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Global Industries 10-Q 2009 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2009
OR
For the transition period from to
Commission File Number: 0-21086
Global Industries, Ltd.
(Exact name of registrant as specified in its charter)
(337) 583-5000
(Registrant’s telephone number, including area code) None
(Former name, former address and former fiscal year, if changes since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
YES
o NO o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ
The number
of shares of the registrant’s common stock outstanding as of November 3, 2009, was
113,876,792.
Global Industries, Ltd.
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Global Industries, Ltd.
We have reviewed the accompanying condensed consolidated balance sheet of Global Industries, Ltd.
and subsidiaries (the “Company”) as of September 30, 2009, and the related condensed consolidated
statements of operations for the three-month and nine-month periods ended September 30, 2009 and
2008, and cash flows for the nine-month periods ended September 30, 2009 and 2008. These interim
financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with standards of
the Public Company Accounting Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Global Industries, Ltd. and
subsidiaries as of December 31, 2008, and the related consolidated statements of operations,
shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our
report dated February 27, 2009 (October 5, 2009 as to the effects of the retrospective adjustments
discussed in Notes 2 and 18), we expressed an unqualified opinion and included an explanatory
paragraph relating to the adoption of new accounting guidance on convertible debt instruments that
may be settled in cash upon conversion (including partial cash settlement), on determining whether
instruments granted in share-based payment transactions are participating securities, and to a
change in segment reporting on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet as of December 31,
2008 is fairly stated, in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ DELOITTE & TOUCHE LLP
November 5, 2009
Houston, Texas 3
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GLOBAL INDUSTRIES, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
See Notes to Condensed Consolidated Financial Statements.
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GLOBAL INDUSTRIES, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
See Notes to Condensed Consolidated Financial Statements.
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GLOBAL INDUSTRIES, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
See Notes to Condensed Consolidated Financial Statements.
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Notes to Condensed Consolidated Financial Statements (Unaudited)
FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not
Orderly” (ASC 820-10-65-4), provides guidance for determining fair values when there is
no active market or where the price inputs being used represent distressed sales.
FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments” (ASC 320-10-65-1), provides additional guidance to provide greater clarity
about the credit and noncredit component of an other than temporary impairment event and
to improve presentation and disclosure of other than temporary impairments in the
financial statements.
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FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” (ASC 825-10-65-1), requires disclosures about the fair value of financial
instruments in interim as well as annual financial statements.
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Fair Value Measurements at September 30, 2009
(In thousands)
Changes in Level 3 Financial Instruments
(In thousands)
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Receivables also include claims and unapproved change orders of $54.0 million at September
30, 2009 and $28.6 million at December 31, 2008. These claims and change orders are amounts
due for extra work or changes in the scope of work on certain projects.
Costs and Estimated Earnings on Uncompleted Contracts
Due to escalating costs for dry-docking services, escalating repair and maintenance costs
for aging vessels, increasing difficulty in obtaining certain replacement parts, and
declining marketability of certain vessels, we decided to forego dry-docking or
refurbishment of certain vessels and to sell or permanently retire them from service.
Consequently, we recognized gains and losses on the disposition of certain vessels, and
non-cash impairment charges on the retirement of other vessels. Each asset was analyzed
using an undiscounted cash flow analysis and valued at the lower of carrying value or net
realizable value.
Net Gains and (Losses) on Asset Disposal consisted of the following:
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Losses on Asset Impairments consisted of the following:
In accordance with accounting guidance, long-lived assets held for sale are carried at the
lower of the asset’s carrying value or net realizable value and depreciation ceases.
Assets Held for Sale consisted of the following:
The components of property and equipment, at cost, and the related accumulated depreciation
are as follows:
Expenditures for property and equipment and items that substantially increase the useful
lives of existing assets are capitalized at cost and depreciated. Routine expenditures for
repairs and maintenance are expensed as incurred. We capitalized $3.9 million and $2.2
million of interest costs for the three months ended September 30, 2009 and 2008,
respectively. We capitalized $10.5 million and $4.9 million of interest costs for the nine
months ended September 30, 2009 and 2008, respectively. Except for major construction
vessels that are depreciated on the units-of-production (“UOP”) method over estimated vessel
operating days, depreciation is provided utilizing the straight-line method over the
estimated useful lives of the assets. The UOP method is based on vessel utilization days
and more closely correlates depreciation expense to vessel revenue. In addition, the UOP
method provides for a minimum depreciation floor in periods with nominal vessel use. In
general, if we applied only a straight-line depreciation method instead of the UOP method,
less depreciation expense would be recorded in periods of high utilization and revenues, and
more depreciation expense would be recorded in periods of low vessel utilization and
revenues.
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We utilize the deferral method to capitalize vessel dry-docking costs and to amortize the
costs to the next dry-docking. Such capitalized costs include regulatory required steel
replacement, direct costs for vessel mobilization and demobilization and rental of
dry-docking facilities and services. Crew costs may also be capitalized when employees
perform all or a part of the required dry-docking. Any repair and maintenance costs
incurred during the dry-docking period are expensed.
The below table presents dry docking costs incurred and amortization for all periods
presented:
The components of long-term debt are as follows:
The fair value of our Senior Convertible Debentures based on quoted market prices was
approximately $211.3 million and $113.6 million at September 30, 2009 and December 31, 2008,
respectively. The fair value of our Title XI bonds based on quoted market prices was $76.5
million and $88.1 million at September 30, 2009 and December 31, 2008, respectively.
Senior Convertible Debentures
On January 1, 2009, we retrospectively implemented new accounting guidance which changed the
accounting treatment of our Senior Convertible Debentures. This guidance requires cash
settled convertible debt to be separated into debt and equity components at issuance and a
value to be assigned to each. The value assigned to the debt component is the estimated
fair value of similar bonds without the conversion feature. The difference between the bond
cash proceeds and this estimated fair value is recorded as a debt discount and amortized to
interest expense over the ten year period ending August 1, 2017. This is the earliest date
that holders of the Debentures may require us to repurchase all or part of their Debentures
for cash. The adoption of this guidance resulted in an increase in net loss of $0.3 million
for the three months ended September 30, 2008 with no impact on earnings per share and an
increase in net loss of $1.7 million, or $0.02 per diluted share for the nine months ended
September 30, 2008. The net income for the three and nine month periods ended September 30,
2009 was not materially impacted by the implementation of this guidance.
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The Debentures are convertible into cash, and if applicable, into shares of our common
stock, or under certain circumstances and at our election, solely into our common stock,
based on a conversion rate of 28.1821 shares per $1,000 principal amount of Debentures,
which represents an initial conversion price of $35.48 per share. As of September 30, 2009,
the Debentures’ if-converted value does not exceed the Debentures’ principal of $325
million.
The adjusted components of our Debentures are as follows:
Although the implementation of the new guidance has no impact on our actual past or future
cash flows, it requires us to record a material increase in non-cash interest expense as the
debt discount is amortized. The table below presents adjusted Debentures interest expense:
Revolving Credit Facility
Our Revolving Credit Facility provides a borrowing capacity of up to $150.0 million. As of
September 30, 2009, we had no borrowings against the facility and $67.8 million of letters
of credit outstanding thereunder. Due to the sale of one of the vessels mortgaged under the
Revolving Credit Facility, the effective borrowing capacity under this facility at September
30, 2009 is $139.9 million. As a result of operating performance, we did not meet the
minimum fixed charge coverage ratio under the facility at September 30, 2008. On November
7, 2008, we amended our Revolving Credit Facility to temporarily require us to
cash-collateralize letters of credit and bank guarantees. During the interim cash
collateralization period, no borrowings, letters of credit, or bank guarantees unsecured by
cash were available to us under the Revolving Credit Facility. As a result of our operating
performance, the interim cash collateralization period ended, effective June 30, 2009, as
requirements to release this restricted cash collateral were satisfied. We also have a
$16.0 million short-term credit facility at one of our foreign locations. At September 30,
2009, we had $4.9 million of letters of credit outstanding, and $11.1 million of credit
availability under this particular credit facility.
Commitments
Construction and Purchases in Progress — The estimated cost to complete capital expenditure
projects in progress at September 30, 2009 was approximately $333.1 million, which primarily
represents expenditures for construction of the Global 1200 and Global 1201, our new
generation derrick/pipelay vessels. This amount includes aggregate commitments of 59.4
million Singapore Dollars (or $41.9 million as of September 30, 2009) and € 11.5 million (or
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$16.8 million as of September 30, 2009). During the second quarter of 2009, we entered into
two forward contracts to purchase 18.9 million Singapore Dollars to hedge certain of these
purchase commitments.
Off Balance Sheet Arrangements — In the normal course of our business activities, and
pursuant to agreements or upon obtaining such agreements to perform construction services,
we provide guarantees, bonds, and letters of credit to customers, vendors, and other
parties. At September 30, 2009, the aggregate amount of these outstanding bonds was $53.3
million, which are scheduled to expire between October 2009 and September 2010, and the
aggregate amount of outstanding letters of credit was $69.3 million, which are due to expire
between October 2009 and July 2011.
Contingencies
During the fourth quarter of 2007, we received a payroll tax assessment for the years 2005
through 2007 from the Nigerian Revenue Department in the amount of $23.2 million. The
assessment alleges that certain expatriate employees, working on projects in Nigeria, were
subject to personal income taxes, which were not paid to the government. We filed a formal
objection to the assessment on November 12, 2007. We do not believe these employees are
subject to the personal income tax assessed; however, based on past practices of the
Nigerian Revenue Department, we believe this matter will ultimately have to be resolved by
litigation. We do not expect the ultimate resolution to have a material adverse effect on
our future operating results.
During 2008, we received an additional assessment from the Nigerian Revenue Department in
the amount of $40.4 million for tax withholding related to third party service providers.
The assessment alleges that taxes were not withheld from third party service providers for
the years 2002 through 2006 and remitted to the Nigerian government. We have filed an
objection to the assessment. We do not expect the ultimate resolution to have a material
adverse effect on our future operating results.
During the third quarter of 2009, we received a tax assessment from the Mexican Revenue
Department in the amount of $5.9 million related to the 2003 tax year. The assessment
alleges that chartered vessels should be treated as equipment leases and subject to tax at a
rate of 10%. We have engaged outside counsel to assist us in appealing the assessment. We
do not expect the ultimate resolution to have a material adverse effect on our future
operating results; however, if the Mexican Revenue Department prevails in its assessment, we
could be exposed to similar liabilities for the tax years beginning in 2004 through the
current year.
We have an unresolved issue related to an Algerian tax assessment that we received on
February 21, 2007. The remaining amount in dispute is approximately $10.4 million of
alleged value added tax for the years 2004 and 2005. We are contractually indemnified by
our client for the full amount of the assessment that remains in dispute. We continue to
engage outside tax counsel to assist us in resolving the tax assessment.
In June 2007, we announced that we were conducting an internal investigation of our West
Africa operations, focusing on the legality, under the U.S. Foreign Corrupt Practices Act
(“FCPA”) and local laws, of one of our subsidiary’s reimbursement of certain expenses
incurred by a customs agent in connection with shipments of materials and the temporary
importation of vessels into West African waters. The Audit Committee of our Board of
Directors has engaged outside legal counsel to lead the investigation.
At this stage of the internal investigation, we are unable to predict what conclusions, if
any, the Securities and Exchange Commission (“SEC”) will reach, whether the U.S. Department
of Justice will open a separate investigation to investigate this matter, or what potential
remedies these agencies may seek. If the SEC or Department of Justice determines that
violations of the FCPA have occurred, they could seek civil and criminal sanctions,
including monetary penalties, against us and certain of our employees, as well as changes to
our business practices and compliance programs, any of which could have a material adverse
effect on our business and financial condition. In addition, such actions, whether actual
or alleged, could damage our reputation and ability to do business. Further detecting,
investigating, and resolving these matters is expensive and consumes significant time and
attention of our senior management.
As of the date of this Quarterly Report on Form 10-Q (“Quarterly Report”) we have no active
projects in West Africa and have curtailed our operations in the region. We will continue
to seek prospects in the area and could return in the future.
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Notwithstanding the internal investigation, we have concluded that certain changes
to our compliance program would provide us with greater assurance that we are in compliance
with the FCPA and its record-keeping requirements. We have a long-time published policy
requiring compliance with the FCPA and broadly prohibiting any improper payments by us to
foreign or domestic officials, as well as training programs for our employees. Since the
commencement of the internal investigation, we have adopted, and may adopt additional,
measures intended to enhance our compliance procedures and ability to audit and confirm our
compliance. Additional measures also may be required once the investigation concludes.
We have concluded that it is premature for us to make any financial reserve for any
potential liabilities that may result from these activities.
In addition to the previously mentioned legal matters, we are a party to legal proceedings
and potential claims arising in the ordinary course of business. We do not believe that
these matters arising in the ordinary course of business will have a material impact on our
financial statements in future periods.
Other Comprehensive Income (Loss) — The differences between net income and comprehensive
income for each of the comparable periods presented are as follows.
Accumulated Other Comprehensive Income (Loss) — A roll-forward of the amounts included in
accumulated other comprehensive income (loss), net of taxes, is shown below.
The amount of accumulated translation adjustment included in accumulated other comprehensive
income (loss) relates to prior translations of subsidiaries whose functional currency was
not the U.S. Dollar. The amount of gain (loss) on forward foreign currency contracts
included in accumulated other comprehensive income (loss) hedges our exposure to changes in
Norwegian Kroners for commitments of long-term vessel charters. The amount of loss on
auction rate securities relates to a temporary decline in the fair value of certain
investments that lack current market liquidity. See also Note 3 for further discussion on
auction rate securities.
In accordance with accounting guidance, companies must recognize the cost of employee
services received in exchange for awards of equity instruments based on the grant-date fair
value of those awards.
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16. Earnings Per Share
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Forward-Looking Statements
We are including the following discussion to inform our existing and potential shareholders
generally of some of the risks and uncertainties that can affect us and to take advantage of the
“safe harbor” protection for forward-looking statements that applicable federal securities law
affords.
From time to time, our management or persons acting on our behalf make forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, to inform existing and potential shareholders about
us. These statements may include projections and estimates concerning the timing and success of
specific projects and our future backlog, revenues, income and capital expenditures.
Forward-looking statements are generally accompanied by words such as “estimate,” “project,”
“predict,” “believe,” “expect,” “anticipate,” “plan,” “goal” or other words that convey the
uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a
statement as being a forward-looking statement and refer to this cautionary statement.
In addition, various statements in this Quarterly Report on Form 10-Q, including those that express
a belief, expectation or intention, as well as those that are not statements of historical fact,
are forward-looking statements. Those forward-looking statements appear in Part I, Item 2 -
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the
notes to our consolidated financial statements in Part I, Item 1 of this report and elsewhere in
this report. These forward-looking statements speak only as of the date of this report; we
disclaim any obligation to update these statements unless required by securities law, and we
caution you not to rely on them unduly. We have based these forward-looking statements on our
current expectations and assumptions about future events. While our management considers these
expectations and assumptions to be reasonable, they are inherently subject to significant business,
economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which
are difficult to predict and many of which are beyond our control. These risks, contingencies and
uncertainties relate to, among other matters, the following:
We believe the items we have outlined above are important factors that could cause estimates in our
financial statements to differ materially from actual results and those expressed in a
forward-looking statement made in this report or elsewhere by us or on our behalf. We have
discussed many of these factors in more detail elsewhere in this report. These factors are not
necessarily all the factors that could affect us. Unpredictable or unanticipated factors we have
not discussed in this report could also have material adverse effects on actual results of matters
that are the subject of our forward-looking statements. We do not intend to update our description
of important factors each time a potential important factor arises, except as required by
applicable securities laws and regulations. We advise our shareholders that they should (1) be
aware that factors not referred to above could affect the accuracy of our forward-looking
statements and (2) use caution and common sense when considering our forward-looking statements.
For more detailed information regarding risks, see the discussion of risk factors in Item 1A of our
Annual Report on Form 10-K for 2008.
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The following discussion presents management’s discussion and analysis of our financial condition
and results of operations and should be read in conjunction with the consolidated financial
statements and related notes for the period ended September 30, 2009.
Results of Operations
General
We are a leading offshore construction company offering a comprehensive and integrated range of
marine construction and support services in North America, Latin America, West Africa, the Middle
East (including the Mediterranean), and Asia Pacific/India regions. As of the date of this
Quarterly Report, we have no active projects in West Africa and have curtailed our operations in
the region. We will continue, however, to evaluate viable and profitable projects in the area.
Our business consists of two principal activities:
Our results of operations, in terms of revenues, gross profit, and gross profit as a percentage of
revenues (“margins”), are principally driven by three factors: (1) our level of offshore
construction activity (“activity”), (2) pricing, which can be affected by contract mix (“pricing”),
and (3) operating efficiency on any particular construction project (“productivity”).
Offshore Construction Services
The level of our offshore construction activity in any given period has a significant impact on our
results of operations. Our results of operations depend heavily upon our ability to obtain, in a
very competitive environment, a sufficient quantity of offshore construction contracts with
sufficient gross profit margins to recover the fixed costs associated with our offshore
construction business. The offshore construction business is capital and personnel intensive, and
as a practical matter, many of our costs, including the wages of skilled workers, are effectively
fixed in the short run regardless of whether or not our vessels are being utilized in productive
service. In general, as activity increases, a greater proportion of these fixed costs are
recovered through operating revenues; consequently, gross profit and margins increase. Conversely,
as activity decreases, our revenues decline, but our costs do not decline proportionally, thereby
constricting our gross profit and margins. Our activity level can be affected by changes in demand
due to economic or other conditions in the oil and gas exploration industry, seasonal conditions in
certain geographical areas, and our ability to win the bidding for available jobs.
Most of our offshore construction revenues are earned through international contracts which are
generally larger, more complex, and of longer duration than our typical domestic contracts. Most
of these international contracts require a significant amount of working capital, are generally bid
on a lump-sum basis, and are secured by a letter of credit or performance bond. Operating cash
flows may be negatively impacted during periods of escalating activity due to the substantial
amounts of cash required to initiate these projects and the normal delays between our cash
expenditures and cash receipts from the customer. Additionally, lump-sum contracts for offshore
construction services are inherently risky and are subject to many unforeseen circumstances and
events that may affect productivity and thus, profitability. When productivity decreases with no
offsetting decrease in costs or increases in revenues, our contract margins erode compared to our
bid margins. In general, we traditionally bear a larger share of project related risks during
periods of weak demand for our services and a smaller share of risks during periods of high demand
for our services. Consequently, our revenues and margins from offshore construction services are
subject to a high degree of variability, even as compared to other businesses in the offshore
energy industry.
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Subsea Services
Most of our subsea revenues are the result of short-term work, involve numerous smaller contracts,
and are usually based on a day-rate charge. Financial risks associated with these types of
contracts are normally limited due to their short-term and non-lump sum nature. However, some
subsea contracts, especially those that utilize dive support vessels (“DSVs”), may involve
longer-term commitments that extend from the exploration, design, and installation phases of a
field throughout its useful life by providing IRM services. The financial risks which are
associated with these commitments remain low in comparison with our offshore construction
activities due to the day-rate structure of the contracts. Revenues and margins from our subsea
activities tend to be more consistent than from our offshore construction activities.
Quarter Ended September 30, 2009 Compared to Quarter Ended September 30, 2008
Revenues — Revenues decreased by 6.8% to $203.7 million for the third quarter of 2009, compared to
the third quarter of 2008. This decrease was primarily due to lower activity in the Middle East,
West Africa, and Latin America partially offset by higher activity in North America OCD, North
America Subsea, and Asia Pacific/India. For a detailed discussion of revenues and income before
taxes for each geographical area, see “Segment Information” below.
Gross Profit — Gross profit increased to $39.9 million in the third quarter of 2009, compared to a
gross loss of $88.9 million in the third quarter of 2008, primarily due to higher project margins.
Gross profits in North America OCD, North America Subsea, Latin America and Middle East were higher
for the third quarter of 2009 in comparison to the third quarter of 2008 primarily due to improved
project productivity. During the 2008 third quarter, two projects in Saudi Arabia and Brazil
experienced significant productivity and logistical issues while projects during the 2009 third
quarter were not comparably impacted by these factors. Asia Pacific/India segment gross profit
reduction was primarily attributable to decreased pricing and increased costs associated with the
DLB264 and the Subtec 1 which were in the Middle East segment in the third quarter of 2008.
(Gain) loss on Asset Disposals and Impairments — (Gain) loss on asset disposals and impairments
decreased to a loss of $0.3 million in the third quarter of 2009, compared to a loss of $1.6
million in the third quarter of 2008, primarily due to the $1.6 million impairment of the Sea Puma
in the third quarter of 2008.
Selling, General and Administrative Expenses — Selling, general and administrative expenses
decreased by $6.3 million, or 25%, to $19.1 million for the third quarter of 2009, compared to the
third quarter of 2008. Decreased labor costs of $1.2 million in all business segments except North
America OCD and Asia Pacific/India as well as decreases in travel costs, amortization of equity
compensation, and professional fees were the primary drivers of the decrease. The decreases are
attributable to our cost reduction efforts.
Interest Income — Interest income decreased by $2.1 million to $0.4 million in the third quarter of
2009, compared to $2.5 million in the third quarter of 2008. Significantly lower interest rates in
2009 contributed to a lower return on cash balances and short-term investments compared to 2008.
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Interest Expense — Interest expense decreased by $1.8 million to $2.8 million in the third quarter
of 2009, compared to $4.6 million in the third quarter of 2008. Higher capitalized interest
primarily driven by expenditures for ongoing construction of the Global 1200 and Global 1201 was
responsible for the majority of the decrease between comparable periods. Capitalized interest
during the third quarter of 2009 was $3.9 million compared to $2.2 million for the third quarter of
2008.
Other Income (Expense), net — Other income (expense), net increased by $0.2 million from a $0.2
million expense in the third quarter of 2008 to $0.01 million of income in the third quarter of
2009. The increase is primarily attributable to receipt of a $1.8 million insurance claim in our
West Africa segment substantially offset by losses on foreign currency exchange transactions during
the 2009 third quarter.
Income Taxes — Our effective tax rate for the third quarter of 2009 was 22.8%, compared to 12.9%
for the third quarter of 2008. The third quarter of 2008 included losses that could not be tax
effected and lower margins in tax jurisdictions with a deemed profit regime where tax is calculated
as a percentage of revenue resulting in a lower tax benefit than if these conditions had not
occurred. Comparatively, the third quarter of 2009 was profitable and benefited from higher
earnings in foreign jurisdictions with deemed profit tax regimes and utilization of losses not
previously tax benefited.
Segment Information — The following sections discuss the results of operations for each of our
reportable segments during the quarters ended September 30, 2009 and 2008.
North America Offshore Construction Division
Revenues were $60.0 million for the third quarter of 2009 compared to $28.9 million for the third
quarter of 2008. This increase in revenues is primarily due to increased utilization of the
Cherokee, Hercules and the Sea Constructor, partially offset by the reduction in utilization of the
Titan II, which was chartered from our Latin America segment in the 2008 third quarter, and the
GP37. The third quarter of 2008 was adversely affected by the extended dry dock of the Cherokee
and non-compensated vessel stand-by costs during Hurricanes Gustav and Ike and decreases in
productivity on certain projects. Income before taxes was $12.9 million during the third quarter
of 2009 compared to a loss of $6.0 million during the third quarter of 2008. This increase in
income was primarily due to increased vessel utilization and higher profit margins on projects.
North America Subsea
Revenues were $46.3 million for the third quarter of 2009 compared to $43.4 million for the third
quarter of 2008. This increase in revenues is primarily due to increased utilization of the Global
Orion and Olympic Challenger, which entered service late in the third quarter of 2008, partially
offset by loss of revenue from the utilization of the Sea Lion and a third party vessel in the
third quarter of 2008. Income before taxes was $10.3 million for the third quarter of 2009 compared
to $0.5 million for the third quarter of 2008. This $9.8 million increase in income was primarily
attributable to higher revenues and project margins due to higher pricing and productivity
primarily related to the mix of vessels used in comparable periods. In the third quarter of 2009,
the Global Orion was available for use for the entire quarter while the third quarter of 2008 was
negatively impacted by approximately $2.8 million of start-up costs associated with the acquisition
of the vessel.
Latin America
Revenues were $35.7 million for the third quarter of 2009 compared to $59.5 million for the third
quarter of 2008. The decrease of $23.8 million was attributable to decreased activity in Brazil
partially offset by increased activity in Mexico. The Camarupim project in Brazil was substantially
completed in the third quarter of 2009 and work progressed on two projects in Mexico. Loss before
taxes was $10.6 million for the third quarter of 2009 compared to a loss before taxes of $19.6
million for the third quarter of 2008. The increase of $9.0 million was attributable to higher
project margins in 2009 compared to the third quarter of 2008 which included an increase in the
loss estimate of approximately $17.5 million for the Camarupim project. The loss estimate was
adjusted primarily due to lower than expected productivity and vessel standby delays from
mechanical and weather downtime.
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West Africa
Revenues were $(0.5) million for the third quarter of 2009 compared to $22.9 million for the third
quarter of 2008. We recorded a $0.5 million reserve on one completed project during the third
quarter of 2009 compared to one significant project completion during the third quarter of 2008.
Loss before taxes was $2.7 million for the third quarter of 2009 compared to a loss before taxes of
$10.1 million for the third quarter of 2008. The increase of $7.4 million was primarily
attributable to reduced vessel costs associated with the relocation of the Hercules and the Sea
Constructor to the U.S. Gulf of Mexico in January 2009, and reductions in labor, travel, and
professional fees attributable to our cost cutting efforts related to our decision to curtail
operations in the region. Also contributing to the increase was the receipt of an insurance claim
in the third quarter of 2009 of $1.8 million reimbursing us for prior year costs incurred on a
project claim. A $1.6 million impairment of the Sea Puma, a DSV, contributed to the loss in the
third quarter of 2008.
Middle East
Revenues were $28.7 million for the third quarter of 2009 compared to $35.6 million for the third
quarter of 2008. The decrease of $6.9 million was the result of lower activity in the region. The
Berri and Qatif project in Saudi Arabia was completed during the third quarter of 2009 compared to
three projects in progress during the third quarter of 2008. Income before taxes was $6.3 million
for the third quarter of 2009 compared to a loss before taxes of $83.3 million for the third
quarter of 2008, an increase of $89.6 million. In the third quarter of 2008, we eliminated the
previously recorded profit estimate and recorded an estimated loss which totaled approximately
$83.3 million on the Berri and Qatif project related to an exceptional loss in productivity and
cost over-runs that resulted in a complete re-evaluation and extension of the schedule and
additional cost to complete the remaining scope of work. Productivity improvements and cost
savings on the Berri and Qatif project reduced our previously recorded loss estimate by $10.2
million positively impacting the third quarter 2009 results. Also contributing to the increase
were reduced vessel costs due to the transfer of the DLB264 and Subtec I to Asia Pacific/India and
reduced selling, general and administrative expenses partially offset by a foreign currency
exchange loss of $0.8 million.
Asia Pacific/India
Revenues were $47.4 million for the third quarter of 2009 compared to $40.4 million for the third
quarter of 2008. The increase of $7.0 million was primarily due to increased project activity in
the region. Activities were ongoing on three projects in Thailand, Indonesia, and India as well as
a third party charter of the DLB264 in Malaysia during the 2009 third quarter compared to one
project in Vietnam and a third party charter of the Seminole in the third quarter of 2008. Income
before taxes was $9.3 million for the third quarter of 2009 compared to $10.8 million for the third
quarter of 2008. This $1.5 million decrease was due to lower project margins and increased costs
associated with the transfer of the Subtec 1 from the Middle East.
Corporate
Loss before taxes, which is comprised of corporate costs, was $7.3 million for the third quarter of
2009 compared to a loss before taxes of $10.7 million for the third quarter of 2008. The $3.4
million decrease in loss is primarily attributable to a $2.2 million reduction in professional fees
and a $1.1 million reduction in amortization of equity compensation for the third quarter 2009 as
compared to the third quarter 2008.
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Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Revenues — Revenues decreased by 6.4% to $768.0 million for the nine months ended September 30,
2009, compared to $820.6 million for the nine months ended September 30, 2008. This decrease was
primarily due to lower activity in the Middle East and West Africa partially offset by higher
activity in North America OCD, North America Subsea, Latin America and Asia Pacific/India. For a
detailed discussion of revenues and income before taxes for each geographical area, see “Segment
Information” below.
Gross Profit — Gross profit increased to $150.4 million for the nine months ended September 30,
2009, compared to a gross loss of $26.7 million for the nine months ended September 30, 2008.
Higher utilization and productivity in the North America OCD and North America Subsea segments
favorably impacted the gross profits for these segments in the first nine months of 2009 compared
to the first nine months of 2008. Productivity delays and performance-related issues which
negatively impacted our Latin America and Middle East segments in the first nine months of 2008
were not experienced in the nine months ended September 30, 2009. In the first nine months of 2009,
our West Africa segment benefited from increased pricing and productivity and the transfer of the
Hercules to the U.S. Gulf of Mexico in January 2009 compared to logistical, weather, and
productivity delays which negatively impacted the first nine months of 2008. Gross profit in our
Asia Pacific/India segment declined primarily due to increased costs on a project in India.
Gain on Asset Disposals and Impairments — Gain on asset disposals and impairments increased by $7.8
million to $8.2 million for the nine months ended September 30, 2009, compared to the nine months
ended September 30, 2008, primarily due to a $3.4 million gain on the sale of the Seminole and a
$4.9 million gain on the sale of a DSV, the Sea Lion. The Sea Lion was grounded in an incident in
November 2008 and was damaged beyond economical repair. We settled the insurance claim in the
first quarter of 2009, in which the insurance company purchased the vessel. During the nine months
ended September 30, 2009, we also realized gains on the sale of the Tonkawa, Sea Puma, CB 3, Power
Barge 1, and GP37 and impairments on two DSVs and three dive systems. In the first nine months of
2008, we recorded a $2.3 million gain from the sale of a DSV in our Middle East segment partially
offset by the $1.6 million impairment of the Sea Puma.
Selling, General and Administrative Expenses — Selling, general and administrative expenses
decreased by $17.8 million, or 24%, to $55.6 million for the nine months ended September 30, 2009,
compared to $73.4 million for the nine months ended September 30, 2008. Decreased labor costs of
$5.0 million in all business segments except North America OCD and Asia Pacific/India were the
primary driver of the decrease, as well as decreases in travel costs, amortization of equity
compensation, and professional fees. These decreases are the result of our ongoing cost reduction
efforts.
Interest Income — Interest income decreased by $11.1 million to $1.6 million for the nine months
ended September 30, 2009, compared to $12.7 million for the nine months ended September 30, 2008.
Significantly lower interest rates in 2009 contributed to lower returns on cash balances and
short-term investments compared to 2008.
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Interest Expense — Interest expense decreased by $2.6 million to $10.0 million for the nine months
ended September 30, 2009, compared to $12.6 million for the nine months ended September 30, 2008.
The decrease in expense was due primarily to higher capitalized interest driven by expenditures for
ongoing construction of the Global 1200 and Global 1201. Capitalized interest for the nine months
ended September 30, 2009 was $10.5 million compared to $4.9 million for the nine months ended
September 30, 2008. Partially offsetting the decrease was a benefit to interest expense in the
first nine months of 2008 due to an adjustment related to the resolution of a previously uncertain
tax position.
Other Income (Expense), net — Other income (expense), net increased by $8.5 million to $6.6 million
for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008
primarily due to gains related to foreign currency exchange rate transactions and proceeds from
insurance claims in both our North America OCD and West Africa segments in the first nine months of
2009. We also reached a $3.3 million settlement with a customer for recovery of exchange losses
related to remitted payments on Naira invoices and an agreement to pay outstanding Naira invoices
in U.S. Dollars.
Income Taxes — Our effective tax rate for the nine months ended September 30, 2009 was 22.0% as
compared to 10.2% for the nine months ended September 30, 2008. The first nine months of 2008
included losses that could not be tax effected and lower margins in tax jurisdictions with a deemed
profit regime where tax is calculated as a percentage of revenue resulting in a lower tax benefit
than if these conditions had not occurred. Comparatively, the first nine months of 2009 was
profitable and benefited from higher earnings in foreign jurisdictions with deemed profit tax
regimes and utilization of losses not previously tax benefited.
Segment Information — The following sections discuss the results of operations for each of our
reportable segments during the nine months ended September 30, 2009 and 2008.
North America Offshore Construction Division
Revenues were $109.0 million for the nine months ended September 30, 2009 compared to $58.4 million
for the nine months ended September 30, 2008. This increase in revenues is primarily due to the
relocation of the Hercules and Sea Constructor in January 2009 to the U.S Gulf of Mexico and an
increase in the utilization of the Cherokee, partially offset by the reduction in utilization of
the Chickasaw, GP37, and Titan II, which was on charter from our Latin America segment during the
first nine months of 2008. Revenues for the nine months ended September 30, 2008 were negatively
affected by seasonally adverse weather conditions and extended dry docking of the Cherokee. Income
before taxes was $4.9 million for the nine months ended September 30, 2009 compared to a loss
before taxes of $11.9 million for the nine months ended September 30, 2008. This $16.8 million
increase in income was primarily due to higher vessel utilization and higher margins from increased
productivity on recent projects.
North America Subsea
Revenues were $112.1 million for the nine months ended September 30, 2009 compared to $103.1
million for the nine months ended September 30, 2008. The increase of $9.0 million was primarily
attributable to increased activity for the Olympic Challenger, the Pioneer, and the Global Orion,
which entered service late in the third quarter of 2008, partially offset by loss of revenue from
the REM Commander and a third party vessel which were utilized in the first nine months of 2008.
Also offsetting the increase was the loss of revenues from the Sea Lion which was grounded in an
incident in November 2008, damaged beyond economical repair and sold in the first quarter of 2009.
Income before taxes was $26.0 million for the nine months ended September 30, 2009 compared to $6.9
million for the nine months ended September 30, 2008. The increase of $19.1 million was primarily
attributable to higher revenues and project margins due to improved pricing plus a $4.9 million
gain on the sale of the DSV, the Sea Lion. The increase was partially offset by unrecovered vessel
costs attributable to the Olympic Challenger and the REM Commander, which was relocated to the U.S.
Gulf of Mexico in May 2009.
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Latin America
Revenues were flat at $185.5 million for the nine months ended September 30, 2009 compared to
$185.3 million for the nine months ended September 30, 2008. Income before taxes was $11.8 million
for the nine months ended September 30, 2009 compared to a loss of $12.1 million for the nine
months ended September 30, 2008. The increase of $23.9 million was primarily attributable to
higher project margins due to increased productivity and increased vessel utilization. During the
nine months ended September 30, 2009, the Camarupim project in Brazil experienced additional
project deterioration of $12.9 million attributable to increased costs associated with rescheduling
diving work from the REM Commander to a third party diving vessel and increased project duration
caused by third party equipment failure, compared to a loss of $21.6 million recorded on this same
project during the nine months ended September 30, 2008. The decrease in the Camarupim loss was
supplemented by profits on one additional project in Brazil and two projects in Mexico.
West Africa
Revenues were $101.0 million for the nine months ended September 30, 2009 compared to $140.7
million for the nine months ended September 30, 2008. The decrease of $39.7 million was due to
decreased activity attributable to low demand for services in the region. Three projects were
completed during the first nine months of 2008 compared to one project during the same period in
2009. Income before taxes was $30.2 million for the nine months ended September 30, 2009 compared
to a loss before taxes of $19.4 million for the nine months ended September 30, 2008. The increase
of $49.6 million was attributable to increased project profitability due to increased pricing and
productivity, reduced vessel costs with the transfer of the Hercules and Sea Constructor to North
America in January 2009, gains on the sale of the Sea Puma, CB3, and the Power Barge 1, the receipt
of a $1.8 million insurance reimbursement related to prior year costs incurred on a project claim,
and the reduction in labor, travel, and professional fees attributable to the decision to curtail
operations in the region. During the nine months ended September 30, 2009, we also reached a $3.3
million settlement with a customer for recovery of the deterioration of the Naira on remitted
invoice payments and final payment of outstanding Naira invoices in U.S. Dollars. As of the date
of this Quarterly Report, we have no active projects in West Africa and have curtailed our
operations in the region.
Middle East
Revenues were $82.2 million for the nine months ended September 30, 2009 compared to $188.1 million
for the nine months ended September 30, 2008. The decrease of $105.9 million was the result of
lower activity in the region. Work on our Berri and Qatif project in Saudi Arabia was completed
during the nine months ended September 30, 2009 compared to two major projects in progress for the
nine months ended September 30, 2008. Income before taxes was $15.9 million for the nine months
ended September 30, 2009 compared to a loss before taxes of $73.8 million for the nine months ended
September 30, 2008. This $89.7 million increase in income before taxes was primarily attributable
to $18.5 million of productivity improvements and cost savings on the Berri and Qatif project in
Saudi Arabia during the nine months ended September 30, 2009 compared to $82.4 million of
deterioration on this project in the first nine months of 2008. A $0.4 million gain on the sale of
the Tonkawa, reduced vessel costs due to the transfer of the Subtec 1 to Asia Pacific/India, and
reduced labor, travel and office support costs also positively impacted the nine months ended
September 30, 2009. Partially offsetting these increases were the gain on the sale of a DSV and
foreign currency exchange gains realized in the first nine months of 2008.
Asia Pacific/India
Revenues were $206.9 million for the nine months ended September 30, 2009 compared to $172.3
million for the nine months ended September 30, 2008. The increase of $34.6 million was primarily
attributable to higher activity in the region. Income before taxes was $34.4 million for the nine
months ended September 30, 2009 compared to $35.3 million for the nine months ended September 30,
2008. Overall profit margins decreased for the nine months ended September 30, 2009 compared to
the nine months ended September 30, 2008. Cost savings on a major construction project and cost
recoveries attributable to higher vessel utilization contributed to the higher margins for the nine
months ended September 30, 2008. The decline in project margins was partially offset by a $3.4
million gain on the sale of the Seminole and foreign currency exchange gains.
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Corporate
Loss before taxes, which is comprised of corporate costs, was $21.9 million for the nine months
ended September 30, 2009 compared to a loss before taxes of $26.6 million for the nine months ended
September 30, 2008. The $4.7 million decrease in loss is primarily attributable to a $5.0 million
reduction in interest expense due to higher capitalized interest related to expenditures for
ongoing construction of the Global 1200 and Global 1201, a $2.1 million reduction in labor costs, a
$4.3 million reduction in professional fees, a $0.9 million reduction in travel costs, and a $3.3
million reduction in amortization of equity compensation for the nine months ended September 30,
2009 compared to the nine months ended September 30, 2008. Offsetting these interest and cost
reductions was a decrease in interest income of $11.2 million due to significantly lower interest
rates for the nine months ended September 30, 2009 compared to the nine months ended September 30,
2008.
Utilization of Major Construction Vessels - Worldwide utilization for our major construction
vessels was 44% and 50% for the three and nine month periods ended September 30, 2009,
respectively, and 53% and 50% for the three and nine month periods ended September 30, 2008,
respectively. Utilization of our major construction vessels is calculated by dividing the total
number of days major construction vessels are assigned to project-related work by the total number
of calendar days for the period. Dive support vessels, cargo/launch barges, ancillary supply
vessels and short-term chartered project-specific construction vessels are excluded from the
utilization calculation. We frequently use chartered anchor handling tugs, dive support vessels
and, from time to time, construction vessels in our operations. Also, most of our international
contracts (which are generally larger, more complex and of longer duration) are generally bid on a
lump-sum or unit-rate (vs. day-rate) basis wherein we assume the risk of performance and changes in
utilization rarely impact revenues but can have an inverse relationship to changes in
profitability. For these reasons, we consider utilization rates to have a relatively low direct
correlation to changes in revenue and gross profit.
Industry and Business Outlook
The continued downturn in the worldwide economy is significantly impacting the offshore
construction industry. Pricing pressures from potential customers and increased competition
attributable to a decrease in bid activity is impacting our ability to win new project awards.
Opportunities do remain and we continue to bid new projects. However, neither the duration or
severity of the worldwide recession nor the impact that it will have on our operations can be
predicted with certainty. We continue to expect weak demand for our services throughout 2009
and into 2010.
Our focus will remain on successful execution of our projects, building additional backlog, cost
cutting initiatives, and cash conservation. We continue to pursue new work; however, we have not
yet been successful in obtaining new project awards sufficient for the size of our existing
operations. To the extent that we are not successful in building sufficient additional backlog,
further cost cutting and cash conservation measures will be required, including closing offices,
stacking idle vessels, asset sales and reducing our work force further.
As of September 30, 2009, our backlog totaled approximately $147.6 million ($134.4 million for
international regions and $13.2 million for the U.S. Gulf of
Mexico) compared to backlog of $397.2 million at September 30, 2008.
Due to continued delays and postponements of new offshore oil and gas
development projects, especially in Latin America, our backlog is at
its lowest level for some time. The amount of our backlog in
North America is not a reliable indicator of the level of demand for our services due to the
prevalence of short-term contractual arrangements in this region.
Liquidity and Capital Resources
Cash Flow
Cash and cash equivalents as of September 30, 2009, were $380.6 million compared to $287.7 million
as of December 31, 2008, an increase of $92.9 million. The primary sources of cash and cash
equivalents for the nine months ended September 30, 2009 have been cash provided from net income, a
decrease in our restricted cash requirements and proceeds from the sale of certain assets. The
primary uses of cash have been for working capital needs and capital projects.
Operating activities provided $56.3 million of net cash during the nine months ended September 30,
2009, compared to a use of $121.9 million of net cash during the nine months ended September 30,
2008. This increase in net cash provided from operating activities reflects higher net income and
reduced dry-docking costs, partially offset by higher working capital needs. Changes in operating
assets and liabilities were $(76.3) million during the nine months ended September 30, 2009,
compared to $(48.3) million during the nine months ended September 30, 2008. Contributing to the
decrease in cash due to changes in operating assets and liabilities were decreases in accounts
payable and other accrued liabilities and income taxes paid, partially offset by decreases in
billed and unbilled accounts receivable and dry-docking costs incurred.
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Investing activities provided $41.3 million of net cash during the nine months ended September 30,
2009, compared to a use of $176.1 million of net cash during the nine months ended September 30,
2008. During the nine months ended September 30, 2009, cash was provided by asset sales of $26.9
million and a $93.4 million decrease in our restricted cash requirements due to the ending of our
interim cash collateralization period under our Revolving Credit Agreement, partially offset by $79
million used to purchase property and equipment. Contributing to the net cash used during the nine
months ended September 30, 2008 was the purchase of property and equipment of approximately $240.1
million, partially offset by the net sale of $57.5 million of auction rate securities, and $6.5
million received from the sale of assets.
Financing activities used $4.7 million of net cash during the nine months ended September 30, 2009,
compared to a use of $19.2 million of net cash during the nine months ended September 30, 2008.
The increased net cash used during the nine months ended September 30, 2008 is primarily due to the
repurchase of the Company’s common stock under a repurchase program announced in August 2008.
Contractual Obligations
The information below summarizes the contractual obligations (in thousands) as of September 30,
2009 for the Global 1200 and the Global 1201, which represents contractual agreements with third
party service providers to procure material, equipment and services for the construction of these
vessels. The actual timing of these expenditures will vary based on the completion of various
construction milestones, which are generally beyond our control.
Liquidity Risk
As a result of operating performance, we did not meet the existing minimum fixed charge coverage
ratio covenant in our Third Amended and Restated Credit Agreement (the “Revolving Credit Facility”)
as of September 30, 2008. On November 7, 2008, the financial institutions participating in the
Revolving Credit Facility waived compliance with the covenant condition. In consideration of this
waiver, we and the participating financial institutions amended the Revolving Credit Facility to:
On February 25, 2009, the Revolving Credit Facility was further amended to remove the requirement
to maintain unencumbered liquidity of $100 million, effective December 31, 2008.
The length of the interim cash-collateralization period depended on our future financial
performance. For the remaining duration of the Revolving Credit Facility after the
cash-collateralization period, this facility has been further amended to:
During the interim cash-collateralization period, no borrowings, letters of credit or bank
guarantees unsecured by cash were available to us under the Revolving Credit Facility. All cash
collateral was classified in our Condensed Consolidated Balance Sheet as Restricted Cash. As of
September 30, 2009, we had no borrowing against the Revolving Credit Facility and $67.8 million in
letters of credit outstanding thereunder. As a result of our operating performance, the interim
cash collateralization period ended effective June 30, 2009, as requirements to release the
restricted cash collateral have been satisfied. We also have a $16.0 million short-term credit
facility at one of our foreign locations. At September 30, 2009, the available borrowing under
this facility was $11.1 million.
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As of September 30, 2009, approximately $42.4 million in par value of our marketable securities
were held in auction rate securities. These securities are intended to provide liquidity through an
auction process that resets the applicable interest rate at predetermined intervals, allowing
investors to either roll over their holdings or sell them at par value. As a result of liquidity
issues in the global credit markets, our outstanding auction rate securities, as of September 30,
2009, have failed to settle at auction. Consequently, these investments are not currently liquid
and we will not be able to access these funds until a future auction of these investments is
successful or a buyer is found outside the auction process. On November 13, 2008, we agreed to
accept auction rate security rights (the “Settlement”) from UBS related to $30.8 million in par
value of auction rate securities. The Settlement permits us to sell or put our auction rate
securities back to UBS at par value at any time during the period from June 30, 2010 through
July 2, 2012. We expect to put these auction rate securities back to UBS on June 30, 2010, the
earliest date allowable under the Settlement, if not sold prior to that date.
Liquidity Outlook
During the next twelve months, we expect that balances of cash, cash equivalents, and marketable
securities, supplemented by cash generated from operations will be sufficient to fund operations
(including increases in working capital required to fund any increases in activity levels),
scheduled debt retirement, and currently planned capital expenditures. Based on expected operating
cash flows and other sources of cash, we do not believe the illiquidity of our investments in
auction rate securities will have a material impact on our overall ability to meet liquidity needs
during the next twelve months. However, a significant amount of our expected operating cash flows
are based upon projects which have been identified, but not yet awarded. If we are not successful
in converting a sufficient number of our bids into project awards, we may not have sufficient
liquidity to meet all of our needs and may be forced to postpone or cancel capital expenditures and
take other actions. Our liquidity position could affect our ability to bid on and accept projects,
particularly where the project requires a letter of credit. This could have a material adverse
effect on our future results.
Capital expenditures for the remainder of 2009 are expected to be between $75 million and $85
million. This range includes expenditures for the Global 1200, Global 1201, and various vessel
upgrades. In addition, we will continue to evaluate the divesture of assets that are no longer
critical to operations to reduce operating costs and help preserve a solid financial position.
Our long-term liquidity will ultimately be determined by our ability to earn operating profits
which are sufficient to cover our fixed costs, including scheduled principal and interest payments
on debt, and to provide a reasonable return on shareholders’ investment. Our ability to earn
operating profits in the long run will be determined by, among other things, the sustained
viability of the oil and gas energy industry, commodity price expectations for crude oil and
natural gas, the competitive environment of the markets in which we operate, and ability to win
bids and manage awarded projects to successful completion.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Due to the international nature of our business operations and the interest rate fluctuation, we
are exposed to certain risks associated with changes in foreign currency exchange rates and
interest rates.
Interest Rate Risk
We are exposed to changes in interest rates with respect to investments in cash equivalents and
marketable securities. Our investments consist primarily of commercial paper, bank certificates of
deposit, money market funds, and tax-exempt auction rate securities. These investments are subject
to changes in short-term interest rates. We invest in high grade investments with a credit rating
of AA-/Aa3 or better, with a main objective of preserving capital. A 1% increase or decrease in
the average interest rate of cash equivalents and marketable securities at September 30, 2009 would
have an approximate $4.2 million impact on pre-tax annualized interest income.
Foreign Currency Risk
As of September 30, 2009, our contractual obligations under two long-term vessel charters will
require the use of approximately 130.9 million Norwegian Kroners (or $22.4 million as of September
30, 2009) over the next two years. We have hedged most of our non-cancelable Norwegian Kroner
commitments related to this charter, and consequently, gains and losses from forward foreign
currency contracts will be substantially offset by gains and losses from the underlying commitment.
As of September 30, 2009, we were committed to purchase certain equipment which will require the
use of € 11.5 million (or $16.8 million as of September 30, 2009) over the next two years. A 1%
increase in the value of the Euro will increase the dollar value of these commitments by
approximately $0.2 million.
The estimated cost to complete capital expenditure projects in progress at September 30, 2009 will
require an aggregate commitment of 59.4 million Singapore Dollars (or $41.9 million as of September
30, 2009). A 1% increase in the value of the Singapore Dollar at September 30, 2009 will increase
the dollar value of these commitments by approximately $0.4 million. During the second quarter of
2009, we entered into two forward contracts to purchase 18.9 million Singapore Dollars to hedge
certain purchase commitments in the second quarter of 2010 related to the construction of the
Global 1200 in Singapore.
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Item 4. Controls and Procedures.
As of the end of the period covered by this report, our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures. These disclosure controls and procedures are designed to
provide us with a reasonable assurance that all of the information required to be disclosed in our
periodic reports filed under the Securities Exchange Act of 1934 as amended (“Exchange Act”) is
recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed and maintained to ensure that all of the information we are required to disclose in
reports is accumulated and communicated to management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow those persons to make timely decisions regarding
required disclosure.
Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are effective to ensure that material information
relating to us is made known to management on a timely basis. The Chief Executive Officer and
Chief Financial Officer noted no material weaknesses in the design or operation of the internal
controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that are
likely to adversely affect the ability to record, process, summarize, and report financial
information. There have been no changes in internal control over financial reporting that occurred
during the last fiscal quarter that have materially affected or are reasonably likely to materially
affect internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Our operations are subject to the inherent risks of offshore marine activity including accidents
resulting in the loss of life or property, environmental mishaps, mechanical failures, and
collisions. We insure against certain of these risks. We believe insurance should protect us
against, among other things, the accidental total or constructive total loss of our vessels. We
also carry workers’ compensation, maritime employer’s liability, general liability, and other
insurance customary in the business. All insurance is carried at levels of coverage and
deductibles that we consider financially prudent. Recently, the industry has experienced a
tightening in the builders’ risk market and the property market subject to named windstorms, which
has increased deductibles and reduced coverage.
Our services are provided in hazardous environments where accidents involving catastrophic damage
or loss of life could result, and litigation arising from such an event may result in our being
named a defendant in lawsuits asserting large claims. Although there can be no assurance that the
amount of insurance we carry is sufficient to protect us fully in all events, we believe that this
insurance protection is adequate for our business operations. A successful liability claim for
which we are underinsured or uninsured could have a material adverse effect on our operational
results.
For information about our internal FCPA investigation of our West Africa operations, refer to Note
11 included in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this
Quarterly Report.
We are involved in various routine legal proceedings primarily involving claims for personal injury
under the General Maritime Laws of the United States and Jones Act as a result of alleged
negligence. We believe that the outcome of all such proceedings, even if determined adversely,
would not have a material adverse effect on our business or financial statements.
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report, you should carefully
consider the factors discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2008, which could materially affect our business, financial condition, or
future results of operations. The risks described in our Annual Report on Form 10-K for the year
ended December 31, 2008 are not the only risks we face. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may materially adversely
affect business, financial condition, or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Purchases of Equity Securities.
The following table contains our purchases of equity securities during the third quarter of 2009.
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Item 6. Exhibits.
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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, thereto duly authorized.
November 5, 2009
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