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Global Industries 10-Q 2010 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2010
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 definition of “accelerated filer,”
“large accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o NO þ
The number of shares of the registrant’s common stock outstanding as of May 4, 2010, was
114,901,953.
Global Industries, Ltd.
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PART I — FINANCIAL INFORMATION
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 March 31, 2010, and the related condensed consolidated
statements of operations and cash flows for the three-month periods ended March 31, 2010 and 2009.
These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with standards of
the Public Company Accounting Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet of the Company as of December 31, 2009, 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 26, 2010, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009 is
fairly stated, in all material respects, in relation to the consolidated balance sheet from which
it has been derived.
/s/ DELOITTE & TOUCHE LLP
May 6, 2010
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)
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Fair Value Measurements at March 31, 2010
(In thousands)
Fair Value Measurements at December 31, 2009
(In thousands)
Changes in Level 3 Financial Instruments
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Costs and Estimated Earnings on Uncompleted Contracts
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the Global 1200 and Global 1201, our new generation derrick/pipelay vessels. This
amount includes aggregate commitments of 100.4 million Singapore dollars (or $71.8 million
as of March 31, 2010) and 9.5 million Euros or $12.7 million as of March 31, 2010). We have
entered into forward contracts to purchase 28.8 million Singapore dollars to hedge certain
purchase commitments related to the construction of the Global 1200 and Global 1201 and 8.3
million Singapore dollars to hedge operating expenses related to our Asia Pacific/Middle
East segment.
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 March 31, 2010, the aggregate amount of these outstanding bonds was $57.6
million, which are scheduled to expire between April 2010 and January 2011, and the
aggregate amount of outstanding letters of credit was $59.7 million, which are due to expire
between April 2010 and March 2014.
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 this matter and have filed an
appeal in the Mexican court system. We await disposition of that appeal. 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 each of the tax years beginning with 2004 through the current
year.
We have one unresolved issue related to an Algerian tax assessment received by us 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.
Investigations and Litigation
We are involved in various legal proceedings and potential claims that arise in the ordinary
course of business, 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 condition.
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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 cumulative foreign currency 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 a long-term vessel charter. 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.
13. Stock-Based Compensation
We recognize the cost of employee services received in exchange for awards of equity
instruments based on the grant date fair value of those awards.
The table below sets forth the total amount of stock-based compensation expense for the
three months ended March 31, 2010 and 2009.
During the quarter ended March 31, 2010 and 2009, 193,992 and 146,537 shares of restricted
stock vested, respectively. In addition, during the quarter ended March 31, 2010, 360,000
shares of stock with immediate vesting were awarded to managerial employees. Pursuant to
the terms of the Non-Employee Director Compensation Policy,
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28,856 shares of stock with immediate vesting were awarded to our directors during the
quarter ended March 31, 2010.
14. Other Income (Expense), net
Components of other income (expense), net are as follows:
15. Income Taxes
Our effective tax rate for the first quarter of 2010 was 16.1% compared to 35.4% for the
first quarter of 2009. 2010 losses in foreign jurisdictions that could not be fully tax
benefited resulted in a lower effective tax rate when compared to the corporate tax rate in
the United States of 35%.
16. Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing earnings (loss) attributed to
common shareholders during the period by the weighted average number of shares of common
stock outstanding during each period. Diluted EPS is computed by dividing net income (loss)
attributed to common shareholders during the period by the weighted average number of shares
of common stock that would have been outstanding assuming the issuance of dilutive potential
common stock as if outstanding during the reporting period, net of shares assumed to be
repurchased using the treasury stock method. The dilutive effect of stock options and
performance units is based on the treasury stock method. The dilutive effect of non-vested
restricted stock awards is based on the more dilutive of the treasury stock method or the
two-class method assuming a reallocation of undistributed earnings to common shareholders
after considering the dilutive effect of potential shares of common stock other than the
non-vested shares of restricted stock.
In accordance with current accounting guidance, certain instruments granted in share-based
payment transactions are participating securities prior to vesting and, therefore, need to
participate in computing earnings per share under the two-class method. Our non-vested
restricted stock awards contain nonforfeitable rights to dividends and consequently are
included in the computation of basic earnings per share under the two-class method.
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The following table presents information necessary to calculate earnings (loss) per share of
common stock for the three months ended March 31, 2010 and 2009:
Anti-dilutive shares primarily represent options where the strike price was in excess
of the average market price of our common stock for the period reported and are excluded
from the computation of diluted earnings per share. Excluded anti-dilutive shares totaled
2.2 million and 1.9 million for the quarters ended March 31, 2010 and 2009, respectively.
The net settlement premium obligation on the Senior Convertible Debentures was not included
in the dilutive earnings per share calculation for the three months ended March 31, 2010 and
2009 because the conversion price of the debentures was in excess of our common stock price.
17. Segment Information
The following table presents information about the profit (or loss) for the three months
ended March 31, 2010 and 2009 of each of our five reportable segments: North America
Offshore Construction Division (“OCD”), North America Subsea, Latin America, West Africa,
and Asia Pacific/Middle East.
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Effective January 1, 2010, we combined our Middle East and Asia Pacific/India segments into
the Asia Pacific/Middle East segment. The equipment and personnel assigned to each of these
segments as well as the executive management thereof were consolidated during 2009;
therefore, we made the decision to combine the segments. The combined reporting segment
will continue to pursue projects in both regions. This change has been reflected as a
retrospective change to the financial information for the three months ended March 31, 2009,
presented below. This change did not affect our condensed consolidated balance sheets,
condensed consolidated statements of operations, or condensed consolidated statements of
cash flows.
The following table presents information about the assets of each of our reportable segments
as of March 31, 2010 and December 31, 2009.
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18. Related Party Transactions
Mr. William J. Doré, our founder and a member of our Board of Directors, is also a
beneficial owner of more than 5% of our outstanding common stock. We are parties to a
retirement and consulting agreement, as amended, with him. Pursuant to the terms of the
agreement, we recorded expense of $100,000 for services provided for the three months ended
March 31, 2010. We also recorded expenses of $16,800 for the three months ended March 31,
2010, for use of Mr. Doré’s hunting lodge related to two business development trips.
19. Subsequent Events
On April 22, 2010, we hired C. Andrew Smith as Senior Vice President and Chief Financial
Officer of the Company, effective April 26, 2010.
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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 condensed 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 actual results
to differ materially from 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 security holders 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 the year ended December
31, 2009.
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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 condensed consolidated
financial statements and related notes for the period ended March 31, 2010.
Results of Operations
General
We are a leading offshore construction company offering a comprehensive and integrated range of
marine construction and support services in the North America, Latin America, West Africa, and Asia
Pacific/Middle East regions. These services include pipeline construction, platform installation
and removal, project management, construction support, diving services, diverless intervention,
SURF (subsea equipment, umbilical, riser, and flow line), IRM (inspection, repairs, and
maintenance), and decommissioning/plug and abandonment services.
Our results of operations, in terms of revenues, gross profit, and gross profit as a percentage of
revenues (“margins”), are principally driven by three factors: (1) our level of offshore
construction activity and subsea activity (“activity”), (2) pricing, which can be affected by
contract mix (“pricing”), and (3) operating efficiency on any particular construction project
(“productivity”).
Our business consists of two principal activities:
Offshore Construction Services
The level of our offshore construction activity in any given period has a significant impact on our
results of operations. Our results of operations depend heavily upon our ability to obtain, in a
very competitive environment, a sufficient quantity of offshore construction contracts with
sufficient gross profit margins to recover the fixed costs associated with our offshore
construction business. The offshore construction business is capital and personnel intensive, and
as a practical matter, many of our costs, including the wages of skilled workers, are effectively
fixed in the short run regardless of whether or not our vessels are being utilized in productive
service. In general, as activity increases, a greater proportion of these fixed costs are
recovered through operating revenues; consequently, gross profit and margins increase. Conversely,
as activity decreases, our revenues decline, but our costs do not decline proportionally, thereby
constricting our gross profit and margins. Our activity level can be affected by changes in demand
due to economic or other conditions in the oil and gas exploration industry, seasonal conditions in
certain geographical areas, and our ability to win the bidding for available jobs.
Most of our offshore construction revenues are earned through international contracts which are
generally larger, more complex, and of longer duration than our typical domestic contracts. Most
of these international contracts require a significant amount of working capital, are generally bid
on a lump-sum basis, and are secured by a letter of credit or performance bond. Operating cash
flows may be negatively impacted during periods of escalating activity due to the substantial
amounts of cash required to initiate these projects and the normal delays between our cash
expenditures and cash receipts from the customer. Additionally, lump-sum contracts for offshore
construction services are inherently risky and are subject to many unforeseen circumstances and
events that may affect productivity and thus, profitability. When productivity decreases with no
offsetting decrease in costs or increases in revenues, our contract margins erode compared to our
bid margins. In general, we traditionally bear a larger share of project related risks during
periods of weak demand for our services and a smaller share of risks during periods of high demand
for our services. Consequently, our revenues and margins from offshore construction services are
subject to a high degree of variability, even as compared to other businesses in the offshore
energy industry.
Subsea Services
Most of our subsea revenues are the result of short-term work, involve numerous smaller contracts,
and are usually based on a day-rate charge. Financial risks associated with these types of
contracts are normally limited due to their short-term and non-lump sum nature. However, some
subsea contracts, especially those that utilize dive support vessels (“DSVs”), may involve
longer-term commitments that extend from the exploration, design, and installation phases of a
field throughout its
useful life by providing IRM services. The financial risks which are associated with these
commitments remain low in
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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 March 31, 2010 Compared to Quarter Ended March 31, 2009
Revenues — Revenues decreased by 60% to $106.8 million for the first quarter of 2010, compared to
$269.5 for the first quarter of 2009. This decrease was primarily due to lower activity in all
reporting segments. For a detailed discussion of revenues and income before taxes for each
reporting segment, see “Segment Information” below.
Gross Profit (loss) — Gross loss for the first quarter of 2010 was $4.2 million, compared to gross
profit for the first quarter of 2009 of $45.4 million. This change was primarily due to lower
revenues attributable to decreased project activity and higher non-recovered vessel costs due to
decreased vessel utilization. Profits from our Latin America segment were lower in the first
quarter of 2010 due to decreased activity and decreased vessel utilization. Lower profits in our
West Africa segment were primarily attributable to idle vessel costs coupled with no project
activity since our curtailment of operations in the region in mid-2009. Although our Asia
Pacific/Middle East segment experienced higher project margins in the first quarter of 2010
primarily due to an improvement on the completion of change orders on the project in Saudi Arabia,
we experienced lower profits due to decreased project activity and decreased vessel utilization in
the region. Our North America Subsea segment was negatively affected by the dry-docking of the
Pioneer and the decreased utilization of the Global Orion. The Global Orion was undergoing major
repairs to its crane for a significant portion of the first quarter of 2010 and was unavailable for
work. Higher profits in our North America OCD segment were attributable to lower vessel costs
primarily associated with the Hercules and Sea Constructor.
Loss (gain) on Asset Disposals and Impairments — Loss on asset disposals and impairments was $0.6
million for the first quarter of 2010, compared to gain on asset disposals and impairments for the
first quarter of 2009 of $4.8 million. In the first quarter of 2010, we recorded impairments of
$0.7 million on two North America Subsea DSVs, the Sea Cat and Sea Fox, upon classification of
these vessels to Assets held for sale. In comparison, we recorded a $4.9 million gain on the sale
of a DSV, the Sea Lion, in the first quarter of 2009. The vessel 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.
Selling, General and Administrative Expenses — Selling, general and administrative expenses
decreased by $2.4 million, or 11.7%, to $17.5 million for the first quarter of 2010, compared to
the first quarter of 2009. Decreased labor costs of $1.6 million in the North America Subsea, West
Africa, and Corporate segments attributable to reductions in work force commensurate with our
decline in revenues, as well as decreased expenses of $3.7 million for bad debt, legal, accounting,
and other professional fees were the primary drivers of the decrease. Partially offsetting these
decreases was an increase in equity compensation of $1.8 million for the first quarter of 2010.
Interest Income — Interest income decreased by $0.4 million to $0.2 million in the first quarter
of 2010, compared to the first quarter of 2009. Lower interest rates in 2010 contributed to lower
return on cash balances and short-term investments compared to 2009.
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Interest Expense — Interest expense decreased by $0.6 million to $2.9 million in the first quarter
of 2010, compared to the first quarter of 2009. Higher capitalized interest primarily driven by
expenditures for ongoing construction of the Global 1200 and Global 1201, partially offset by
increased interest on uncertain tax positions, was responsible for the majority of the decrease
between the periods. Capitalized interest for the first quarter of 2010
was $4.4 million compared
to $2.9 million for the first quarter of 2009.
Other Income (Expense), net — Other expense, net was $0.4 million for the first quarter of 2010
compared to other income, net of $2.1 million for the first quarter of 2009. In the first quarter
of 2010, we recognized a $0.5 million loss on the sale of auction rate securities. In comparison,
we recorded proceeds from an insurance claim in our North America OCD segment in the first quarter
of 2009 in connection with the insurance company’s purchase of the Sea Lion.
Income Taxes — Our effective tax rate for the first quarter of 2010 was 16.1% as compared to 35.4%
for the first quarter of 2009. The decrease in our effective tax rate was due to losses in foreign
jurisdictions that could not be fully tax benefited.
Segment Information - The following sections discuss the results of operations for each of our
reportable segments for the quarters ended March 31, 2010 and 2009.
North America Offshore Construction Division
Revenues were $3.9 million for the first quarter of 2010 compared to $5.3 million for the first
quarter of 2009. The decrease of $1.4 million was primarily due to a decrease in the utilization
of the Cherokee which was partially offset by an increase in the utilization of the Hercules and
Sea Constructor. Loss before taxes was $7.2 million for the first quarter of 2010 compared to
$12.2 million for the first quarter of 2009. This improvement of $5.0 million was primarily due to
the reduction in vessel costs for the first quarter of 2010 primarily due to the Hercules and Sea
Constructor. The Hercules and Sea Constructor were transferred to the U.S. Gulf of Mexico in
January 2009 and incurred repair and maintenance costs in the first quarter of 2009 associated with
preparing the vessels to return to work in the U.S. Gulf of Mexico.
North America Subsea
Revenues were $27.8 million for the first quarter of 2010 compared to $31.6 million for the first
quarter of 2009. The decrease of $3.8 million was primarily attributable to decreased utilization
of the Global Orion, Pioneer, Sea Cat, and Sea Fox partially offset by increased utilization of the
Olympic Challenger and the Normand (formerly REM) Commander. The Normand (formerly REM) Commander
was assigned to our Latin America segment in the first quarter of 2009 and returned to the U.S.
Gulf of Mexico in May 2009. The Pioneer was in dry-dock for most of the first quarter of 2010 and
both the Sea Cat and Sea Fox were removed from the operating fleet and are held for sale. The
Global Orion was undergoing major repairs to its crane for a significant portion of the first
quarter of 2010 and was unavailable for work. Loss before taxes was $3.1 million for the first
quarter of 2010 compared to income before taxes of $12.0 million for the first quarter of 2009.
This negative impact of $15.1 million was primarily attributable to lower project margins. In
addition, the results for the first quarter of 2009 included a $4.9 million gain on proceeds from
sale of the Sea Lion.
Latin America
Revenues were $42.8 million for the first quarter of 2010 compared to $76.3 million for the first
quarter of 2009. The $33.5 million decrease is primarily attributable to decreased project
activity and decreased vessel utilization. Activity during the first quarter of 2010 consisted
primarily of one repair project in Mexico and a DSV charter project in Brazil, compared to two
repair projects in Mexico and the Camarupim project in Brazil during the first quarter of 2009.
Loss before taxes was $9.1 million for the first quarter of 2010 compared to income before taxes of
$6.0 million for the first quarter of 2009. This negative impact of $15.1 million was primarily
attributable to higher non-recovered vessel costs in the first quarter of 2010 due to decreased
vessel utilization.
West Africa
There were no revenues for the first quarter of 2010 compared to revenues of $65.1 million for the
first quarter of 2009. Loss before taxes was $1.8 million for the first quarter of 2010 compared to
income before taxes of $17.8 million for the first quarter of 2009. Activity in the first quarter
of 2009 consisted of work on a large construction project for the replacement and repair of a
24-inch pipeline offshore Nigeria. Subsequent to the completion of that project in the second
quarter of 2009,
we curtailed our operations in the region and have had no project activity in West Africa since
that time. The loss before taxes for the first quarter of 2010 was primarily due to non-recovered
vessel costs associated with the Cheyenne and
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Tornado which remain idle in Tema, Ghana and are held
for sale. The income before taxes for the first quarter of 2009 was attributable to increased
project profitability related to the one ongoing project in Nigeria in that quarter.
Asia Pacific/Middle East
Revenues were $33.6 million for the first quarter of 2010 compared to $92.1 million for the first
quarter of 2009. The decrease of $58.5 was the result of decreased project activity in the region.
Activity during the first quarter of 2010 consisted of two construction projects in Malaysia
compared to two construction projects in India, one project in Indonesia, and the Berri and Qatif
project in Saudi Arabia during the first quarter of 2009. Income before taxes was $4.4 million for
the first quarter of 2010 compared to $13.7 million for the first quarter of 2009. This $9.3
million decrease in income before taxes was primarily attributable to higher non-recovered vessel
costs in the first quarter of 2010 due to decreased vessel utilization attributable to decreased
project activity, partially offset by favorable settlement of change orders on the Berri and Qatif
project during the first quarter of 2010.
Utilization of Major Construction Vessels — Worldwide utilization for our major construction
vessels was 16.4% and 45.9% for the three month periods ended March 31, 2010 and 2009,
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. DSVs, 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, DSVs, and, from time to time,
construction vessels in our operations. In our international operations changes in utilization
rarely impact revenues but can have an inverse relationship to changes in profitability.
Industry and Business Outlook
The offshore construction industry continues to be hindered by a low level of project activity
worldwide. Increased competition in certain key areas attributable to a decrease in worldwide bid
activity is leading to lower than historical success ratio on our bid outcomes. Opportunities
remain and we continue to bid on new projects. However, the impact on our operations due to the
duration and severity of the industry downturn cannot be predicted with certainty. We continue to
expect weak demand for our services throughout 2010.
During 2010, our focus remains 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 executing our projects or
building sufficient backlog, further cost cutting and cash conservation measures will be required
including closing offices, stacking idle vessels, asset sales, and further work force reductions.
As of March 31, 2010, our backlog totaled approximately $110.4 million ($97.7 million for
international regions and $12.7 million for North America) compared to $394.0 million ($358.8
million for international regions and $35.2 million for North America) as of March 31, 2009. Of
the total backlog, $106.4 million is scheduled to be performed in 2010. 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 March 31, 2010, were $307.0 million compared to $344.9 million as
of December 31, 2009, a decrease of $37.9 million. The primary sources of cash and cash equivalents
during the first quarter of 2010 have been cash provided from a net decrease in the working capital
components and the sale of marketable securities. The primary uses of cash have been for capital
projects.
Operating activities provided $14.6 million of net cash during the first quarter of 2010, compared
to a use of $10.0 million of net cash during the first quarter of 2009. This increase in net cash
provided from operating activities reflects a net decrease in the major working capital components
partially offset by a net loss from operations. Changes in operating assets and liabilities were
$21.0 million during the first quarter of 2010, compared to a negative $43.1 million during the
first quarter of 2009. Contributing to the decrease in changes in operating assets and liabilities
were decreases in accounts receivable and income taxes paid.
Investing activities used $24.4 million of net cash during the first quarter of 2010, compared to a
use of $7.6 million of net cash during the first quarter of 2009. During the first quarter of
2010, we used $32.3 million to purchase property and
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equipment, partially offset by cash provided
from the sale of marketable securities of $10.7 million. Cash used in investing activities in the
first quarter of 2009 was primarily related to the purchases of property and equipment of
approximately $20.2 million, partially offset by a decrease in our restricted cash requirements of
$11.4 million.
Financing activities used $28.5 million of net cash during the first quarter of 2010, compared to
using $2.0 million of net cash during the first quarter of 2009. During the first quarter of 2010,
we used $26.0 million to pay long-term payables related to the purchase of property and equipment.
Contractual Obligations
The information below summarizes the contractual obligations as of March 31, 2010 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 (in thousands).
Liquidity Risk
As a result of operating performance, we did not meet the existing minimum fixed charge coverage
ratio covenant in the Third Amended and Restated Credit Agreement (the “Revolving Credit Facility”)
as of September 30, 2008. 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 have 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. The effective date of this amendment was
December 31, 2008.
The length of the interim cash-collateralization period was dependent on our future financial
performance and ended June 30, 2009. For the remaining duration of the Revolving Credit Facility
after the cash-collateralization period, the facility was 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 Sheets as Restricted Cash. As of
March 31, 2010, we had no borrowing against the facility, $59.2 million in letters of credit
outstanding thereunder, and available credit of $51.6 million. We also have a $16.0 million
short-term credit facility at one of our foreign locations. At March 31, 2010, the available
borrowing under this facility was $11.4 million.
At March 31, 2010, we were in compliance with the terms of our Revolving Credit Facility. Our
current financial projections indicate that we may not meet our leverage ratio covenant beginning
in the second quarter of 2010 and continuing through the fourth quarter of 2010. We are currently
in discussion with our lenders regarding these potential violations. If we do not meet our
leverage ratio, we may be required to cash collateralize our outstanding letters of credit or seek
another remedy. If we are required to cash collateralize letters of credit, it would reduce our
available cash and may impact our ability to bid on future projects. Further, upon a covenant
violation and the declaration of an event of default by our lenders, under the cross
default provisions of our Title XI bonds (1) we may be subject to additional reporting
requirements, (2) we may be subject to additional covenants restricting our operations, and (3) the
Maritime Administration of the U.S. Department of
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Transportation(“MarAd”), guarantor of the bonds,
may institute procedures that could ultimately allow the bondholders the right to demand payment of
the bonds from MarAd. MarAd can alternatively assume the obligation to pay the bonds when due. As
we have no outstanding indebtedness under our Revolving Credit Facility, an event of default
related to the covenant failure would not trigger the cross default provision of our Senior
Convertible Debentures. It is not possible at this time to predict the outcome of discussions with
our lenders or the effect that these potential violations may have on our financial position.
As of March 31, 2010, approximately $30.8 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 March 31, 2010,
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. In November 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, including payments related
to the Global 1200 and the Global 1201. Based on expected operating cash flows and other sources of
cash, we do not believe that our reduced project backlog or the illiquidity of our investments in
auction rate securities will have a material impact on our overall ability to meet our liquidity
needs during the next twelve months. However, a significant amount of our expected operating cash
flows is based upon projects that 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 capital expenditures or
take other actions including closing offices, stacking idle vessels, selling assets, and further
reducing our workforce. Also, our current financial projections indicate that we may not meet our
leverage ratio covenant under our Revolving Credit Facility beginning in the second quarter of 2010
and continuing through the fourth quarter of 2010. Consequently, we may be required to cash
collateralize our outstanding letters of credit or explore other alternatives with respect to the
covenant violation. We are currently in discussion with our lenders regarding these potential
violations and cannot predict the outcome these potential violations may have on our financial
position. 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 ability to obtain project awards and our financial results.
Capital expenditures for the remainder of 2010 are expected to be between $200 million and $210
million. This range includes expenditures for the Global 1200, Global 1201, two new saturation
diving systems, 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
preserve a solid financial position.
Our long-term liquidity will ultimately be determined by our ability to earn operating profits that
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 our ability to win bids and manage
awarded projects to successful completion.
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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, repurchase agreements, 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 0.5% increase or decrease in the average interest rate of cash equivalents and marketable
securities at March 31, 2010 would have an approximate $1.7 million impact on pre-tax annualized
interest income.
Foreign Currency Risk
As of March 31, 2010, our contractual obligations under a long-term vessel charter will require the
use of approximately 89.1 million Norwegian kroners (or $14.9 million as of March 31, 2010) 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 March 31, 2010, we were committed to purchase certain equipment which will require the use of
9.5 million Euros (or $12.7 million as of March 31, 2010) over the next year. A 1% increase in the
value of the Euro will increase the dollar value of these commitments by approximately $0.1
million.
The estimated cost to complete capital expenditure projects in progress at March 31, 2010 will
require an aggregate commitment of 100.4 million Singapore dollars (or $71.8 million as of March
31, 2010). A 1% increase in the value of the Singapore dollar at March 31, 2010 will increase the
dollar value of these commitments by approximately $0.7 million. We have entered into forward
contracts to purchase 28.8 million Singapore dollars to hedge certain purchase commitments related
to the construction of the Global 1200 and Global 1201 and 8.3 million Singapore dollars to hedge
operating expenses related to our Asia Pacific/Middle East segment.
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As of the end of the period covered by this report, our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures. These disclosure controls and procedures are designed to
provide us with a reasonable assurance that all of the information required to be disclosed by us
in periodic reports filed under the Securities Exchange Act of 1934 as amended (“Exchange Act”) is
recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed and maintained to ensure that all of the information required to be disclosed by us 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 our Company 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
The information set forth under the heading “Investigations and Litigation” in Note 11,
“Commitments and Contingencies,” to our condensed consolidated financial statements included in
this Quarterly Report is incorporated by reference into this Item 1.
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, 2009, 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, 2009, 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.
The following table contains our purchases of equity securities during the first quarter of 2010.
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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.
May 6, 2010
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