OCEANEERING INTERNATIONAL INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2017
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OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission File Number: 1-10945
____________________________________________
OCEANEERING INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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95-2628227
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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11911 FM 529
Houston, Texas
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77041
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(Address of principal executive offices)
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(Zip Code)
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(713) 329-4500
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed from 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.
þ
Yes
¨
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ
Yes
¨
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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þ
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Accelerated filer
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¨
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Non-accelerated filer
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company
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¨
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Emerging growth company
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¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨
Yes
þ
No
Number of shares of Common Stock outstanding as of
October 27, 2017
:
98,279,062
Oceaneering International, Inc.
Form 10-Q
Table of Contents
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Part I
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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Part II
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|||
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Item 1.
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Item 6.
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1
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Item 1.
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Financial Statements.
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OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
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Sep 30, 2017
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Dec 31, 2016
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||||||
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(in thousands, except share data)
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||||||||
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(unaudited)
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||||||||
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ASSETS
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||||||||
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Current Assets:
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||||||||
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Cash and cash equivalents
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$
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472,381
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$
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450,193
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Accounts receivable, net of allowances for doubtful accounts of $6,151 and $8,288
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464,547
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489,749
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||||
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Inventory, net
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245,783
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280,130
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||||
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Other current assets
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50,064
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42,523
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||||
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Total Current Assets
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1,232,775
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1,262,595
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||||
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Property and Equipment, at cost
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2,790,056
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2,728,125
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||||
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Less accumulated depreciation
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1,706,703
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1,574,867
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Net Property and Equipment
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1,083,353
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1,153,258
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Other Assets:
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||||||||
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Goodwill
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464,772
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443,551
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Other non-current assets
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363,783
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270,911
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Total Other Assets
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828,555
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714,462
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Total Assets
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$
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3,144,683
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$
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3,130,315
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LIABILITIES AND EQUITY
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||||||||
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Current Liabilities:
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||||||||
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Accounts payable
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$
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89,438
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$
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77,593
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Accrued liabilities
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372,018
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430,771
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Total Current Liabilities
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461,456
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508,364
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Long-term Debt
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795,805
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793,058
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Other Long-term Liabilities
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387,464
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312,250
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Commitments and Contingencies
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Equity:
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||||||||
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Common Stock, par value $0.25 per share; 360,000,000 shares authorized; 110,834,088 shares issued
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27,709
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27,709
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Additional paid-in capital
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224,542
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227,566
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Treasury stock; 12,557,317 and 12,768,726 shares, at cost
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(719,096
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)
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(731,202
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)
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Retained earnings
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2,243,844
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2,295,234
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Accumulated other comprehensive loss
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(282,395
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)
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(302,664
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)
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Oceaneering Shareholders' Equity
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1,494,604
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1,516,643
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Noncontrolling interest
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5,354
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—
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Total Equity
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1,499,958
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1,516,643
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Total Liabilities and Equity
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$
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3,144,683
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$
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3,130,315
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
2
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
(unaudited)
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Three Months Ended Sep 30,
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Nine Months Ended Sep 30,
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||||||||||||||||
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(in thousands, except per share data)
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2017
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2016
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2017
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2016
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|||||||||||||
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Revenue
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$
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476,120
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$
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549,275
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$
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1,437,332
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$
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1,783,158
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Cost of services and products
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421,235
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513,832
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1,284,021
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1,555,002
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Gross Margin
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54,885
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35,443
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153,311
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228,156
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Selling, general and administrative expense
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44,354
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47,299
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133,540
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153,533
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Income (loss) from Operations
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10,531
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(11,856
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)
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19,771
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74,623
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Interest income
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1,997
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684
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5,379
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2,421
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Interest expense, net of amounts capitalized
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(8,650
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)
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(6,325
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)
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(22,517
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)
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(18,924
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)
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Equity in income (losses) of unconsolidated affiliates
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(424
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)
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(246
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)
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(1,798
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)
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543
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Other income (expense), net
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(1,287
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)
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570
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(3,901
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)
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(6,823
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)
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Income (Loss) before Income Taxes
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2,167
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(17,173
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)
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(3,066
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)
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51,840
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Provision for (benefits from) income taxes
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3,935
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(5,375
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)
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4,104
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16,226
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Net income (loss)
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$
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(1,768
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)
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$
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(11,798
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)
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$
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(7,170
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)
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$
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35,614
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Weighted average shares outstanding
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Basic
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98,270
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98,061
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98,224
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98,025
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Diluted
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98,270
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98,061
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98,224
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98,384
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Earnings (Loss) per Share
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Basic
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$
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(0.02
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)
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$
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(0.12
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)
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$
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(0.07
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)
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$
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0.36
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Diluted
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$
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(0.02
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)
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$
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(0.12
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)
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$
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(0.07
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)
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$
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0.36
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Cash Dividends declared per Share
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$
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0.15
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$
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0.27
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$
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0.45
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$
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0.81
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
3
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
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Three Months Ended Sep 30,
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Nine Months Ended Sep 30,
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(in thousands)
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2017
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2016
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2017
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2016
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Net Income (Loss)
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$
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(1,768
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)
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$
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(11,798
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)
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$
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(7,170
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)
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$
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35,614
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|||||
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Other comprehensive income (loss), net of tax:
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Foreign currency translation adjustments
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16,547
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16,411
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20,269
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31,246
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Total other comprehensive income
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16,547
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16,411
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20,269
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31,246
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Total Comprehensive Income
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$
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14,779
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$
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4,613
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$
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13,099
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$
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66,860
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
4
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
(unaudited)
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Nine Months Ended Sep 30,
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(in thousands)
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2017
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2016
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Cash Flows from Operating Activities:
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Net income (loss)
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$
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(7,170
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)
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$
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35,614
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Adjustments to reconcile net income (loss) to net cash provided by operating activities:
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Depreciation and amortization
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160,480
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193,960
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Deferred income tax provision (benefit)
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(25,065
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)
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(6,704
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)
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Inventory write-downs
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—
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30,490
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Net loss on sales of property and equipment
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429
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516
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Noncash compensation
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10,854
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10,546
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Excluding the effects of acquisitions, increase (decrease) in cash from:
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||||||||
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Accounts receivable
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25,501
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102,361
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||||
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Inventory
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35,000
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768
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||||
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Other operating assets
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(20,162
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)
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57,879
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Currency translation effect on working capital, excluding cash
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253
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15,592
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Current liabilities
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(56,148
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)
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(161,488
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)
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Other operating liabilities
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20,042
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(17,861
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)
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Total adjustments to net income
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151,184
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226,059
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Net Cash Provided by Operating Activities
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144,014
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261,673
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Cash Flows from Investing Activities:
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||||||||
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Purchases of property and equipment
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(59,900
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)
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(83,389
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)
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||||
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Business acquisitions, net of cash acquired
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(11,278
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)
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(2,500
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)
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||||
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Other investing activities
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(10,777
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)
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(39,818
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)
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||||
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Distributions of capital from unconsolidated affiliates
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2,556
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5,108
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||||
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Dispositions of property and equipment
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635
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3,217
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||||
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Net Cash Used in Investing Activities
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(78,764
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)
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(117,382
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)
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||||
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Cash Flows from Financing Activities:
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Cash dividends
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(44,220
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)
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(79,429
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)
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Other financing activities
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(1,772
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)
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(1,927
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)
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||||
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Net Cash Used in Financing Activities
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(45,992
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)
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(81,356
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)
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||||
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Effect of exchange rates on cash
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2,930
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(6,545
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)
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||||
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Net Increase in Cash and Cash Equivalents
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22,188
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56,390
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||||
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Cash and Cash Equivalents—Beginning of Period
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450,193
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385,235
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||||
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Cash and Cash Equivalents—End of Period
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$
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472,381
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$
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441,625
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF MAJOR ACCOUNTING POLICIES
Basis of Presentation
. Oceaneering International, Inc. ("Oceaneering", "we" or "us") has prepared these unaudited consolidated financial statements pursuant to instructions for quarterly reports on Form 10-Q, which we are required to file with the U.S. Securities and Exchange Commission (the "SEC"). These financial statements do not include all information and footnotes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). These financial statements reflect all adjustments that we believe are necessary to present fairly our financial position as of
September 30, 2017
and our results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, all such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K for the year ended
December 31, 2016
. The results for interim periods are not necessarily indicative of annual results.
Principles of Consolidation.
The consolidated financial statements include the accounts of Oceaneering and our
50%
or more owned and controlled subsidiaries. We also consolidate entities that are determined to be variable interest entities if we determine that we are the primary beneficiary; otherwise, we account for those entities using the equity method of accounting. We use the equity method to account for our investments in unconsolidated affiliated companies of which we own an equity interest of between
20%
and
50%
and as to which we have significant influence, but not control, over operations. We use the cost method for all other long-term investments. Investments in entities that we do not consolidate are reflected on our balance sheet in Other non-current assets. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates.
The preparation of financial statements in conformity with U.S. GAAP requires that our management make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Reclassifications.
Certain amounts from prior periods have been reclassified to conform with the current period presentation.
Cash and Cash Equivalents.
Cash and cash equivalents include demand deposits and highly liquid investments with original maturities of three months or less from the date of investment.
Accounts Receivable – Allowances for Doubtful Accounts.
We determine the need for allowances for doubtful accounts using the specific identification method. We do not generally require collateral from our customers.
Inventory
. Inventory is valued at the lower of cost or net realizable value. We determine cost using the weighted-average method.
Property and Equipment and Long-Lived Intangible Assets.
We provide for depreciation of property and equipment on the straight-line method over their estimated useful lives. We charge the costs of repair and maintenance of property and equipment to operations as incurred, while we capitalize the costs of improvements that extend asset lives or functionality. Upon the disposition of property and equipment, the related cost and accumulated depreciation accounts are relieved and any resulting gain or loss is included as an adjustment to cost of services and products.
Intangible assets, primarily acquired in connection with business combinations, include trade names, intellectual property and customer relationships and are being amortized over their estimated useful lives.
We capitalize interest on assets where the construction period is anticipated to be more than three months. We capitalized
$1.1 million
and
$1.0 million
of interest in the
three-month periods ended
September 30, 2017
and
2016
, respectively, and
$3.3 million
and
$2.8 million
in the
nine-month periods ended
September 30, 2017
and
2016
, respectively. We do not allocate general administrative costs to capital projects.
Our management periodically, and upon the occurrence of a triggering event, reviews the realizability of our property and equipment and long-lived intangible assets to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, we base our evaluation on impairment indicators such as the nature of the assets, the future economic benefits of the assets, any historical or future profitability measurements and other external market
6
conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of an asset may not be recoverable, we determine whether an impairment has occurred through the use of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. For assets held for sale or disposal, the fair value of the asset is measured using fair market value less estimated costs to sell. Assets are classified as held-for-sale when we have a plan for disposal of certain assets and those assets meet the held for sale criteria.
Business Acquisitions
. We account for business combinations using the acquisition method of accounting, and, in each case, we allocate the acquisition price to the assets acquired and liabilities assumed based on their fair market values at the date of acquisition.
On August 31, 2017, we acquired a
60%
ownership interest in Dalgidj LLC ("Dalgidj") for approximately
$12.4 million
. Of the $12.4 million,
$4.4 million
is expected to be paid during the fourth quarter of 2017, and $
3.0 million
is expected to be paid in 2018. Therefore,
$7.4 million
has not yet been reflected in Business acquisitions in our Consolidated Statements of Cash Flows. In connection with the purchase of the equity interest, we advanced Dalgidj
$6.4 million
to pay off certain Dalgidj indebtedness.
Dalgidj is an Azerbaijan company that provides office and yard facilities for warehousing, logistics and administration to foreign and local companies in the Caspian Sea basin. Dalgidj also owns a 49% interest in a joint venture, which provides remotely operated vehicle solutions, air diving services, and engineering and project management services.
As a result of the Dalgidj acquisition, we have recognized
$5.4 million
in Noncontrolling interest on our Consolidated Balance Sheets. Net income attributable to noncontrolling interest for the one month since we acquired Dalgidj was not significant. The operating results of Dalgidj are reflected in our Subsea Projects segment.
Goodwill.
In our annual evaluation of goodwill for impairment, we first assessed qualitative factors to determine whether the existence of events or circumstances led to a determination that it was more likely than not that the fair value of a reporting unit was less than its carrying amount. If, after assessing the totality of events or circumstances, we determined it was more likely than not that the fair value of a reporting unit was less than its carrying amount, we were required to perform the first step of the two-step impairment test. We tested the goodwill attributable to each of our reporting units for impairment as of
December 31, 2016
and concluded that there was no impairment. In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04
"Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment."
This update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update are effective beginning January 1, 2020. Early adoption is permitted for testing dates after January 1, 2017, and the update is to be applied on a prospective basis. We adopted this update effective January 1, 2017.
In addition to our annual evaluation of goodwill for impairment, upon the occurrence of a triggering event, we review our goodwill to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
Foreign Currency Translation.
The functional currency for several of our foreign subsidiaries is the applicable local currency. Results of operations for foreign subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using average exchange rates during the period. Assets and liabilities of these foreign subsidiaries are translated into U.S. dollars using the exchange rates in effect at the balance sheet date, and the resulting translation adjustments are recognized, net of tax, in accumulated other comprehensive income as a component of shareholders' equity. All foreign currency transaction gains and losses are recognized currently in the Consolidated Statements of Operations.
7
New Accounting Standards.
In May 2014, the FASB issued ASU 2014-09, "
Revenue from Contracts with Customers
." ASU 2014-09, as amended, completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is not permitted before periods beginning after December 15, 2016, and we have elected to apply ASU 2014-09 by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information.
We have formed a project team to implement this standard. Our project team has now produced the procedures and control changes required to address the impacts that ASU 2014-09 may have on our business. We are now in the process of training our staff on the procedures and controls going into effect January 1, 2018. We continue to believe that our project plan will enable us to complete all of the required work to train our people; implement our new procedures and controls; and calculate the cumulative effect of applying ASU 2014-09 at the date of initial application, in line with the timeline and requirements of the standard.
In our service based business lines, which principally charge on a day rate basis for services provided, we see no significant impact in the amount or pattern of revenue and profit recognition as a result of the implementation of ASC 2014-09. In our product based business lines, we expect impacts on the pattern of our revenue and profit recognition as a result of the implementation of ASC 2014-09.
Based on our overall assessment performed to date, we do not expect a significant adjustment to retained earnings being made on January 1, 2018.
In January 2016, the FASB issued ASU 2016-01,
"Financial Instruments — Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities."
This update:
|
•
|
requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value, with changes in fair value recognized in net income;
|
|
•
|
simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment — when a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value;
|
|
•
|
eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet;
|
|
•
|
requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;
|
|
•
|
requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments;
|
|
•
|
requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and
|
|
•
|
clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
|
ASU 2016-01 will be effective for us beginning on January 1, 2018. We are currently assessing the impact of the requirements of ASU 2016-01 on our consolidated financial statements and future disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
"Leases."
This update requires reporting entities to separate the lease components from the non-lease components in a contract and recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. ASU No. 2016-02 is effective for us beginning January 1, 2019. We are currently evaluating the requirements of ASU 2016-02 and have not yet determined its impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
"Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting."
This update simplifies several aspects of accounting for share-
8
based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. In addition, the update allows an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The element of the update that will have the most impact on our financial statements will be income tax consequences. See Note 6 -"Income Taxes" - for the effect this update has had on our income taxes in 2017. Excess tax benefits and tax deficiencies on share-based compensation awards are now included in our tax provision within our condensed consolidated statement of operations as discrete items in the reporting period in which they occur, rather than (as was the previous accounting treatment) recording in additional paid-in capital on our condensed consolidated balance sheets. We have also elected to continue our current policy of estimating forfeitures of share-based compensation awards at the time of grant and revising in subsequent periods to reflect actual forfeitures. In our consolidated statement of cash flows for the
nine-month period ended
September 30, 2016
, we have reclassified two items to conform with the presentation specified under ASU 2016-09: (1) we have reclassified the effect related to the tax deficiency associated with share-based compensation from financing activities to operating activities; and (2) we have reclassified the amounts related to withholding tax payments from operating activities to financing activities. Other than these two cash flow items applied retrospectively, we have implemented ASU 2016-09 prospectively beginning January 1, 2017.
In October 2016, the FASB issued ASU 2016-16,
"Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other than Inventory."
Current U.S. GAAP generally prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The amendments in this update will eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included within the scope of this update are intellectual property and property, plant, and equipment. The exception for an intra-entity transfer of inventory will remain in place. The amendments in this update are effective for us beginning January 1, 2018. We do not anticipate that this update will have a material effect on our consolidated financial statements.
2. INVENTORY
The following is information regarding our inventory:
|
(in thousands)
|
Sep 30, 2017
|
Dec 31, 2016
|
|||||||
|
Inventory, net:
|
|||||||||
|
Remotely operated vehicle parts and components
|
$
|
119,976
|
|
$
|
118,236
|
|
|||
|
Other inventory, primarily raw materials
|
125,807
|
|
161,894
|
|
|||||
|
Total
|
$
|
245,783
|
|
$
|
280,130
|
|
|||
9
Long-term Debt consisted of the following:
|
(in thousands)
|
Sep 30, 2017
|
Dec 31, 2016
|
|||||||
|
4.650% Senior Notes due 2024:
|
|||||||||
|
Principal amount of the notes
|
$
|
500,000
|
|
$
|
500,000
|
|
|||
|
Issuance costs, net of amortization
|
(4,870
|
)
|
(5,385
|
)
|
|||||
|
Fair value of interest rate swaps on $200 million of principal
|
675
|
|
(1,557
|
)
|
|||||
|
Term Loan Facility
|
300,000
|
|
300,000
|
|
|||||
|
Revolving Credit Facility
|
—
|
|
—
|
|
|||||
|
Long-term Debt
|
$
|
795,805
|
|
$
|
793,058
|
|
|||
In November 2014, we completed the public offering of
$500 million
aggregate principal amount of
4.650%
Senior Notes due 2024 (the "Senior Notes"). We pay interest on the Senior Notes on May 15 and November 15 of each year. The Senior Notes are scheduled to mature on November 15, 2024.
In October 2014, we entered into a new credit agreement (as amended, the "Credit Agreement") with a group of banks to replace our prior principal credit agreement. The original Credit Agreement from October 2014 has been amended three times, and it currently provides for a
$300 million
term loan (the "Term Loan Facility") and a
$500 million
revolving credit facility (the "Revolving Credit Facility"), which mature in October 2019 and October 2021, respectively. Subject to certain conditions, the aggregate commitments under the Revolving Credit Facility may be increased by up to
$300 million
at any time upon agreement between us and existing or additional lenders. Borrowings under the Revolving Credit Facility and the Term Loan Facility may be used for general corporate purposes. Simultaneously with the execution of the Credit Agreement in 2014 and pursuant to its terms, we repaid all amounts outstanding under, and terminated, our prior principal credit agreement.
Borrowings under the Credit Agreement bear interest at an Adjusted Base Rate or the Eurodollar Rate (both as defined in the Credit Agreement), at our option, plus an applicable margin based on our Leverage Ratio (as defined in the Credit Agreement) and, at our election, based on the ratings of our senior unsecured debt by designated ratings services, thereafter to be based on such debt ratings. The applicable margin varies: (1) in the case of advances bearing interest at the Adjusted Base Rate, from
0.125%
to
0.750%
for borrowings under the Revolving Credit Facility and from
0%
to
0.500%
for borrowings under the Term Loan Facility; and (2) in the case of advances bearing interest at the Eurodollar Rate, from
1.125%
to
1.750%
for borrowings under the Revolving Credit Facility and from
1.000%
to
1.500%
for borrowings under the Term Loan Facility. The Adjusted Base Rate is the highest of (1) the per annum rate established by the administrative agent as its prime rate, (2) the federal funds rate plus
0.50%
and (3) the daily one-month LIBOR plus
1%
. We pay a commitment fee ranging from
0.125%
to
0.300%
on the unused portion of the Revolving Credit Facility, depending on our Leverage Ratio. The commitment fees are included as interest expense in our consolidated financial statements.
The Credit Agreement contains various covenants that we believe are customary for agreements of this nature, including, but not limited to, restrictions on our ability and the ability of each of our subsidiaries to incur debt, grant liens, make certain investments, make distributions, merge or consolidate, sell assets and enter into certain restrictive agreements. We are also subject to a maximum adjusted total capitalization ratio (as defined in the Credit Agreement) of 55%. The Credit Agreement includes customary events of default and associated remedies. As of
September 30, 2017
, we were in compliance with all the covenants set forth in the Credit Agreement.
We incurred
$6.9 million
of issuance costs related to the Senior Notes and
$2.2 million
of new loan costs, including costs of the Amendments, related to the Credit Agreement. We are amortizing these costs, which are included on our balance sheet, net of accumulated amortization, as a reduction of debt for the Senior Notes and as an other non-current asset for the Credit Agreement, to interest expense over ten years for the Senior Notes and over six years for the Credit Agreement. Please refer to Note 4 - "Commitments and Contingencies" - for more information on our interest rate swaps.
10
4. COMMITMENTS AND CONTINGENCIES
Litigation. O
n June 17, 2014, Peter L. Jacobs, a purported shareholder, filed a derivative complaint against all of the then current members of our board of directors and one of our former directors, as defendants, and our company, as nominal defendant, in the Court of Chancery of the State of Delaware. Through the complaint, the plaintiff asserted, on behalf of our company, actions for breach of fiduciary duties and unjust enrichment in connection with prior determinations of our board of directors relating to nonexecutive director compensation. The plaintiff sought relief including disgorgement of payments made to the defendants, an award of unspecified damages and an award for attorneys’ fees and other costs. We and the defendants filed a motion to dismiss the complaint and a supporting brief. Subsequently, the parties to the litigation jointly requested and received a series of extension orders from the Court to extend the time for certain filings. The last such extension expired on September 16, 2016. By letter dated August 30, 2017, we received notice from the Office of the Register in Chancery advising the parties that the Court was closing the matter for failure to prosecute or to comply with an order of the Court.
In the ordinary course of business, we are subject to actions for damages alleging personal injury under the general maritime laws of the United States, including the Jones Act, for alleged negligence. We report actions for personal injury to our insurance carriers and believe that the settlement or disposition of those claims will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Various other actions and claims are pending against us, most of which are covered by insurance. Although we cannot predict the ultimate outcome of these matters, we believe that our ultimate liability, if any, that may result from these other actions and claims will not materially affect our results of operations, cash flows or financial position.
Financial Instruments and Risk Concentration.
In the normal course of business, we manage risks associated with foreign exchange rates and interest rates through a variety of strategies, including the use of hedging transactions. As a matter of policy, we do not use derivative instruments unless we have an underlying exposure. Other financial instruments that potentially subject us to concentrations of credit risk are principally cash and cash equivalents and accounts receivable.
The carrying values of cash and cash equivalents approximate their fair values due to the short-term maturity of the underlying instruments. Accounts receivable are generated from a broad group of customers, primarily from within the energy industry, which is our major source of revenue. Due to their short-term nature, carrying values of our accounts receivable and accounts payable approximate fair market values. We had borrowings of
$300 million
as of
September 30, 2017
under our Term Loan Facility. Due to the short-term nature of the associated interest rate periods, the carrying value of our debt under the Term Loan Facility approximates its fair value. The fair value of this debt is classified as Level 2 in the fair value hierarchy under U.S. GAAP (inputs other than quoted prices in active markets for similar assets and liabilities that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities).
We estimated the fair market value of the Senior Notes to be
$499 million
as of
September 30, 2017
, based on quoted prices. Since the market for the Senior Notes is not an active market, the fair value of the Senior Notes is classified within Level 2 in the fair value hierarchy under U.S. GAAP.
We have two interest rate swaps in place on a total of
$200 million
of the Senior Notes for the period to November 2024. The agreements swap the fixed interest rate of 4.650% on $100 million of the Senior Notes to the floating rate of one month LIBOR plus 2.426% and on another $100 million to one month LIBOR plus 2.823%. We estimate the combined fair value of the interest rate swaps to be a net asset of
$0.7 million
as of
September 30, 2017
, with
$0.4 million
included on our balance sheet in our other long-term liabilities, and
$1.1 million
included in non-current assets. These values were arrived at using a discounted cash flow model using Level 2 inputs.
Since the second quarter of 2015, the exchange rate for the Angolan kwanza relative to the U.S. dollar generally has been declining, although the exchange rate was relatively stable during the
three- and nine- month periods ended
September 30, 2017
. As our functional currency in Angola is the U.S. dollar, we recorded foreign currency transaction gains (losses) related to the kwanza of
$0.7 million
and
$(7.6) million
in the three- and
nine-month periods ended
September 30, 2016
, respectively, as a component of
Other income (expense), net
in our Consolidated Statements of Operations for those respective periods. Our foreign currency transaction gains or
11
losses related primarily to the remeasurement of our Angolan kwanza cash balances to U.S. dollars. Conversion of cash balances from kwanza to U.S. dollars is controlled by the central bank in Angola, and the central bank has slowed this process since mid-2015, causing our kwanza cash balances to subsequently increase. As of
September 30, 2017
, we had the equivalent of approximately
$26 million
of kwanza cash balances in Angola reflected on our balance sheet.
To mitigate our currency exposure risk in Angola, through
September 30, 2017
, we used kwanza to purchase
$70 million
equivalent Angolan central bank (Banco Nacional de Angola) bonds with various maturities throughout 2018 and 2020. These bonds are denominated as U.S. dollar equivalents, so that, upon payment of semi-annual interest and principal upon maturity, payment is made in kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate. We have classified these instruments as held-to-maturity, and have recorded the original cost on our balance sheet as other non-current assets. We estimated the fair market value of the Angolan bonds to be
$68 million
at
September 30, 2017
using quoted prices. Since the market for the Angolan bonds is not an active market, the fair value of the Angolan bonds is classified within Level 2 in the fair value hierarchy under U.S. GAAP.
5. EARNINGS PER SHARE, SHARE-BASED COMPENSATION AND SHARE REPURCHASE PLAN
Earnings per Share.
For each period presented, the only difference between our calculated weighted average basic and diluted number of shares outstanding is the effect of outstanding restricted stock units. In periods where we have a net loss, the effect of our outstanding restricted stock units is anti-dilutive, and therefore does not increase our diluted shares outstanding.
For each period presented, our net income (loss) allocable to both common shareholders and diluted common shareholders is the same as our net income (loss) in our consolidated statements of operations.
Dividends.
From the second quarter of 2014 through the third quarter of 2016, we paid a quarterly dividend to our common shareholders of
$0.27
per share. Starting in the fourth quarter of 2016 through the third quarter 2017, we paid a dividend of
$0.15
per share. Our last quarterly dividend was
$0.15
per share and was declared in July 2017 and was paid in September 2017.
Share-Based Compensation.
We have no outstanding stock options and, therefore, no share-based compensation to be recognized pursuant to stock option grants.
During 2017, 2016 and 2015, we granted restricted units of our common stock to certain of our key executives and employees. During 2017 and 2016, our Board of Directors granted restricted common stock to our nonemployee directors. During 2015, our Board of Directors granted restricted units of our common stock to our Chairman and restricted common stock to our other nonemployee directors. The restricted units granted to our key executives and key employees generally vest in full on the third anniversary of the award date, conditional on continued employment. The restricted stock unit grants, including those granted to our Chairman, can vest pro rata over three years, provided the individual meets certain age and years-of-service requirements. The shares of restricted common stock we grant to our non-employee directors vest in full on the first anniversary of the award date, conditional upon continued service as a director. Each grantee of shares of restricted stock is deemed to be the record owner of those shares during the restriction period, with the right to vote and receive any dividends on those shares. The restricted stock units outstanding have no voting or dividend rights.
For each of the restricted stock units granted in
2015
through
2017
, at the earlier of three years after grant or at termination of employment or service, the grantee will be issued one share of our common stock for each unit vested. As of
September 30, 2017
and
December 31, 2016
, respective totals of
1,212,373
and
1,052,007
shares of restricted stock or restricted stock units were outstanding.
We estimate that share-based compensation cost not yet recognized related to shares of restricted stock or restricted stock units, based on their grant-date fair values, was
$15 million
at
September 30, 2017
. This expense is being recognized on a staged-vesting basis over three years for awards attributable to individuals meeting certain age and years-of-service requirements, and on a straight-line basis over the applicable vesting period of one or three years for the other awards.
Share Repurchase Plan.
In December 2014, our Board of Directors approved a plan to repurchase up to
10 million
shares of our common stock. Under this plan, we had repurchased
2.0 million
shares of our common stock for
$100 million
through
December 31, 2016
. We did not repurchase any shares under the plan during the
nine-month
12
period ended
September 30, 2017
. We account for the shares we hold in treasury under the cost method, at average cost.
6. INCOME TAXES
During interim periods, we provide for income taxes based on our current estimated annual effective tax rate using assumptions as to (1) earnings and other factors that would affect the tax provision for the remainder of the year and (2) the operations of foreign branches and subsidiaries that are subject to local income and withholding taxes. In the
nine-month period ended
September 30, 2017
, we recognized additional tax expense of
$4.5 million
from discrete items, which included a
$1.4 million
tax reserve for uncertain income tax positions related to foreign entity tax filings of prior years and
$2.9 million
as a result of our implementation of ASU 2016-09,
"Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting."
Excess tax benefits and tax deficiencies on share-based compensation awards are now included in our tax provision within our condensed consolidated statement of operations as discrete items in the reporting period in which they occur, rather than (as was the previous accounting treatment) recording in additional paid-in capital on our condensed consolidated balance sheets. See Note 1 for further discussion of ASU 2016-09.
The effective tax rate for the
nine months ended
September 30, 2017
was different than the federal statutory rate of
35.0%
, primarily due to the geographic mix of tax jurisdictions in which we generated our earnings and losses and non-deductible expenses. It is our intention to continue to indefinitely reinvest in certain of our international operations. We do not believe the effective tax rate before discrete items is meaningful, as the rate is less significant at a low pretax income or a pretax loss position. The effective tax rate, before discrete items, of
31.3%
for the
nine months
ended
September 30, 2016
was lower than the federal statutory rate of
35.0%
, primarily due to our intention to indefinitely reinvest in certain of our international operations. We do not provide for U.S. taxes on the portion of our foreign earnings we indefinitely reinvest.
We conduct our international operations in a number of locations that have varying laws and regulations with regard to income and other taxes, some of which are subject to interpretation. We recognize the benefit for a tax position if the benefit is more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that we believe is greater than
50%
likely of being realized upon ultimate settlement. We do not believe that the total of unrecognized tax benefits will significantly increase or decrease in the next 12 months.
We account for any applicable interest and penalties on uncertain tax positions as a component of our provision for income taxes on our financial statements. Including associated foreign tax credits and penalties and interest, we have accrued a net total of
$6.6 million
in Other Long-term Liabilities on our balance sheet for unrecognized tax benefits as of
September 30, 2017
. All additions or reductions to those liabilities would affect our effective income tax rate in the periods of change.
13
Our tax returns are subject to audit by taxing authorities in multiple jurisdictions. These audits often take years to complete and settle. The following lists the earliest tax years open to examination by tax authorities where we have significant operations:
|
Jurisdiction
|
Periods
|
|
|
United States
|
2014
|
|
|
United Kingdom
|
2013
|
|
|
Norway
|
2007
|
|
|
Angola
|
2013
|
|
|
Brazil
|
2011
|
|
|
Australia
|
2013
|
|
7. BUSINESS SEGMENT INFORMATION
We are a global oilfield provider of engineered services and products, primarily to the offshore oil and gas industry, with a focus on deepwater applications. Through the use of our applied technology expertise, we also serve the defense, aerospace and commercial theme park industries. Our Oilfield business consists of Remotely Operated Vehicles ("ROVs"), Subsea Products, Subsea Projects and Asset Integrity. Our ROV segment provides submersible vehicles operated from the surface to support offshore oil and gas exploration, development, production and decommissioning activities. Our Subsea Products segment supplies a variety of specialty subsea hardware and related services. To improve operational efficiency, we have reorganized our Subsea Products segment into two business units: (1) manufactured products; and (2) service and rental. Manufactured products include production control umbilicals and specialty subsea hardware, while service and rental includes tooling, subsea work systems and installation and workover control systems. This internal reorganization did not affect our segment reporting structure or the historical comparability of our segment results. Our Subsea Projects segment provides
multiservice subsea support
vessels and oilfield diving and support vessel operations, primarily for inspection, maintenance and repair and installation activities. Since April 2015, we have also provided survey, autonomous underwater vehicle ("AUV") and satellite-positioning services. Our Asset Integrity segment provides inspection and assessment services, nondestructive testing and asset integrity management. Our Advanced Technologies business provides project management, engineering services and equipment for applications in non-oilfield markets. Unallocated Expenses are those not associated with a specific business segment. These consist of expenses related to our incentive and deferred compensation plans, including restricted stock and bonuses, as well as other general expenses, including corporate administrative expenses.
There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from those used in our consolidated financial statements for the year ended
December 31, 2016
.
14
The table that follows presents Revenue, Income (Loss) from Operations and Depreciation and Amortization by business segment for each of the periods indicated.
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||||||
|
(in thousands)
|
Sep 30, 2017
|
Sep 30, 2016
|
Jun 30, 2017
|
Sep 30, 2017
|
Sep 30, 2016
|
|||||||||||||||
|
Revenue
|
||||||||||||||||||||
|
Oilfield
|
||||||||||||||||||||
|
Remotely Operated Vehicles
|
$
|
104,617
|
|
$
|
126,507
|
|
$
|
103,432
|
|
$
|
302,071
|
|
$
|
413,769
|
|
|||||
|
Subsea Products
|
143,583
|
|
157,269
|
|
174,893
|
|
469,115
|
|
542,978
|
|
||||||||||
|
Subsea Projects
|
80,116
|
|
110,799
|
|
75,545
|
|
218,617
|
|
378,883
|
|
||||||||||
|
Asset Integrity
|
61,098
|
|
71,995
|
|
58,192
|
|
171,948
|
|
215,459
|
|
||||||||||
|
Total Oilfield
|
389,414
|
|
466,570
|
|
412,062
|
|
1,161,751
|
|
1,551,089
|
|
||||||||||
|
Advanced Technologies
|
86,706
|
|
82,705
|
|
102,974
|
|
275,581
|
|
232,069
|
|
||||||||||
|
Total
|
$
|
476,120
|
|
$
|
549,275
|
|
$
|
515,036
|
|
$
|
1,437,332
|
|
$
|
1,783,158
|
|
|||||
|
Income (Loss) from Operations
|
||||||||||||||||||||
|
Oilfield
|
||||||||||||||||||||
|
Remotely Operated Vehicles
|
$
|
5,009
|
|
$
|
(23,845
|
)
|
$
|
10,376
|
|
$
|
21,310
|
|
$
|
21,162
|
|
|||||
|
Subsea Products
|
12,383
|
|
6,109
|
|
10,552
|
|
34,418
|
|
71,870
|
|
||||||||||
|
Subsea Projects
|
6,512
|
|
15,029
|
|
3,000
|
|
9,699
|
|
32,055
|
|
||||||||||
|
Asset Integrity
|
3,050
|
|
4,725
|
|
3,755
|
|
9,072
|
|
4,354
|
|
||||||||||
|
Total Oilfield
|
26,954
|
|
2,018
|
|
27,683
|
|
74,499
|
|
129,441
|
|
||||||||||
|
Advanced Technologies
|
6,602
|
|
4,357
|
|
7,632
|
|
19,260
|
|
10,478
|
|
||||||||||
|
Unallocated Expenses
|
(23,025
|
)
|
(18,231
|
)
|
(25,925
|
)
|
(73,988
|
)
|
(65,296
|
)
|
||||||||||
|
Total
|
$
|
10,531
|
|
$
|
(11,856
|
)
|
$
|
9,390
|
|
$
|
19,771
|
|
$
|
74,623
|
|
|||||
|
Depreciation and Amortization
|
||||||||||||||||||||
|
Oilfield
|
||||||||||||||||||||
|
Remotely Operated Vehicles
|
$
|
28,269
|
|
$
|
43,705
|
|
$
|
29,036
|
|
$
|
86,534
|
|
$
|
111,415
|
|
|||||
|
Subsea Products
|
13,340
|
|
14,205
|
|
12,785
|
|
39,124
|
|
39,964
|
|
||||||||||
|
Subsea Projects
|
7,881
|
|
8,575
|
|
7,781
|
|
23,742
|
|
25,447
|
|
||||||||||
|
Asset Integrity
|
2,139
|
|
5,980
|
|
1,780
|
|
5,379
|
|
11,736
|
|
||||||||||
|
Total Oilfield
|
51,629
|
|
72,465
|
|
51,382
|
|
154,779
|
|
188,562
|
|
||||||||||
|
Advanced Technologies
|
796
|
|
789
|
|
784
|
|
2,377
|
|
2,329
|
|
||||||||||
|
Unallocated Expenses
|
1,088
|
|
946
|
|
1,138
|
|
3,324
|
|
3,069
|
|
||||||||||
|
Total
|
$
|
53,513
|
|
$
|
74,200
|
|
$
|
53,304
|
|
$
|
160,480
|
|
$
|
193,960
|
|
|||||
We determine income (loss) from operations for each business segment before interest income or expense, other income (expense) and provision for income taxes. We do not consider an allocation of these items to be practical. Our equity in earnings (losses) of unconsolidated affiliates is part of our Subsea Projects segment.
15
|
Item 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations.
|
Certain statements we make in this quarterly report on Form 10-Q are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements regarding our expectations about:
|
•
|
fourth
quarter and the full year of
2017
operating results and earnings per share, and the contributions from our segments to those results (including anticipated revenue, operating income and utilization information), as well as the items below the operating income line;
|
|
•
|
our earnings and cash flows in 2018;
|
|
•
|
demand and business activity levels;
|
|
•
|
the impact on our retained earnings as a result of the implementation of ASC 2014-09 on January 1, 2018;
|
|
•
|
our plans for future operations (including planned additions to and retirements from our remotely operated vehicle ("ROV") fleet, our intent regarding the new
multiservice subsea support
vessel scheduled for delivery
at the end of December 2017
and to be placed into service
during the first quarter of 2018
, and other capital expenditures);
|
|
•
|
our future cash flows;
|
|
•
|
our future dividends;
|
|
•
|
the adequacy of our liquidity, cash flows and capital resources;
|
|
•
|
our expectations regarding shares to be repurchased under our share repurchase plan;
|
|
•
|
our assumptions that could affect our estimated tax rate;
|
|
•
|
the implementation of new accounting standards and related policies, procedures and controls;
|
|
•
|
seasonality; and
|
|
•
|
industry conditions.
|
These forward-looking statements are subject to various risks, uncertainties and assumptions, including those we have referred to under the headings "Risk Factors" and "Cautionary Statement Concerning Forward-Looking Statements" in Part I of our annual report on Form 10-K for the year ended
December 31, 2016
. Although we believe that the expectations reflected in such forward-looking statements are reasonable, because of the inherent limitations in the forecasting process, as well as the relatively volatile nature of the industries in which we operate, we can give no assurance that those expectations will prove to have been correct. Accordingly, evaluation of our future prospects must be made with caution when relying on forward-looking information.
The following discussion should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our annual report on Form 10-K for the year ended
December 31, 2016
.
Executive Overview
Our diluted earnings (loss) per share for the three- and
nine-month periods ended
September 30, 2017
were $
(0.02)
and $
(0.07)
, respectively, as compared to $
(0.12)
and $
0.36
, respectively, for the corresponding periods of the prior year. Taking into account our results through
September 30, 2017
and our outlook for the remainder of
2017
, we project our
2017
diluted earnings per share to be less than our
2016
diluted earnings per share of
$0.25
.
In the nine-month period ended
September 30, 2017
, we recognized an additional tax expense of
$4.5 million
for discrete items, which included a
$1.4 million
tax reserve for uncertain income tax positions related to foreign entity tax filings of prior years and
$2.9 million
related to the tax effects on the difference between book and tax amounts of share-based compensation paid in the periods. As a result of our implementation of Accounting Standards Update ("ASU") 2016-09,
"Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting,"
these tax effects are recognized in our statements of operations effective January 1, 2017. Previously, these tax effects were reflected on our balance sheet as adjustments to additional paid-in capital. See Note 1 to the consolidated financial statements included in this report for further discussion of ASU 2016-09.
In the nine
-month periods ended
September 30, 2017
and
2016
, we incurred foreign exchange losses of $3.4 million and $6.5 million, respectively. The foreign exchange losses in
2016
primarily related to the Angolan kwanza and its declining exchange rate relative to the U.S. dollar. We did not incur significant exchange losses in any one currency during the
nine months ended
September 30, 2017
. Our foreign exchange losses are reflected in Other income (expense), net.
16
For the fourth quarter of
2017
, we believe our results will be considerably lower than our third quarter results due to seasonality and a reduced level of offshore activity. Most of the decline is expected to be in our ROV and Subsea Projects segments, with modestly lower operating income from our other oilfield segments, as we foresee very few near-term catalysts to support an improvement in our oilfield markets. For our-non-oilfield segment, Advanced Technologies, we are projecting a modest quarterly improvement. We expect Unallocated Expenses to be slightly higher.
While our fourth quarter outlook has been revised downward, we continue to believe that we will be marginally profitable at the operating income line on a consolidated basis for the full year of
2017
. We anticipate continued lower global demand for deepwater drilling, field development, and inspection, maintenance and repair and installation activities due to the current and anticipated oil price environment, which has led to spending cuts by our customers and pricing pressure. Below the operating income line, we expect:
|
•
|
increased interest expense from higher interest rates, which affect our floating rate debt and our swaps to floating rates on $200 million of fixed-rate debt; and
|
|
•
|
a loss on our equity investment in Medusa Spar LLC, as volume continues to be low in current producing zones.
|
Based on the current number of floating rigs working and expectations for further reductions in oil and gas industry capital and operating expenditures as offshore activities get pushed into 2019, we believe our 2018 earnings will be significantly lower than 2017. During 2018, we expect each of our operating segments will contribute positive earnings before interest, taxes and depreciation and amortization (EBITDA), and on a consolidated basis, we will generate more than sufficient cash flows to service our debt and fund our anticipated maintenance and organic growth capital expenditures. While we are anticipating an increase in offshore activity levels during the second half of 2018, we do not expect this shift in momentum to be adequate to offset the near-term market weakness or to present an opportunity to meaningfully improve pricing.
With an outlook for diminishing cash flow from operations for the fourth quarter of 2017 and for the full year of 2018, we feel it is prudent at this time to focus our resources on growth and positioning the company for the future. Consequently, our Board did not declare a quarterly dividend to be paid in the fourth quarter of 2017. While we will continue to review our dividend position on a quarterly basis, we do not anticipate our Board reinstating a quarterly cash dividend until we see a significant improvement in our market outlook and projected free cash flow.
Critical Accounting Policies and Estimates
For information about our Critical Accounting Policies and Estimates, please refer to the discussion in our annual report on Form 10-K for the year ended
December 31, 2016
under the heading "Critical Accounting Policies and Estimates" in Item 7 – "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Liquidity and Capital Resources
As of
September 30, 2017
, we had working capital of
$771 million
, including
$472 million
of cash and cash equivalents. Additionally, we had
$500 million
of borrowing capacity available under our revolving credit facility under a credit agreement with a group of banks (the "Credit Agreement"). The Credit Agreement includes a $300 million, three-year term loan and a $500 million, five-year, revolving credit facility. We consider our liquidity, cash flows and capital resources to be adequate to support our existing operations and capital commitments.
Our capital expenditures were
$60 million
during the first
nine months
of
2017
, excluding an $
11 million
equity investment and advance in a business acquisition to expand our presence in the Caspian Sea region, as compared to $
83 million
, excluding a $3 million business acquisition, during the first
nine months
of
2016
. We currently estimate our capital expenditures for
2017
, excluding business acquisitions, will be in the range of
$90 million
to
$110 million
, including
$20 million
of construction progress payments for the new deepwater
multiservice subsea support
vessel, to be named the
Ocean Evolution
, discussed below.
During the third quarter of 2013, we signed an agreement with a shipyard for the construction of a subsea support vessel, to be named the
Ocean Evolution
. We expect to take delivery of the vessel
at the end of December 2017
and to place it into service
during the first quarter of 2018
. We intend for the vessel to be U.S.-flagged and documented with a coastwise endorsement by the U.S. Coast Guard. It is expected to have an overall length of
17
353 feet, a Class 2 dynamic positioning system, accommodations for 110 personnel, a helideck, a 250-ton active heave-compensated crane, and a working moonpool. We will outfit the vessel with two of our high specification work-class ROVs and a satellite communications system capable of transmitting streaming video for real-time work observation by shore personnel. We anticipate the vessel will be used to augment our ability to provide subsea intervention services and hardware installations in the deepwater U.S. Gulf of Mexico.
Unless indicated otherwise, each of the vessels discussed below is a deepwater
multiservice subsea support
vessel outfitted with two of our high-specification work-class ROVs.
Beginning in the third quarter of 2008, we chartered a vessel, the
Olympic Intervention IV
, for an initial term of five years. Following extension periods, the charter expired in July 2016, and we released the vessel to its owner. We had been using the
Olympic Intervention IV
in the U.S. Gulf of Mexico.
In 2012, we moved the chartered vessel
Ocean Intervention III
to Angola and also chartered the
Bourbon Oceanteam 101
to work on a three-year field support vessel services contract for a unit of BP plc. We had extended the charter of the
Bourbon Oceanteam 101
to January 2017. However, in early 2016, the customer exercised its right, under the field support vessel services contract, to terminate its use of the
Bourbon Oceanteam 101
at the end of May 2016. Under the terms of the contract, the costs incurred by us associated with the early release and demobilization of the vessel were reimbursed by the customer. Following the release of the vessel, we redelivered it to the vessel supplier. The charter for the
Ocean Intervention III
expired at the end of July 2017. Under the field support vessel services contract, which has been extended through January 2019, we are continuing to supply project management and engineering services. We also provide ROV tooling, asset integrity services and installation and workover control system services as requested by the customer. Chartered vessels and barges are provided to the customer upon request. Under this arrangement, the
Ocean Intervention III
will be
provided for a fixed term from January 2018 until May 2018 with three one-month optional customer extension periods.
In March 2013, we commenced a five-year charter for a Jones Act-compliant multi-service support vessel, the
Ocean Alliance
, we have been using in the U.S. Gulf of Mexico. In January 2015, we commenced a two-year contract with a customer for the use of the
Ocean Alliance
. The contract expired in January 2017, and we are marketing the vessel for spot market work in the U.S. Gulf of Mexico.
In December 2013, we commenced a three-year charter for the
Normand Flower
, a multi-service subsea marine support vessel. We made modifications to the vessel and used the vessel in the U.S. Gulf of Mexico to perform inspection, maintenance and repair projects and hardware installations. In December 2016, we declined our option to extend the charter and the vessel was released.
In November 2015, we commenced a two-year charter for the use of the
Island Pride
, a multi-service subsea marine support vessel. We are using the vessel under a two-year contract to provide field support services off the coast of India for an oil and gas customer based in India. Our two-year contract is scheduled to end in early November. Our customer has several option periods available to them; however, they have not exercised their right to use them. The future IMR vessel work in this field is out to tender, and we are bidding for the work.
We also charter or lease vessels on a short-term basis as necessary to augment our fleet.
As of
September 30, 2017
, we had long-term debt in the principal amount of
$800 million
outstanding and
$500 million
available under our revolving credit facility provided under the Credit Agreement.
In October 2014, we entered into a new credit agreement (as amended, the "Credit Agreement") with a group of banks to replace our prior principal credit agreement. The original Credit Agreement from October 2014 has been amended three times and it currently provides for a
$300 million
term loan (the "Term Loan Facility") and a
$500 million
revolving credit facility (the "Revolving Credit Facility"), which mature in October 2019 and October 2021, respectively. Subject to certain conditions, the aggregate commitments under the Revolving Credit Facility may be increased by up to
$300 million
at any time upon agreement between us and existing or additional lenders. Borrowings under the Revolving Credit Facility and the Term Loan Facility may be used for general corporate purposes. Simultaneously with the execution of the Credit Agreement in 2014 and pursuant to its terms, we repaid all amounts outstanding under, and terminated, our prior principal credit agreement.
18
Borrowings under the Credit Agreement bear interest at an Adjusted Base Rate or the Eurodollar Rate (both as defined in the Credit Agreement), at our option, plus an applicable margin based on our Leverage Ratio (as defined in the Credit Agreement) and, at our election, based on the ratings of our senior unsecured debt by designated ratings services, thereafter to be based on such debt ratings. The applicable margin varies: (1) in the case of advances bearing interest at the Adjusted Base Rate, from
0.125%
to
0.750%
for borrowings under the Revolving Credit Facility and from
0%
to
0.500%
for borrowings under the Term Loan Facility; and (2) in the case of advances bearing interest at the Eurodollar Rate, from
1.125%
to
1.750%
for borrowings under the Revolving Credit Facility and from
1.000%
to
1.500%
for borrowings under the Term Loan Facility. The Adjusted Base Rate is the highest of (1) the per annum rate established by the administrative agent as its prime rate, (2) the federal funds rate plus
0.50%
and (3) the daily one-month LIBOR plus
1%
. We pay a commitment fee ranging from
0.125%
to
0.300%
on the unused portion of the Revolving Credit Facility, depending on our Leverage Ratio. The commitment fees are included as interest expense in our consolidated financial statements.
The Credit Agreement contains various covenants that we believe are customary for agreements of this nature, including, but not limited to, restrictions on our ability and the ability of each of our subsidiaries to incur debt, grant liens, make certain investments, make distributions, merge or consolidate, sell assets and enter into certain restrictive agreements. We are also subject to a maximum adjusted total capitalization ratio (as defined in the Credit Agreement) of 55%. The Credit Agreement includes customary events of default and associated remedies. As of
September 30, 2017
, we were in compliance with all the covenants set forth in the Credit Agreement.
In November 2014, we completed the public offering of
$500 million
aggregate principal amount of
4.650%
Senior Notes due 2024 (the "Senior Notes"). We pay interest on the Senior Notes on May 15 and November 15 of each year. The Senior Notes are scheduled to mature on November 15, 2024.
Our principal source of cash from operating activities is our net income (loss), adjusted for the non-cash effects of, among other things, depreciation and amortization, deferred income taxes and noncash compensation under our share-based compensation plans. Our
$144 million
and
$262 million
of cash provided from operating activities in the
nine-month periods ended
September 30, 2017
and
2016
, respectively, were principally affected by operating results and cash increases (decreases) of:
|
•
|
$26 million
and
$102 million
, respectively, from changes in accounts receivable;
|
|
•
|
$35 million
and
$1 million
, respectively, from changes in inventory; and
|
|
•
|
$(56) million
and
$(161) million
, respectively, from changes in current liabilities.
|
We had a decrease in cash related to accounts receivable in the
nine months ended
September 30, 2017 compared to 2016, as we had lower revenue in the three months ended September 30, 2017 as compared to the fourth quarter of 2016, so, combined with our cash collections, our overall accounts receivable balances decreased. The decrease in inventory levels in 2017 reflected usage on a large umbilical project and our lower Subsea Products backlog. Each of the
2017
and
2016
decreases in cash related to current liabilities reflected generally lower business levels, and decreased accruals for incentive compensation.
In the
nine months
ended
September 30, 2017
, we used
$79 million
of cash in investing activities, largely related to capital expenditures of
$60 million
, excluding investment and advances in a business acquisition of $
11 million
. We also used
$46 million
in financing activities, primarily for the payment of cash dividends of
$44 million
. In the
nine months
ended
September 30, 2016
, we used
$117 million
of cash in investing activities. The cash used in investing activities related to capital expenditures of $
83 million
and other investments of $40 million. The other investments were primarily for the purchase of bonds in Angola for the purpose of mitigating our Angolan currency risk. We also used
$81 million
in financing activities, primarily for the payment of cash dividends of
$79 million
.
We have not guaranteed any debt not reflected on our consolidated balance sheet, and we do not have any off-balance sheet arrangements, as defined by SEC rules.
In December 2014, our Board of Directors approved a plan to repurchase up to
10 million
shares of our common stock. Under this plan, we had repurchased
2.0 million
shares of our common stock for
$100 million
through
September 30, 2017
, all during 2015. We account for the shares we hold in treasury under the cost method, at average cost. The timing and amount of any future repurchases will be determined by our management. We expect that any additional shares repurchased under the plan will be held as treasury stock for possible future use. The plan does not obligate us to repurchase any particular number of shares.
19
From the second quarter of 2014 through the third quarter of 2016, we paid a quarterly dividend to our common shareholders of $0.27 per share. Starting in the fourth quarter of 2016 through the third quarter of 2017, we paid a dividend of
$0.15
per share. Our last quarterly dividend was declared in July 2017 at
$0.15
per share and paid in September 2017. With an outlook for diminishing cash flow from operations for the fourth quarter of 2017 and for the full year of 2018, we feel it is prudent at this time to focus our resources on growth and positioning our company for the future. Consequently, our Board did not declare a quarterly dividend to be paid in the fourth quarter of 2017. While we will continue to review our dividend position on a quarterly basis, we do not anticipate our Board reinstating a quarterly cash dividend until we see a significant improvement in our market outlook and projected free cash flow.
Results of Operations
We operate in five business segments. The segments are contained within two businesses — services and products provided to the oil and gas industry ("Oilfield") and all other services and products ("Advanced Technologies"). Our Unallocated Expenses are those not associated with a specific business segment.
Consolidated revenue and profitability information is as follows:
|
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||||||
|
(dollars in thousands)
|
Sep 30, 2017
|
Sep 30, 2016
|
Jun 30, 2017
|
Sep 30, 2017
|
Sep 30, 2016
|
||||||||||||||||
|
Revenue
|
$
|
476,120
|
|
$
|
549,275
|
|
$
|
515,036
|
|
$
|
1,437,332
|
|
$
|
1,783,158
|
|
||||||
|
Gross Margin
|
54,885
|
|
35,443
|
|
53,571
|
|
153,311
|
|
228,156
|
|
|||||||||||
|
Gross Margin %
|
12
|
%
|
6
|
%
|
10
|
%
|
11
|
%
|
13
|
%
|
|||||||||||
|
Operating Income (Loss)
|
10,531
|
|
(11,856
|
)
|
9,390
|
|
19,771
|
|
74,623
|
|
|||||||||||
|
Operating Income %
|
2
|
%
|
(2
|
)%
|
2
|
%
|
1
|
%
|
4
|
%
|
|||||||||||
In our Subsea Projects segment, we generate a material amount of our consolidated revenue from contracts for services in the U.S. Gulf of Mexico, which has historically been more active from April through October, as compared to the rest of the year. The European operations of our Asset Integrity segment have historically been more active in the second and third quarters; however, the reduced customer spending levels in the current commodity price environment have substantially obscured this seasonality since mid-2014. Revenue in our ROV segment is generally subject to seasonal variations in demand, with our first quarter typically being the low quarter of the year. The level of our ROV seasonality primarily depends on the number of ROVs we have engaged in vessel-based subsea infrastructure inspection, maintenance and repair and installation, which is more seasonal than drilling support. Periods since mid-2014 reflect an exception, as there has been a general decline in offshore activity, which caused a decrease in our ROV days on hire and utilization during each sequential quarter from September 2014 through September 2017, with few exceptions. The number of ROV days on hire for the quarters ended September 2017, June 2017 and June 2016 were slightly higher than that of the respective immediately preceding quarters. Revenue in our Subsea Products and Advanced Technologies segments generally has not been seasonal.
20
Oilfield
The following table sets forth the revenues and margins for our Oilfield business segments for the periods indicated. In the ROV section of the table that follows, "Days available" includes all days from the first day that an ROV is placed into service until the ROV is retired. All days during this period are considered available days, including periods when an ROV is undergoing maintenance or repairs. Our ROVs do not have scheduled maintenance or repair that requires significant time when the ROVs are not available for utilization.
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||||||||
|
(dollars in thousands)
|
Sep 30, 2017
|
Sep 30, 2016
|
Jun 30, 2017
|
Sep 30, 2017
|
Sep 30, 2016
|
||||||||||||||||
|
Remotely Operated Vehicles
|
|||||||||||||||||||||
|
Revenue
|
$
|
104,617
|
|
$
|
126,507
|
|
$
|
103,432
|
|
$
|
302,071
|
|
$
|
413,769
|
|
||||||
|
Gross Margin
|
12,102
|
|
(16,288
|
)
|
16,659
|
|
41,783
|
|
45,959
|
|
|||||||||||
|
Operating Income (Loss)
|
5,009
|
|
(23,845
|
)
|
10,376
|
|
21,310
|
|
21,162
|
|
|||||||||||
|
Operating Income (Loss) %
|
5
|
%
|
(19
|
)%
|
10
|
%
|
7
|
%
|
5
|
%
|
|||||||||||
|
Days available
|
25,695
|
|
29,126
|
|
25,300
|
|
76,214
|
|
86,904
|
|
|||||||||||
|
Days utilized
|
12,742
|
|
15,156
|
|
12,267
|
|
36,497
|
|
47,218
|
|
|||||||||||
|
Utilization
|
50
|
%
|
52
|
%
|
48
|
%
|
48
|
%
|
54
|
%
|
|||||||||||
|
Subsea Products
|
|||||||||||||||||||||
|
Revenue
|
143,583
|
|
157,269
|
|
174,893
|
|
469,115
|
|
542,978
|
|
|||||||||||
|
Gross Margin
|
24,949
|
|
20,423
|
|
22,762
|
|
72,702
|
|
119,287
|
|
|||||||||||
|
Operating Income
|
12,383
|
|
6,109
|
|
10,552
|
|
34,418
|
|
71,870
|
|
|||||||||||
|
Operating Income %
|
9
|
%
|
4
|
%
|
6
|
%
|
7
|
%
|
13
|
%
|
|||||||||||
|
Backlog at end of period
|
284,000
|
|
457,000
|
|
328,000
|
|
284,000
|
|
457,000
|
|
|||||||||||
|
Subsea Projects
|
|||||||||||||||||||||
|
Revenue
|
80,116
|
|
110,799
|
|
75,545
|
|
218,617
|
|
378,883
|
|
|||||||||||
|
Gross Margin
|
10,187
|
|
19,321
|
|
6,462
|
|
20,673
|
|
45,147
|
|
|||||||||||
|
Operating Income
|
6,512
|
|
15,029
|
|
3,000
|
|
9,699
|
|
32,055
|
|
|||||||||||
|
Operating Income %
|
8
|
%
|
14
|
%
|
4
|
%
|
4
|
%
|
8
|
%
|
|||||||||||
|
Asset Integrity
|
|||||||||||||||||||||
|
Revenue
|
61,098
|
|
71,995
|
|
58,192
|
|
171,948
|
|
215,459
|
|
|||||||||||
|
Gross Margin
|
9,754
|
|
11,591
|
|
10,004
|
|
28,139
|
|
29,030
|
|
|||||||||||
|
Operating Income
|
3,050
|
|
4,725
|
|
3,755
|
|
9,072
|
|
4,354
|
|
|||||||||||
|
Operating Income %
|
5
|
%
|
7
|
%
|
6
|
%
|
5
|
%
|
2
|
%
|
|||||||||||
|
Total Oilfield
|
|||||||||||||||||||||
|
Revenue
|
$
|
389,414
|
|
$
|
466,570
|
|
$
|
412,062
|
|
$
|
1,161,751
|
|
$
|
1,551,089
|
|
||||||
|
Gross Margin
|
56,992
|
|
35,047
|
|
55,887
|
|
163,297
|
|
239,423
|
|
|||||||||||
|
Operating Income
|
26,954
|
|
2,018
|
|
27,683
|
|
74,499
|
|
129,441
|
|
|||||||||||
|
Operating Income %
|
7
|
%
|
—
|
%
|
7
|
%
|
6
|
%
|
8
|
%
|
|||||||||||
In general, our Oilfield business focuses on supplying services and products to the deepwater sector of the offshore market. We have experienced, and expect to continue to experience, lower global demand for deepwater drilling, field development, and inspection, maintenance and repair activities due to the general decline in oil prices since June 2014. As a result, we are forecasting an overall decrease in our oilfield operating segments for the full year of 2017 as compared to 2016.
21
We believe we are the world's largest provider of ROV services, and this business segment historically, but not currently, has been the largest contributor to our Oilfield business operating income. Our ROV segment revenue reflects the utilization percentages, fleet sizes and average pricing of the respective periods. Our ROV operating margins have declined as depreciation has become a higher percentage of revenue, and we have experienced lower utilization and pricing in recent years. In the full year of 2014, 2015 and 2016, ROV depreciation and amortization was 14%, 18% and 27% of ROV revenue respectively; and in the
nine months ended
September 30, 2017
it was
29%
of ROV revenue. Our ROV operating income increased in the three- and
nine-month periods ended
September 30, 2017
compared to the corresponding periods of the prior year, mainly due to 2016 inventory write-downs and fixed assets write-offs totaling $36 million, substantially offset by lower utilization and lower average revenue per day on hire in 2017. During the third quarter of
2017
, ROV operating income decreased compared to the immediately preceding quarter, mainly as a result of lower average revenue per day on hire and an increase in average daily operating costs. The average revenue per day on hire decreased due primarily to an unfavorable change in geographic mix, as we experienced disproportionately fewer work days in higher day rate operating areas, notably Angola. Days on hire increased 4% sequentially during the third quarter of 2017 as our fleet utilization improved to 50% from 48%. We added
four
new ROVs to our fleet during the
nine months
ended
September 30, 2017
and retired
five
, resulting in a total of
279
ROVs in our ROV fleet. We expect our
fourth
quarter
2017
ROV operating income to decrease considerably from that of the
third
quarter due to fewer working days, largely on decreased demand to provide vessel-based services, and lower average revenue per day, partially attributable to seasonality. We also expect a decline in our average daily operating costs.
To improve operational efficiency, in 2016 we reorganized our Subsea Products segment into two business units
–
(1) manufactured products and (2) service and rental. Manufactured products include production control umbilicals and specialty subsea hardware, while service and rental includes tooling, subsea work systems and installation and workover control systems. This internal reorganization did not affect our segment reporting structure or the historical comparability of our segment results. The following table presents revenue from manufactured products and service and rental, as their respective percentages of total Subsea Products revenue:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
Sep 30, 2017
|
Sep 30, 2016
|
Jun 30, 2017
|
Sep 30, 2017
|
Sep 30, 2016
|
||||||||||||
|
Manufactured products
|
59
|
%
|
64
|
%
|
70
|
%
|
67
|
%
|
66
|
%
|
||||||
|
Service and rental
|
41
|
%
|
36
|
%
|
30
|
%
|
33
|
%
|
34
|
%
|
||||||
Our Subsea Products operating income increased in the three-month period ended
September 30, 2017
compared to the corresponding periods of the prior year, mainly due to a 2016 charge of $8.2 million, predominantly for tools and inventory in our portfolio used to support deepwater drilling and operations, partially offset by lower demand and pricing in both manufactured products and service and rental in 2017. Subsea Products operating income decreased in
nine-month period ended
September 30, 2017
compared to the the corresponding period of the prior year, due to lower demand and pricing in both manufactured products and service and rental. Subsea Products operating income in the
third
quarter of
2017
was higher than that of the immediately preceding quarter due to the higher percentage of segment revenue being generated by our service and rental business and excellent execution by our umbilical business unit, partially offset by the effect of an 18% decline in revenues.
Our Subsea Products backlog was
$284 million
as of
September 30, 2017
, compared to $431 million as of
December 31, 2016
. The backlog decline was largely attributable to low umbilical order intake and production associated with the Shell Appomattox project in the U.S. Gulf of Mexico. We expect Subsea Products margins to weaken further into the mid-single digit range in the
fourth
quarter of
2017
compared to the
third
quarter, due to legacy contracts with better pricing having been completed and more recent contracts at more competitive pricing being executed.
Our Subsea Projects operating income was lower in the three- and
nine-month periods ended
September 30, 2017
compared to the corresponding periods of the prior year, as a result of generally lower vessel demand and pricing, and the release in May 2016 of the
Bourbon Oceanteam 101,
which was previously deployed under the field support vessel services contract offshore Angola. Our Subsea Projects operating income increased in the
three-month period ended
September 30, 2017
compared to the immediately preceding quarter, principally driven by seasonal improvements in U.S. Gulf of Mexico deepwater vessel work. In the
fourth
quarter of
2017
, we expect lower operating income than we had for the
third
quarter, due to the seasonal decrease in deepwater vessel work in
22
the U.S. Gulf of Mexico, a continued low vessel price environment and current global oversupply of vessels, and a lower profit contribution from our Angola operations due to the release of the
Ocean Intervention III
by the customer during the third quarter of this year.
For the three-month period ended
September 30, 2017
, compared to the corresponding period of the prior year, Asset Integrity's operating income was lower. For nine-month period ended
September 30, 2017
, compared to the corresponding periods of the prior year, Asset Integrity's operating income improved on lower revenue, as we benefited from restructuring efforts we made in prior periods and 2016 operating results included a second quarter bad debt expense of $3.3 million. Asset Integrity's operating income in the
three-month period ended
September 30, 2017
was lower compared to the immediately preceding quarter . For the
fourth
quarter of
2017
, we expect Asset Integrity's operating income to be lower compared to the
third
quarter, due to seasonal decreases.
Advanced Technologies
Revenue and margin information was as follows:
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||||||||
|
(dollars in thousands)
|
Sep 30, 2017
|
Sep 30, 2016
|
Jun 30, 2017
|
Sep 30, 2017
|
Sep 30, 2016
|
||||||||||||||||
|
Revenue
|
$
|
86,706
|
|
$
|
82,705
|
|
$
|
102,974
|
|
275,581
|
|
232,069
|
|
||||||||
|
Gross Margin
|
$
|
11,833
|
|
$
|
9,665
|
|
$
|
14,133
|
|
$
|
36,038
|
|
$
|
26,092
|
|
||||||
|
Operating Income
|
6,602
|
|
4,357
|
|
7,632
|
|
19,260
|
|
10,478
|
|
|||||||||||
|
Operating Income %
|
8
|
%
|
5
|
%
|
7
|
%
|
7
|
%
|
5
|
%
|
|||||||||||
Advanced Technologies operating income for the three- and
nine-month periods ended
September 30, 2017
was higher than that of the corresponding periods of the prior year, from improved execution on theme park and other commercial projects. Operating income in the
third
quarter of
2017
was lower than that of the immediately preceding quarter, primarily due to lower levels of work for the U.S. Navy. We expect a slight increase in our Advanced Technologies operating income in the
fourth
quarter of
2017
compared to the
third
quarter, due to increased activity on theme park projects.
Unallocated Expenses
Our Unallocated Expenses,
i.e.
, those not associated with a specific business segment, within gross profit consist of expenses related to our incentive and deferred compensation plans, including restricted stock units, performance units and bonuses, as well as other general expenses. Our Unallocated Expenses within operating income consist of those expenses within gross profit plus general and administrative expenses related to corporate functions.
The following table sets forth our Unallocated Expenses for the periods indicated.
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||||||
|
(dollars in thousands)
|
Sep 30, 2017
|
Sep 30, 2016
|
Jun 30, 2017
|
Sep 30, 2017
|
Sep 30, 2016
|
||||||||||||||
|
Gross margin
|
$
|
13,940
|
|
$
|
9,269
|
|
$
|
16,449
|
|
46,024
|
|
37,359
|
|
||||||
|
Operating income
|
23,025
|
|
18,231
|
|
25,925
|
|
73,988
|
|
65,296
|
|
|||||||||
|
Operating income % of revenue
|
5
|
%
|
3
|
%
|
5
|
%
|
5
|
%
|
4
|
%
|
|||||||||
Our Unallocated Expenses for the three- and
nine-month periods ended
September 30, 2017
increased compared to the corresponding periods of the prior year, primarily due to higher 2017 estimated expenses related to incentive compensation from our performance units and bonuses. Our Unallocated Expenses for the three months ended September 30, 2017 were lower compared to the immediately preceding quarter. For the fourth quarter of
2017
, we expect our quarterly Unallocated Expenses to be slightly higher compared to the
third
quarter.
23
Other
The following table sets forth our significant financial statement items below the income from operations line.
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||||||
|
(in thousands)
|
Sep 30, 2017
|
Sep 30, 2016
|
Jun 30, 2017
|
Sep 30, 2017
|
Sep 30, 2016
|
||||||||||||||
|
Interest income
|
$
|
1,997
|
|
$
|
684
|
|
$
|
2,045
|
|
5,379
|
|
2,421
|
|
||||||
|
Interest expense, net of amounts capitalized
|
(8,650
|
)
|
(6,325
|
)
|
(7,599
|
)
|
(22,517
|
)
|
(18,924
|
)
|
|||||||||
|
Equity in income (losses) of unconsolidated affiliates
|
(424
|
)
|
(246
|
)
|
(394
|
)
|
(1,798
|
)
|
543
|
|
|||||||||
|
Other income (expense), net
|
(1,287
|
)
|
570
|
|
(58
|
)
|
(3,901
|
)
|
(6,823
|
)
|
|||||||||
|
Provision for (benefits from) income taxes
|
3,935
|
|
(5,375
|
)
|
1,252
|
|
4,104
|
|
16,226
|
|
|||||||||
In addition to interest on borrowings, interest expense includes amortization of loan costs, fees for lender commitments under our revolving credit agreement and fees for standby letters of credit and bank guarantees that banks issue on our behalf for performance bonds, bid bonds and self-insurance requirements.
Foreign currency transaction gains and losses are the principal component of
Other income (expense), net
. In the
three-month periods ended
September 30, 2017
and
2016
, we incurred foreign currency transaction gains (losses) of $
(1.3) million
and $
0.6 million
, respectively. In the
nine-month periods ended
September 30, 2017
and
2016
, we incurred foreign currency transaction losses of $
(3.4) million
and $
(6.5) million
, respectively. In the
three- and nine- month periods ended
September 30, 2017
, we did not incur significant currency losses in any one currency. The currency losses in
2016
primarily related to the Angolan kwanza and its declining exchange rate relative to the U.S. dollar, and related primarily to our cash balances in Angola. Conversion of cash balances from Angolan kwanza to U.S. dollars is controlled by the central bank in Angola, and the central bank slowed this process starting in mid-2015, causing our cash balances in kwanza to increase.
The provisions for income taxes were related to U.S. income taxes that we provided at estimated annual effective rates using assumptions as to earnings and other factors that would affect the tax provision for the remainder of the year, and to the operations of foreign branches and subsidiaries that were subject to local income and withholding taxes. Factors that could affect our estimated tax rate include our profitability levels in general and the geographic mix in the sources of our results. The effective tax rate for the
nine months ended
September 30, 2017
was different than the federal statutory rate of
35.0%
, primarily due to the geographic mix of tax jurisdictions in which we generated our earnings and losses and non-deductible expenses. It is our intention to continue to indefinitely reinvest in certain of our international operations. We do not believe the effective tax rate before discrete items is meaningful, as the rate is less significant at a low pretax income or a pretax loss position. The effective tax rate of
31.3%
for the period ended September 30, 2016 was lower than the federal statutory rate of
35.0%
, primarily due to our intention to indefinitely reinvest in certain of our international operations. We do not provide for U.S. taxes on the portion of our foreign earnings we indefinitely reinvest.
24
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk.
|
We are currently exposed to certain market risks arising from transactions we have entered into in the normal course of business. These risks relate to interest rate changes and fluctuations in foreign exchange rates. Except for our exposure in Angola, we do not believe these risks are material. We have not entered into any market risk sensitive instruments for speculative or trading purposes. When we have a significant amount of borrowings, we typically manage our exposure to interest rate changes through the use of a combination of fixed- and floating-rate debt. See Note 3 of Notes to Consolidated Financial Statements included in this report for a description of our revolving credit facility and interest rates on our borrowings. We have two interest rate swaps in place on a total of
$200 million
of the Senior Notes for the period to November 2024. The agreements swap the fixed interest rate of 4.650% on $100 million of the Senior Notes to the floating rate of one month LIBOR plus 2.426% and on another $100 million to one month LIBOR plus 2.823%. We believe significant interest rate changes would not have a material near-term impact on our future earnings or cash flows.
Because we operate in various oil and gas exploration and production regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar. The functional currency for several of our international operations is the applicable local currency. A stronger U.S. dollar against the U.K. pound sterling, the Norwegian kroner and the Brazilian real may result in lower operating income. We manage our exposure to changes in foreign exchange rates principally through arranging compensation in U.S. dollars or freely convertible currency and, to the extent possible, by limiting compensation received in other currencies to amounts necessary to meet obligations denominated in those currencies. We use the exchange rates in effect as of the balance sheet date to translate assets and liabilities as to which the functional currency is the local currency, resulting in translation adjustments that we reflect as accumulated other comprehensive income or loss in the shareholders' equity section of our Consolidated Balance Sheets. We recorded net adjustments to our equity accounts of $
20.3 million
and $
31.2 million
in the nine-month periods ended
September 30, 2017
and
2016
, respectively. Negative adjustments reflect the net impact of the strengthening of the U.S. dollar against various foreign currencies for locations where the functional currency is not the U.S. dollar. Conversely, positive adjustments reflect the effect of a weakening U.S. dollar.
We recorded foreign currency transaction gains (losses) of $
(1.3) million
and $
0.6 million
in the
three-month periods ended
September 30, 2017
and
2016
, respectively, and
$(3.4) million
and
$(6.5) million
in the
nine-month periods ended
September 30, 2017
and
2016
, respectively. Those gains and losses are included in
Other income (expense), net
in our Consolidated Statements of Operations in those respective periods. Since the second quarter of 2015, the exchange rate for the Angolan kwanza relative to the U.S. dollar generally has been declining, although the exchange rate was relatively stable during the
nine-month period ended
September 30, 2017
. As our functional currency in Angola is the U.S. dollar, we recorded foreign currency transaction gains (losses) related to the kwanza of
$0.7 million
and
$(7.6) million
in the three- and
nine-month periods ended
September 30, 2016
, respectively, as a component of
Other income (expense), net
in our Consolidated Statements of Operations for those respective periods. Our foreign currency transaction gains (losses) related primarily to the remeasurement of our Angolan kwanza cash balances to U.S. dollars. Conversion of cash balances from kwanza to U.S. dollars is controlled by the central bank in Angola, and the central bank has slowed this process since mid-2015, causing our kwanza cash balances to subsequently increase. As of
September 30, 2017
, we had the equivalent of approximately
$26 million
of kwanza cash balances in Angola reflected on our balance sheet.
To mitigate our currency exposure risk in Angola, through
September 30, 2017
we used kwanza to purchase
$70 million
equivalent Angolan central bank (Banco Nacional de Angola) bonds with various maturities throughout 2018 and 2020. These bonds are denominated as U.S. dollar equivalents, so that, upon payment of semi-annual interest and principal upon maturity, payment is made in kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate. We have classified these instruments as held-to-maturity, and have recorded the original cost on our balance sheet as other non-current assets.
25
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of
September 30, 2017
to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal control over financial reporting that occurred during the three months ended
September 30, 2017
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
26
|
Item 1.
|
Legal Proceedings.
|
O
n June 17, 2014, Peter L. Jacobs, a purported shareholder, filed a derivative complaint against all of the then current members of our board of directors and one of our former directors, as defendants, and our company, as nominal defendant, in the Court of Chancery of the State of Delaware. Through the complaint, the plaintiff asserted, on behalf of our company, actions for breach of fiduciary duties and unjust enrichment in connection with prior determinations of our board of directors relating to nonexecutive director compensation. The plaintiff sought relief including disgorgement of payments made to the defendants, an award of unspecified damages and an award for attorneys’ fees and other costs. We and the defendants filed a motion to dismiss the complaint and a supporting brief. Subsequently, the parties to the litigation jointly requested and received a series of extension orders from the Court to extend the time for certain filings. The last such extension expired on September 16, 2016. By letter dated August 30, 2017, we received notice from the Office of the Register in Chancery advising the parties that the Court was closing the matter for failure to prosecute or to comply with an order of the Court.
In the ordinary course of business, we are subject to actions for damages alleging personal injury under the general maritime laws of the United States, including the Jones Act, for alleged negligence. We report actions for personal injury to our insurance carriers and believe that the settlement or disposition of those claims will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Various other actions and claims are pending against us, most of which are covered by insurance. Although we cannot predict the ultimate outcome of these matters, we believe that our ultimate liability, if any, that may result from these other actions and claims will not materially affect our results of operations, cash flows or financial position.
27
|
Registration or File Number
|
Form of Report
|
Report Date
|
Exhibit Number
|
||||||||||
|
*
|
3.01
|
|
1-10945
|
10-K
|
Dec. 2000
|
3.01
|
|
||||||
|
*
|
3.02
|
|
1-10945
|
8-K
|
May 2008
|
3.1
|
|
||||||
|
*
|
3.03
|
|
1-10945
|
8-K
|
May 2014
|
3.1
|
|
||||||
|
*
|
3.04
|
|
1-10945
|
8-K
|
Aug. 2015
|
3.1
|
|
||||||
|
12.01
|
|
||||||||||||
|
31.01
|
|
||||||||||||
|
31.02
|
|
||||||||||||
|
32.01
|
|
||||||||||||
|
32.02
|
|
||||||||||||
|
101.INS
|
|
XBRL Instance Document
|
|||||||||||
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|||||||||||
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|||||||||||
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|||||||||||
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|||||||||||
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|||||||||||
|
*
|
|
Exhibit previously filed with the Securities and Exchange Commission, as indicated, and incorporated herein by reference.
|
|||||||||||
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
November 2, 2017
|
/
S
/ R
ODERICK
A. L
ARSON
|
|
|
Date
|
Roderick A. Larson
|
|
|
President and Chief Executive Officer
|
||
|
(Principal Executive Officer)
|
||
|
November 2, 2017
|
/
S
/ A
LAN
R. C
URTIS
|
|
|
Date
|
Alan R. Curtis
|
|
|
Senior Vice President and Chief Financial Officer
|
||
|
(Principal Financial Officer)
|
||
|
November 2, 2017
|
/
S
/ W. C
ARDON
G
ERNER
|
|
|
Date
|
W. Cardon Gerner
|
|
|
Senior Vice President and Chief Accounting Officer
|
||
|
(Principal Accounting Officer)
|
||
29
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 6. Exhibits