensed Consolidated
Balance Sheet as Restricted Cash. The Company also has a $16.0 million short-term credit
facility at one of its foreign locations. At September 30, 2008, the available borrowing
under this facility was $6.5 million. |
| |
| 10. |
|
Commitments and Contingencies |
| |
| |
|
Commitments |
| |
| |
|
Construction and Purchases in Progress – The estimated cost to complete capital expenditure
projects in progress at September 30, 2008 was approximately $388.2 million, which primarily
represents expenditures for construction of new generation derrick/pipelay vessels, the
Global 1200 and Global 1201. This amount includes an aggregate commitment of 149.9 million
Singapore Dollars (or $101.3 million as of September 30, 2008) and €24.0 million (or $32.9
million as of September 30, 2008). |
| |
| |
|
Lease Extension – On August 8, 2008, the Company entered into a contractual addendum to
extend the Titan II cancelable lease an additional 57 months from August 2013 to May 2018,
thereby increasing the contractual obligation by $34.1 million. |
| |
| |
|
Off Balance Sheet Arrangements – In the normal course of our business activities, and
pursuant to agreements to perform construction services, we provide bonds, letters of credit
and guarantees to customers, vendors, and other parties. At September 30, 2008, the
aggregate amount of outstanding bonds was $93.9 million, which are scheduled to expire
between October 2008 and July 2009, and the aggregate amount of outstanding letters of
credit and bank guarantees was $109.8 million, which are due to expire between October 2008
and October 2009. |
| |
| |
|
Contingencies |
| |
| |
|
During the fourth quarter of 2007, we received a payroll tax assessment for the years 2005
through 2007 from the Nigerian tax authorities in the amount of $23.2 million. The
assessment alleges that certain expatriate employees, working on projects in Nigeria, were
subject to personal income taxes, which were not paid to the government. We filed a formal
objection to the assessment on November 12, 2007. We do not believe these employees are
subject to the personal income tax assessed; however, we believe this matter will ultimately
have to be resolved by litigation. We do not expect the ultimate resolution to have a
material adverse effect on the Company. |
| |
| |
|
On February 21, 2007, we received a $29.7 million tax assessment from Algeria for income
tax, business tax and value added tax for the years 2005 and 2004. We are indemnified by
our client for the value added tax portion of the assessment, which is approximately $10.4
million. We accrued income taxes for the Algerian tax liability in conjunction with the
project in 2005 and 2004. We have engaged an outside tax counsel to assist us in resolving
the tax assessment. During the fourth quarter of 2007, we reached a final resolution with
the Algerian tax authority for the income and the business tax portions of the assessment
for approximately $2.5 million, including penalties. This amount was paid during the first
quarter of 2008. |
| |
| |
|
In June 2007, the Company announced that it was conducting an internal investigation of its
West Africa operations, focusing on the legality, under the U.S. Foreign Corrupt Practices
Act (“FCPA”) and local laws, of one of its subsidiary’s reimbursement of certain expenses
incurred by a customs agent in connection with shipments of materials and the temporary
importation of vessels into West African waters. The Audit Committee has engaged Andrews
Kurth LLP to lead the investigation. Andrews Kurth LLP is an international firm with
significant experience in investigating and advising on FCPA matters. |
| |
| |
|
At this stage of the internal investigation, the Company is unable to predict what
conclusions, if any, the Securities and Exchange Commission (“SEC”) will reach, whether the
Department of Justice will open a separate investigation to investigate this matter, or what
potential remedies these agencies may seek. If the SEC or Department of Justice determines
that violations of the FCPA have occurred, they could seek civil and criminal sanctions,
including |
13
| |
|
monetary penalties, against us and/or certain of our employees, as well as changes to our
business practices and compliance programs, any of which could have a material adverse
effect on our business and financial condition. In addition, such actions, whether actual
or alleged, could damage our reputation and ability to do business. Further detecting,
investigating, and resolving these matters is expensive and consumes significant time and
attention of our senior management. |
| |
| |
|
We continue to use alternative procedures adopted after the commencement of the
investigation to obtain Nigerian temporary import permits. These procedures are designed to
ensure FCPA compliance. Although we are still working and pursuing additional work in West
Africa, we have declined or terminated available projects and delayed the start of certain
projects in Nigeria in order to ensure FCPA compliance and appropriate security for our
personnel and assets. The possibility exists that we may have to curtail or cease our
operations in Nigeria if appropriate long-term solutions cannot be identified and
implemented. We have worldwide customer relationships and a mobile fleet, and we are
prepared to redeploy vessels to other areas as necessary to ensure the vessels are utilized
to the fullest extent possible. |
| |
| |
|
Notwithstanding the ongoing internal investigation, we have concluded that certain changes
to our compliance program would provide us with greater assurance that we are in compliance
with the FCPA and its record-keeping requirements. We have a long-time published policy
requiring compliance with the FCPA and broadly prohibiting any improper payments by us to
foreign or domestic officials as well as training programs for our employees. Since the
commencement of the internal investigation, we have adopted, and may adopt additional,
measures intended to enhance our compliance procedures and ability to audit and confirm our
compliance. Additional measures also may be required once the investigation concludes. |
| |
| |
|
The Company has concluded that it is premature for it to determine whether it needs to make
any financial reserve for any potential liabilities that may result from these activities
given the status of the internal investigation. |
| |
| |
|
We are a party to legal proceedings and potential claims arising in the ordinary course of
business. We do not believe that these matters arising in the ordinary course of business
will have a material impact on our financial statements in future periods. |
| |
| 11. |
|
Comprehensive Income (Loss) |
| |
| |
|
Other Comprehensive Income (Loss) – The differences between net income (loss) and
comprehensive income (loss) for each of the comparable periods is presented in the table
below. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30 |
|
|
September 30 |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net Income (Loss) |
|
$ |
(102,787 |
) |
|
$ |
31,475 |
|
|
$ |
(89,437 |
) |
|
$ |
127,060 |
|
Unrealized gain (loss) on derivatives |
|
|
(7,005 |
) |
|
|
4,958 |
|
|
|
(5,969 |
) |
|
|
8,435 |
|
Unrealized gain (loss) on auction rate securities |
|
|
— |
|
|
|
— |
|
|
|
(907 |
) |
|
|
— |
|
Deferred tax benefit (expense) |
|
|
2,452 |
|
|
|
(1,735 |
) |
|
|
2,337 |
|
|
|
(2,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss) |
|
$ |
(107,340 |
) |
|
$ |
34,698 |
|
|
$ |
(93,976 |
) |
|
$ |
132,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
| |
|
Accumulated Other Comprehensive Income (Loss) – A roll-forward of the amounts included in
accumulated other comprehensive income (loss), net of taxes, is shown below. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Forward |
|
|
|
|
|
|
Accumulated |
|
| |
|
Accumulated |
|
|
Foreign |
|
|
|
|
|
|
Other |
|
| |
|
Translation |
|
|
Currency |
|
|
Auction Rate |
|
|
Comprehensive |
|
| |
|
Adjustment |
|
|
Contracts |
|
|
Securities |
|
|
Income/(Loss) |
|
| |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
(8,978 |
) |
|
$ |
5,075 |
|
|
$ |
— |
|
|
$ |
(3,903 |
) |
Change in value |
|
|
— |
|
|
|
(3,880 |
) |
|
|
(659 |
) |
|
|
(4,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
(8,978 |
) |
|
$ |
1,195 |
|
|
$ |
(659 |
) |
|
$ |
(8,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
The amount of accumulated translation adjustment included in accumulated other comprehensive
income (loss) relates to prior translations of subsidiaries whose functional currency was
not the U.S. dollar. The amount of gain on forward foreign currency contracts included in
accumulated other comprehensive income (loss) hedges the Company’s exposure to changes in
Norwegian Kroners for commitments of long-term vessel charters. |
| |
| 12. |
|
Stock-Based Compensation |
| |
| |
|
Pursuant to Statement of Financial Accounting Standards No. 123(R), Share-Based Payment,
(“SFAS 123(R)”) companies must recognize the cost of employee services received in exchange
for awards of equity instruments based on the grant-date fair value of those awards. |
| |
| |
|
The table below sets forth the total amount of stock-based compensation expense for the
three and nine months ended September 30, 2008 and 2007. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30 |
|
|
September 30 |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
784 |
|
|
$ |
1,015 |
|
|
$ |
2,342 |
|
|
$ |
3,432 |
|
Restricted stock |
|
|
2,020 |
|
|
|
2,037 |
|
|
|
6,040 |
|
|
|
7,205 |
|
Performance shares and units |
|
|
727 |
|
|
|
854 |
|
|
|
1,797 |
|
|
|
2,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
3,531 |
|
|
$ |
3,906 |
|
|
$ |
10,179 |
|
|
$ |
13,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 13. |
|
Other Income (Expense), net |
| |
| |
|
Components of other income (expense), net are as follows: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30 |
|
|
September 30 |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Foreign exchange rate gain (loss) |
|
$ |
(222 |
) |
|
$ |
(969 |
) |
|
$ |
(2,457 |
) |
|
$ |
(1,843 |
) |
Derivative contract gain (loss) |
|
|
(186 |
) |
|
|
921 |
|
|
|
403 |
|
|
|
1,479 |
|
Reversal of allowance for doubtful accounts |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
787 |
|
Settlement (1) |
|
|
— |
|
|
|
1,395 |
|
|
|
— |
|
|
|
1,395 |
|
Other |
|
|
174 |
|
|
|
980 |
|
|
|
188 |
|
|
|
1,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(234 |
) |
|
$ |
2,327 |
|
|
$ |
(1,866 |
) |
|
$ |
2,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Gain from settlement of a claim for interrupted operations as a result of a 2006 oil
spill by a refinery adjacent to our property in Louisiana. |
15
| 14. |
|
Income Taxes |
| |
| |
|
The Company’s effective tax rate for the three and nine months ended September 30, 2008 was
12.8% and 9.6%, respectively, compared to 27.0% and 29.7% for the three and nine months
ended September 30, 2007. The primary difference in the effective tax rate between the
three and nine months ended September 30, 2008 and 2007 was due to losses that could not be
tax effected and lower margins in tax jurisdictions with a deemed profit tax regime where
tax is calculated based as a percentage of revenue. This resulted in an income tax benefit
on the loss before taxes for the three and nine months ended September 30, 2008 that was
lower than if these conditions had not occurred during those periods. In the second quarter
of 2008, a tax liability totaling $1.5 million in taxes and $0.3 million in penalties for
late filing related to uncertain tax positions taken in prior years was settled. The
liability related to filing requirements in West Africa. Taxes and penalties associated
with years 1997 through 2006 were paid with a corresponding reduction in the reserve for
uncertain tax positions for the amount of $1.5 million. |
| |
| 15. |
|
Earnings Per Share |
| |
| |
|
Basic earnings per share (“EPS”) is computed by dividing net income (loss) during the period
by the weighted average number of common shares outstanding during each period. Diluted EPS
is computed by dividing net income (loss) during the period by the weighted average number
of shares that would have been outstanding assuming the issuance of dilutive potential
common shares as if outstanding during the reporting period, net of shares assumed to be
repurchased using the treasury stock method. |
| |
| |
|
The following table presents the reconciliation between basic shares and diluted shares. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30 |
|
|
September 30 |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
(In thousands, except per share data) |
|
Net income (loss) |
|
$ |
(102,787 |
) |
|
$ |
31,475 |
|
|
$ |
(89,437 |
) |
|
$ |
127,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares dilution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding — basic |
|
|
114,493 |
|
|
|
115,715 |
|
|
|
114,135 |
|
|
|
116,503 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
— |
|
|
|
1,166 |
|
|
|
— |
|
|
|
1,194 |
|
Performance shares and units |
|
|
— |
|
|
|
411 |
|
|
|
— |
|
|
|
411 |
|
Restricted stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding — diluted |
|
|
114,493 |
|
|
|
117,292 |
|
|
|
114,135 |
|
|
|
118,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.90 |
) |
|
$ |
0.27 |
|
|
$ |
(0.78 |
) |
|
$ |
1.09 |
|
Diluted |
|
$ |
(0.90 |
) |
|
$ |
0.27 |
|
|
$ |
(0.78 |
) |
|
$ |
1.08 |
|
| |
|
Excluded anti-dilutive shares totaled approximately
3.6 million and 0.1 million potential shares of common stock for the three months ended September 30, 2008 and 2007, respectively.
Approximately 3.6 million and 0.7 million potential shares of common stock were excluded
from the diluted EPS for the nine months ended September 30, 2008 and 2007, respectively,
because they were anti-dilutive. |
| |
| 16. |
|
Segment Information |
| |
| |
|
The following table presents information about the profit (or loss) for the three and nine
months ended September 30, 2008 and 2007 of each of the Company’s six reportable segments:
North America Offshore Construction Division (“OCD”), North America Subsea, Latin America,
West Africa, Middle East (including the Mediterranean), and Asia Pacific/India. In the
third quarter of 2008, we renamed our Gulf of Mexico segments to North America segments to
better reflect our strategic direction to expand our marketing efforts into Canada,
Newfoundland, and |
16
| |
|
other regions in North America. The information below contains an allocation of all
corporate expense to the reportable segments, with the exception of interest expense and
interest income. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30 |
|
|
September 30 |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Total segment revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America OCD |
|
$ |
28,868 |
|
|
$ |
32,037 |
|
|
$ |
58,440 |
|
|
$ |
80,075 |
|
North America Subsea |
|
|
43,422 |
|
|
|
45,620 |
|
|
|
103,122 |
|
|
|
117,724 |
|
Latin America |
|
|
59,509 |
|
|
|
39,404 |
|
|
|
185,259 |
|
|
|
174,269 |
|
West Africa |
|
|
22,924 |
|
|
|
44,626 |
|
|
|
140,664 |
|
|
|
153,876 |
|
Middle East |
|
|
35,638 |
|
|
|
41,530 |
|
|
|
188,085 |
|
|
|
84,955 |
|
Asia Pacific/India |
|
|
40,423 |
|
|
|
8,977 |
|
|
|
172,317 |
|
|
|
156,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
230,784 |
|
|
|
212,194 |
|
|
|
847,887 |
|
|
|
767,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America OCD |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,726 |
) |
North America Subsea |
|
|
(10,159 |
) |
|
|
(8,225 |
) |
|
|
(23,187 |
) |
|
|
(13,511 |
) |
Latin America |
|
|
(2,074 |
) |
|
|
— |
|
|
|
(2,074 |
) |
|
|
— |
|
Middle East |
|
|
— |
|
|
|
(401 |
) |
|
|
(2,067 |
) |
|
|
(16,966 |
) |
Asia Pacific/India |
|
|
— |
|
|
|
(32 |
) |
|
|
— |
|
|
|
(145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
(12,233 |
) |
|
|
(8,658 |
) |
|
|
(27,328 |
) |
|
|
(38,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
218,551 |
|
|
$ |
203,536 |
|
|
$ |
820,559 |
|
|
$ |
729,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America OCD |
|
$ |
(6,666 |
) |
|
$ |
4,888 |
|
|
$ |
(13,946 |
) |
|
$ |
10,115 |
|
North America Subsea |
|
|
(459 |
) |
|
|
21,974 |
|
|
|
4,012 |
|
|
|
48,395 |
|
Latin America |
|
|
(21,858 |
) |
|
|
10,282 |
|
|
|
(18,622 |
) |
|
|
75,101 |
|
West Africa |
|
|
(12,270 |
) |
|
|
2,924 |
|
|
|
(25,764 |
) |
|
|
(4,857 |
) |
Middle East |
|
|
(84,893 |
) |
|
|
2,489 |
|
|
|
(78,455 |
) |
|
|
15,027 |
|
Asia Pacific/India |
|
|
9,463 |
|
|
|
(6,145 |
) |
|
|
31,269 |
|
|
|
25,192 |
|
Corporate |
|
|
(1,160 |
) |
|
|
6,729 |
|
|
|
2,616 |
|
|
|
11,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income (loss) before taxes |
|
$ |
(117,843 |
) |
|
$ |
43,141 |
|
|
$ |
(98,890 |
) |
|
$ |
180,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 17. |
|
Subsequent Events |
| |
| |
|
On October 16, 2008, the Company announced that B.K. Chin resigned all of his positions with
the Company, including Chairman of the Board and Chief Executive Officer, effective
immediately. Current board member John A. Clerico was appointed Chairman of the Board and
interim Chief Executive Officer. Mr. Clerico will serve as interim Chief Executive Officer
until the Board completes its search for a permanent replacement. In connection with
Mr. Clerico’s appointment as interim Chief Executive Officer, Mr. Clerico was awarded a
restricted stock grant for 143,885 shares of the Company’s common stock (valued at $600,000
based upon the closing price of the common stock on October 17, 2008). |
| |
| |
|
Pursuant to the Resignation and Release agreement between the Company and Mr. Chin, the
Company expects to report net pretax charges of approximately $2.7 million and $0.2 million
in the fourth quarter of 2008 and first quarter of 2009, respectively. |
| |
| |
|
As a result of operating performance, the Company did not meet the existing minimum fixed
charge coverage ratio covenant in the Third Amended and Restated Credit Agreement (the
“Revolving Credit Facility”) as of September 30, 2008. As of October 31, 2008, the Company
had no borrowing against the facility and $100.2 million in letters of credit outstanding
thereunder. On November 7, 2008, the financial institutions participating in the Revolving
Credit Facility waived compliance with the covenant condition. In consideration of this
waiver, the Company and the participating financial institutions have amended the Revolving
Credit Facility to: |
| |
• |
|
temporarily cash-collateralize letters of credit and bank guarantees; |
| |
| |
• |
|
temporarily waive compliance with certain financial covenants;
|
17
| |
• |
|
temporarily prohibit share repurchases and the buyback of convertible securities;
and |
| |
| |
• |
|
temporarily maintain unencumbered liquidity of $100 million. |
| |
|
The length of the interim cash-collateralization period will depend on the Company’s future
financial performance. For the remaining duration of the Revolving Credit Facility after the
cash-collateralization period, this facility has been further amended to: |
| |
• |
|
allow for a new starting point in measuring financial performance; and |
| |
| |
• |
|
permit borrowings and/or the issuance of letters of credit and bank guarantees
based on a rate premium over prime rate ranging from 1.50% to 3.00% or London
Interbank Offered Rate (“LIBOR”) ranging from 2.00% to 3.50% based upon certain
financial ratios. |
| |
|
While the interim cash-collateralization requirement is in effect, no borrowings, letters of
credit or bank guarantees unsecured by cash are available to the Company under the Revolving
Credit Facility. All cash collateral will be classified in the Condensed Consolidated
Balance Sheet as Restricted Cash. The Company also has a $16.0 million short-term credit
facility at one of its foreign locations. At September 30, 2008, the available borrowing
under this facility was $6.5 million. |
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
From time to time, our management or persons acting on our behalf make forward-looking statements
to inform existing and potential security holders about the Company. These statements may include
projections and estimates concerning the timing and success of specific projects and our future
backlog, revenues, income, and capital spending. Forward-looking statements are generally
accompanied by words such as “estimate,” “project,” “believe,” “expect,” “anticipate,” “plan,”
“goal,” or other words that convey the uncertainty of future events or outcomes.
In addition, various statements in this Quarterly Report on Form 10-Q for the three and nine months
ended September 30, 2008 (“Quarterly Report”), including those that express a belief, expectation,
or intention, as well as those that are not statements of historical fact, are forward-looking
statements. We are including the following discussion to inform our existing and potential
security holders generally of some of the risks and uncertainties that can affect our Company and
to take advantage of the “safe harbor” protection for forward-looking statements that applicable
federal securities law affords.
Our forward-looking statements speak only as of the date of this report. We disclaim any
obligation to update these statements unless required by securities laws, and we caution you not to
rely on them unduly. We have based these forward-looking statements on our current expectations
and assumptions about future events. While our management considers these expectations and
assumptions to be reasonable, they are inherently subject to significant business, economic,
competitive, regulatory, and other risks, contingencies and uncertainties, most of which are
difficult to predict and many of which are beyond our control. These risks, contingencies, and
uncertainties relate to, among other matters, the following:
| |
• |
|
the level of capital expenditures in the oil and gas industry; |
| |
| |
• |
|
risks inherent in doing business abroad; |
| |
| |
• |
|
operating hazards related to working offshore; |
| |
| |
• |
|
dependence on significant customers; |
| |
| |
• |
|
ability to attract and retain skilled workers; |
| |
| |
• |
|
general industry conditions; |
| |
| |
• |
|
environmental matters; |
| |
| |
• |
|
changes in laws and regulations; |
| |
| |
• |
|
the effects of resolving claims and variation orders; |
| |
| |
• |
|
availability of capital resources; |
| |
| |
• |
|
delays or cancellation of projects included in backlog; |
| |
| |
• |
|
fluctuations in the prices or demand for oil and gas; |
| |
| |
• |
|
changes in vessel construction costs and delays in completion of vessels; |
| |
| |
• |
|
the level of offshore drilling activity; and |
| |
| |
• |
|
foreign exchange and currency fluctuations. |
We believe the items we have outlined above are important factors that could cause our actual
results to differ materially from the estimates in our financial statements and those expressed in
forward-looking statements made in this report or elsewhere. These factors are not necessarily all
the important factors that could affect us. Unpredictable or unknown factors we have not discussed
in this report could also have material adverse effects on actual results of matters that are the
subject of our forward-looking statements. We do not intend to update our description of important
factors each time a potential important factor arises, except as required by applicable securities
laws and regulations. We advise existing and potential security holders to be aware that important
factors not referred to above could affect the accuracy of our forward-looking statements. For
more detailed information regarding risks, see the discussion of risk factors in Item 1A of our
Annual Report on Form 10-K for 2007.
The following discussion presents management’s discussion and analysis of our financial condition
and results of operations.
Results of Operations
General
We are a leading offshore construction company offering a comprehensive and integrated range of
marine construction and support services in the North America, Latin America, West Africa, the
Middle East (including the Mediterranean), and Asia Pacific/India regions. These services include
pipeline construction, platform installation and removal, project management,
19
construction support, diving services, diverless intervention, SURF (subsea equipment, umbilical,
riser, and flow line), IRM (inspection, repairs, and maintenance), and decommissioning/plug and
abandonment services.
Our results of operations, in terms of revenues, gross profit, and gross profit as a percentage of
revenues (“margins”), are principally driven by three factors: (1) our level of offshore
construction and subsea activity (“activity”), (2) pricing, which can be affected by contract mix
(“pricing”), and (3) operating efficiency on any particular construction project (“productivity”).
Our business consists of two principal activities:
| |
• |
|
Offshore Construction Services, which include pipeline construction and platform
installation and removal services; and |
| |
| |
• |
|
Subsea Services, which include diving, diverless intervention, SURF, IRM, salvage, and
site clearance services. |
Offshore Construction Services
The level of our offshore construction activity in any given period has a significant impact on our
results of operations. Our results of operations depend heavily upon our ability to obtain, in a
very competitive environment, a sufficient quantity of offshore construction contracts with
sufficient gross profit margins to recover the fixed costs associated with our offshore
construction business. The offshore construction business is capital and personnel intensive, and
as a practical matter, many of our costs, including the wages of skilled workers, are effectively
fixed in the short run regardless of whether or not our vessels are being utilized in productive
service. In general, as activity increases, a greater proportion of these fixed costs are
recovered through operating revenues; consequently, gross profit and margins increase. Conversely,
as activity decreases, our revenues decline, but our costs do not decline proportionally, thereby
constricting our gross profit and margins. Our activity level can be affected by changes in demand
due to economic or other conditions in the oil and gas exploration industry, seasonal conditions in
certain geographical areas, and our ability to win the bidding for available jobs.
Most of our offshore construction revenues are earned through international contracts which are
generally larger, more complex, and of longer duration than our typical domestic contracts. Most
of these international contracts require a significant amount of working capital, are generally bid
on a lump-sum basis, and are secured by a letter of credit or performance bond. Operating cash
flows may be negatively impacted during periods of escalating activity due to the substantial
amounts of cash required to initiate these projects and the normal delays between our cash
expenditures and cash receipts from the customer. Additionally, lump-sum contracts for offshore
construction services are inherently risky and are subject to many unforeseen circumstances and
events that may affect productivity and thus, profitability. When productivity decreases with no
offsetting decrease in costs or increases in revenues, our contract margins erode compared to our
bid margins. In general, we traditionally bear a larger share of project related risks during
periods of weak demand for our services and a smaller share of risks during periods of high demand
for our services. Consequently, our revenues and margins from offshore construction services are
subject to a high degree of variability, even as compared to other businesses in the offshore
energy industry.
Subsea Services
Most of our subsea revenues are the result of short-term work, involve numerous smaller contracts,
and are usually based on a day-rate charge. Financial risks associated with these types of
contracts are normally limited due to their short-term and non-lump sum nature. However, some
subsea contracts, especially those that utilize dive support vessels (“DSVs”), may involve
longer-term commitments that extend from the exploration, design, and installation phases of a
field throughout its useful life by providing IRM services. The financial risks which are
associated with these commitments remain low in comparison with our offshore construction
activities due to the day-rate structure of the contracts. Revenues and margins from our subsea
activities tend to be more consistent than from our offshore construction activities.
20
Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
| |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
% Change |
|
| |
|
(Thousands) |
|
|
Revenue |
|
|
(Thousands) |
|
|
Revenue |
|
|
(Unfavorable) |
|
Revenues |
|
$ |
218,551 |
|
|
|
100.0 |
% |
|
$ |
203,536 |
|
|
|
100.0 |
% |
|
|
7.4 |
% |
Cost of operations |
|
|
258,736 |
|
|
|
118.4 |
|
|
|
146,714 |
|
|
|
72.1 |
|
|
|
(109.5 |
) |
Anticipated contract losses |
|
|
48,673 |
|
|
|
22.3 |
|
|
|
— |
|
|
|
— |
|
|
|
n/m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(88,858 |
) |
|
|
40.7 |
|
|
|
56,822 |
|
|
|
27.9 |
|
|
|
(256.4 |
) |
Loss (gain) on asset disposals and impairments |
|
|
1,640 |
|
|
|
0.7 |
|
|
|
(9 |
) |
|
|
— |
|
|
|
n/m |
|
Selling, general and administrative expenses |
|
|
25,439 |
|
|
|
11.6 |
|
|
|
20,749 |
|
|
|
10.2 |
|
|
|
(22.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(115,937 |
) |
|
|
53.0 |
|
|
|
36,082 |
|
|
|
17.7 |
|
|
|
(421.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2,476 |
|
|
|
1.1 |
|
|
|
8,450 |
|
|
|
4.2 |
|
|
|
(70.7 |
) |
Interest expense |
|
|
(4,148 |
) |
|
|
1.9 |
|
|
|
(3,718 |
) |
|
|
1.8 |
|
|
|
(11.6 |
) |
Other income (expense), net |
|
|
(234 |
) |
|
|
0.1 |
|
|
|
2,327 |
|
|
|
1.1 |
|
|
|
(110.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
(117,843 |
) |
|
|
53.9 |
|
|
|
43,141 |
|
|
|
21.2 |
|
|
|
(373.2 |
) |
Income tax expense (benefit) |
|
|
(15,056 |
) |
|
|
6.9 |
|
|
|
11,666 |
|
|
|
5.7 |
|
|
|
(229.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(102,787 |
) |
|
|
47.0 |
% |
|
$ |
31,475 |
|
|
|
15.5 |
% |
|
|
(426.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview – Net loss for the third quarter of 2008 was $102.8 million on revenues of $218.6 million
compared with 2007 third quarter net income of $31.5 million on revenues of $203.5 million. Third
quarter 2008 diluted loss per share was $0.90 compared to diluted earnings per share of $0.27 in
the third quarter 2007. During the third quarter of 2008, the Company continued to experience
significant adverse impact on gross profits on two significant projects in Saudi Arabia and Brazil
due to productivity and logistical issues, including non-compensated standby and mechanical
downtime occurrences, necessitating significant increases to the time and cost estimates required
to complete both projects satisfactorily. Third quarter 2008 results therefore include estimates
for losses on both the Brazil and Saudi Arabia projects through their estimated completion dates of
the first and third quarter 2009, respectively. Revenues and gross profits were also negatively
impacted by lower vessel utilization in North America and West Africa.
Revenues – Revenues increased $15.1 million, or 7%, to $218.6 million for the third quarter of 2008
compared to $203.5 million for the third quarter of 2007. Higher activity in the Asia
Pacific/India and Latin America segments contributed to the increase for the third quarter of 2008.
This increase was partially reduced by lower revenues from West Africa, Middle East, and North
America.
For further discussion of revenues and income (loss) before taxes for each geographical area see
“Segment Information” below.
Gross Profit – Gross profit decreased by $145.7 million, or 256%, to a gross loss of $88.9 million
in the third quarter of 2008 compared to a gross profit of $56.8 million in the third quarter of
2007. Significant increases in the estimated costs to complete projects in the Middle East and
Latin America as well as decreased activity in West Africa and North America were the primary
factors contributing to decreased profitability in the third quarter of 2008.
Loss
(gain) on asset disposals and impairments – Loss (gain) on asset disposals and impairments, net
decreased by $1.6 million to a loss of $1.6 million for the third quarter of 2008 primarily due to
a $1.6 million impairment of the Sea Puma, a DSV in West Africa.
Selling,
General and Administrative Expenses – Selling, general and administrative expenses
increased by $4.7 million, or 23%, to $25.4 million for the third quarter of 2008 compared to $20.7
million for the third quarter of 2007. Increased labor and professional fees, worldwide, as well as
infrastructure support costs related to geographical expansion into Brazil and the Middle East were
incurred in the third quarter of 2008 compared to the third quarter of 2007.
Interest
Income – Interest income decreased by $6.0 million, or 71%, to $2.5 million for the third
quarter of 2008 compared to $8.5 million for the third quarter of 2007. Lower interest rates and
decreased cash balances in the third quarter of 2008 contributed to lower return on cash balances
and short-term investments, compared to the third quarter of 2007.
Interest
Expense – Interest expense increased by $0.4 million to $4.1 million for the third quarter
of 2008 primarily due to additional interest expense from the issuance of $325.0 million of
convertible debentures in July 2007.
21
Other
income (expense), net – Other income (expense), net decreased by $2.5 million from the third
quarter of 2007 primarily due to a $1.4 million gain from settlement of a claim for interrupted
operations as a result of a 2006 oil spill by a refinery adjacent to our property in Louisiana
recorded in third quarter of 2007.
Income
Taxes – The Company’s effective tax rate for the third quarter of 2008 was 12.8% as compared
to 27.0% for the third quarter of 2007. The lower tax rate was due to losses that could not be tax
effected and lower margins in tax jurisdictions with a deemed profit tax regime where tax
is calculated as a percentage of revenue. This resulted in an income tax benefit on the loss
before taxes for the three months ended September 30, 2008 that was lower than if these conditions
had not occurred during this period.
Segment Information – The following sections discuss the results of operations for each of our
reportable segments during the quarters ended September 30, 2008 and 2007.
North America Offshore Construction Division
Revenues were $28.9 million for the third quarter of 2008 compared to $32.0 million for the third
quarter of 2007. A decrease of $3.1 million, or 10%, in the third quarter of 2008 compared to the
same period in 2007 reflects lower utilization in the third quarter of 2008 primarily from the
non-availability of the Cherokee which remained in extended dry-dock for all of July through August
18, 2008. Loss before taxes was $6.7 million for the third quarter of 2008 compared to income
before taxes of $4.9 million for the third quarter of 2007. The decrease of $11.6 million was
primarily attributable to lower revenues, a period of non-compensated vessel stand-by costs during
Hurricanes Gustav and Ike, and productivity issues on certain projects.
North America Subsea
Revenues were $43.4 million for the third quarter of 2008 compared to $45.6 million for the third
quarter of 2007. A decrease of $2.2 million, or 5%, for the third quarter of 2008 compared to the
same period in 2007 was primarily due to weather related project delays. Loss before taxes was
$0.5 million during the third quarter of 2008 compared to income before taxes of $22.0 million for
the third quarter of 2007. A decrease of $22.5 million between comparable quarters was primarily
due to lower margins from low productivity on lump sum projects, lower day rates and higher rental
cost on a chartered “flotel” (floating hotel) as compared to day rate projects executed by REM
Commander in the 2007 third quarter. Conversion, standby operations and mobilization expenses for
the newly acquired Global Orion and Olympic Challenger, also unfavorably impacted the financial
results in the third quarter of 2008 compared to the prior year quarter.
Latin America
Revenues were $59.5 million for the third quarter of 2008 compared to $39.4 million for the third
quarter of 2007. An increase of $20.1 million, or 51%, in the third quarter of 2008 compared to the
same period in 2007 was primarily due to additional revenues from our operations in Brazil. Loss
before taxes was $21.9 million for the third quarter of 2008 compared to income before taxes of
$10.3 million for the third quarter of 2007. A decrease of $32.2 million was primarily attributable
to an increase of approximately $17.5 million in the loss estimate for the Camarupim project in
Brazil primarily due to lower than expected productivity and vessel standby delays from mechanical
and weather downtime during the third quarter of 2008. Third quarter 2008 results therefore
include an estimate for losses on the Camarupim project through the estimated completion date of
the 2009 first quarter.
West Africa
Revenues were $22.9 million for the third quarter of 2008 compared to $44.6 million for the third
quarter of 2007. A decrease of $21.7 million, or 49%, in the third quarter of 2008 compared to the
same period in 2007 was primarily due to lower activity in the third quarter of 2008 compared to
the third quarter of 2007. While the Company successfully and profitably completed the Vaalco
project with the Hercules in Gabon in late July, the idle cost of the Cheyenne and Sea Constructor
contributed to a loss before taxes of $12.3 million for the third quarter of 2008 compared to
earnings before taxes of $2.9 million for the third quarter of 2007. The $1.6 million impairment of
the Sea Puma, a DSV, in the third quarter of 2008 also contributed to the loss for the current
quarter. Due to the lack of visibility on short-term opportunities, increasing uncertainty and
challenges surrounding projects in Nigeria and post-hurricane activity in the U.S. Gulf of Mexico
the Company decided to relocate two vessels, the Hercules and Sea Constructor to the U.S. Gulf of
Mexico. This relocation is expected to be completed in the first quarter of 2009. See also Note 10
of the Notes to Condensed Consolidated Financial Statements for a discussion of challenges related
to conducting operations in Nigeria.
22
Middle East
Revenues were $35.6 million for the third quarter of 2008 compared to $41.5 million for the third
quarter of 2007. A decrease of $5.9 million, or 14%, in the third quarter of 2008 compared to the
same period in 2007 was attributable to continued delays, low productivity, and cost over-runs on
the Berri and Qatif project during the third quarter of 2008. Loss before taxes was $84.9 million
for the third quarter of 2008 compared to income before taxes of $2.5 million for the third quarter
of 2007. During the 2008 third quarter, the Company eliminated the previously recorded profit
estimate and recorded an estimated loss for the Berri and Qatif project in Saudi Arabia which total
approximately $83.3 million, as the Company experienced an exceptional loss in productivity and
cost over-runs on this project that resulted in a complete re-evaluation and extension of the
schedule and additional cost to complete the remaining scope of work. In addition, the Company
re-sequenced certain phases of the remaining scope of work to mitigate the risk of excessive
equipment and personnel stand-by cost during the previously scheduled regulatory dry-docking of the
work barge DLB332. This rescheduling to mitigate those risks necessitates continuous working
through the bad weather season in January and February 2009 and the Company has increased the
contingencies for estimated future weather downtime during that period. Third quarter 2008 results
therefore include an estimate for losses on the Berri and Qatif project through the estimated
completion date of the 2009 third quarter.
Asia Pacific/India
Revenues were $40.4 million for the third quarter of 2008 compared to $9.0 million for the third
quarter of 2007. An increase of $31.4 million, or 349%, in the third quarter of 2008 compared to
the same period in 2007 was primarily due to higher activity related to a project in Vietnam and
the Seminole being on third party charter in Malaysia during the third quarter of 2008. During the
third quarter of 2007, revenues were negatively impacted due to the timing of revenue recognition
on a multi-year project. Income before taxes was $9.5 million for the third quarter of 2008
compared to a loss of $6.1 million for the third quarter of 2007. An increase of $15.6 million was
due to higher revenues and increased project margins attributable to higher utilization.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
| |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
% Change |
|
| |
|
(Thousands) |
|
|
Revenue |
|
|
(Thousands) |
|
|
Revenue |
|
|
(Unfavorable) |
|
Revenues |
|
$ |
820,559 |
|
|
|
100.0 |
% |
|
$ |
729,485 |
|
|
|
100.0 |
% |
|
|
12.5 |
% |
Cost of operations |
|
|
795,881 |
|
|
|
97.0 |
|
|
|
505,056 |
|
|
|
69.2 |
|
|
|
(67.8 |
) |
Anticipated contract losses |
|
|
51,370 |
|
|
|
6.3 |
|
|
|
— |
|
|
|
— |
|
|
|
n/m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(26,692 |
) |
|
|
3.3 |
|
|
|
224,429 |
|
|
|
30.8 |
|
|
|
(111.9 |
) |
Loss (gain) on asset disposals and impairments |
|
|
(372 |
) |
|
|
— |
|
|
|
(1,317 |
) |
|
|
0.2 |
|
|
|
(71.8 |
) |
Selling, general and administrative expenses |
|
|
73,439 |
|
|
|
8.9 |
|
|
|
58,777 |
|
|
|
8.1 |
|
|
|
(24.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(99,759 |
) |
|
|
12.2 |
|
|
|
166,969 |
|
|
|
22.9 |
|
|
|
(159.7 |
) |
Interest income |
|
|
12,709 |
|
|
|
1.5 |
|
|
|
19,260 |
|
|
|
2.6 |
|
|
|
(34.0 |
) |
Interest expense |
|
|
(9,974 |
) |
|
|
1.2 |
|
|
|
(8,491 |
) |
|
|
1.2 |
|
|
|
(17.5 |
) |
Other income (expense), net |
|
|
(1,866 |
) |
|
|
0.2 |
|
|
|
2,933 |
|
|
|
0.4 |
|
|
|
(163.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
(98,890 |
) |
|
|
12.1 |
|
|
|
180,671 |
|
|
|
24.7 |
|
|
|
(20.4 |
) |
Income tax expense (benefit) |
|
|
(9,453 |
) |
|
|
1.2 |
|
|
|
53,611 |
|
|
|
7.3 |
|
|
|
(117.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(89,437 |
) |
|
|
10.9 |
% |
|
$ |
127,060 |
|
|
|
17.4 |
% |
|
|
(170.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview – Net loss for the nine months ended September 30, 2008 was $89.4 million on revenues of
$820.6 million compared to net income of $127.1 million on revenues of $729.5 million for the nine
months ended September 30, 2007. For the nine months ended September 30, 2008 diluted loss per
share was $0.78 compared to diluted earnings per share of $1.08 for the nine months ended September
30, 2007. During the nine months ended September 30, 2008, the Company experienced significant
adverse impact on gross profits of two significant projects in Saudi Arabia and Brazil due to
productivity and logistical issues, including non-compensated standby and mechanical downtime
occurrences. Results for the nine months ended September 30, 2008 therefore include estimates for
losses on both the Brazil and Saudi Arabia projects through their estimated completion dates of the
first and third quarter, 2009, respectively. Additionally, the Company experienced significant
non-availability of vessels undergoing dry docking during the nine months ended September 30, 2008.
Revenues
– Revenues increased by $91.1 million, or 13%, to $820.6 million for the nine months
ended September 30, 2008 compared to $729.5 million for the nine months ended September 30, 2007.
The increase was primarily due to higher activity
23
in the Middle East, Asia Pacific/India, and Latin America for the nine months ended September 30,
2008. For further discussion of revenues and income (loss) before taxes for each geographical area,
see “Segment Information” below.
Gross Profit – Gross profit decreased by $251.1 million, or 112%, to $26.7 million loss for the
nine months ended September 30, 2008 compared to $224.4 million profit for the nine months ended
September 30, 2007. The decrease primarily reflects the adverse effects of the Berri and Qatif
project in Saudi Arabia and Camarupim project in Brazil.
Selling, General and Administrative Expenses – Selling, general and administrative expenses
increased by $14.6 million, or 25%, to $73.4 million for the nine months ended September 30, 2008
compared to $58.8 million for the nine months ended September 30, 2007. Increased labor and
professional fees worldwide and administrative support costs, related to geographical expansion
into Brazil and the Middle East were incurred in the nine months ended September 30, 2008, compared
to the nine months ended September 30, 2007.
Interest Income – Interest income decreased by $6.6 million, or 34%, to $12.7 million for the nine
months ended September 30, 2008 compared to $19.3 million for the nine months ended September 30,
2007. Lower interest rates and decreased cash balances in the nine months ended September 30, 2008
contributed to lower return on cash balances and short-term investments, compared to the nine
months ended September 30, 2007.
Interest Expense – Interest expense increased by $1.5 million, or 18%, to $10.0 million for the
nine months ended September 30, 2008 compared to $8.5 million for the nine months ended September
30, 2007, resulting from the issuance of $325.0 million of convertible debentures in July 2007,
partially offset by an adjustment recorded in the nine months ended September 30, 2008 for interest
expense related to a previous uncertain tax position.
Other income (expense), net – Other income (expense), net decreased by $4.8 million from the nine
months ended September 30, 2007 primarily resulting from losses on foreign currency exchange rate
differences incurred in the nine months ended September 30, 2008 and a $1.4 million gain from
settlement of a claim for interrupted operations as a result of a 2006 oil spill in the Gulf of
Mexico by a refinery adjacent to our property in Louisiana recognized in the nine months ended
September 30, 2007.
Income
Taxes – The Company’s effective tax rate was 9.6% and 29.7%, respectively, for the nine
months ended September 30, 2008 and 2007. The lower tax rate was due to losses that could not be
tax effected and lower margins in tax jurisdictions with a deemed profit tax regime where tax
is calculated as a percentage of revenue. This resulted in an income tax benefit on the loss before taxes
for the nine months ended September 30, 2008 that was lower than if these conditions had not
occurred during the period.
Segment Information – The following sections discuss the results of operations for each of our
reportable segments during the nine month periods ended September 30, 2008 and 2007.
North America Offshore Construction Division
Revenues were $58.4 million for the nine months ended September 30, 2008 compared to $80.1 million
for the nine months ended September 30, 2007. A decrease of $21.7 million, or 27%, for the nine
months ended September 30, 2008 compared to the same period in 2007 was primarily due to: (1) lower
activity related to market conditions driven by competition (2) extended dry docking of the
Cherokee; and (3) non-compensated vessel standby costs during Hurricanes Gustav and Ike. Loss
before taxes was $13.9 million for the nine months ended September 30, 2008 compared to income
before taxes of $10.1 million for the nine months ended September 30, 2007. A decrease of $24.0
million was primarily attributable to lower revenues and non-recovered vessel costs resulting from
lower vessel utilization for the nine months ended September 30, 2008.
North America Subsea
Revenues were $103.1 million for the nine months ended September 30, 2008 compared to $117.7
million for the nine months ended September 30, 2007. A decrease of $14.6 million, or 12%, for the
nine months ended September 30, 2008 compared to the same period in 2007 was due to reduced demand
related to competition and adverse weather in the nine months ended September 30, 2008. Income
before taxes was $4.0 million for the nine months ended September 30, 2008 compared to $48.4
million for the nine months ended September 30, 2007. A decrease of $44.4 million, or 92%, was
attributable to lower revenues and margins. For the nine months ended September 30, 2007, higher
project margins were generated from the REM Commander which was subsequently transferred to the
Latin American region in April 2008.
24
Latin America
Revenues were $185.3 million for the nine months ended September 30, 2008 compared to $174.3
million for the nine months ended September 30, 2007. An increase of $11.0 million, or 6%, for the
nine months ended September 30, 2008 compared to the same period in 2007 was primarily due to
additional revenue from expansion into Brazil. Loss before taxes was $18.6 million for the nine
months ended September 30, 2008 compared to income before taxes of $75.1 million for the nine
months ended September 30, 2007. A decrease of $93.7 million was primarily due to increased costs.
For the nine months ended September 30, 2008, the Camarupim project in Brazil was estimated to
complete at a significant loss due to lower than expected productivity and vessel standby delays.
Results for the nine months ended September 30, 2008 therefore include an estimate for losses on
the Camarupim project through the estimated completion date of the 2009 first quarter. This
compares to high profit margins obtained from the favorable resolutions of change orders and claims
on projects in Mexico in the nine months ended September 30, 2007.
25
West Africa
Revenues were $140.7 million for the nine months ended September 30, 2008 compared to $153.9
million for the nine months ended September 30, 2007. A decrease of $13.2 million, or 9%, for the
nine months ended September 30, 2008 compared to the same period in 2007 was primarily due to
decreased activity in the region. Loss before taxes was $25.8 million for the nine months ended
September 30, 2008 compared to $4.9 million for the nine months ended September 30, 2007. For the
nine months ended September 30, 2008, additional costs were incurred related to idle vessel costs
from low utilization and project delays. For the nine months ended September 30, 2007, security
issues experienced in Nigeria resulted in suspended projects and additional non-recovered vessel
costs. See also Note 10 of the Notes to Condensed Consolidated Financial Statements for a
discussion of challenges related to conducting operations in Nigeria.
Middle East
Revenues were $188.1 million for the nine months ended September 30, 2008 compared to $85.0 million
during the nine months ended September 30, 2007. An increase of $103.1 million, or 121%, for the
nine months ended September 30, 2008 compared to the same period in 2007 was attributable to two
major projects being in progress during the nine months ended September 30, 2008 compared to a
lower level of construction activity during most of the nine months ended September 30, 2007. Loss
before taxes was $78.5 million for the nine months ended September 30, 2008 compared to income
before taxes of $15.0 million for the nine months ended September 30, 2007 due primarily to the
significant deterioration in the Berri and Qatif project in Saudi Arabia during the nine months
ended September 30, 2008. Results for the nine months ended September 30, 2008 therefore include
an estimate for losses on the Berri and Qatif project through the estimated completion date of the
2009 third quarter.
Asia Pacific/India
Revenues were $172.3 million for the nine months ended September 30, 2008 compared to $156.9
million for the nine months ended September 30, 2007. An increase of $15.4 million, or 10%, for
the nine months ended September 30, 2008 compared to the same period in 2007 was primarily
attributable to higher activity during the nine months ended September 30, 2008. Income before
taxes was $31.3 million for the nine months ended September 30, 2008 compared to $25.2 million for
the nine months ended September 30, 2007. An increase of $6.1 million, or 24%, was primarily due
to higher revenues, increased project margins, and cost recoveries attributable to higher vessel
utilization during the nine months ended September 30, 2008.
Utilization of Major Construction Vessels - Worldwide utilization for our major construction
vessels was 53% and 50% for the three and nine month period ended September 30, 2008, respectively,
and 37% and 49% for the three and nine month period ended September 30, 2007, respectively.
Utilization of our major construction vessels is calculated by dividing the total number of days
major construction vessels are assigned to project-related work by the total number of calendar
days for the period. Dive support vessels, cargo/launch barges, ancillary supply vessels and
short-term chartered project-specific construction vessels are excluded from the utilization
calculation. The Company frequently uses chartered anchor handling tugs, dive support vessels and,
from time to time, construction vessels in the Company’s operations. Also, most of the Company’s
international contracts (which are generally larger, more complex and of longer duration) are
generally bid on a lump-sum or unit-rate (vs. day-rate) basis wherein the Company assumes the risk
of performance and changes in utilization rarely impact revenues but can have an inverse
relationship to changes in profitability. For these reasons, the Company considers utilization
rates to have a relatively low direct correlation to changes in revenue and gross profit.
Industry and Business Outlook
Recent declines in energy prices, concerns regarding the economic outlook globally and the
continuing credit crisis could potentially negatively impact demand for offshore construction and subsea
services. It is not possible to accurately predict the timing or severity of impact of any of these
developments on the Company’s operations. However, the Company believes that it can strategically
position its assets and operations to capitalize on longer-term demand for our services over the
next several years.
The Company experienced large operating losses in 2008 and faces significant operating challenges.
In order to address these challenges, the Company is developing a comprehensive plan to restore
profitability with an emphasis on improving bidding and project execution processes, controlling
costs, and maximizing cash resources.
As of September 30, 2008, backlog totaled approximately $397.2 million ($344.2 million for
international regions and $53.0 million for North America). Approximately 52% of this backlog is
scheduled to be performed in 2008. The Company is committed to significantly improving bid to
backlog conversion performance. The amount of our backlog in North America
26
is not a reliable indicator of the level of demand for the Company’s services in this region due to
the prevalence of short-term contractual arrangements.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents as of September 30, 2008, were $406.2 million compared to $723.5 million
as of December 31, 2007. The primary uses of cash and cash equivalents for the nine months ended
September 30, 2008 were expenditures to fund operating losses,
repurchase common shares, fund
capital projects and working capital needs. The primary source of cash and cash equivalents during
the nine months ended September 30, 2008 was from the sale of auction rate securities.
Operating activities used $121.9 million of net cash during the nine months ended September 30,
2008, compared to providing $210.9 million of net cash during the nine months ended September 30,
2007. The decrease of net cash generated from operating activities reflects higher working capital
needs and lower net income. Changes in operating assets and
liabilities were a negative $48.3 million
during the nine months ended September 30, 2008 compared to $53.0 million during the nine months
ended September 30, 2007. Cash generated by receivables decreased and cash required for dry
docking activities increased significantly in the nine months ended September 30, 2008 compared to
the prior year nine months.
Investing activities used $176.1 million of net cash during the nine months ended September 30,
2008 compared to $145.7 million during the nine months ended September 30, 2007. Purchases of
property and equipment, totaling $240.1 million, resulting primarily from the expansion and upgrade
to the fleet, was partially offset by net sales of marketable securities, totaling $57.5 million
for the nine months ended September 30, 2008. During the nine months ended September 30, 2008, the
Company incurred expenditures for the construction of two new generation derrick/pipelay vessels
(the Global 1200 and Global 1201) and purchased a deepwater subsea construction vessel, the Global
Orion. During the nine months ended September 30, 2007, net cash used primarily consisted of net
purchases of marketable securities totaling $100.8 million.
Financing activities used $19.2 million of net cash during the nine months ended September 30, 2008
compared to providing $257.3 million of net cash during the nine months ended September 30, 2007.
The net cash used during the nine months ended September 30, 2008 is primarily due to the
repurchase of the company’s common stock under a repurchase program announced in August 2008.
Approximately 3.1 million shares of Company stock were purchased in the 2008 third quarter at a
cost of approximately $25.6 million, leaving approximately $74.4 million remaining under the
program. As a result of the November 7, 2008 amendment to the Revolving Credit Facility, the
Company is prohibited from additional share repurchases. During the nine months ended September
30, 2007, net cash provided consisted primarily of the issuance of $325.0 million of Senior
Convertible Debentures due 2027 partially offset by the repurchase of $76.2 million of common
stock. The Company may redeem all or a part of the debentures any time on or after August 1, 2014,
for cash at a price equal to 100% of the principal amount of the debentures being redeemed plus
accrued and unpaid interest. The holders of the debentures may require the Company to repurchase
all or a part of their debentures for cash on August 1, 2017 and August 1, 2022 at a price equal to
100% of the principal amount of the debentures being redeemed plus accrued or unpaid interest, or
upon the occurrence of certain types of fundamental changes.
Contractual Obligations
On April 10, 2008, the Company approved the construction of a new generation derrick/pipelay
vessel, designated as the Global 1201, for an estimated cost of $250.0 million. The contractual
obligation for the construction of the Global 1200 is included in Item 7. “Management’s Discussion
and Analysis of Financial Condition and Results of Operation — Summary of Contractual Obligations”
in our Annual Report on Form 10-K for the year ended December 31, 2007. The information below
summarizes the contractual obligations as of September 30, 2008 for the construction of the Global
1201 and the Global 1200, which represents contractual agreements with third party service
providers to procure material, equipment and services for the construction of these vessels. The
actual timing of these expenditures will vary based on the completion of various construction
milestones, which are generally beyond our control.
| |
|
|
|
|
| |
|
(In millions) |
|
Less than 1 year |
|
$ |
178.0 |
|
1 to 3 years |
|
|
156.8 |
|
|
|
|
|
Total |
|
$ |
334.8 |
|
|
|
|
|
27
On August 8, 2008, the Company entered a contractual addendum to the Titan II cancelable lease for
an additional 57 months, extending the end of lease from August 2013 to May 2018, increasing the
contractual obligation by $34.1 million.
Liquidity Risk
As of September 30, 2008, approximately 9% of our cash balances and marketable securities were held
in auction rate securities. These securities are intended to provide liquidity through an auction
process that resets the applicable interest rate at predetermined intervals, allowing investors to
either roll over their holdings or sell them at par value. As a result of liquidity issues in the
global credit markets, investments in auction rate securities with a par value of $42.7 million, as
of September 30, 2008, have failed to settle at auction. Consequently, these investments are not
currently liquid and the Company will not be able to access these funds until a future auction of
these investments is successful or a buyer is found outside the auction process. The Company does
not consider its investment in auction rate securities to be
permanently impaired due to the current
illiquidity and have reclassified our investment to non-current, as the Company intends to continue
holding these securities until anticipated recovery in fair value occurs.
As a result of operating performance, the Company did not meet the existing minimum fixed charge
coverage ratio covenant in the Third Amended and Restated Credit Agreement (the “Revolving Credit
Facility”) as of September 30, 2008. As of October 31, 2008, the Company had no borrowing against
the facility and $100.2 million in letters of credit outstanding thereunder. On November 7, 2008,
the financial institutions participating in the Revolving Credit Facility waived compliance with
the covenant condition. In consideration of this waiver, the Company and the participating
financial institutions have amended the Revolving Credit Facility to:
| |
• |
|
temporarily cash-collateralize letters of credit and bank guarantees; |
| |
| |
• |
|
temporarily waive compliance with certain financial covenants; |
| |
| |
• |
|
temporarily prohibit share repurchases; and |
| |
| |
• |
|
temporarily maintain unencumbered liquidity of $100 million. |
The length of the interim cash-collateralization period will depend on the Company’s future
financial performance. For the remaining duration of the Revolving Credit Facility after the
cash-collateralization period, this facility has been further amended to:
| |
• |
|
allow for a new starting point in measuring financial performance; and |
| |
| |
• |
|
permit borrowings and/or the issuance of letters of credit and bank guarantees based on
a rate premium over prime rate ranging from 1.50% to 3.00% or London Interbank Offered Rate
(“LIBOR”) ranging from 2.00% to 3.50% based upon certain financial ratios. |
While the interim cash-collateralization requirement is in effect, no borrowings, letters of credit
or bank guarantees unsecured by cash are available to the Company under the Revolving Credit
Facility. All cash collateral will be classified in the Condensed Consolidated Balance Sheet as
Restricted Cash. The Company also has a $16.0 million short-term credit facility at one of its
foreign locations. At September 30, 2008, the available borrowing under this facility was $6.5
million.
Liquidity Outlook
During the next twelve months, the Company expects that balances of cash, cash equivalents, and
marketable securities, supplemented by cash generated from operations will be sufficient to fund
operations (including increases in working capital required to fund any increases in activity
levels), scheduled debt retirement, and currently planned capital expenditures. The Company’s Board
of Directors approved a stock repurchase program on August 4, 2008, which authorizes $100.0 million
for the repurchase of outstanding shares of the Company’s common stock over the twelve month period
ending August 4, 2009. Approximately 3.1 million shares of Company stock were purchased in the 2008
third quarter at a cost of approximately $25.6 million, leaving approximately $74.4 million
remaining under the program. As a result of the November 7, 2008 amendment to the Revolving Credit
Facility, the Company is prohibited from additional share repurchases. Capital expenditures for the
remainder of 2008 are expected to be between $60.0 million and $65.0 million. This range includes
expenditures for the Global 1200, Global 1201, and various vessel upgrades. Drydocking expenditures
for the remainder of 2008 are not estimated to be significant. In addition, the Company will
continue to evaluate the divesture of assets that are no longer critical to operations to reduce
operating costs and maintain a strong financial position.
28
Based on expected operating cash flows and other sources of cash, the Company does not believe the
reduction in liquidity of investments in auction rate securities or the amendments to the Revolving
Credit Facility executed on November 7, 2008 will have a material impact on the Company’s overall
ability to meet liquidity needs during the next twelve months.
The long-term liquidity of the Company will be determined by our ability to earn operating profits
which are sufficient to cover fixed costs, including scheduled principal and interest payments on
debt, and to provide a reasonable return on shareholders’ investment. The Company’s ability to
earn operating profits in the long run will be determined by, among other things, the continued
viability of the oil and gas energy industry, commodity price expectations for crude oil and
natural gas, the competitive environment of the markets in which the Company operates, and ability
to win bids and manage awarded projects to successful completion.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Due to the international nature of the Company’s business operations and the interest rate
fluctuation, the Company is exposed to certain risks associated with changes in foreign currency
exchange rates and interest rates.
Interest Rate Risk
The Company is exposed to changes in interest rates with respect to investments in cash equivalents
and marketable securities. The Company’s investments consist primarily of commercial paper, bank
certificates of deposit, repurchase agreements, money market funds, and tax-exempt auction rate
securities. These investments are subject to changes in short-term interest rates. The Company
invests in high grade investments with a credit rating of AA-/Aa3 or better, with a main
objective of preserving capital. A 1% increase or decrease in the average interest rate of cash
equivalents and marketable securities at September 30, 2008 would have an approximate $4.5 million
impact on pre-tax annualized interest income.
Foreign Currency Risk
As of September 30, 2008, the Company’s contractual obligations under two long-term vessel charters
will require the use of approximately 258.4 million Norwegian Kroners (or $45.0 million as of
September 30, 2008) over the next three years. The Company has hedged its non-cancelable Norwegian
Kroner commitments related to this charter, and consequently, gains and losses from forward foreign
currency contracts will be substantially offset by gains and losses from the underlying commitment.
As of September 30, 2008, the Company was committed to purchase certain equipment which will
require the use of €24.0 million (or $32.9 million as of September 30, 2008) over the next three
years. A 1% increase in the value of the Euro will increase the dollar value of these commitments
by approximately $0.3 million.
The estimated cost to complete capital expenditure projects in progress at September 30, 2008 will
require an aggregate commitment of 149.9 million Singapore Dollars (or $101.3 million as of
September 30, 2008). A 1% increase in the value of the Singapore Dollar at September 30, 2008 will
increase the dollar value of these commitments by approximately $1.0 million.
Additional quantitative and qualitative disclosures about market risk are in Item 7A. “Quantitative
and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year
ended December 31, 2007.
30
Item 4. Controls and Procedures.
As of the end of the period covered by this report, our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures. These disclosure controls and procedures are designed to
provide us with a reasonable assurance that all of the information required to be disclosed by the
Company in periodic reports filed under the Securities Exchange Act of 1934 as amended (“Exchange
Act”) is recorded, processed, summarized, and reported within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed and maintained to ensure that all of the information required to be
disclosed by the Company in reports is accumulated and communicated to management, including
principal executive officer and chief financial officer, as appropriate to allow those persons to
make timely decisions regarding required disclosure.
Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded
that disclosure controls and procedures are effective to ensure that material information relating
to the Company is made known to management on a timely basis. The Chief Executive Officer and
Chief Financial Officer noted no significant deficiencies or material weaknesses in the design or
operation of the internal controls over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that are likely to adversely affect the ability to record, process, summarize, and
report financial information. There have been no changes in internal control over financial
reporting that occurred during the last fiscal quarter that have materially affected or are
reasonably likely to materially affect internal control over financial reporting.
31
PART
II – OTHER INFORMATION
Item 1. Legal Proceedings.
The Company’s operations are subject to the inherent risks of offshore marine activity including
accidents resulting in the loss of life or property, environmental mishaps, mechanical failures,
and collisions. The Company insures against certain of these risks. The Company believes
insurance should protect the Company against, among other things, the accidental total or
constructive total loss of Company vessels. The Company also carries workers’ compensation,
maritime employer’s liability, general liability, and other insurance customary in the business.
All insurance is carried at levels of coverage and deductibles that the Company considers
financially prudent. Recently, the industry has experienced a tightening in the builders’ risk
market and the property market subject to named windstorms, which has increased deductibles and
reduced coverage.
The Company’s services are provided in hazardous environments where accidents involving
catastrophic damage or loss of life could result, and litigation arising from such an event may
result in the Company being named a defendant in lawsuits asserting large claims. Although there
can be no assurance that the amount of insurance carried by the Company is sufficient to protect
the Company fully in all events, management believes that this insurance protection is adequate for
the Company’s business operations. A successful liability claim for which the Company is
underinsured or uninsured could have a material adverse effect on the Company.
For information about the Company’s internal FCPA investigation of its West Africa operation, refer
to Note 10 included in Part I, Item 1 of the Notes to Condensed Consolidated Financial Statements.
The Company is involved in various routine legal proceedings primarily involving claims for
personal injury under the General Maritime Laws of the United States and Jones Act as a result of
alleged negligence. The Company believes that the outcome of all such proceedings, even if
determined adversely, would not have a material adverse effect on its business or financial
statements.
Item 1A. Risk Factors.
In addition to the other information
set forth in this Quarterly Report, you should carefully
consider the factors discussed in Item 1A. “Risk Factors” in the Company’s Annual Report on
Form
10-K for the year ended December 31, 2007, which could materially affect the Company’s business,
financial condition, or future results of operations. The risks described in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007, are not the only risks facing the
Company. Additional risks and uncertainties not currently known to the Company or that the Company
currently deems to be immaterial also may materially adversely affect business, financial
condition, or operating results.
Item 1B. Unresolved Staff Comments.
On June 4, 2008, we received a comment letter from the Staff of the Division of Corporation Finance
with respect to its review of our
Form 10-K for the year ended December 31, 2007 and our Form 10-Q
for the quarter ended March 31, 2008. We have submitted responses to the Staff and received follow
up letters from the Staff regarding these comments. We are in discussion with the Staff to resolve
remaining comments regarding our accounting for dry docking expenditures.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Purchases of Equity Securities.
The following table contains the purchases of equity securities by the Company during the third
quarter of 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number |
|
Maximum |
| |
|
|
|
|
|
|
|
|
|
of Shares |
|
Number of |
| |
|
|
|
|
|
|
|
|
|
Purchased as |
|
Shares that |
| |
|
|
|
|
|
|
|
Part of Publicly |
|
May Yet Be |
| |
|
Total Number |
|
Average |
|
Announced |
|
Purchased |
| |
|
of Shares |
|
Price Paid |
|
Plans or |
|
Under the Plans |
| Period |
|
Purchased(1) |
|
per Share |
|
Programs |
|
or Programs |
July 1, 2008 - July 31, 2008 |
|
|
89 |
|
|
$ |
17.89 |
|
|
|
— |
|
|
|
— |
|
August 1, 2008 - August 31, 2008 |
|
|
619,755 |
|
|
|
8.90 |
|
|
|
619,200 |
|
|
|
— |
|
September 1, 2008 - September 30, 2008 |
|
|
2,488,072 |
|
|
|
8.06 |
|
|
|
2,488,072 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,107,916 |
|
|
$ |
8.23 |
|
|
|
3,107,272 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
On July 17, 2007, the Board of Directors authorized the Company to withhold shares of
restricted stock to satisfy payments for withholding taxes. |
32
On August 4, 2008, the Company’s Board of Directors approved a program which authorizes $100.0
million for the repurchase of outstanding shares of the Company’s common stock over the twelve
month period ending August 4, 2009. Approximately 3.1 million shares of Company stock were
purchased in the 2008 third quarter at a cost of approximately $25.6 million, leaving approximately
$74.4 million remaining under the program. As a result of the November 7, 2008 amendment to the
Revolving Credit Facility, the Company is prohibited from additional share repurchases.
Item 5. Other Information.
The follow events occurred subsequent to the period covered by this Form 10-Q and are reportable
under Form 8-K:
Item 1.01 Entry Into a Material Definitive Agreement.
On
November 7, 2008 the Company, Global Offshore Mexico, S. de R.L. de C.V. and Global
Industries International, L.P., entered into Amendment No. 4 to the Third Amended and Restated
Credit Agreement with certain Lenders and Calyon New York Branch, as administrative agent for the
Lenders (the “Revolving Credit Facility”). The parties have amended the Revolving Credit Facility
to:
| |
• |
|
temporarily cash-collateralize letters of credit and bank guarantees; |
| |
| |
• |
|
temporarily waive compliance with certain financial covenants; |
| |
| |
• |
|
temporarily prohibit share repurchases; and |
| |
| |
• |
|
temporarily maintain unencumbered liquidity of $100 million. |
The length of the interim cash-collateralization period will depend on the Company’s future
financial performance. For the remaining duration of the Revolving Credit Facility, after the
cash-collateralization period, the facility was further amended to:
| |
• |
|
allow for a new starting point in measuring financial performance; and |
| |
| |
• |
|
permit borrowings and/or the issuance of letters of credit and bank guarantees based
on a rate premium over prime rate ranging from 1.50% to 3.00% or London Interbank
Offered Rate (“LIBOR”) ranging from 2.00% to 3.50% based upon certain financial ratios. |
While the interim cash-collateralization requirement is in effect, no borrowings, letters of credit
or bank guarantees unsecured by cash are available to the Company under the Revolving Credit
Facility.
The foregoing description of the Revolving Credit Facility does not purport to be complete and is
qualified in its entirety by reference to the Revolving Credit Facility, attached as Exhibit 10.2
to this Form 10-Q.
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Item 5.02
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Departure of Directors, or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. |
For some time, Global has provided certain executive officers and key employees change in control
agreements that provide financial protections in the event of a change in control transaction
coupled with a termination of employment. The agreements are intended to facilitate management
retention and to encourage management to devote their full attention to the business in the event
of a possible change in control.
With the approval of the Compensation Committee of the Board of Directors, the Company entered into
new change in control agreements with certain executive officers. The executives who have entered
into new agreements are Peter Atkinson, President, Russell Robicheaux, Chief Administrative Officer
and General Counsel, James Doré, Senior Vice President World Wide Diving & Subsea Services and
Byron Baker, Senior Vice President North America Region and Worldwide Fleet Operations. These
agreements supersede and replace existing change in control severance agreements with each of these
executives.
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The new change in control agreements (the “Agreements”) reflect changes to, among other things,
ensure full compliance with Section 409A of the Internal Revenue Code of 1996, as amended (the
“Code”), provide for the vesting of equity awards and grants immediately upon a change in control
(as defined in the Agreement) and modify certain significant defined terms, including “cause,” and
“good reason”.
Under the terms of the Agreements, upon a change in control and without regard to whether there is
a subsequent termination of employment, (i) all outstanding stock options will immediately vest
and, unless the compensation committee determines to make an
equitable adjustment or substitution,
the executive will receive a cash payment equal to the number of shares subject to the options
outstanding multiplied by the difference between the closing price of the Company’s common stock on
the date immediately prior to the change in control and the exercise price of the stock options,
(ii) all outstanding restricted stock awards will immediately vest and all forfeiture restrictions
will lapse, and (iii) all outstanding performance unit awards for which the performance period has
not been completed will be deemed earned at the target level payout, will be payable in the same
form of equity or other consideration as all other stockholders with respect to shares of Company
common stock and will be delivered within 10 days of the change in control.
In addition, within two years following a change in control and upon a subsequent termination of
the executive’s employment by the Company other than for “cause” or by the executive for “good
reason”, the executive will be eligible for the following additional benefits:
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A lump sum cash payment equal to (x) three times (y) base salary and bonus. Calculation
of the bonus amount used in determination of the lump sum payment is based on the largest
actual bonus paid in the last five years or, if higher, the target bonus in the year of
termination of employment. |
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A cash payment for unvested contributions under the Company’s retirement plan as of the
date of termination. |
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Two years of continued healthcare and dependent healthcare coverage at no additional
cost. |
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Reimbursement of legal fees incurred as a result of the termination and certain
relocation expenses, if applicable. |
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A “gross-up” payment, in the event that any payments made in connection with a change in
control would be subjected to the excise tax imposed by Section 4999 of the Internal
Revenue Code, equal to the excise tax imposed plus any additional taxes imposed on the
gross-up payment itself (except for Mr. Byron Baker, whose agreement calls for severance
payments to be “cut back” in order to avoid triggering any excise tax implications). |
The initial term of the Agreements continues through December 31, 2009 and shall be automatically
extended for successive one-year terms unless the Company notifies an executive 30 days prior to
the end of a term of its intention not to extend the agreement. In the event of a change in
control during the term of the Agreements, the Agreements shall continue in effect for two years
from the date of the change in control.
The foregoing description of the Agreement does not purport to be complete and is qualified in its
entirety by reference to the Agreements, attached as Exhibits 10.3 and 10.4 to this Form 10-Q.
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Item 6. Exhibits.
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| 3.1 -
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Amended and Restated Articles of Incorporation of
Registrant as amended, incorporated by reference to
Exhibits 3.1 and 3.3 to the Form S-1 Registration
Statement filed by the Registrant (Reg. No 33-56600). |
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| 3.2 -
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Bylaws of Registrant as amended through October 31,
2007, incorporated by reference to Exhibit 3.1 of the
Registrant’s Form 8-K filed November 2, 2007. |
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| 10.1 -
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Change-In-Control Agreement, dated as of August 14, 2008
between Global Industries, Ltd. and Jeffrey B. Levos,
incorporated by reference to Exhibit 10.1 of the
Registrant’s Form 8-K filed on August 20, 2008 |
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| * 10.2 -
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Amendment No. 4 and Waiver to the Third Amended and
Restated Credit Agreement dated November 7, 2008 among
Global Industries, Ltd., Global Offshore Mexico, S. de
R.L. de C.V., Global Industries International, L.L.C.,
in its capacity as general partner of Global Industries
International, L.P., the Lenders and Calyon New York
Branch, as administrative agent for the Lenders. |
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| * 10.3 -
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Form of Change-In-Control Agreement Form of
Change-In-Control Agreement (with tax gross-up) entered
into on November 7, 2008 by each of Peter Atkinson,
Russell Robicheaux and James Doré |
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| * 10.4 -
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Form of Change-In-Control Agreement (without tax
gross-up) entered into on November 7, 2008 by Bryon
Baker |
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| * 15.1 -
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Letter regarding unaudited interim financial information. |
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| * 31.1 -
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Section 302 Certification of CEO, John A. Clerico |
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| * 31.2 -
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Section 302 Certification of CFO, Jeffrey B. Levos |
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| * 32.1 -
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Section 906 Certification of CEO, John A. Clerico |
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| * 32.2 -
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Section 906 Certification of CFO, Jeffrey B. Levos |
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| * Included with this filing |
35
Signature
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, thereto duly authorized.
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GLOBAL INDUSTRIES, LTD. |
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By:
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/s/ Jeffrey B. Levos |
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Jeffrey B. Levos |
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Senior Vice President and |
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Chief Financial Officer |
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(Principal Financial Officer) |
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By:
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/s/ Trudy P. McConnaughhay |
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Trudy P. McConnaughhay |
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Corporate Controller |
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(Principal Accounting Officer) |
November 7, 2008
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