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SEACOR HOLDINGS INC 10-K 2008 Documents found in this filing:QuickLinks -- Click here to rapidly navigate through this document
United States FORM 10-K ANNUAL REPORT
Commission file number 1-12289 SEACOR Holdings Inc.
Registrant's telephone number, including area code (954)-523-2200 Securities registered pursuant to Section 12 (b) of the Act:
Securities registered pursuant to Section 12 (g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes o No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ý No 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 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. ý Yes o No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 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). o Yes ý No The aggregate market value of the voting stock of the registrant held by non-affiliates as of June 30, 2007 was approximately $1,941,802,000 based on the closing price on the New York Stock Exchange on such date. The total number of shares of Common Stock issued and outstanding as of February 22, 2008 was 22,585,381. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for its 2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A within 120 days after the end of the Registrant's last fiscal year is incorporated by reference into Part III of this Annual Report on Form 10-K.
SEACOR HOLDINGS INC.
Certain statements discussed in Item 1 (Business), Item 1A (Risk Factors), Item 3 (Legal Proceedings), Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations), Item 7A (Quantitative and Qualitative Disclosures About Market Risk) and elsewhere in this Annual Report on Form 10-K as well as in other materials and oral statements that the Company releases from time to time to the public constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concerning management's expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters involve significant known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements discussed or implied by such forward-looking statements. Such risks, uncertainties and other important factors are discussed in Item 1A (Risk Factors). In addition, these statements constitute the Company's cautionary statements under the Private Securities Litigation Reform Act of 1995. It should be understood that it is not possible to predict or identify all such factors. Consequently, the following should not be considered to be a complete discussion of all potential risks or uncertainties. The words "anticipate," "estimate," "expect," "project," "intend," "believe," "plan," "target," "forecast" and similar expressions are intended to identify forward-looking statements. Forward-looking statements speak only as of the date of the document in which they are made. The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward- looking statement to reflect any change in the Company's expectations or any change in events, conditions or circumstances on which the forward-looking statement is based. It is advisable, however, to consult any further disclosures the Company makes on related subjects in its 10-Q and 8-K reports to the Securities and Exchange Commission. PART I
ITEM 1. BUSINESS General Unless the context indicates otherwise, the terms "we," "our," "ours," "us" and the "Company" refer to SEACOR Holdings Inc. and its consolidated subsidiaries. "SEACOR" refers to SEACOR Holdings Inc., incorporated in 1989 in Delaware. "Common Stock" refers to the common stock, par value $.01 per share, of SEACOR. The Company's fiscal year ended on December 31, 2007. The Company is in the business of owning, operating, investing in and marketing equipment, primarily in the offshore oil and gas and marine transportation industries. The Company operates a diversified fleet of offshore support vessels and helicopters servicing oil and gas exploration, development and production facilities worldwide and a fleet of U.S.-flag product tankers that transport petroleum, chemicals and crude products primarily in the U.S. domestic or "coastwise" trade. In addition, the Company operates a fleet of inland river barges transporting grain and other bulk commodities on the U.S. inland waterways. The Company's environmental services segment provides oil spill response, manages environmental remediation projects and offers related consulting services worldwide to those who store, transport, produce or handle petroleum products and environmentally hazardous materials. SEACOR's principal executive offices are located at 2200 Eller Drive, P.O. Box 13038, Fort Lauderdale, Florida 33316, and the telephone number is (954) 523-2200. SEACOR's website address is www.seacorholdings.com. The Company's Corporate Governance policies, including the Board of Directors' Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee charters are made available, free of charge, on the Company's website or in print for shareholders. All of the Company's periodic report filings with the Securities and Exchange Commission ("SEC") pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available, 1 free of charge, through the Company's website, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports. These reports and amendments are available through the Company's website as soon as reasonably practicable after the Company electronically files such reports or amendments with the SEC. They are also available to be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information as to the operation of the SEC's Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information. Segment and Geographic Information The Company's operations are divided into five main business segments: Offshore Marine Services, Marine Transportation Services, Inland River Services, Aviation Services, and Environmental Services. The Company also has activities that are referred to and described under Other, which primarily includes Harbor and Offshore Towing Services, energy trading activities, various other investments in joint ventures and asset leasing activities. Marine Transportation Services and Harbor and Offshore Towing Services were acquired as a result of the acquisition of Seabulk International, Inc. ("Seabulk") on July 1, 2005 through a merger with a wholly-owned subsidiary of SEACOR (the "Seabulk Merger"). Financial data for segment and geographic areas is reported in Part IV "Note 16. Major Customers and Segment Data" of this Annual Report on Form 10-K. Offshore Marine Services Offshore Marine Services operates a diversified fleet of support vessels primarily servicing offshore oil and gas exploration, development and production facilities worldwide. Vessels in this service are employed to deliver cargo and personnel to offshore installations, handle anchors for drilling rigs and other marine equipment, support offshore construction and maintenance work, provide standby safety support and oil spill response services. From time to time, Offshore Marine Services supports projects such as well stimulation, seismic data gathering and offshore accommodation. Offshore Marine Services also offers logistics services in support of offshore oil and gas exploration, development and production operations, including shorebased, marine transport and other supply chain management services. This segment contributed 51%, 52% and 50% of consolidated revenues in 2007, 2006 and 2005, respectively. The following tables identify the types of vessels that make up the Offshore Marine Services' fleet as of December 31 in the indicated years. "Owned" are those majority owned by the Company. "Joint Ventured" are those owned by entities in which the Company does not have a controlling interest. "Leased-in" are generally those that have been sold to an institutional lessor and then leased back to the Company. "Pooled" are owned by entities not affiliated with Offshore Marine Services with the revenues or results of operations of these vessels being shared with the revenues or results of operations of certain vessels owned by Offshore Marine Services based upon an agreed formula. "Managed" are owned by entities not affiliated with the Company but are operated by Offshore Marine Services for a fee. See Glossary of Vessel Types below for an explanation of the services they perform. 2
The following table indicates average fleet age in years as of December 31:
Anchor handling towing supply ("AHTS") vessels are used primarily to support offshore drilling activities in the towing, positioning and mooring of drilling rigs and other marine equipment. AHTS vessels are also used to transport supplies and equipment from shore bases to offshore drilling rigs, platforms and other installations. The defining characteristics of AHTS vessels are horsepower ("bhp"), size of winch in terms of "line pull" and wire storage capacity. Offshore Marine Services' fleet of AHTS vessels has varying capabilities and supports offshore mooring activities in water depths ranging from 300 to 8,000 feet. Most modern AHTS vessels are equipped with dynamic positioning ("DP") systems that enable them to maintain a fixed position in close proximity to a rig without the use of tie-up lines. 3 Crew boats are used primarily to move cargo and personnel to and from offshore drilling rigs, platforms and other installations. Historically, crew boats transported people and were also used to deliver "light" cargo such as personal effects, small machinery and small quantities of fuel and water. These boats also served as field stand-by vessels, moving personnel between platforms and providing emergency stand-by services. Crew boats built prior to 1990 are generally 100 to 130 feet in length and are capable of 20 knots in light conditions and calm seas. Vessels built since 1998, also referred to as Fast Support Vessels ("FSVs"), range from 130 to 200 feet in length and are capable of between 25 and 35 knots. Modern FSVs have enhanced cargo carrying capacities, including the capacity to support drilling operations. Vessels supporting deep water drilling are usually equipped with DP capabilities. Mini-supply vessels are generally less than 165 feet in length and typically carry deck cargo, liquid mud, methanol, diesel fuel and water. These vessels are typically used to support construction projects, maintenance work, certain drilling support activities and production support. Standby safety vessels typically remain on location proximate to offshore rigs and production facilities to respond to emergencies. These vessels carry special equipment to rescue personnel and are equipped to provide first aid and shelter. These vessels sometimes perform a dual role, also functioning as supply vessels. Supply vessels and towing supply vessels are generally more than 165 feet in length and are used to deliver cargo to rigs and platforms where drilling and work-over activity is underway or to support construction work by delivering pipe to vessels performing underwater installations. Supply vessels are distinguished from other vessels by the total carrying capacity (expressed as deadweight: "dwt"), available area of clear deck space, below-deck capacity for storage of mud and cement used in the drilling process and tank storage for water and fuel oil. The ability to hold station in open water and moderately rough seas is a key factor in differentiating supply vessels. To improve station keeping ability, certain supply vessels have DP capabilities. Towing supply vessels perform similar cargo delivery functions to those handled by supply vessels. They are, however, equipped with more powerful engines (4-8,000 bhp) and winches, giving them the added capability to perform general towing functions, buoy setting and limited anchor handling work. Other includes geophysical, accommodation, anchor handling tugs, line handling, lift boats and other vessels. These vessels generally have specialized features adapting them to specific applications. Special project activities include well stimulation, seismic data gathering, freight hauling services and accommodation services. The demand for vessels is affected by the level of offshore exploration and drilling activities, which in turn is influenced by a number of factors including:
4
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussion of current market conditions. Offshore Marine Services operates vessels in six principal geographic regions. From time to time, vessels are relocated between these regions to meet customer demand for equipment. The table below sets forth vessel types by geographic market as of December 31 in the indicated years. Offshore Marine Services sometimes participates in joint venture arrangements in certain geographical locations in order to enhance marketing capabilities and facilitate operations in certain foreign markets. This allows for the expansion of Offshore Marine Services' fleet and operations while diversifying risks and reducing capital outlays associated with such expansion. 5
6 United States. At December 31, 2007, 95 vessels were operating in the U.S. Gulf of Mexico, including 55 owned, 36 leased-in, three joint ventured and one pooled. Offshore Marine Services' expertise in this market is deepwater anchor handling with its fleet of AHTS vessels, and exploration and production support with its fleet of crew and mini-supply vessels. Over the last few years, the market has split between the traditional shallow water shelf activity and the developing deepwater market. The shelf market is highly price sensitive and quickly impacted by movements in commodity prices. The deepwater market offers longer term projects with greater emphasis by customers on vessel specifications and features in addition to price. Africa, primarily West Africa. At December 31, 2007, 37 vessels were operating in West Africa, including 24 owned, six leased-in, three joint ventured and four managed. Offshore Marine Services operates primarily in Angola, servicing large-scale, multi-year projects for major oil companies. The remainder of vessels in this region operate from ports in Nigeria, the Republic of the Congo, Cameroon, Gabon, Equatorial Guinea and South Africa. United Kingdom, primarily North Sea. At December 31, 2007, 29 vessels were operating in the North Sea, including 23 owned, one joint ventured and five managed. The North Sea fleet provides standby safety and supply services. Demand in the North Sea market for standby services developed in 1991 after the United Kingdom passed legislation requiring offshore operators to maintain higher specification standby safety vessels. The legislation requires a vessel to "stand by" to provide a means of evacuation and rescue for platform and rig personnel in the event of an emergency at an offshore installation. Middle East. At December 31, 2007, 19 vessels were operating in the Middle East region, including 18 owned and one joint ventured. Offshore Marine Services' vessels operating in this area generally support activities in countries along the Arabian Gulf and Arabian Sea, including the United Arab Emirates, Qatar, Saudi Arabia and India. Offshore Marine Services competes with a large number of local and international companies in this region. Asia. At December 31, 2007, ten vessels were operating in Asia, including seven owned and three joint ventured. Offshore Marine Services' vessels operating in this area generally support exploration programs. To date, Offshore Marine Services' largest markets in this area have been Vietnam and Indonesia. Offshore Marine Services competes with a large number of local and international companies in this region. Mexico, Central and South America. At December 31, 2007, 16 vessels were operating in Mexico, Central and South America, including 14 owned and two managed. Offshore Marine Services' primary markets in this region are Mexico and Brazil. In both areas, Offshore Marine Services operates through local companies registered to do business in the country and benefits from certain national flag preferences. Offshore Marine Services' principal customers are major integrated oil companies, large independent oil and gas exploration and production companies and emerging independent companies. Consolidation of oil and gas companies through mergers and acquisitions over the past several years has reduced Offshore Marine Services' customer base. In 2007 there was no single customer responsible for 10% or more of consolidated operating revenues. The ten largest customers of Offshore Marine Services accounted for approximately 38% of Offshore Marine Services' operating revenues. The loss of one or a few of these customers could have a material adverse effect on Offshore Marine Services' results of operations. The Offshore Marine Services segment earns and recognizes revenues primarily from the time charter and bareboat charter of vessels to customers based upon daily rates of hire. Under a time charter Offshore Marine Services provides a vessel to a customer and is responsible for all operating expenses, typically excluding fuel. Under bareboat charter agreements, Offshore Marine Services provides the vessel to the customer and the customer assumes responsibility for all operating expenses and assumes all risk of 7 operation. Vessel charters may range from several days to several years. Revenues from time charters and bareboat charters are recorded and recognized as service is provided. Each of the markets in which Offshore Marine Services operates is highly competitive. The most important competitive factors are pricing and the availability and specifications of equipment to fit customer requirements. Other important factors include service, reputation, flag preference, local marine operating conditions, the ability to provide and maintain logistical support given the complexity of a project and the cost of moving equipment from one geographical location to another. Offshore Marine Services has numerous competitors in each of the geographical regions in which it operates, ranging from international companies that operate in many regions to smaller local companies that typically concentrate their activities in one specific region. For the years ended December 31, 2007, 2006 and 2005 approximately 52%, 46% and 50%, respectively, of Offshore Marine Services' operating revenues were derived from foreign operations. Foreign operations are subject to inherent risks, including, among others, political instability, asset seizures, nationalization of assets, terrorist attacks, piracy, kidnapping, fluctuating currency values, hard currency shortages, controls on currency exchange, the repatriation of income or capital, import-export quotas and other forms of public and governmental regulation, all of which are beyond the control of Offshore Marine Services. It is difficult to predict whether or when any of these conditions or events may develop in the future. The occurrence of any one or more of these conditions or events could have a material adverse effect on the Company's financial condition and results of operations. Marine Transportation Services As of December 31, 2007, Marine Transportation Services operated a fleet of ten owned U.S.-flag tankers, providing marine transportation services for petroleum products and chemicals moving in the U.S. domestic or coastwise trade. Additionally, Marine Transportation Services managed one vessel on behalf of a third party. This segment contributed 9%, 11% and 7% of consolidated revenues in 2007, 2006 and 2005, respectively. Subsequent to December 31, 2007, Marine Transportation Services sold two of its U.S.-flag tankers to third parties for scrapping. The Oil Pollution Act of 1990 ("OPA 90") prohibits vessels without double-hulls from transporting crude oil and petroleum products in U.S. coastwise transportation after certain dates based on the age and carrying capacity of the vessel. In addition, single-hulled vessels will be prohibited from transporting petroleum products in most international markets under a phase-out schedule established by the 8 International Maritime Organization ("IMO"). The table below sets forth the Marine Transportation Services' fleet as of December 31, 2007.
Petroleum Product Transportation. In the domestic energy trade, oceangoing vessels transport fuel and other petroleum products primarily from refineries and storage facilities along the coast of the U.S. Gulf of Mexico to utilities, waterfront industrial facilities and distribution facilities along the U.S. Gulf of Mexico, the Atlantic and Pacific coasts, as well as transport crude and product between Alaska and the Pacific coast and Hawaii. The number of U.S.-flag oceangoing vessels eligible to participate in the U.S. domestic trade and capable of transporting fuel or petroleum products has steadily decreased since 1980 as vessels have reached the end of their useful lives or are being retired due to OPA 90 requirements. In addition, the cost of new vessel construction in the United States (a requirement to operate in the U.S. domestic coastwise trade) has substantially increased. Chemical Transportation. In the U.S. domestic coastwise chemical transportation trade, vessels carry chemicals, primarily from chemical manufacturing plants and storage facilities along the coast of the U.S. Gulf of Mexico to industrial users in and around U.S. Atlantic and Pacific coast ports. The chemicals transported consist primarily of caustic soda, paraxylene, alkylates, toluene and lubricating oils. Some of the chemicals must be carried in vessels with specially coated or stainless steel cargo tanks and many of them are sensitive to contamination and require special cargo-handling equipment. The primary purchasers of petroleum product transportation services are multi-national oil and gas companies, refining companies, oil trading companies and large industrial consumers of fuel with waterfront facilities. The primary purchasers of chemical transportation services are chemical and oil companies. Both services are generally contracted for on the basis of short-term or long-term time charters, voyage charters, contracts of affreightment or other transportation agreements tailored to the shipper's requirements. In 2007, no single customer was responsible for 10% or more of consolidated operating revenues. The ten largest customers of Marine Transportation Services accounted for approximately 99% of its operating revenues. The loss of one or a few of these customers could have a material adverse effect on Marine Transportation Services' results of operations. Under a time charter Marine Transportation Services provides a vessel and is responsible for all operating expenses, typically excluding fuel. Under bareboat charter agreements, Marine Transportation Services provides the vessel to the customer and the customer assumes responsibility for all operating expenses and assumes all risk of operation. Vessel charters may range from several days to several years. Revenues from time charters and bareboat charters are recorded and recognized as service is provided. 9 Contracts of affreightment are contracts for cargos that are committed on a multi-voyage basis for various periods of time, with minimum and maximum cargo tonnages specified over the period at a fixed or escalating rate per ton. Revenues for voyage charters and contracts of affreightment are recognized based on the percentage of voyage completion computed on the basis of the number of voyage days worked at the relevant reporting date divided by the total number of days expected to complete the entire voyage. The markets in which the Marine Transportation Services fleet operates are highly competitive. Primary direct competitors are other operators of U.S.-flag ocean-going tank vessels and chemical carriers, operators of articulated tug and barge units and operators of refined product pipelines. The U.S. "Jones Act" shipping market is a trade that is not available to foreign-based competition. The most important competitive factors are pricing, vessel age and vessel availability to fit customer requirements as well as the requirement in certain areas to operate double-hull vessels. Inland River Services Inland River Services owns, operates, invests in and markets inland river transportation equipment. The Company believes it operates one of the industry's newest fleets of dry cargo and liquid tank barges transporting agricultural, industrial, chemical and petrochemical products on the U.S. inland waterways, primarily the Mississippi River, Illinois River, Tennessee River, Ohio River and their tributaries and the U.S. Gulf Intracoastal waterways. Inland River Services also owns towboats used for moving barges, fleeting operations used in barge loading and unloading activities and deck barges for specialized projects. It also manages barges for third parties. Inland River Services contributed 9%, 11% and 13% of consolidated operating revenues in 2007, 2006 and 2005, respectively. The following table sets forth the number of dry cargo barges, liquid tank barges, deck barges and towboats owned and/or operated by Inland River Services.
10 Inland barges are unmanned and are moved on the U.S. inland waterways by vessels known in the trade as "towboats." The combination of a towboat and dry cargo barges is commonly referred to as a "tow." The Inland River Services dry cargo fleet consists of open and covered hopper barges. Open hopper barges are used to transport commodities that are not sensitive to water such as coal, aggregate and scrap. Covered hopper barges are more versatile because they can also carry water sensitive products, such as grain, ores, alloys, cements and fertilizer. Each dry cargo barge in the Inland River Services' fleet is capable of transporting approximately 1,500 to 2,000 tons (1,350 to 1,800 metric tons) of cargo. The carrying capacity of a barge at any particular time is determined by water depth in the river channels and hull size of the barge. Adverse river conditions, such as high water resulting from excessive rainfall or low water caused by drought, can also impact operations by limiting the speed at which tows travel the U.S. inland waterways, the number of barges included in tows and the quantity of cargo that is loaded in the barges. Inland River Services generally charges a price per ton for point to point transportation of dry bulk commodities. Customers are permitted a specified number of days to load and discharge the cargo and thereafter pay a per diem demurrage rate for extra time. From time to time, dry cargo barges may be used for storage for a period prior to delivery. Inland River Services contracts with third parties to provide towing services to move its dry cargo barges on a spot basis. Towing prices are market driven with prices typically higher during periods of peak movement. In addition, towing prices may rise in response to higher costs of fuel and wages for vessel personnel. Typical dry cargo voyage activity requires shifting a clean, empty barge from a fleeting location to a loading facility. The barge is then moved from the loading location and assembled into a tow before proceeding to its next destination. After unloading, it is shifted to a fleeting area for cleaning and repair, if needed, before being moved again into a load position. Typically, grain cargos move southbound and non-grain cargos move northbound. Generally, Inland River Services attempts to coordinate the logistical match-up of northbound and southbound movements of cargo to minimize repositioning costs. Inland River Services' fleet of 10,000 barrel liquid tank barges transports liquid bulk commodities such as lube oils, solvents and glycols. The operation and chartering arrangements for these barges are similar to those of the dry cargo barges described above and are currently provided to Inland River Services by a third party. Inland River Services' fleet of 30,000 barrel liquid tank barges are normally chartered out as "unit tows" consisting of two to four barges along with a towboat working in patterns prescribed by the customer. Inland River Services is responsible for providing manpower for the towboats working in such operations. Inland River Services also owns a "fleeting operation," which is a staging area for grouping barges in preparation for movements up and down the river and a holding area for barges waiting to load and unload cargo. This fleeting operation is managed by a third party. Inland River Services has a 50% interest in a joint venture which owns a fleet of inland marine transportation assets with a view toward generating cash returns that may be enhanced by entering into strategic positions in marketable securities and commodity futures. Under the terms of the joint venture agreement and until October 31, 2009, Inland River Services has agreed to offer the joint venture the option to invest in any new dry cargo and liquid tank barges that Inland River Services acquires, subject to certain exceptions. Inland River Services has a 50% interest in a joint venture that operates a grain and fertilizer storage and handling facility in McLeansboro, Illinois. During the first quarter of 2007, the Company acquired all of the assets and certain liabilities of Waxler Transportation Company, Inc, and Waxler Towing Company, Incorporated (collectively referred to as "Waxler"), as well as certain assets from Waxler affiliates. Acquired assets included 14 liquid tank barges and eight towboats. In addition, the Company assumed leases on two other liquid tank barges. During the first quarter of 2007, Inland River Services entered into a 50-50 joint venture with a third party in South America to operate four towboats and 72 dry cargo barges on the Parana-Paraguay Rivers. 11 The joint venture was capitalized through equity contributions by the partners and bank debt. During 2007, Inland River Services sold four towboats and 61 open dry cargo barges to the joint venture. During the fourth quarter of 2007, Inland River Services entered into a joint venture to construct and operate four 98,000 barrel tanks for a tank farm and handling facility in Sauget, Illinois. This facility is a multi-modal supporting truck, rail, unit trains and barges. Inland River Services owns 67% of the joint venture and the first tanks are projected to be operational during the first half of 2008. The market for Inland River Services is driven by supply and demand economics, which impacts prices, margins achieved and utilization of Inland River Services' assets. The relationship between supply and demand reflects many factors, including:
Within the U.S., other local factors also have an effect on pricing and margins, including:
During harsh winters the upper Mississippi River usually closes to barge traffic from mid-December to mid-March. Ice often hinders the navigation of barge traffic on the mid-Mississippi River, the Illinois River and the upper Ohio River during the same period. The volume of grain transported from the Midwest to the Gulf of Mexico, which is primarily for export, is greatest during the harvest season from mid-August through late November. The harvest season is particularly significant because pricing tends to peak during these months in response to higher demand for equipment. The principal customers for Inland River Services are major agricultural companies, major integrated oil companies and industrial companies. In 2007 there was no single customer responsible for 10% or more of consolidated operating revenues. The ten largest customers of Inland River Services accounted for approximately 48% of Inland River Services' revenues in 2007. The loss of one or a few of its customers would likely not have a material adverse effect on Inland River Services' results of operations. Most of Inland River Services' dry cargo barges are employed under contracts of affreightment that can vary in duration, ranging from one voyage to several years. For longer term contracts, base rates may be adjusted in response to changes in fuel prices and operating expenses. Some longer term contracts provide for the transport of a minimum number of tons of cargo or specific transportation requirements for a particular customer. Some barges are bareboat chartered-out to third parties for a fixed payment of 12 hire per day for the duration of the charter. These contracts tend to be longer, ranging in term from one to five years. Inland River Services' 10,000 barrel liquid tank barges are either chartered out on term contracts ranging from one to five years or marketed on the spot market. Inland River Services' 30,000 barrel liquid tank barges are marketed primarily as unit tows under term contracts ranging from one to five years. Generally, Inland River Services believes the primary barriers to effective competitive entry into the U.S. inland waterways markets are the complexity of operations, the consolidation of the inland river towing industry and the difficulty in assembling a large enough fleet and an experienced staff to operate efficiently in the execution of voyages and to re-position barges effectively to optimize their use. The primary competitive factors among established operators are price, availability and reliability of barges and having equipment of a suitable type and condition for a specific cargo. The Company believes there are four major domestic companies that each operate over 2,000 dry cargo barges, with one of those operating over 3,000 barges. There are also four mid-sized barge companies that operate more than 500 but less than 1,000 barges. While Inland River Services' main competitors are other barge lines, railroads also compete for traffic that might otherwise move on the U.S. inland waterways. The Company believes there are five domestic companies that operate over 150 liquid tank barges each. These companies control approximately 64% of the equipment in the liquid cargo market. Aviation Services Aviation Services is primarily engaged in transportation services to the offshore oil and gas exploration, development and production industry, transportation services to hospitals ("Air Medical Services") and flightseeing tours in Alaska. In addition, Aviation Services sells fuel and provides other services to corporate aircraft and a regional airline at its fixed base operation ("FBO") at Ted Stevens Anchorage International Airport. It also leases helicopters to third parties, provides aircraft and flight crews under contracts and manages customer-owned aircraft. Aviation Services contributed 16%, 12% and 14% of consolidated operating revenues in 2007, 2006 and 2005, respectively. At December 31, 2007, Aviation Services controlled a fleet of 171 helicopters including 127 owned, 18 leased-in, 22 managed and four joint ventured. Of these, 129 were located in the United States and 16 were located in foreign jurisdictions. Aviation Services operates a Federal Aviation Administration ("FAA") approved maintenance repair station in Lake Charles, Louisiana and is a factory approved service facility for Bell Helicopter, American Eurocopter and Turbomeca. 13 The composition of Aviation Services' fleet as of December 31 was as follows:
Light helicopters are single or twin engine helicopters with a passenger capacity of between four and seven. Medium helicopters are twin engine helicopters with a passenger capacity of up to 13. Heavy helicopters are twin engine helicopters with a passenger capacity of up to 19. On January 5, 2007, a wholly owned subsidiary of the Company, Era Med LLC ("EraMED"), acquired the air medical services business of Keystone Helicopter Corporation. EraMED currently operates 37 light and medium twin engine helicopters, including five owned, ten leased-in and 22 managed, in support of hospital based air medical programs primarily in the eastern United States. Aviation Services' current principal market for its transportation services supporting the offshore oil and gas exploration, development and production industry is in the U.S. Gulf of Mexico. The customers and locations are similar to those serviced by Offshore Marine Services and its market opportunities are subject to the same cycles and pressures as described in "Item 1. Business—Offshore Marine Services—Markets." Aviation Services also provides services to the utility and offshore markets in Alaska. Air Medical Services operations are primarily in the northeastern United States, Florida and Tennessee. Flightseeing services in Alaska are operated out of Juneau and from areas near Denali National Park. Other helicopter services to the oil and mining industries in Alaska are provided on a contract or charter basis from bases in Valdez, Anchorage, the Kenai area and Deadhorse. In addition, Aviation Services leases aircraft in the U.S. and internationally. A significant portion of Aviation Services' operating revenues and profits related to oil and gas industry activity is dependent on actual flight hours. The fall and winter months have fewer hours of daylight and consequently flight hours are generally lower at these times. In addition, prolonged periods of adverse weather and the effect of fewer hours of daylight can adversely impact operating results in the U.S. Gulf of Mexico and Air Medical Services' operations. In general, the months of December through 14 February in the U.S. Gulf of Mexico and October through April in Alaska have more days of adverse weather conditions than the other months of the year. In the U.S. Gulf of Mexico, June through November is tropical storm season. During tropical storms, Aviation Services is unable to operate in the area of the storm although flight activity may increase immediately prior to and after storms due to the evacuation and return of offshore workers. The Alaska flightseeing operation is also seasonal; activity generally occurs from late May until early September. Aviation Services charters its helicopters to utility and oil and gas customers primarily through master service agreements, term contracts, day-to-day charter arrangements and leases. Master service agreements require incremental payments above a fixed fee based upon flight hours flown, have fixed terms ranging from one month to five years and generally are cancelable upon 30 days notice. Term contracts and day-to-day charter arrangements are generally non-cancelable without cause and call for a combination of a monthly or daily fixed rental fee plus a charge based on hours flown. Day-to-day charter arrangements are generally based on either an hourly or daily rate. Leases can be either "dry", providing only the equipment, or "wet", providing equipment and personnel, either pilots, mechanics or both. The rate structure, as it applies to Aivation Services' utility and oil and gas contracts, typically contains terms that limit its exposure to increases in fuel costs over a pre-agreed level. Fuel costs in excess of these levels are passed through to customers. With respect to flightseeing aircraft, block space is allocated to cruise lines and seats sold directly to customers. Air Medical Services are provided under contracts with hospitals that typically include either a fixed monthly and hourly rate structure, similar to oil and gas, or a fee per completed flight. Most contracts with hospitals are longer term, but offer either party the ability to terminate, with less than six months notice. Other markets for Aviation Services include international oil and gas industry support activities, agricultural support and general aviation activities. Aviation Services' activities in these markets are limited. At December 31, 2007, Aviation Services had 16 helicopters operating abroad under leases to third parties. Aviation Services' FBO sells fuel and other services to a regional airline under a long-term ground services agreement and to a diverse group of general aviation companies and large corporations on an ad hoc basis. In addition, the FBO leases hangar space and provides fueling services for the aviation assets of local companies. Aviation Services' principal customers in the U.S. Gulf of Mexico are oil companies of varying sizes. In Alaska, its principal customers for helicopter services are oil companies and cruise line passengers. In 2007, no one customer was responsible for 10% or more of consolidated operating revenues. The ten largest customers of Aviation Services accounted for approximately 46% of Aviation Services' operating revenues. The loss of one or a few of its customers could have a material adverse effect on Aviation Services' results of operations. The helicopter transportation business is highly competitive. Aviation Services is one of the largest helicopter companies operating in the U.S. Gulf of Mexico and one of the largest operating in Alaska. In the U.S. Gulf of Mexico there are three major competitors, PHI, Inc., Bristow Group, Inc and Rotorcraft Leasing Company LLC. In addition, several customers in the U.S. Gulf of Mexico operate their own helicopter fleets. In the air medical business, there are several major competitors with larger fleets than Aviation Services. In most instances, an operator must have an acceptable safety record, demonstrated reliability and suitable equipment to bid for work. Among bidders meeting these criteria, customers typically make their final choice based on price and aircraft preference. 15 Environmental Services Environmental Services primarily provides emergency preparedness and response services to oil, chemical, industrial and marine transportation clients in the U.S. and abroad. In the United States, these services are generally rendered to those clients who store, transport, produce or handle petroleum and certain non-petroleum oils that are subject to the provisions of OPA 90 and various other federal, state and municipal regulations. Internationally, these services may be required by legislation and regulation of countries, international maritime conventions and environmental covenants placed on clients by their lending institutions. To a lesser extent, Environmental Services provides emergency preparedness and response services to governmental agencies arising from natural disasters and homeland security issues such as bio-terrorism, pandemic influenza and port security. Business is conducted primarily through the Company's wholly owned subsidiaries and their affiliates, National Response Corporation, The O'Brien's Group, Inc. and SEACOR Environmental Services International Limited. Environmental Services contributed 12%, 11% and 14% of consolidated revenues in 2007, 2006 and 2005, respectively. Emergency Response Services. Environmental Services employs trained personnel and maintains specialized equipment positioned in the U.S. and in certain locations outside the U.S. to respond to oil and chemical spills, other emergencies and customer projects. A fleet of specialized vessels and barges outfitted with oil spill equipment is positioned on the East, Gulf and West Coasts of the U.S. as well as in the Caribbean and Hawaii. Oil spill and other response equipment are also stationed in certain international locations in Africa, the Caspian and Black Sea Region, the Far East and the Middle East. Environmental Services has established a network of approximately 175 independent oil spill response contractors that may assist it by providing equipment and personnel. Retainer Services. Environmental Services offers retainer contracts to the maritime community, such as operators of tank and non-tank vessels and chemical carriers and to owners of facilities, such as refineries, pipelines, exploration and production platforms, power plants and storage tank and transportation terminals. Retainer services include access to professional response management and specialized equipment necessary to respond to an oil or chemical spill emergency. Consulting and Training Services. Environmental Services develops prevention, emergency response, business continuity, safety and security plans, and procedures worldwide to assist oil, chemical, industrial, marine transportation, financial services and government customers in the prevention of, and response to, an extensive variety of environmental emergencies on both a retained and stand-alone basis. Environmental Services also assists customers in the selection and training of personnel in the use of environmental equipment and products. Environmental Services also provides a service to state, county and other local government agencies assisting them with claim reimbursement from the federal government, through agencies such as the Federal Emergency Management Agency ("FEMA") and the Federal Highway Administration. It also provides oversight of clean-up and debris management required after hurricanes, floods and other disasters. Industrial and Remediation Services. Environmental Services provides industrial and remediation services to oil, chemical, industrial and government clients. These services include hazardous waste management, industrial and marine cleaning, salvage support, petroleum storage tank removal, pipeline repair and site remediation services. The market for contractual oil spill preparedness, response and other related training and consulting services in the U.S. resulted from the enactment of OPA 90. OPA 90 and several subsequent regulations promulgated by the Department of Transportation, Environmental Protection Agency ("EPA"), the Minerals Management Service division of the U.S. Department of Interior ("MMS") and the United States Coast Guard ("USCG") require that all tank vessels operating within the 200-mile Exclusive Economic Zone of the U.S. and all facilities and pipelines handling oil that could have a spill affecting the navigable waters of the U.S. develop a plan to respond to a "worst case" oil spill and ensure by contract or other approved means the ability to respond to such a spill. 16 The market for vessel security assessments, security plans, security training and exercises and other related services is for clients required to comply with the Maritime Transportation Security Act of 2002. Homeland Security services are marketed to government agencies to assist with efforts to improve emergency preparedness and response capabilities. In the international market for oil spill response services, Environmental Services seeks to develop opportunities with governments, other agencies and international oil and gas exploration and production companies to establish and operate the necessary response capability. International crisis management and business continuity services focus on middle and senior management and are marketed to a broad range of industry sectors such as oil and gas, chemical, financial services, transportation and other industries. The market for government services in the U.S. includes federal, state, county, city, and other subdivisions and agencies. Services are typically provided in association with specific funding sources, FEMA reimbursement, Homeland Security Grants, municipal budgets and other agency funding. Environmental Services offers its services primarily to the domestic and international shipping community, major oil companies, independent exploration and production companies, pipeline and transportation companies, power generating operators, industrial companies, airports and state and local government agencies. Services are provided pursuant to contracts generally ranging from one month to ten years. In 2007, there was no single customer responsible for 10% or more of consolidated operating revenues. The ten largest customers of Environmental Services accounted for approximately 38% of Environmental Services' operating revenues. The loss of a single large client or a group of mid-size customers could have a material adverse effect on Environmental Services' results of operations. However, Environmental Services has more than 2,300 customers, and management does not believe that it is dependent on a single customer or small group of customers. The principal competitive factors in the environmental service business are price, customer service, reputation, experience, qualifications, availability of personnel and operating capabilities. In the U.S., Environmental Services' Oil Spill Removal Organization ("OSRO") unit faces competition primarily from the Marine Spill Response Corporation, a non-profit corporation funded by the major integrated oil companies, other non-profit industry cooperatives and also from those commercial contractors who target specific market niches in response, consulting and remediation. Internationally, competition for both oil spill response and emergency preparedness and management comes from a few private companies and regional oil industry cooperatives. Consulting and training service competitors range from small independent privately owned businesses to large enginerring consulting groups and major defense contractors. Environmental Services operates worldwide. For the years ended December 31, 2007, 2006 and 2005 approximately 25%, 22% and 11%, respectively, of Environmental Services' operating revenues were derived from its foreign operations. Foreign operations are subject to various inherent risks. These risks include, among others, political instability, nationalization of assets, terrorist attacks, the repatriation of income or capital, import-export quotas and other forms of public and governmental regulation, all of which are beyond the control of the Company. It is not possible to predict whether any of these conditions or events might develop in the future. 17 Other Harbor and Offshore Towing Services. At December 31, 2007, Harbor and Offshore Towing Services operated a total of 30 tugs, excluding one tug removed from service, of which 14 were conventional tugs, six were Azimuth Stern Drive tugs, three were Forward Azimuth Drive tugs, three were tractor tugs and four were Ship Docking Modules ("SDM™"). SDMs™ are innovative vessels designed and patented by Seabulk that are maneuverable, efficient and flexible and require fewer crew members than conventional harbor tugs. In 2007 there was no single customer responsible for 10% or more of consolidated operating revenues. The ten largest customers of Harbor and Offshore Towing Services accounted for approximately 34% of Harbor and Offshore Towing Services' operating revenues. At December 31, 2007, thirteen tugs were operating in Florida; four in Port Everglades, six in Tampa and three in Port Canaveral. Six tugs were operating in Port Arthur, Texas, five were operating in Mobile, Alabama and three were operating in Lake Charles, Louisiana. Two tugs were engaged in offshore towing operations, one in Mexico and one in St. Maarten. One tug was bareboat chartered-out. Other Joint Ventures, Leasing and Other Activities. The Company is party to a 50-50 joint venture that operated a 52,000 dwt handy-max bulk carrier that was sold to a third party in September 2006. In addition, the Company has a minority equity investment in a company that designs and manufactures water treatment systems for sale or lease. The Company records the results of these investments using the equity method of accounting. The Company also engages in commodity trading activities and asset leasing activities. Government Regulation The Company's operations are subject to significant U.S. federal, state and local regulations, as well as international conventions and the laws of foreign jurisdictions where the Company operates its equipment or where the equipment is registered. The Company's domestically registered vessels are subject to the jurisdiction of the USCG, the National Transportation Safety Board ("NTSB"), the U.S. Customs Service and the U.S. Maritime Administration, as well as to the rules of private industry organizations such as the American Bureau of Shipping. These agencies and organizations establish safety standards and are authorized to investigate vessels and accidents and to recommend improved maritime safety standards. Aviation Services is subject to regulations pursuant to the Federal Aviation Act of 1958, as amended ("Federal Aviation Act"), and other statutes pursuant to Federal Aviation Regulations Part 135 Air Taxi Certificate granted by the FAA. The FAA regulates flight operations and, in this respect, has jurisdiction over Aviation Services personnel, aircraft, ground facilities and certain technical aspects of its operations. In addition to the FAA, the NTSB is authorized to investigate aircraft accidents and to recommend improved safety standards. The Company is also subject to the Communications Act of 1934, as amended, because of the use of radio facilities in Aviation Services operations. Offshore Marine Services, Marine Transportation Services and Inland River Services are subject to the Shipping Act, 1916, as amended ("1916 Act"), and the Merchant Marine Act of 1920, as amended ("1920 Act," or "Jones Act" and, together with the 1916 Act, "Shipping Acts"), which govern, among other things, the ownership and operation of vessels used to carry cargo between U.S. ports known as "U.S. coastwise trade." The Shipping Acts require that vessels engaged in U.S. coastwise trade be owned by U.S. citizens and built in the U.S. For a corporation engaged in the U.S. coastwise trade to be deemed a U.S. citizen: (i) the corporation must be organized under the laws of the U.S. or of a state, territory or possession thereof, (ii) each of the president or other chief executive officer and the chairman of the board of directors of such corporation must be a U.S. citizen, (iii) no more than a minority of the number of directors of such corporation necessary to constitute a quorum for the transaction of business can be non-U.S. citizens and (iv) at least 75% of the interest in such corporation must be owned by U.S. "citizens" (as defined in the Shipping Acts). Should the Company fail to comply with the U.S. citizenship 18 requirements of the Shipping Acts, it would be prohibited from operating its vessels in the U.S. coastwise trade during the period of such non-compliance. To facilitate compliance with the Shipping Acts, SEACOR's Restated Certificate of Incorporation: (i) limits the aggregate percentage ownership by non-U.S. citizens of any class of the SEACOR's capital stock (including the Common Stock) to 22.5% of the outstanding shares of each such class to ensure that such foreign ownership will not exceed the maximum percentage permitted by applicable maritime law (presently 25%) but authorizes SEACOR's Board of Directors, under certain circumstances, to increase the foregoing percentage to 24%, (ii) requires institution of a dual stock certification system to help determine such ownership and (iii) permits the Board of Directors to make such determinations as reasonably may be necessary to ascertain such ownership and implement such limitations. In addition, SEACOR's by-laws provide that the number of foreign directors shall not exceed a minority of the number necessary to constitute a quorum for the transaction of business and restrict any officer who is not a U.S. citizen from acting in the absence or disability of the Chairman of the Board of Directors and the Chief Executive Officer and the President, all of whom must be U.S. citizens. Aviation Services' helicopters operating in the United States are subject to registration and citizenship requirements under the Federal Aviation Act. That Act requires that before an aircraft may be legally operated in the United States, it must be owned by "citizens of the United States," which, in the case of a corporation, means a corporation (i) organized under the laws of the U.S. or of a state, territory or possession thereof, (ii) of which at least 75% of its voting interests are owned or controlled by persons who are U.S. "citizens" (as defined in the Federal Aviation Act and regulations promulgated thereunder), and (iii) of which the president and at least two-thirds of the board of directors and managing officers are U.S. citizens. All of Marine Transportation Services' and Inland River Services' vessels and the majority of Offshore Marine Services' vessels are registered in the United States. Offshore Marine Services also operates vessels registered in a number of foreign jurisdictions. Vessels registered in these jurisdictions are subject to the laws of the applicable jurisdiction as to ownership, registration, manning and safety. In addition, the vessels are subject to the requirements of a number of international conventions that are applicable to vessels depending on their jurisdiction of registration. Among the more significant of these conventions are: (i) the 1978 Protocol Relating to the International Convention for the Prevention of Pollution from Ships, (ii) the International Convention on the Safety of Life at Sea, 1974 and 1978 Protocols, and (iii) the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers, 1978. The Company believes that its vessels registered in foreign jurisdictions are in compliance with all applicable material regulations and have all licenses necessary to conduct their business. In addition, vessels operated as standby safety vessels in the North Sea are subject to the requirements of the Department of Transport of the United Kingdom pursuant to the United Kingdom Safety Act. All of Marine Transportation Services', Harbor and Offshore Towing Services', certain of Offshore Marine Services' vessels and all of Inland River Services' liquid tank barges are subject to periodic inspection and survey by, and drydocking and maintenance requirements of, the USCG and/or the American Bureau of Shipping and other marine classification societies. Moreover, to insure compliance with applicable safety regulations, the USCG is authorized to inspect vessels at will. NRC is classified by the USCG as an OSRO for every port in the continental U.S., Hawaii and the Caribbean. The OSRO classification process is strictly voluntary. Vessel owners and other customers subject to OPA 90 who utilize classified OSROs are exempt from the requirement to list their response resources in their plans. The classification process permits the USCG and these customers to evaluate the ability of an OSRO to respond to and recover oil spills of various types and sizes in different operating environments and geographic locations. In addition to the USCG, the EPA, the Office of Pipeline Safety, the MMS and certain individual states regulate vessels, facilities and pipelines in accordance with the requirements of OPA 90 or under analogous state law. There is currently little uniformity among the regulations issued by these agencies. 19 When responding to third-party oil spills, Environmental Services enjoys immunity from liability under federal law and some state laws for any spills arising from its response efforts, except in the event of deaths or personal injuries as a result of its gross negligence or willful misconduct. As more fully described below, all of the Company's businesses are, to some degree, subject to federal, state, local and international laws and regulations relating to environmental protection and occupational safety and health, including laws that govern the discharge of oil and pollutants into navigable waters. Violations of these laws may result in civil and criminal penalties, fines, injunctions or other sanctions. The Company believes that its operations are currently in compliance with all material environmental laws and regulations. It does not expect that it will be required to make capital expenditures in the near future that are material to its financial position or operations to comply with environmental laws and regulations; however, because such laws and regulations are frequently changing and may impose increasingly strict requirements, the Company cannot predict the ultimate cost of complying with these laws and regulations. The recent trend in environmental legislation and regulation is generally toward stricter standards, and it is the Company's view that this trend is likely to continue. OPA 90 establishes a regulatory and liability regime for the protection of the environment from oil spills. OPA 90 applies to owners and operators of facilities operating near navigable waters and owners and operators of vessels operating in U.S. waters, which include the navigable waters of the United States and the 200-mile Exclusive Economic Zone of the United States. Although it appears to apply in general to all vessels, for purposes of its liability limits and financial-responsibility and response-planning requirements, OPA 90 differentiates between tank vessels (which include the Company's chemical and petroleum product vessels) and "other vessels" (which include the Company's tugs, offshore marine vessels and dry cargo barges). Under OPA 90, owners and operators of regulated facilities and owners and operators or certain charterers of vessels are "responsible parties" and are jointly, severally and strictly liable for removal costs and damages arising from facility and vessel oil spills unless the spill results solely from the act or omission of certain third parties under specified circumstances, an act of God or an act of war. Damages are defined broadly to include (i) injury to natural resources and the costs of remediation thereof; (ii) injury to, or economic losses resulting from the destruction of, real and personal property; (iii) net loss by the U.S. government, a state or political subdivision thereof of taxes, royalties, rents, fees and profits; (iv) lost profits or impairment of earning capacity due to property or natural resources damage; (v) net costs of providing increased or additional public services necessitated by a spill response, such as protection from fire, safety or other hazards; and (vi) loss of subsistence use of available natural resources. The statutory liability of responsible parties for tank vessels is limited to the greater of $1,200 per gross ton or $10 million ($2 million for a vessel of 3,000 gross tons or less) per vessel; for any "other vessel," such liability is limited to the greater of $600 per gross ton or $500,000 per vessel. These liability limits do not apply (a) if an incident is caused by the responsible party's violation of federal safety, construction or operating regulations or by the responsible party's gross negligence or willful misconduct, (b) if the responsible party fails to report the incident or to provide reasonable cooperation and assistance in connection with oil removal activities as required by a responsible official or (c) if the responsible party fails to comply with certain governmental orders. Under OPA 90, with certain limited exceptions, all newly-built oil tankers carrying crude oil and petroleum products in U.S. waters must have double-hulls. Existing single-hull, double-side or double-bottom tank vessels, unless retrofitted with double-hulls, must be phased out of service at some point through 2015, depending upon the vessel's size, age and place of discharge. OPA 90 expanded pre-existing financial responsibility requirements and requires tank vessel owners and operators to establish and maintain with the USCG evidence of insurance or qualification as a 20 self-insurer or other evidence of financial responsibility sufficient to meet their potential liabilities under OPA 90. The Company has satisfied USCG regulations by providing evidence of financial responsibility demonstrated by commercial insurance and self-insurance. The regulations also implement the financial responsibility requirements of the Comprehensive Environmental Response, Compensation and Liability Act, described below, which imposes liability for discharges of hazardous substances such as chemicals, in an amount equal to $300 per gross ton, thus increasing the overall financial responsibility in the case of tank vessels from $1,200 to $1,500 per gross ton. OPA 90 also amended the Clean Water Act ("CWA"), also described below, to require the owner or operator of certain facilities or of a tank vessel to prepare facility or vessel response plans and to contract with oil spill removal organizations to remove, to the maximum extent practicable, a worst-case discharge. The Company has complied with these requirements. The Company expects its pollution liability insurance to cover any cost of spill removal subject to overall coverage limitations of $1.0 billion; however, a failure or refusal of the insurance carrier to provide coverage in the event of a catastrophic spill could result in material liability in excess of available insurance coverage, resulting in a material adverse effect on the Company's business, results of operations or financial position. OPA 90 allows states to impose their own liability regimes with respect to oil pollution incidents occurring within their boundaries and many states have enacted legislation providing for unlimited liability for oil spills. Some states have issued regulations addressing financial responsibility and vessel and facility response planning requirements. The Company does not anticipate that state legislation or regulations will have any material impact on its operations. In addition to OPA 90, the following are examples of environmental laws that relate to the Company's business and operations: The federal CWA and comparable state and local laws impose restrictions on the discharge of pollutants into the navigable waters of the United States. These laws also provide for civil and criminal penalties, as well as injunctive relief, for violations. A related statute, the Coastal Zone Management Act, authorizes state development and implementation of programs to manage non-point source pollution to restore and protect coastal waters. The federal Resource Conservation and Recovery Act and comparable state and local laws regulate the generation, transportation, treatment, storage and disposal of hazardous and certain non-hazardous wastes. These laws also provide for civil and criminal penalties, as well as injunctive relief, for violations. The Company's operations may generate or, in some cases, result in the transportation of these regulated wastes. The federal Comprehensive Environmental Response, Compensation, and Liability Act and comparable state laws establish strict and, under certain circumstances, joint and several liabilities for specified parties in connection with liability for the investigation and remediation of releases of hazardous materials into the environment and damages to natural resources. The federal Clean Air Act and comparable state and local laws impose restrictions on the emission of air pollutants into the atmosphere. These laws also provide for civil and criminal penalties, as well as injunctive relief, for violations. The Company's chemical and petroleum product carrier vessels are subject to vapor control and recovery requirements when loading, unloading, ballasting, cleaning, and conducting other operations in certain ports and are equipped with vapor control systems that satisfy these requirements in all material respects. The Company manages exposure to losses from the above-described laws through its efforts to use only well-maintained, well-managed and equipped facilities and vessels and its development of safety and environmental programs, including a maritime compliance program and its insurance program. The Company believes it will be able to accommodate reasonably foreseeable environmental regulatory changes. There can be no assurance, however, that any future regulations or requirements or that any discharge or emission of pollutants by the Company will not have a material adverse effect. 21 Heightened awareness of security needs brought about by the events of September 11, 2001 has caused the USCG, the IMO and the states and local ports to adopt heightened security procedures relating to ports and vessels. The Company has updated its procedures in light of the new requirements. In 2002, Congress passed the Maritime Transportation Security Act ("MTSA"), which together with the IMO's recent security proposals (collectively known as the International Ship and Port Facility Security Code or "ISPS"), requires specific security plans for the Company's vessels and rigorous crew identification requirements. The following vessels are subject to the requirements of the ISPS:
The Company has implemented vessel security plans and procedures for each of its U.S.-flag vessels pursuant to rules implementing the MTSA which have been issued by the USCG. The Company anticipates that the costs of security for its business will continue to increase. The Company's U.S.-flag vessels, subject to the requirements of the ISPS, all foreign flag vessels and U.S.-flag vessels, operating on international voyages, were in compliance with the ISPS requirements effective July 1, 2004. Industry Hazards and Insurance Vessel operations involve inherent risks associated with carrying large volumes of cargo and rendering services in a marine environment. In addition, helicopter operations are potentially hazardous and may result in incidents or accidents. Hazards include adverse weather conditions, collisions, fire and mechanical failures, which may result in injury to personnel, damage to equipment, loss of operating revenues, contamination of cargo, pollution and other environmental damages and increased costs. The Company maintains marine and aviation hull, liability and war risk, general liability, workers compensation and other insurance customary in the industries in which the Company operates. The Company also conducts training and safety programs to promote a safe working environment and minimize hazards. Employees As of December 31, 2007, the Company employed 5,268 individuals directly and indirectly through crewing or manning agreements. Substantially all indirect employees support Offshore Marine Services vessel operations. At December 31, 2007, Offshore Marine Services employed 812 seafarers in the North Sea of whom approximately 325 were members of a union under the terms of an ongoing agreement. In the United States, a total of approximately 504 employees are unionized in Marine Transportation Services and Harbor and Offshore Towing Services. The union agreements expire at varying times through September 30, 2011. Certain individuals in Environmental Services are also represented by unions. The unionization of domestic seamen and/or aviation employees could arise in the future. Management considers relations with its employees to be satisfactory. 22
ITEM 1A. RISK FACTORS Risks, Uncertainties and Other Factors That May Affect Future Results The Company's results of operations, financial condition and cash flow can be adversely affected by numerous risks. Carefully consider the risks described below, which represent some of the more critical risk factors that affect the Company, as well as the other information that has been provided in this Annual Report on Form 10-K. The risks described below are not the exclusive risks faced by the Company. Additional risks not presently known may also impair the Company's business operations. Difficult market conditions can materially adversely affect the Company's business in many ways. The success of the Company's business is both directly and indirectly dependent upon conditions in the global financial markets and economic conditions throughout the world that are outside its control and difficult to predict. Factors such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates and controls, and national and international political circumstances (including wars, terrorist acts or security operations) can have a material negative impact on the Company's business and investments, which in turn would reduce its revenues and profitability. Demand for many of the Company's services substantially depends on the level of activity in the offshore oil and natural gas exploration, development and production industry. The level of offshore oil and natural gas exploration, development and production activity has historically been volatile and that volatility is likely to continue. The level of activity is subject to large fluctuations in response to relatively minor changes in a variety of factors that are beyond the Company's control, including:
A prolonged material downturn in oil and natural gas prices is likely to cause a substantial decline in expenditures for exploration, development and production activity. Lower levels of expenditure and activity would result in a decline in the demand and lower rates for the Company's offshore energy support services and tanker services. Moreover, approximately 48% of Offshore Marine Services and 58% of Aviation Services are currently conducted in the U.S. Gulf of Mexico and are therefore dependent on levels of activity in that region, which may differ from levels of activity in other regions of the world. Risks from the Company's international operations. The Company operates vessels, leases helicopters and transacts other business worldwide. Its ability to compete in the international offshore energy support market may be adversely affected by foreign government regulations that favor or require the awarding of contracts to local competitors, or that require foreign persons to employ citizens of, or purchase supplies from, a particular jurisdiction. Further, the Company's foreign subsidiaries may face governmentally imposed restrictions on their ability to transfer funds to their parent company. 23 Activity outside the U.S. involves additional risks, including the possibility of:
Unstable political, military and economic conditions in foreign countries where a significant proportion of Offshore Marine Services' operations are conducted could adversely impact the Company's business. During 2007, approximately 52% of Offshore Marine Services' operating revenues resulted from Offshore Marine Services' foreign operations. These operations are subject to risks, including potential vessel seizure, terrorist attacks, piracy, kidnapping, nationalization of assets, currency restrictions, import or export quotas and other forms of public and government regulation, all of which are beyond the Company's control. Economic sanctions or an oil embargo, for example, could have significant impact on activity in the oil and gas industry and, correspondingly, on the Company should Offshore Marine Services operate vessels in a country subject to any sanctions or embargo, or in the surrounding region to the extent any sanctions or embargo disrupt its operations. Offshore Marine Services, Marine Transportation Services and Aviation Services rely on several customers for a significant share of their revenues, the loss of any of which could adversely affect each of their businesses and operating results. Offshore Marine Services', Marine Transportation Services' and Aviation Services' customers are primarily major oil companies and large independent oil and gas exploration and production companies. The portion of Offshore Marine Services', Marine Transportation Services' or Aviation Services' revenues attributable to any single customer may change over time, depending on the level of relevant activity by any such customer, their ability to meet the customer's needs and other factors, many of which are beyond the Company's control. Consolidation of the Company's customer base could adversely affect demand for its equipment and reduce its revenues. Oil and natural gas companies, energy companies and drilling contractors have recently undergone substantial consolidation and additional consolidation is possible. Consolidation results in fewer companies to charter or contract for the Company's equipment. Also, merger activity among both major and independent oil and natural gas companies affects exploration, development and production activity as the consolidated companies integrate operations to increase efficiency and reduce costs. Less promising exploration and development projects of a combined company may be dropped or delayed. Such activity may result in an exploration and development budget for a combined company that is lower than the total budget of both companies before consolidation, which would adversely affect demand for the Company's Offshore Marine Services' vessels, Marine Transportation Services' tankers and Aviation Services' helicopters, thereby reducing the Company's revenues. The Company may be unable to maintain or replace its vessels as they age. As of December 31, 2007, the average age of the Company's Offshore Marine Services vessels, excluding its standby safety vessels, was approximately 12.8 years. The Company believes that after an offshore support vessel has been in service for approximately 20 years, the expense (which typically increases with age) necessary to satisfy required marine certification standards may not be economically justifiable. The Company may be unable to carry out drydockings of its vessels or may be limited by insufficient shipyard capacity, which could adversely 24 affect its ability to maintain its vessels. There can be no assurance that the Company will be able to maintain its fleet by extending the economic life of existing vessels, or that its financial resources will be sufficient to enable it to make expenditures necessary for these purposes or to acquire or build replacement vessels. An increase in the supply of offshore support vessels or tankers could have an adverse impact on the charter rates earned by the Company's offshore support vessels and tankers. Expansion of the supply of the worldwide offshore support vessel fleet would increase competition in the markets where Offshore Marine Services operates. The refurbishment of disused or "mothballed" vessels, conversion of vessels from uses other than oil and gas exploration and production support and related activities or construction of new vessels could all add vessel capacity to current worldwide levels. A significant increase in vessel capacity could lower charter rates and result in lower operating revenues. Similarly, should competitors in the domestic petroleum and chemical product tankers industry construct a significant number of new tankers or large capacity integrated or articulated tug and barges, demand for tanker assets could be adversely affected. If the Company does not restrict the amount of foreign ownership of its Common Stock, it could be prohibited from operating offshore support vessels, inland river vessels and barges and tankers in parts of the U.S. and could be prohibited from operating helicopters, which would adversely impact its business and operating results. The Company is subject to the Shipping Acts, which govern, among other things, the ownership and operation of offshore support vessels, tankers and barges used to carry cargo between U.S. ports. The Acts require that vessels engaged in the "U.S. coastwise trade" be owned by U.S. citizens and built in the U.S. The Company is also subject to regulations pursuant to the Federal Aviation Act and other statutes ("Aviation Acts"). Generally, aircraft operating in the U.S. must be registered in the U.S. In order to register such aircraft under the Aviation Acts, the Company must be owned or controlled by U.S. citizens. Although the Company's Certificate of Incorporation and by-laws contain provisions intended to assure compliance with these provisions of the Shipping Acts, and also comply with the Aviation Acts, the Company would be prohibited from operating vessels in the U.S. coastwise trade and helicopters in the U.S. during any period in which the Company did not comply with these regulations. Repeal, Amendment, Suspension or Failure to Enforce the Jones Act would result in additional competition for Offshore Marine Services, Marine Transportation Services and Inland River Services. A substantial portion of Offshore Marine Services', Marine Transportation Services' and Inland River Services' operations are conducted in the U.S. coastwise trade. Under the Jones Act, this trade is restricted to vessels built in the United States, owned and manned by U.S. citizens and registered under U.S. law. There have been attempts to repeal or amend the Jones Act, and these attempts are expected to continue in the future. Repeal of the Jones Act could result in additional competition from vessels built in lower-cost foreign shipyards and owned and manned by foreign nationals with promotional foreign tax incentives and with lower wages and benefits than U.S. citizens, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Outer Continental Shelf Lands Act, as amended, provides the federal government with broad discretion in regulating the leasing of offshore resources for the production of oil and gas. Because Offshore Marine Services' operations rely on offshore oil and gas exploration and production, the government's exercise of authority under the provisions of the Outer Continental Shelf Lands Act to restrict the availability of offshore oil and gas leases could have a material adverse effect on the Company's financial condition and results of operations. Failure to maintain an acceptable safety record may have an adverse impact on the Company's ability to retain customers. The Company's customers consider safety and reliability a primary concern in selecting a service provider. The Company must maintain a record of safety and reliability that is acceptable to its customers. Should this not be achieved, the ability to retain current customers and attract new customers may be adversely affected. 25 Operational risks could disrupt operations and expose the Company to liability. The operation of offshore support vessels, tankers, tugs, and helicopters is subject to various risks, including catastrophic disaster, adverse weather, mechanical failure and collision. Additional risks to vessels include adverse sea conditions, capsizing, grounding, oil and hazardous substance spills and navigation errors. These risks could endanger the safety of the Company's personnel, equipment, cargo and other property, as well as the environment. If any of these events were to occur, the Company could be held liable for resulting damages. In addition, the affected vessels or helicopters could be removed from service and would not be available to generate revenues. Revenues from Aviation Services are subject to adverse weather conditions and seasonality. A significant portion of the Company's revenues from Aviation Services is dependent on actual flight hours. Prolonged periods of adverse weather, storms and the effect of fewer hours of daylight adversely impact Aviation Services. Winter months generally have more days of adverse weather conditions than the other months of the year with poor visibility, high winds, heavy precipitation and fewer daylight hours, all of which adversely affect helicopter operations. June through November is tropical storm season in the U.S. Gulf of Mexico; during tropical storms, helicopters are unable to operate in the area of the storm. In addition, many of Aviation Services' facilities are located along the U.S. Gulf of Mexico coast, and tropical storms may cause damage to its property. Consolidation in the aircraft parts industry could affect the service and operation of Aviation Services' helicopters. A reduction in the number of approved parts suppliers or a consolidation of the spare parts redistribution market could interrupt or delay the supply of aircraft components, adversely affect Aviation Services' ability to meet service commitments to customers and could cause Aviation Services to lose opportunities with existing and future customers. Aviation Services might not be able to qualify or identify alternative suppliers in a timely fashion, or at all. Consolidations involving suppliers could further reduce the number of alternatives for Aviation Services and affect the cost of components. An increase in the cost of components could make Aviation Services less competitive and result in lower margins. Revenues from Marine Transportation Services could be adversely affected by a decline in demand for domestic refined petroleum products, crude oil or chemical products, or a change in existing methods of delivery. A reduction in domestic consumption of refined petroleum products, crude oil or chemical products may adversely affect revenues from Marine Transportation Services. Moreover, alternative methods of delivery of refined petroleum, natural gas or crude oil may be developed and therefore reduce demand for the Company's services. Finally, a reduction in domestic refining capacity would reduce demand for the Company's services. Construction of additional refined petroleum product, natural gas or crude oil pipelines could have a material adverse effect on Marine Transportation Services' revenues. Long-haul transportation of refined petroleum products, crude oil and natural gas is generally less costly by pipeline than by tanker. Existing pipeline systems are either insufficient to meet demand in, or do not reach all of, the markets served by Marine Transportation Services' tankers. New pipeline segments are being planned and approved for the Florida market. The construction and operation of these pipelines could have an adverse effect on Marine Transportation Services' business. The Company may have to phase-out its double-bottom tanker from petroleum product transportation service in U.S. waters. The Oil Pollution Act of 1990 establishes a phase-out schedule, depending upon vessel size and age, for non-double-hull vessels carrying crude oil and petroleum products in U.S. coastwise transportation. The phase-out date for the Company's non-double-hull tanker, the Seabulk America, is 2015 and unless this vessel is modified with a double-hull, which will require substantial capital expenditure, it will be prohibited from transporting crude oil and petroleum products in U.S. coastwise transportation after this date. It would also be prohibited from transporting petroleum products in most foreign and international markets under a phase-out schedule established by the International Maritime Organization. 26 The Company is subject to complex laws and regulations, including environmental laws and regulations that can adversely affect the cost, manner or feasibility of doing business. Increasingly stringent federal, state, local and international laws and regulations governing worker safety and health and the manning, construction and operation of vessels significantly affect the Company's operations. Many aspects of the marine industry are subject to extensive governmental regulation by the United States Coast Guard ("USCG"), Occupational Safety and Health Administration ("OSHA"), the National Transportation Safety Board ("NTSB") and the U.S. Customs Service and to regulation by port states and class society organizations such as the American Bureau of Shipping, as well as to international regulations from international treaties such as the Safety of Life at Sea convention administered by port states and class societies. The USCG, the OSHA and the NTSB set safety standards and are authorized to investigate vessel accidents and recommend improved safety standards. The U.S. Customs Service is authorized to inspect vessels at will. The Company's business and operations are also subject to federal, state, local and international laws and regulations that control the discharge of oil and hazardous materials into the environment or otherwise relate to environmental protection and occupational safety and health. Compliance with such laws and regulations may require installation of costly equipment or operational changes, and the phase-out of certain product tankers. Failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of the Company's operations. Some environmental laws impose strict and, under certain circumstances, joint and several liability for remediation of spills and releases of oil and hazardous materials and damage to natural resources, which could subject the Company to liability without regard to whether it was negligent or at fault. These laws and regulations may expose the Company to liability for the conduct of or conditions caused by others, including charterers. Moreover, these laws and regulations could change in ways that substantially increase the Company's costs. The Company cannot be certain that existing laws, regulations or standards, as currently interpreted or reinterpreted in the future, or future laws and regulations will not have a material adverse effect on its business, results of operations and financial condition. For more information, see Item 1. "Governmental Regulation—Environmental Compliance." Spill response revenue is subject to significant volatility. Environmental Services' response revenues are event driven and can vary greatly from quarter to quarter and year to year based on the number and magnitude of responses. As a result, Environmental Services' profitability may also vary greatly from quarter to quarter and year to year. A relaxation of oil spill regulation or enforcement could reduce demand for Environmental Services' oil spill response services. Environmental Services is dependent upon the enforcement of regulations promulgated under OPA 90, international conventions and, to a lesser extent, upon local regulations. Less stringent oil spill regulations or less aggressive enforcement of these regulations would decrease demand for Environmental Services' oil spill response services. There can be no assurance that oil spill regulation will not be relaxed or enforcement of existing or future regulation will not become less stringent. If this happens, the demand for Environmental Services' oil spill response services could be adversely impacted. A change in, or revocation of, National Response Corporation's classification as an Oil Spill Removal Organization would result in a loss of business. The National Response Corporation ("NRC") is classified by the USCG as an Oil Spill Removal Organization ("OSRO"). The USCG classifies OSROs based on their overall ability to respond to various types and sizes of oil spills. USCG classified OSROs have a competitive advantage over non-classified service providers because customers of a classified OSRO are exempt from regulations that would otherwise require them to list their oil spill response resources in filings with the USCG. A loss of NRC's classification or changes in the requirements for classification could eliminate or diminish NRC's ability to provide customers with this exemption. If this happens, Environmental Services could lose customers. Environmental Services could incur liability in connection with providing spill response services. Although Environmental Services generally is exempt from liability under the Clean Water Act ("CWA") for its own 27 actions and omissions in providing spill response services, this exemption might not apply if it were found to have been grossly negligent or to have engaged in willful misconduct, or if it were to have failed to provide these services consistent with applicable regulations and directives under the CWA. In addition, the exemption under the federal CWA would not protect Environmental Services against liability for personal injury or wrongful death, or against prosecution under other federal or state laws. While most of the U.S. states in which Environmental Services provides service have adopted similar exemptions, several states have not. If a court or other applicable authority were to determine that Environmental Services does not benefit from federal or state exemptions from liability in providing spill response services, Environmental Services could be liable together with the local contractor and the responsible party for any resulting damages, including damages caused by others. Inland River Services could experience variation in freight rates. Freight transportation rates may fluctuate as the volume of cargo and availability of barges changes. Volume of freight transported on the inland waterways may vary as a result of various factors, such as global economic conditions and business cycles, domestic and international agricultural production and demand and foreign currency exchange rates. Barge participation in the industry can also vary year to year and is dependent on the number of barges built and retired from service. Extended periods of high barge availability and low cargo demand could adversely impact Inland River Services. Inland River Services' results of operations could be adversely affected by the decline in U.S. grain exports. Inland River Services' business is significantly affected by the volume of grain exports handled through U.S. Gulf of Mexico ports. Grain exports can vary due to a number of factors including the crop harvest yield levels in the U.S. and abroad, and the demand for grain in the U.S. The shortage of available grain overseas can increase demand for U.S. grain. Conversely, an abundance of grain overseas can decrease demand for U.S. grain. A decline in exports could result in excess barge capacity, which would likely lower freight rates earned by Inland River Services. Inland River Services' results of operations could be adversely affected by international economic and political factors. The actions of foreign governments could affect the import and export of the dry-bulk commodities typically transported by Inland River Services. Foreign trade agreements and each country's adherence to the terms of such agreements can raise or lower demand for U.S. imports and exports of the dry-bulk commodities Inland River Services transports. National and international boycotts and embargoes of other countries' or U.S. imports or exports together with the raising or lowering of tariff rates will affect the demand for transportation of the cargos Inland River Services transports. These actions or developments could have an adverse impact on Inland River Services. Inland River Services' results of operations are affected by seasonal activity. Inland River Services' business is seasonal, and its quarterly revenues and profits have historically been lower during the first and second quarters of the year and higher during the third and fourth quarters during the grain harvest. Inland River Services' results of operations are affected by adverse weather and river conditions. Weather patterns can affect river levels and cause ice conditions during winter months, which can hamper barge navigation. Locks on river systems may be closed for maintenance or other causes, which may delay barge movements. These conditions could adversely impact Inland River Services. Inland River Services' results of operations could be materially and adversely affected by fuel price fluctuations. For the most part, Inland River Services purchases towboat and fleeting services from third party vendors. It is indirectly exposed to increases in fuel prices, as vendors will adjust the price of the services when fuel prices escalate. If this happens, Inland River Services results of operation may be adversely affected. The Company's insurance coverage may be inadequate to protect it from the liabilities that could arise in its businesses. The Company maintains insurance coverage against the risks related to its businesses. There can be no assurance, however, that existing insurance coverage can be renewed at commercially reasonable 28 rates or that available coverage will be adequate to cover future claims. If a loss occurs that is partially or completely uninsured, the Company could be exposed to substantial liability. The Company's global operations are subject to certain foreign currency, interest rate, fixed-income and equity risks. The Company is exposed to certain foreign currency, interest rate, fixed-income, equity, and commodity price risks. A portion of these risks is hedged, but fluctuations could impact the Company's financial position. Volatility in international currency exchange rates may have a significant impact on the Company's operating results. The Company has, and anticipates that it will continue to receive, contracts denominated in foreign currencies. It is often not practicable for the Company to effectively hedge the entire risk of significant changes in currency rates during the contract period. The Company's operating results have been negatively impacted for certain periods and positively impacted for other periods and may continue to be affected to a material extent by the impact of currency fluctuations. Operating results may also be affected by the cost of hedging activities that the Company undertakes. The Company holds a large proportion of its net assets in cash equivalents and short-term investments, including a variety of public and private debt and equity instruments. Such investments subject the Company to the risks generally inherent in the capital markets. Given the relatively high proportion of the Company's liquid assets relative to its overall size, the results of its operations may be materially affected by the results of the Company's capital management and investment activities and the risks associated with those activities. Volatility in the public equity markets may cause the Company to experience investment losses. In addition, changes in interest rates may have an adverse impact on the Company's results of operations. The Company's inability to attract and retain qualified personnel could have an adverse effect on its business. Attracting and retaining skilled personnel across all of the Company's business segments is an important factor in its future success. The market for the personnel employed is highly competitive and the Company cannot be certain that it will be successful in attracting and retaining qualified personnel in the future. The failure to successfully complete construction or conversion of the Company's vessels, repairs, maintenance or routine drydockings on schedule and on budget could adversely affect the Company's financial condition and results of operations. The Company has a number of vessels under construction and may plan to construct other vessels in response to current and future market conditions. The Company also routinely engages shipyards to drydock vessels for regulatory compliance and to provide repair and maintenance. Construction projects and drydockings are subject to risks of delay and cost overruns, resulting from shortages of equipment, lack of shipyard availability, unforeseen engineering problems, work stoppages, weather interference, unanticipated cost increases, inability to obtain necessary certifications and approvals and shortages of materials or skilled labor. A significant delay in either construction or drydockings could have a material adverse effect on contract commitments and revenues with respect to vessels under construction, conversion or for other drydockings. Significant cost overruns or delays for vessels under construction, conversion or retrofit could also adversely affect the Company's financial condition and results of operations. The demand for vessels currently under construction or conversion may diminish from anticipated levels, which may have a material adverse effect on the Company's revenues and profitability in response to a failure to obtain contracts on favorable terms or at all. A Violation of the Foreign Corrupt Practices Act may adversely affect the Company's business and operations. In order to effectively compete in certain foreign jurisdictions, the Company seeks to establish joint ventures with local operators or strategic partners. As a U.S. corporation, the Company is subject to the regulations imposed by the Foreign Corrupt Practices Act ("FCPA"), which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. The Company has adopted stringent procedures to enforce compliance with the FCPA, but it may be held liable for actions taken by its strategic or local partners even though these partners may not be subject to the FCPA. Any determination that the Company has violated the FCPA could have a material adverse effect on its business and results of operations. 29
ITEM 1B. UNRESOLVED STAFF COMMENTS None
ITEM 2. PROPERTIES Offshore support vessels, tankers, barges and helicopters are the principal physical properties owned by the Company and are more fully described in "Offshore Marine Services," "Marine Transportation Services," "Inland River Services" and "Aviation Services" in "Item 1. Business."
ITEM 3. LEGAL PROCEEDINGS In the normal course of its business, the Company becomes involved in various litigation matters including, among other things, claims by third parties for alleged property damages, personal injuries and other matters. While the Company believes it has meritorious defenses against these claims, management has used estimates in determining the Company's potential exposure and has recorded reserves in its financial statements related thereto where appropriate. It is possible that a change in the Company's estimates of that exposure could occur, but the Company does not expect such changes in estimated costs will have a material effect on the Company's consolidated financial position or results of operations. In June 2005, a subsidiary of SEACOR received a document subpoena from the Antitrust Division of the U.S. Department of Justice. This subpoena relates to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the U.S. Gulf of Mexico. The Company believes that this subpoena is part of a broader industry inquiry and that other providers have also received such subpoena. SEACOR intends to provide all information requested in response to this investigation. Under United States law, "United States persons" are prohibited from business activities and contracts in certain countries, including Sudan and Iran. Relating to the prohibitions, Seabulk, a subsidiary of SEACOR acquired in July 2005, filed three reports with and submitted documents to the Office of Foreign Asset Control ("OFAC") of the U.S. Department of Treasury in December 1999 and January and May 2002. One of the reports was also filed with the Bureau of Export Administration of the U.S. Department of Commerce. The reports and documents related to certain limited charters with third parties involving three Seabulk vessels which called in Sudan for several months in 1999 and January 2000 and charters with third parties involving several of Seabulk's vessels which called in Iran in 1998. In March 2003, Seabulk received notification from OFAC that the case has been referred to its Civil Penalties Division. Should OFAC determine that these activities constituted violations of the laws or regulations, civil penalties, including fines, could be assessed against Seabulk or certain individuals who knowingly participated in such activity. The Company cannot predict the extent of such penalties; however, management does not believe the outcome of these matters will have a material impact on its consolidated financial position or results of operations. Marine Transportation Services had two of its tankers retrofitted to double-hull configuration to enable each of them to continue to transport crude oil and petroleum products beyond their OPA 90 mandated retirement dates in 2011. Both vessels operate in the U.S. coastwise, or Jones Act, trade, which is restricted to vessels built or rebuilt in the United States. The retrofit work was completed in a foreign shipyard. In May 2005, the Company received a determination from the National Vessel Documentation Center ("NVDC") of the U.S. Coast Guard ("USCG"), which administers the U.S.-build requirements of the Jones Act. The determination, which the Company relied upon to commence the retrofits in a foreign shipyard, concluded the retrofits would not constitute a foreign rebuilding and therefore would not jeopardize the tankers' eligibility to operate in the U.S. coastwise trade. On April 25, 2007, Crowley Maritime Corp., an operator of tank vessels in the U.S. coastwise trade, filed an appeal asking the Commandant of the USCG to reverse the NVDC's May 2005 determination, which would render these two tankers ineligible to operate in the U.S. coastwise trade. Subsequently, on July 9, 2007, a U.S. shipbuilders trade association, Crowley Maritime Corp. and another operator of tankers in the U.S. 30 coastwise trade commenced a civil action in the U.S. District Court for the Eastern District of Virginia, Shipbuilders Council of America, Inc., et al. v. U.S. Department of Homeland Security, et al., No. 1:07cv665 (E.D. Va.), in which they seek to have the court set aside the NVDC's determination and direct the USCG to revoke the coastwise license of one of the tankers whose retrofit had then been completed. The Company believes the NVDC's determination was correct and in accord with the USCG's long-standing regulations and interpretations. The Company intervened in the action and intends to assist the USCG in defending the NVDC's determination.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2007. 31
Officers of SEACOR serve at the pleasure of the Board of Directors. The name, age and offices held by each of the executive officers of SEACOR at December 31, 2007 were as follows:
32
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market for the Company's Common Stock SEACOR's Common Stock trades on the New York Stock Exchange ("NYSE") under the trading symbol "CKH." Set forth in the table below for the periods presented are the high and low sale prices for SEACOR's Common Stock.
As of February 22, 2008, there were 821 holders of record of Common Stock. SEACOR has not paid any cash dividends in respect of its Common Stock since its inception in December 1989 and has no present intention to pay any dividends in the foreseeable future. Any payment of future dividends will be at the discretion of SEACOR's Board of Directors and will depend upon, among other factors, the Company's earnings, financial condition, current and anticipated capital requirements, plans for expansion, level of indebtedness and contractual restrictions, including the provisions of the Company's revolving credit facility or other then-existing indebtedness. The payment of future cash dividends, if any, would be made only from assets legally available. 33 Performance Graph Set forth in the graph below is a comparison of the cumulative total return that a hypothetical investor would have earned assuming the investment of $100 over the five-year period commencing on December 31, 2002 in (i) the Common Stock of the Company, (ii) the Standard & Poor's 500 Stock Index ("S&P 500") and (iii) the Simmons Offshore Transportation Index, an index of oil service companies published by Simmons and Company, Inc. (the "Simmons Peer Index").
34 Issuer Repurchases of Equity Securities and Debt In 2007, 2006 and 2005, the Company acquired 2,366,880, 727,180 and 304,676 shares of Common Stock for treasury, respectively, at an aggregate cost of $213.2 million, $58.1 million, and $20.5 million, respectively. As of December 31, 2007, $125.0 million of repurchase authority granted by the Company's Board of Directors remains available for the acquisition of additional shares of Common Stock and 2.875% Convertible Senior Debentures due 2024. In addition, the Company may purchase, separate from such authorization, any or all of the Company's 7.2% Notes due 2009, 5.875% Senior Notes Due 2012, and the 9.5% Senior Notes due 2013 of Seabulk International, Inc., a wholly-owned subsidiary. Securities are acquired from time to time through open market purchases, privately negotiated transactions or otherwise, depending on market conditions.
35
ITEM 6. SELECTED FINANCIAL DATA SELECTED HISTORICAL FINANCIAL INFORMATION The following table sets forth, for the periods and at the dates indicated, selected historical and consolidated financial data for the Company, in thousands of dollars, except per share data. Such financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" included in Parts II and IV, respectively, of this Annual Report on Form 10-K.
36
Management's Discussion and Analysis of Financial Condition and Results of Operations below presents the Company's operating results for each of the three years in the period ended December 31, 2007, and its financial condition at December 31, 2007. Except for the historical information contained herein, this Annual Report on Form 10-K and other written and oral statements that the Company makes from time to time contain forward-looking statements, which involve substantial known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. The Company has tried, wherever possible, to identify such statements by using words such as "anticipate," "estimate," "expect," "project," "intend," "believe," "plan," "target," "forecast" and similar expressions in connection with any discussion of future operating or financial performance. Among the factors that could cause actual results to differ materially are those discussed in "Risks, Uncertainties and Other Factors That May Affect Future Results" in Item 1A of this Annual Report on Form 10-K. In addition, the following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with the information presented in the Company's consolidated financial statements and the related notes to its consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND Overview SEACOR Holdings Inc. is in the business of owning, operating, investing in and marketing equipment, primarily in the offshore oil and gas and marine transportation industries. The Company conducts its activities in five primary business segments: Offshore Marine Services operates a diversified fleet of offshore support vessels primarily servicing offshore oil and gas exploration, development and production facilities worldwide. Marine Transportation Services operates a fleet of U.S.-flag product tankers carrying petroleum, crude oil and chemical products in the U.S. coastwise trade. Inland River Services is primarily engaged in the provision of dry and liquid cargo transportation on the U.S. inland waterways for a range of agricultural and industrial products. Aviation Services operates a fleet of helicopters principally providing transportation services in support of offshore oil and gas activities in the U.S. and air medical services to hospitals. Environmental Services is primarily engaged in the provision of emergency preparedness and response services to oil, chemical, industrial and marine transportation clients in the U.S. and abroad. 37 Other includes harbor assist and offshore towing services, various other investments in joint ventures, commodity trading activities and asset leasing activities. All of the Company's business segments, with the exception of Environmental Services, are "asset related" and highly capital-intensive. Demand for the Company's assets is cyclical in varying degrees, due to changes in the activity levels for those assets as well as availability of supply. To manage capital successfully over time, the Company continually assesses its asset portfolio and pursues opportunities to realize value from its assets by shifting their operation to other markets or trading them when circumstances warrant. The Company actively buys and sells second-hand equipment in the ordinary course of its business, as well as designs, orders, builds, upgrades, operates or re-sells newly constructed equipment. The Company typically pursues a strategy of shedding older assets while adjusting its asset mix. The Company also leases assets to other operators and sells assets to financial lessors and leases them back for varying periods of time. The Company believes that maintaining significant liquidity is an important factor that will enable it to take advantage of opportunities as they arise. In recent years, the Company has also sought to create balance in its businesses and broaden its asset base from support of offshore oil and gas activity, which is highly dependent on energy prices and drilling activity, by investing in barges, tankers and tugs, looking for opportunities to engage in logistics support for movement of agricultural commodities and supporting developing trades in renewable fuels. The Company is exploring opportunities to extend its aviation activities through investments in sales, marketing and distribution of aircraft and specialized parts and services, maintenance and repair facilities and fixed base operations. In addition, the Company is also looking to expand into the Chinese and Indian markets. The Company believes that demand for its barges, tankers and tugs is in part linked to different factors than those that drive demand for offshore oil and gas exploration and development. In addition, for barges and tankers, contracts can often be secured with longer terms than those typically available for offshore marine and helicopter services. The expectation is that over time this strategy of diversification will provide better returns on capital than could be achieved by restricting investment to one specific highly cyclical asset class such as marine vessels supporting offshore oil and gas activity. The Company believes this strategy will afford more opportunities to use capital efficiently, create greater stability of earnings and allow improved margins due to operational synergies which, in turn, should yield a lower cost of capital, more sustainable cash flow and increased profitability. Consolidated Results of Operations The Company's operations are divided into five main business segments: Offshore Marine Services, Marine Transportation Services, Inland River Services, Aviation Services and Environmental Services. The Company also has activities that are referred to and described under Other, which primarily includes Harbor and Offshore Towing Services, energy trading activities, various other investments in joint ventures, commodity trading activities and asset leasing activities. Financial data for segment and geographic areas is reported in Part IV "Note 16. Major Customers and Segment Data" of this Annual Report on Form 10-K. Offshore Marine Services The market for offshore oil and gas drilling has historically been cyclical. Demand tends to be linked to the price of oil and gas and those prices tend to fluctuate depending on many factors, including global economic activity and levels of inventory. Price levels for oil and gas can in themselves cause additional fluctuations by inducing changes in consumer behavior. The cyclicality of the market is further exacerbated by the tendency of others to order capital assets as demand grows, often resulting in new capacity becoming available just as demand for oil and gas is peaking and activity is about to decline. 38 Offshore oil and gas industry markets worldwide have been operating at high levels since the third quarter of 2004 when offshore drilling activity increased in response to higher oil and gas prices. New rigs continue to be delivered with 58 expected in 2008 although these deliveries are subject to probable delays. The Company believes that utilization in the rig market will continue at high levels in 2008. Demand for vessel support services has remained high with supply largely unchanged as the introduction of new and reactivated vessels has generally been offset by retirements of older equipment. The Company believes it is likely that the supply of new vessels could begin to have an increasing influence on vessel hire rates and utilization. The Company believes there are currently in excess of 700 new vessels on order with approximately 300 due for delivery in 2008, although ongoing shipyard delays could mean the actual numbers of deliveries is likely to be nearer to 200. The impact on the market will depend upon demand remaining at high levels and the extent of older equipment retirements. Offshore Marine Services has actively sought to dispose of its old generation equipment while taking delivery of new vessels specifically designed to meet the changing requirements of the market. Since December 31, 2005, the average age of the fleet has reduced from approximately 16 years to approximately 13 years. The number and type of vessels operated, their rates per day worked and their utilization levels are the key determinants of Offshore Marine Services' operating results and cash flows. Unless a vessel is removed from operational service, there is little reduction in daily running costs and, consequently, operating margins are most sensitive to changes in rates per day worked and utilization. The aggregate cost of Offshore Marine Services' operations depends primarily on the size and asset mix of the fleet. Offshore Marine Services' costs and expenses include daily running costs and fixed costs. Daily running costs are primarily comprised of wages paid to marine personnel, maintenance and repairs and insurance, which vary depending on equipment type, location and activity. During 2007, there was continual pressure to increase crew wages in response to chronic shortages of qualified and experienced crew throughout the world, particularly in the U.S. Gulf of Mexico and West Africa. The cost of basic ship repair activities in the U.S. Gulf of Mexico has also increased dramatically in the aftermath of the 2005 hurricanes, as labor shortages and increased activity levels have led to significantly higher costs. Offshore Marine Services expects upward cost pressures on repair and maintenance activity in the U.S. Gulf of Mexico to continue in 2008. Two significant components of maintenance and repair expenses are drydock and main engine overhaul costs which are both expensed as incurred. Vessel drydockings are regularly performed in accordance with applicable regulations and main engine overhauls are performed in accordance with planned maintenance programs. If a disproportionate number of drydockings or main engine overhauls are undertaken in a particular fiscal year or calendar quarter, operating expenses are likely to vary significantly when compared with a prior year or quarter. Depreciation and charter-in expenses of leased equipment are Offshore Marine Services' principal fixed costs. Depreciation depends on the acquisition costs of vessels and their related useful life and salvage value assumptions. When vessels are sold and leased back (bareboat chartered), depreciation and finance charges become indirectly incorporated into operating expenses through the lease payments made. Offshore Marine Services believes its diverse fleet and broad geographical distribution of vessels assist in weathering the effects of any industry downturns. The Company's strong financial position also enables Offshore Marine Services to capitalize on opportunities as they develop for purchasing, mobilizing or upgrading vessels to meet changing market conditions. 39
Operating Revenues—2007 compared to 2006. Overall operating revenues increased by $9.8 million in 2007 compared to 2006. Overall average day rates improved in all geographic regions resulting in additional operating revenues of $97.4 million. Overall fleet utilization was 81% in 2007 compared to 86% in 2006. The reduction was primarily due to a softening shelf market in the U.S. Gulf of Mexico in the second half of 2007 and resulted in a decrease in operating revenues of $45.8 million. Utilization in the international regions remained consistent with 2006 except in the Middle East where utilization improved from 72% in 2006 to 84% in 2007. Total days available for charter decreased by 13,354, or 16%, due to net fleet dispositions and resulted in an overall decrease of $66.7 million in operating revenues. The redeployment of vessels primarily from the U.S. Gulf of Mexico and Asia to other geographic regions, including Mexico, Central and South America, West Africa and the Middle East added additional operating revenues of $13.8 million. In addition, operating revenues increased $5.5 million due to favorable changes in currency exchange rates in the North Sea region and $5.6 million due to higher other marine services revenues. Operating Income—2007 compared to 2006. Operating income in 2007 improved by $5.3 million over 2006. The improvements in operating revenues noted above were partially offset by increased operating expenses primarily due to higher crew wage expense as a result of labor shortages in most regions, higher other marine services revenues, primarily in the Middle East region and an additional contribution to the United Kingdom Merchant Navy Officers' Pension Fund. Depreciation expense was significantly lower due 40 to the net reduction in fleet size. Gains from the disposition of assets were $82.5 million in 2007, compared to $67.0 million in the prior year. Operating Revenues—2006 compared to 2005. Operating revenues in 2006 improved over 2005 due to several factors. Demand for equipment in most of the Company's markets remained at high levels throughout 2006 in response to higher levels of exploration, production and construction activity and in the U.S. Gulf of Mexico the ongoing re-construction activity in the aftermath of the 2005 hurricanes. Overall average day rates improved from $6,757 per day in 2005 to $9,109 per day in 2006, resulting in additional operating revenues of $110.6 million. A further $59.3 million of the improvement was due to an 11% increase in overall available days primarily as a result of a full year of activity for vessels acquired as a result of the acquisition of Seabulk International, Inc. ("Seabulk") on July 1, 2005 through a merger with a wholly-owned subsidiary of SEACOR (the "Seabulk Merger"), partially offset by days lost as a consequence of vessel dispositions. The redeployment of vessels between regions and the change of vessels from bareboat charter to time charter resulted in additional operating revenues of $37.5 million. Operating revenues in the Middle East region increased as a result of a full year of activity for vessels acquired as a result of the acquisition of Seabulk, higher utilization and the mobilization of two additional vessels to the region. Operating revenues in Mexico, Central and South America decreased primarily due to a reduction in activity in Mexico following the sale of a Mexican joint venture in early 2006. A number of vessels that had been chartered to that joint venture were either sold to former joint venture partners or deployed for service in the U.S. Gulf of Mexico. Overall fleet utilization remained flat during 2006 as compared to 2005. Operating Income—2006 compared to 2005. Operating income in 2006 was higher than in 2005 due to a combination of improved operating revenues noted above and higher gains on asset sales. Results in 2006 included gains from asset sales of $67.0 million, compared to $22.0 million in the prior year. Vessels added in the Seabulk Merger and other variations in fleet mix as a result of fleet acquisitions and disposals resulted in additional operating expenses and depreciation of $53.4 million. The improvements in operating income were partially offset by a tightening labor market that increased wages by an average of 18% across all regions, with the Gulf of Mexico experiencing increases approaching 30%. Administrative expenses increased by 19% primarily as a result of assimilating the Seabulk organization. Equity in Earnings of 50% or Less Owned Companies. During 2007, Offshore Marine Services recognized a gain of $4.1 million, net of tax, relating to the sale of its interest in an Egyptian joint venture and a gain of $5.0 million, net of tax, relating to the sale of its interest in certain South American offshore marine services joint ventures. During 2006, Offshore Marine Services recognized a gain of $4.5 million, net of tax, relating to the sale of its interest in a joint venture in Mexico, and a $4.2 million gain, net of tax, relating to the sale by a joint venture of an offshore marine vessel to a third party. Operating Statistics The table below sets forth average rates per day worked, utilization and available days data for Offshore Marine Services' fleet during the periods indicated. The rate per day worked for any group of vessels with respect to any period is the ratio of total time charter revenue of such vessels to the aggregate number of days worked by such vessels in the period. Utilization for any group of vessels in a stated period is the ratio of aggregate number of days worked by such vessels to total calendar days available for work in 41 such period. Available days for a group of vessels represents the total calendar days during which owned and leased-in vessels are operated by the Company.
During 2007, market prices for used equipment stayed at high levels and the vessels sold were of such an age that it was considered prudent to sell these assets. At December 31, 2007, Offshore Marine Services had eleven vessels of various types on order or under construction at shipyards in both the U.S. Gulf of Mexico and in Asia. Marine Transportation Services In 2005, the Company's investment mix was diversified through the acquisition of a fleet of ten U.S.-flag tankers as part of the Seabulk Merger. The fleet included five modern double-hull product tankers, two of which had chemical carrying capacity, four double-bottom vessels and one single-hull vessel. OPA 90 prohibits vessels without double-hulls from transporting crude oil and petroleum products in U.S. coastwise transportation after certain dates based on the age and carrying capacity of the vessel. In addition, single-hulled vessels will be prohibited from transporting petroleum products in most international markets under a phase-out schedule established by the IMO. Subsequent to the acquisition, two of the double-bottom vessels were retro-fitted to a double-hull configuration thereby enabling them to 42 continue to operate beyond their mandated retirement dates in 2011. One vessel returned to service in June 2007, having been off-hire since the fourth quarter of 2006, and the second vessel began its retrofit in March of 2007 and returned to service in November 2007. One of the Company's double-bottom vessels ceased petroleum cargo operations having reached its OPA 90 mandated retirement date; the vessel completed a one-way grain voyage in early 2008 and was subsequently sold to a third party for scrapping. The Company's single-hull vessel, which was scheduled for retirement in 2008, completed a one-way grain voyage in early 2008 and was also sold to a third party for scrapping. Demand for the Company's tankers is dependent on several factors, including petroleum production and refining levels in the United States, domestic consumer and commercial consumption of petroleum products and chemicals, competition from foreign imports and the rate of refining activity in the United States. During 2007 and 2006, other operators placed orders for the construction of new double-hulled tankers and barges that are expected to be qualified for operation in the U.S. coastwise trade when delivered. The Company is uncertain as to whether the market will be able to absorb this additional capacity. During 2006, in response to the uncertainty of both demand and supply factors and in order to secure a portion of the fleet's future earnings, Marine Transportation Services entered into a firm nine year arrangement to bareboat charter-out four vessels with staggered delivery dates. The first vessel began its charter in March 2007. Marine Transportation Services' costs and expenses include daily running costs and fixed costs. Daily running costs are primarily comprised of wages paid to marine personnel, maintenance and repairs and insurance, which vary depending on equipment type, location and activity. The most significant components of maintenance and repair expenses are drydocking costs, which are expensed as incurred. Vessel drydockings are regularly performed in accordance with applicable regulations and if a disproportionately large number of drydockings are undertaken in a particular fiscal year or calendar quarter, operating expenses may vary significantly when compared with a prior year or quarter. Depreciation is Marine Transportation Services' principal fixed cost. Depreciation depends on the acquisition costs of vessels and their related useful life and salvage value assumptions. The costs to retrofit the two double-bottom vessels described above were capitalized and are being depreciated over the remaining life of the vessels. All associated costs, including the mobilizations and regulatory drydocking costs were expensed as incurred.
43 Operating Revenues—2007 compared to 2006. The reduction in operating revenues was primarily due to the extended off-hire period for the Seabulk Challenge between March and November while undergoing a retro-fit to double-hull configuration, the removal of the Seabulk Magnachem from service in February 2007 having reached its mandated OPA 90 retirement date, the change in contract status of the Seabulk Mariner from time charter to long-term bareboat contract commencing in March 2007, and the regulatory drydocking of the Seabulk America in the fourth quarter of 2007. In 2007, Marine Transportation Services earned 72% of its operating revenues under time charters, 6% under a bareboat charter and 22% under contracts of affreightment. Operating Income (Loss)—2007 compared to 2006. The reduction in operating income was primarily due to the reduction in operating revenues and significant regulatory drydocking expense for the Seabulk Challenge while undergoing a retrofit, the change in contract status of the Seabulk Mariner from time charter to long-term bareboat contract commencing in March 2007, the lost operating revenues coupled with drydocking expenses for the Seabulk America, and the removal from service of the Seabulk Magnachem. Operating Revenues—2006 compared to 2005. Operating revenues increased in 2006 primarily reflecting twelve months of tanker operations compared with only six months in 2005 following the Seabulk Merger in July 2005. Operating revenues in 2005 included $2.2 million related to two foreign-flagged vessels which were sold in August and September 2005. In 2006, Marine Transportation Services earned 71% of its operating revenues under time charters and 29% under contracts of affreightment. Operating Income (Loss)—2006 compared to 2005. Operating income increased in 2006 primarily reflecting twelve months of tanker operations compared with only six months in 2005 following the Seabulk Merger in July 2005. Inland River Services In general, 2007 was a good year for the inland river industry despite overall freight rates not reaching 2006 levels. In summary, the market saw strong export demand for grain, weaker northbound demand and higher operating costs, particularly for fuel and crew wages. During the first half of the year, Inland River Services benefited from existing freight contracts that reduced its exposure to the spot market where rates were generally weak. Northbound loads were underpinned by term contracts that typically provided protection against rising fuel prices. Favorable changes in demurrage terms, introduced in the fall of 2006, also helped maintain profitability. During the second half of the year, record high grain freight rates, favorable weather in the lower Mississippi River basin and good river operating conditions were tempered by difficult navigation issues on the Arkansas River and drought conditions in the Midwest. The Midwest drought negatively affected the dry cargo market by lowering grain production and restricting loading drafts. Demand for northbound loads weakened in the second half of the year and late rainfall hampered harvests. As a result, demand weakened and carriers had time to reposition fleets and aggressively compete for harvest loads leading to a reduction in rates from the highs experienced early in the harvest period. At the end of 2007, the average age of the Inland River Services' dry cargo barge fleet was less than five years old, which the Company believes is among the youngest fleets operating on the U.S. inland waterways system. In contrast, Inland River Services believes that approximately 40% of the existing dry cargo barge fleet and 59% of the liquid tank barge fleet operating on the U.S. inland waterways are over 20 years old. Inland River Services expects the relatively young age of its fleet will enhance availability and reliability and reduce downtime for repairs. Inland River Services also expects the young age of its fleet to reduce replacement capital expenditures needed in future years to maintain its fleet size and thus maintain its revenue generating capacity. 44 As of December 31, 2007, the average age (in years) of Inland River Services' owned and joint ventured fleet was as follows:
As of December 31, 2007, Inland River Services controlled a total of 985 dry cargo barges including 608 owned, seven leased-in, 222 joint ventured and 148 managed. Of the dry cargo barges, 275 were chartered to, and operated by, other operators for various periods of time for a fixed rate per day. The remaining 333 dry cargo barges were operated by Inland River Services through a pooling arrangement that Inland River Services manages. Pursuant to these pooling arrangements, operating revenues and voyage expenses are pooled and the net results are allocated to participants based upon the number of days the barges participate in the pool. Each barge owner is responsible for the costs of insurance, maintenance and repair as well as for capital and financing costs of its own equipment in the pool. As of December 31, 2007, Inland River Services also controlled 73 liquid tank, including 49 owned, 22 joint ventured and two leased-in, and 26 deck barges which Inland River Services owned. Inland River Services also controlled 17 towboats, including owned and four joint ventured. In order to maintain control over the costs of towing, fleeting, cleaning and switching, Inland River Services endeavors to secure contracts of twelve months or longer with key vendors to provide these essential services. These contracts normally include fuel price escalators and other cost escalation clauses. In 2007, Inland River Services earned 62% of its operating revenues from participation in dry cargo barge pools that it managed, 12% from the charter-out of dry cargo barges, 17% from liquid tank barges and 9% from the operation of inland towboats and other activities. The following table presents, for the years indicated, Inland River Services' interest in the tons hauled, percentage of tons moved and percentage of operating revenues derived from the movement of cargo and earned from its participation in dry cargo barge pools.
Dry cargo barge expenses are typically differentiated between those directly related to voyages including towing, switching, fleeting and cleaning costs, and non-voyage related expenses including repair costs, insurance and depreciation. For barges chartered-out, expense is limited to depreciation. 45
Operating Revenues—2007 compared to 2006. Operating revenues decreased in 2007, primarily due to the reduction in the owned dry cargo barge fleet, following sales to third parties and the sale and contribution of equipment into Inland River Services' foreign and domestic joint ventures. Operating revenues were also impacted by lower freight rates and reduced northbound loadings. The decreases were partially offset by operating revenues generated by equipment added in an acquisition in March 2007. Operating Income—2007 compared to 2006. Operating income increased in 2007, primarily due to gains on the sale of equipment to third parties and joint ventures. Operating expenses as a percentage of revenue were consistent, period over period while administrative and general expenses were higher due an acquisition. Operating Revenues—2006 compared to 2005. Operating revenues increased in 2006 primarily due to higher freight rates for all classes of equipment, an increase in the size of the tank and deck barge fleet and other changes in fleet mix. The industry-wide supply of barges continued to decline as barge retirements outpaced new barge deliveries. Demand was positively influenced by a number of factors, including a robust corn export program, strong usage of open hopper barges in the coal and aggregate trades, and the use of barges for storage of northbound cargos in the early part of 2006. Operating conditions on the rivers were generally better in 2006 due to milder winter weather resulting in less frequent equipment delays. Operating Income—2006 compared to 2005. Operating income increased in 2006 primarily due to the increases in operating revenues noted. These increases were partially offset by higher operating expenses related to higher repair and maintenance and towing costs and vendor service charges caused by higher labor and fuel costs. Equity in Earnings of 50% or Less Owned Companies. Equity in earnings in 2007 were generated from the activities of an Inland River Services' joint venture which owns a fleet of inland river transportation assets and a joint venture that operates a grain and liquid fertilizer storage and handling facility, both of which began operations in the fourth quarter of 2006, and a South American joint venture that owns a fleet of river transportation assets that began operations in the third quarter of 2007. One of Inland River 46 Services' joint ventures entered into strategic positions in marketable securities and commodity futures thereby enhancing its returns. Aviation Services A significant portion of Aviation Services' operations involves transportation services provided to offshore oil and gas customers. As with the Company's Offshore Marine Services segment, this market is highly cyclical with demand linked to the price of oil and gas which tend to fluctuate depending on many factors, including global economic activity and levels of inventory. The U.S. Gulf of Mexico continues to represent Aviation Services' major market. Aviation Services' current revenue stream from the support of oil and gas activities is balanced between the exploration and production activities of its customers. Exploration and development activities generally require medium size and heavy aircraft, which typically earn higher margins. Production related activities are less sensitive to variations in commodity prices and accordingly provide a more stable demand for services. Aviation Services has concentrated its production support in deepwater areas and pipeline companies. It performs very little shallow water production support. In recent years Aviation Services' oil company customers have been seeking modern aircraft that offer enhanced safety features and greater performance. Some customers have also been moving from small single engine aircraft to small twin engine aircraft due to the additional safety afforded from two engines when flying extended range missions in deepwater areas. On January 5, 2007, a wholly owned subsidiary of the Company, Era Med LLC ("EraMED"), acquired the air medical services business of Keystone Helicopter Corporation. EraMED currently operates 37 light and medium twin engine helicopters, including five owned, ten leased-in and 22 managed, in support of hospital-based air medical programs, primarily in the eastern United States. Maintenance and repair expenses, employee compensation, insurance costs and fuel expenses represent a significant portion of Aviation Services' overall operating costs. All maintenance and repair cost, including aircraft refurbishments and engine and major component overhauls, is expensed as incurred. Should a disproportionate number of refurbishments or overhauls be undertaken in a particular fiscal year or calendar quarter, comparative operating expense may vary considerably. Certain third party vendors maintain the engines and components on some of Aviation Services' helicopters are under programs that require it to pay ratably for the service based on actual flight hours flown. The costs are normally billed on a monthly basis and expensed as incurred. In the event that Aviation Services places an aircraft in a program after a maintenance period has begun it is normally necessary to pay an initial buy-in charge based on hours flown to date. If a helicopter is sold before the scheduled maintenance work is carried out Aviation Services may be able to recover part of the expenditure incurred up to that point. The impact of entry into and exit from these programs can have a significant impact on Aviation Services' repair and maintenance costs. In addition to variable operating expenses, Aviation Services incurs fixed charges for depreciation of aircraft and other property and equipment. In measuring and evaluating Aviation Services' performance, management considers flight hours flown. These were 74,766, 62,609, and 56,924 hours flown in 2007, 2006 and 2005 respectively. These hours are not necessarily indicative of management's expectations for future flight hours for the Aviation Services' fleet. Flight hours in 2007 include hours flown by EraMED. 47
Operating Revenues—2007 compared to 2006. The acquisition of EraMED in early 2007 accounted for 61% of the $59.0 million increase in operating revenues between 2006 and 2007. In the U.S. Gulf of Mexico, although flight hours were lower, operating revenues increased due to generally better rates as newer equipment was placed in service. Operating revenues in Alaska were positively impacted by increased flight hours in support of oil and gas activity and higher rates. International revenues increased as additional aircraft were placed on long-term leases outside of the United States. Operating Income—2007 compared to 2006. Operating income in 2007 included $8.0 million of gains on asset dispositions compared to gains of $11.1 million in 2006. Excluding the impact of these gains, operating income from flight operations increased by $11.8 million. This increase was primarily due to the improvement in operating revenues noted above, partially offset by higher operating expenses, primarily for wages and benefit costs which increased due to the EraMED acquisition and because of wage increases in the U.S Gulf of Mexico. Repair and maintenance costs, fuel costs and depreciation charges were also higher primarily as a result of the EraMED acquisition and other net aircraft additions. Operating income also improved due to hurricane related insurance recoveries. Operating Revenues—2006 compared to 2005. Operating revenues in the U.S. Gulf of Mexico increased as a result of net fleet additions, more efficient fleet utilization and higher rates. Alaska revenues were lower due to the redeployment of two aircraft to Europe. Additionally, Aviation Services expanded its leasing activity to third-party operators in international regions. Operating Income—2006 compared to 2005. Improvements in operating revenues noted above were offset by significantly higher repair and maintenance costs due to a heavy schedule of refurbishments and overhauls in 2006. In addition, other operating costs increased in 2006 primarily due to wage increases for 48 pilots and mechanics, additional training costs associated with the introduction of new aircraft types, higher fuel prices, and continuing costs related to the 2005 hurricanes including facility repairs, housing costs and temporary help. Depreciation expense increased by $3.5 million due to the growth in the fleet. Gains on the sale of assets in 2006 were $3.2 million higher than in 2005. Derivative Expense. In 2006, Aviation Services entered into foreign currency forward contracts designated as a fair value hedge for the purchase of capital equipment. The expense recorded in both periods represents the ineffective portion of the hedge. Environmental Services Environmental Services charges fees for its consulting and industrial and remediation services on both a time and material basis and on a fixed fee bid basis. In both cases the total fees charged are dependent upon the scope of work to be accomplished and the labor and equipment required to carry it out. The margins on time and material services are more predictable and for the most part are larger than for fixed fee work. The margins on equipment intensive jobs are normally higher than labor-intensive jobs. The principal components of Environmental Services' operating expenses are salaries and related benefits for operating personnel, payments to subcontractors, equipment maintenance and depreciation. These expenses are primarily a function of regulatory requirements and the level of retainer, spill, consulting and other environmental business activities. During 2007, Environmental Services continued to build on its environmental and consulting base through acquisitions. In September 2007, it acquired an emergency management company based in the southeastern United States specializing in hurricane planning, response and recovery work. Also in September 2007, it acquired a United Kingdom based crisis management, business continuity training and consulting company. In the fourth quarter of 2007 it acquired a U.S. West Coast based remediation, demolition, evacuation and industrial services company. Also in the fourth quarter of 2007, it acquired a U.S. West Coast based environmental management and engineering company. Subsequent to the end of the year, it acquired a U.S. West Coast based company responsible for the management of the City of Alameda's port operations. Operating results and cash flows are very dependent on the number of spill responses in a given fiscal period, the magnitude of each spill and the profit margin earned. Spill response revenues and related income can vary materially between comparable periods. The revenues from any one period are not indicative of a trend or anticipated results in future periods. Costs of oil spill response activities can include payments to sub-contractors for labor, equipment and materials and/or the direct charge of labor, equipment and materials provided by Environmental Services. Profit margins vary based on the use of the Company's personnel and equipment resources versus the use of third-party personnel and equipment. 49
Operating Revenues—2007 compared to 2006. Operating revenues increased $12.3 million in 2007 compared to 2006 primarily due to a 28% increase in consulting and project management revenues, offset by an 8% decrease in spill response revenues. Consulting and project management revenues accounted for 57% and 51% of Environmental Services, operating revenues in 2007 and 2006, respectively, with 2007 including $11.0 million of operating revenues from acquisitions. Spill response activities accounted for 30% and 35% of Environmental Services' operating revenues in 2007 and 2006, respectively. Operating Income—2007 compared to 2006. Operating income increased $0.3 million in 2007 compared to 2006. Spill response activity in 2007 generated higher margins than in 2006, due to greater utilization of company-owned equipment partially offset by a decrease in income from consulting and project management services due to lower margins. Operating income from acquisitions was $1.6 million. The increases in administrative and general expenses and depreciation were primarily due to acquisitions. Operating Revenues—2006 compared to 2005. Operating revenues increased in 2006 primarily due to a 44% increase in consulting and project management revenues offset by a 21% decrease in spill response revenues. Consulting and project management revenues accounted for 49% and 35% of Environmental Services operating revenues in 2006 and 2005, respectively. This increase was primarily due to greater international activity and additional services offered as a result of Homeland Security requirements. Spill response activities accounted for 35% and 46% of Environmental Services operating revenues in 2006 and 2005, respectively. Operating Income—2006 compared to 2005. Operating income decreased by $5.7 million in 2006 primarily as a result of the aforementioned decreased spill response activity. The spill response activity in 2005 included higher margins due to greater utilization of more company-owned equipment than in the current year. Additionally, Environmental Services incurred increased operating and general and administrative expenses which contributed to decreased operating income. The above factors were partially offset by increased consulting and project management activity. 50 Other Segment Profit (Loss)
Harbor and Offshore Towing Services. Operating income decreased in 2007 as compared to 2006 primarily due to higher wage and benefits costs, as a result of union wage and benefit increases, higher regulatory drydocking costs and increased depreciation expense on new equipment. Operating income increased in 2006 primarily due to twelve months of activity in 2006 compared to only six months in 2005 following the Seabulk Merger. Other, net. Operating income increased in 2007 compared to 2006 due to asset sales in the Company's leasing activities partially offset by losses in the Company's commodity trading activities. Equity in Earnings of 50% or Less Owned Companies. Equity earnings in 2006 included gains of $7.7 million, net of tax, on the sale of a handymax dry bulk ship by one or the Company's joint ventures. Corporate and Eliminations
Corporate Expenses. Corporate expenses decreased in 2007 compared to 2006 primarily due to lower legal and bank and finance costs. Corporate expenses increased in 2006 primarily due to twelve months of Seabulk corporate activity in 2006 compared to only six months in 2005 following the Seabulk Merger, and higher compensation expenses. Derivative gains (losses), net. Derivative gains, net in 2007 are primarily due to net gains on foreign currency forward contracts, futures and options. Derivative gains, net in 2006 are primarily due to net gains on foreign currency forward contracts and commodity futures partially offset by losses on an interest rate swap. Derivative losses in 2005 are primarily due to the results of an interest rate swap acquired in the Seabulk Merger. 51 Other Income (Expense) not included in Segment Profit (Loss)
Interest income. Interest income increased in 2007 as compared to 2006 primarily due to higher average invested balances. These increases were partially offset by lower rates of return on invested balances due to the Company investing available cash primarily in short-term U.S. treasury securities. Interest income increased in 2006 primarily due higher invested balances following the Seabulk Merger and higher rates of return. Interest expense. Interest expense decreased in 2007 as compared to 2006 primarily due to higher capitalized interest and lower debt levels. Interest expense increased in 2006 as compared to 2005 as a result of higher debt balances following the Seabulk Merger. Marketable security gains (losses), net. In 2007 and 2006, marketable security losses, net are primarily due to short sale activities. In 2005, certain investments in available-for-sale marketable securities with previously accumulated unrealized gains were liquidated as part of the Company's repatriation of foreign earnings in order to repatriate the earnings at favorable taxation rates. Income Taxes The Company's effective income tax rate in 2007, 2006 and 2005 was 37.2%, 36.2% and 15.3%, respectively. The Company's effective income tax rate in 2005 was due primarily to the benefit of $46.2 million relating to the repatriation of foreign earnings under the American Jobs Creation Act of 2004. Liquidity and Capital Resources The Company's ongoing liquidity requirements arise primarily from working capital needs, meeting its capital commitments and the repayment of debt obligations. In addition, the Company may use its liquidity to fund acquisitions, repurchase its Common Stock or purchase other investments. Sources of liquidity are cash balances, marketable securities, construction reserve funds, cash flows from operations and borrowings under the Company's revolving credit facility. From time to time, the Company may secure additional liquidity through the issuance of debt, shares of Common Stock, preferred stock, or a combination thereof. 52
Cash flows provided by operating activities improved in 2007 compared to 2006 primarily due to non-recurring increases in working capital during 2006, partially offset by reduced operating results before depreciation and gains on asset dispositions in the Company's business segments. Improved operating results before depreciation and gains on asset dispositions in the Company's business segments, including the effects of the Seabulk Merger and Era Acquisition, primarily increased the Company's cash flows provided by operating activities in 2006 compared to 2005. Cash flows provided by operating activities also improved in 2006 through the utilization of net operating loss carryforwards and the deferral of current taxes on asset sales, partially offset by increases in working capital. The Company's capital expenditure activities in 2007 reflect its continuing strategy to diversify its asset base by allocating capital into assets of differing industries and upgrading the assets of its business units. In addition, the Company has sold offshore vessels to reduce its overall exposure to older assets in Offshore Marine Services and has acquired new vessels to adjust the mix of its fleet. The Company has significantly expanded its investment in Inland River Services and Aviation Services assets in recent years. Capital expenditures were $537.6 million, $381.7 million and $250.5 million in 2007, 2006 and 2005, respectively. In 2007, 18 offshore support vessels, 52 dry cargo barges, four liquid tank barges, 19 deck barges, 26 helicopters and five harbor tugs were delivered. In 2006, ten offshore support vessels, 79 barges and 21 helicopters were delivered. In 2005, nine offshore support vessels, 99 barges and nine helicopters were delivered. The Company's unfunded capital commitments as of December 31, 2007 consisted primarily of marine service vessels, harbor tugs, helicopters and barges and totaled $462.0 million, of which $332.4 million is payable in 2008, with the remaining balance payable through 2010. Of these commitments, approximately $86.0 million may be terminated without further liability other than the payment of liquidated damages of $7.3 million in the aggregate. Subsequent to the end of the year, the Company committed to purchase additional equipment for $6.2 million and sold a purchase contract reducing its unfunded capital commitments by $6.4 million. In 2007, cash flows from the sale of equipment were $449.7 million, which included 44 offshore support vessels, 185 dry cargo barges, eight liquid tank barges, two towboats and eleven helicopters. In 2006, cash flows from the sale of equipment were $278.1 million, which included 60 offshore support vessels and 15 helicopters. In 2005, cash flows from the sale of equipment were $203.1 million, which included 23 offshore support vessels and seven helicopters. The Company sold held for sale equipment for $7.3 million in 2006 and $121.4 million in 2005. 53 The Company has established, pursuant to Section 511 of the Merchant Marine Act, 1936, as amended, joint depository construction reserve funds with the Maritime Administration. In accordance with this statute, the Company is permitted to deposit proceeds from the sale of certain vessels into the joint depository construction reserve fund accounts for the purpose of acquiring U.S.-flag vessels and qualifying for the temporary deferral of taxable gains realized from the sale of vessels. Withdrawals from the construction reserve fund accounts are only permitted with the consent of the Maritime Administration, and the funds on deposit must be committed for expenditure within three years or be released for the Company's general use. Activity in the Company's construction reserve funds used cash flows of $57.6 million and $210.1 million in 2007 and 2006, respectively, and provided cash flows of $21.2 million in 2005. Cash used in investing activities for corporate acquisition transactions, net of cash acquired, was $44.6 million, $8.0 million and $66.8 million in 2007, 2006 and 2005, respectively. The Company acquired Seabulk in 2005. The Company sold the fixed wing operations of Aviation Services for $15.0 million in 2005. Investing activities with the Company's joint ventures provided cash flows of $6.6 million, $0.2 million and $4.7 million 2007, 2006 and 2005, respectively, resulting from the repayment of loans to the Company and proceeds from the sale of joint venture interests partly offset by additional investments made by the Company. The net results of marketable securities transactions and derivative transactions provided cash flows of $56.6 million, $37.5 million and $131.9 million in 2007, 2006 and 2005, respectively. SEACOR's Board of Directors have previously approved a securities repurchase plan which allows the Company to acquire Common Stock, 7.2% Senior Notes, 5.875% Senior Notes, 2.875% Convertible Debentures and 9.5% Senior Notes (collectively the "SEACOR Securities"). In 2007, 2006 and 2005, a total of 2,366,880, 727,180 and 304,676 shares of Common Stock, respectively, were acquired for treasury at an aggregate cost of $213.3 million, $58.1 million and $20.5 million, respectively. As of December 31, 2007, SEACOR had authorization to repurchase $125.0 million of SEACOR Securities. The repurchase of additional SEACOR Securities may be conducted from time to time through open market purchases, privately negotiated transactions or otherwise, depending on market conditions. This repurchase authority remains in place until fully used or until the Company determines otherwise. The Company uses major capital markets and bank financing to meet certain of its financing requirements. The Company has not historically experienced difficulty in obtaining financing or refinancing existing debt. The Company manages its debt portfolio in response to changes in interest rates by periodically retiring, redeeming and repurchasing debt. The Company generally borrows on a long-term basis. Its long-term debt and capital lease obligations at December 31, 2007 totaled $937.8 million as compared to $961.0 million at December 31, 2006. The Company's outstanding long-term debt at December 31, 2007 primarily included $250.0 million of its 2.875% convertible debentures due December 15, 2024, $200.0 million of its 5.875% notes due October 1, 2012, $134.5 million of its 7.2% notes due 2009, $192.9 million of Seabulk's United States Government Guaranteed Ship Financing Bonds and $138.5 million of Seabulk's 9.5% Senior Notes due August 2013. On July 3, 2007, the Company amended its existing $300.0 million unsecured revolving credit facility, increasing the availability by $150.0 million, bringing the maximum available for borrowing to $450.0 million. The credit facility matures in November 2013 and advances under the facility are available for general corporate purposes. This facility will be reduced by 10% of the maximum committed amount during its term at the beginning of each of the final two years of the credit agreement. Interest on advances will be charged at a rate per annum of LIBOR plus an applicable margin of 60 basis points through the first five years and 67.5 basis points thereafter. A quarterly commitment fee is payable based on the average unfunded portion of the committed amount at the rate of 17.5 basis points through the first five years and at the rate of 22.5 basis points thereafter. The revolving credit facility contains various restrictive 54 covenants including interest coverage, secured debt to total capitalization, funded debt to total capitalization ratios, as well as other customary covenants, representations and warranties, funding conditions and events of default, including a cross-default as defined in the credit agreement. As of December 31, 2007, the Company had no outstanding borrowings under the new revolving credit facility and the remaining availability under this new facility was $447.6 million, net of issued letters of credit of $2.4 million. The Company anticipates it will continue to generate positive cash flows from operations and that these cash flows will be adequate to meet its working capital requirements and contribute toward its capital expenditure program. As in the past and in further support of the Company's capital expenditure program, the Company may use cash balances, sell securities, utilize construction reserve funds, sell additional vessels or other equipment, enter into sale and leaseback transactions for equipment, borrow under its revolving credit facility, issue debt or a combination thereof. The Company's long-term liquidity is dependent upon its ability to generate operating profits sufficient to meet its requirements for working capital, capital expenditures and a reasonable return on shareholders' investment. The Company believes that earning such operating profits will permit it to maintain its access to favorably priced debt, equity or off-balance sheet financing arrangements. On occasion, the Company and its partners will guarantee certain obligations on behalf of their joint ventures. As of December 31, 2007, the Company had the following guarantees in place: The Company is a guarantor of 50% of the outstanding debt for one of its domestic offshore marine joint ventures. The Company's guarantee declines as principal payments are made and will terminate when the debt is repaid. The debt matures in 2015. As of December 31, 2007, the Company's guarantee was $16.0 million. The Company is a party to an international offshore marine joint venture which has obtained bank debt to finance the acquisition of four offshore support vessels. The debt is secured by, among other things, a first preferred mortgage on the vessels. The bank also has the authority to require the parties to the joint venture to fund the uncalled capital commitments to the joint venture. In such event, the Company would be required to contribute its allocable share of uncalled capital, which as of December 31, 2007, was $3.3 million. The Company guaranteed up to $5.4 million with respect to amounts owing pursuant to a vessel charter agreement between a U.S. joint venture entity in which the Company owns a 50% interest and the owner of the chartered vessel. The Company's guarantee declines over the life of the charter and terminates in 2011. The Company guaranteed up to $0.7 million with respect to amounts owed by a Singapore joint venture of which the Company owns a 50% interest, under a banking facility used to finance the construction of two new Crew boats. The Company guaranteed up to $0.5 million as security for the performance of a contract between an Environmental Services joint venture, in which the Company has a 50% interest, for the provision of oil spill response and related services in Turkey to the Baku-Tblisi-Ceyhan Crude Oil Export Pipeline. Provision of this performance guaranty was a condition to the contract in Turkey. 55 The following table summarizes the Company's contractual obligations and other commercial commitments and their aggregate maturities as of December 31, 2007 (in thousands):
56 Effects of Inflation The Company's operations expose it to the effects of inflation. In the event that inflation becomes a significant factor in the world economy, inflationary pressures could result in increased operating and financing costs. Contingencies In the normal course of its business, the Company becomes involved in various litigation matters including, among other things, claims by third parties for alleged property damages, personal injuries and other matters. While the Company believes it has meritorious defenses against these claims, management has used estimates in determining the Company's potential exposure and has recorded reserves in its financial statements related thereto where appropriate. It is possible that a change in the Company's estimates of that exposure could occur, but the Company does not expect such changes in estimated costs will have a material effect on the Company's consolidated financial position or results of operations. In June 2005, a subsidiary of SEACOR received a document subpoena from the Antitrust Division of the U.S. Department of Justice. This subpoena relates to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the U.S. Gulf of Mexico. The Company believes that this subpoena is part of a broader industry inquiry and that other providers have also received such subpoena. SEACOR intends to provide all information requested in response to this investigation. Under United States law, "United States persons" are prohibited from business activities and contracts in certain countries, including Sudan and Iran. Relating to the prohibitions, Seabulk, a subsidiary of SEACOR acquired in July 2005, filed three reports with and submitted documents to the Office of Foreign Asset Control ("OFAC") of the U.S. Department of Treasury in December 1999 and January and May 2002. One of the reports was also filed with the Bureau of Export Administration of the U.S. Department of Commerce. The reports and documents related to certain limited charters with third parties involving three Seabulk vessels which called in Sudan for several months in 1999 and January 2000 and charters with third parties involving several of Seabulk's vessels which called in Iran in 1998. In March 2003, Seabulk received notification from OFAC that the case has been referred to its Civil Penalties Division. Should OFAC determine that these activities constituted violations of the laws or regulations, civil penalties, including fines, could be assessed against Seabulk or certain individuals who knowingly participated in such activity. The Company cannot predict the extent of such penalties; however, management does not believe the outcome of these matters will have a material impact on its consolidated financial position or results of operations. Marine Transportation Services had two of its tankers retrofitted to double-hull configuration to enable each of them to continue to transport crude oil and petroleum products beyond their OPA 90 mandated retirement dates in 2011. Both vessels operate in the U.S. coastwise, or Jones Act, trade, which is restricted to vessels built or rebuilt in the United States. The retrofit work was completed in a foreign shipyard. In May 2005, the Company received a determination from the National Vessel Documentation Center ("NVDC") of the U.S. Coast Guard ("USCG"), which administers the U.S.-build requirements of the Jones Act. The determination, which the Company relied upon to commence the retrofits in a foreign shipyard, concluded the retrofits would not constitute a foreign rebuilding and therefore would not jeopardize the tankers' eligibility to operate in the U.S. coastwise trade. On April 25, 2007, Crowley Maritime Corp., an operator of tank vessels in the U.S. coastwise trade, filed an appeal asking the Commandant of the USCG to reverse the NVDC's May 2005 determination, which would render these two tankers ineligible to operate in the U.S. coastwise trade. Subsequently, on July 9, 2007, a U.S. shipbuilders trade association, Crowley Maritime Corp. and another operator of tankers in the U.S. coastwise trade commenced a civil action in the U.S. District Court for the Eastern District of Virginia, Shipbuilders Council of America, Inc., et al. v. U.S. Department of Homeland Security, et al., No. 1:07cv665 (E.D. Va.), in which they seek to have the court set aside the NVDC's determination and direct the USCG 57 to revoke the coastwise license of one of the tankers whose retrofit had then been completed. The Company believes the NVDC's determination was correct and in accord with the USCG's long-standing regulations and interpretations. The Company intervened in the action and intends to assist the USCG in defending the NVDC's determination. Certain subsidiaries of the Company are participating employers in an industry-wide, multi-employer, defined benefit pension fund, the United Kingdom Merchant Navy Officers Pension Fund ("MNOPF"). Under the direction of a court order, any deficit of the MNOPF is to be remedied through future funding contributions from all participating employers. The Company's participation relates to officers employed between 1978 and 2002 by SEACOR's Stirling group of companies (which had been acquired by SEACOR in 2001) and its predecessors. Based on an actuarial valuation of the MNOPF in 2003, the Company was invoiced and expensed $4.4 million in 2005, representing the Company's allocated share of a total funding deficit of $412.0 million. Subsequent to this invoice, the pension fund trustees determined that $49.0 million of the $412.0 million deficit was deemed uncollectible due to the non-existence or liquidation of certain participating employers and the Company was invoiced and expensed $0.6 million in March 2007 for its allocated share of the uncollectible deficit. Based on an actuarial valuation of the MNOPF in 2006, the Company was invoiced and expensed $3.9 million in September 2007, representing the Company's allocated share of an additional funding deficit of $332.6 million. Depending on the results of future actuarial valuations, it is possible that the MNOPF will experience further funding deficits requiring the Company to recognize payroll related operating expenses in the periods invoices are received. Related Party Transactions The Company manages barge pools as part of its Inland River Services segment. Pursuant to the pooling agreements, operating revenues and expenses of participating barges are combined and the net results are allocated on a pro-rata basis based on the number of barge days contributed by each participant. Mr. Charles Fabrikant, the Chief Executive Officer of SEACOR, companies controlled by Mr. Fabrikant, trusts for the benefit of Mr. Fabrikant's two children, and Mr. Andrew Morse, a member of the board of directors of SEACOR own barges that participate in the barge pools managed by the Company. Mr. Morse's wife owned a barge that participated in the barge pools prior to the sale referred to below. Mr. Fabrikant and his affiliates and Mr. Morse and his wife were participants in the barge pools prior to the acquisition of SCF Marine Inc. by SEACOR. In 2007, 2006 and 2005, Mr. Fabrikant and his affiliates earned $1.7 million, $2.0 million and $1.3 million, respectively, of net barge pool results (after payment of $0.1 million, $0.1 million and $0.1 million, respectively, in management fees to the Company). In 2007 and 2006, Mr. Morse and his wife earned $0.1 and $0.15 million, respectively, of net barge pool results. As of December 31, 2007, 2006 and 2005, the Company owed Mr. Fabrikant and his affiliates and Mr. Morse and his wife $0.5 million, $0.6 million and $0.5 million, respectively, for undistributed net barge pool results. Mr. Fabrikant and his affiliates and Mr. Morse and his wife participate in the barge pool on the same terms and conditions as other pool participants who are unrelated to the Company. During 2007, the Company purchased a barge from Mr. Morse's wife at fair market value and sold it to Inland River Services' South American joint venture at the same value. The proceeds received by Mr. Morse's wife were deposited into a construction reserve fund established by her that is managed by the Company. Critical Accounting Policies and Estimates General. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Company continually evaluates its estimates, including those related to bad debts, useful lives of property and equipment, impairments, deferred tax assets and those accrued liabilities subject to 58 estimation, based on historical experience, changes in the markets and businesses in which the Company operates and various other assumptions that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgments about the carrying value of the assets and liabilities that may not be readily apparent from other sources. Actual results may differ from these estimates and those differences may be material. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the accompanying consolidated financial statements: Revenue Recognition. The Company's Offshore Marine Services segment earns and recognizes revenues primarily from the time charter and bareboat charter of vessels to customers based upon daily rates of hire. Under a time charter Offshore Marine Services provides a vessel to a customer and is responsible for all operating expenses, typically excluding fuel. Under a bareboat charter Offshore Marine Services provides the vessel to the customer and the customer assumes responsibility for all operating expenses and risk of operation. Vessel charters may range from several days to several years. Revenues from time charter and bareboat charter are recorded and recognized as service is provided. Charter durations and rates are typically established in the context of master service agreements which govern the terms and conditions of charter. The Company's Marine Transportation Services segment earns revenue from the time charter, bareboat charter and voyage charter of its vessels or under contracts of affreightment. Under a time charter Marine Transportation Services provides a vessel to a customer and is responsible for all operating expenses, typically excluding fuel. Under a bareboat charter Marine Transportation Services provides the vessel to a customer and the customer assumes responsibility for all operating expenses and risk of operation. Revenues from time charter and bareboat charter are recognized as service is provided. Voyage contracts are contracts to carry cargoes on a single voyage basis regardless of time to complete. Contracts of affreightment are contracts for cargoes that are committed on a multi-voyage basis for various periods of time, with minimum and maximum cargo tonnages specified over the period at a fixed or escalating rate per ton. Revenues for voyage charters and contracts of affreightment are recognized over the progress of the voyage while the related costs are expensed as incurred. The Company's Inland River Services segment earns revenues primarily from voyage affreightment contracts whereby customers are charged an established rate per ton to transport cargo from point to point. Revenues from voyage affreightment contracts are generally recognized over the progress of the voyage while the related costs are expensed as incurred. Certain of Inland River Services' barges are operated in barge pools with other barges of third parties from whom Inland River Services earns and recognizes a management fee as the services are rendered. Pursuant to the pooling agreements, operating revenues and expenses of participating barges are combined and the net results are allocated on a pro-rata basis based on the number of barge days contributed by each participant. In addition, revenues are earned from equipment chartered to third parties and storage and demurrage of cargos associated with affreightment activities. In both of these cases, revenues are recognized as services are rendered. The Company's Aviation Services segment charters its helicopters to utility and oil and gas customers primarily through master service agreements, term contracts, day-to-day charter arrangements and leases. Master service agreements require incremental payments above a fixed fee based upon flight hours flown, have fixed terms ranging from one month to five years and generally are cancelable upon 30 days notice. Term contracts and day-to-day charter arrangements are generally non-cancelable without cause and call for a combination of a monthly or daily fixed rental fee plus a charge based on hours flown. Day-to-day charter arrangements are generally based on either an hourly or daily rate. Leases can be either dry, providing only the equipment, or wet, providing equipment and personnel. Fixed rental fee revenues are recognized ratably over the contract term. Usage or hourly based revenues are recognized as hours are flown. Aviation Services' air medical activities are provided under contracts with hospitals that typically include either a fixed monthly and hourly rate structure or a fee per completed flight. Fixed monthly 59 revenues are recognized ratably over the month while per hour or flight based revenues are recognized as hours are flown or flights are completed. With respect to flightseeing activities, Aviation Services allocates block space to cruise lines and sells seats directly to customers with revenues for helicopter usage being recognized as the services are performed. The Company's Environmental Services segment earns revenues primarily from emergency response services, retainer services, consulting and training services and industrial and remediation services. Emergency response revenues are recognized as contracted services are provided and are dependent on the magnitude and number of individual spill responses. Retainer agreements with vessel owners generally range from one to three years while retainer agreements with facility owners can be as long as ten years. Such retainer fees are generally recognized ratably over the term of the contract. Consulting and training fees are recognized as the services are provided based on contract terms. Industrial and remediation services are provided on both a time and material basis or on a fixed fee bid basis and are recognized as the services are provided based on contract terms. Trade Receivables. Customers of Offshore Marine Services, Marine Transportation Services and Aviation Services are primarily major and large independent oil and gas exploration and production companies. Customers of Inland River Services are primarily major agricultural and industrial companies based within the United States. Oil spill, emergency response and remediation services are provided by Environmental Services to domestic and international shippers, major oil companies, independent exploration and production companies, pipeline and transportation companies, power generating operators, industrial companies, airports and state and local government agencies. All customers are granted credit on a short-term basis and related credit risks are considered minimal. The Company routinely reviews its trade receivables and makes provisions for probable doubtful accounts. Trade receivables are deemed uncollectible and removed from accounts receivable and the allowance for doubtful accounts when collection efforts have been exhausted. Derivatives. The Company accounts for derivatives in accordance with Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. All of the Company's derivative positions are stated at fair value in the accompanying consolidated balance sheets. Realized and unrealized gains and losses on derivatives, not designated as a fair value hedge, are reported in the accompanying consolidated statements of income as derivative gains (losses), net. Realized and unrealized gains and losses on derivatives designated as a fair value hedge, to the extent they are effective, are recognized as a corresponding increase or decrease in the fair value of the underlying hedged asset or liability, with the ineffective portion reported in the accompanying consolidated statements of income as derivative gains (losses), net. Property and Equipment. All of the Company's business segments except Environmental Services are asset-based and highly capital intensive. The Company's assessment of the useful economic lives of its assets are based on management's judgment, taking into consideration historical industry data, the Company's own experience in operating such assets and other relevant factors. Equipment, stated at cost, is depreciated using the straight line method over the estimated useful life of the asset to an estimated salvage value. With respect to each class of asset, the estimated useful life is typically based upon a newly built asset being placed into service and represents the point at which it is typically not justifiable for the Company to continue to operate the asset in the same or similar manner. From time to time, the Company may acquire older assets which have already exceeded the Company's useful life policy, in which case the Company depreciates such assets based on its best estimate of remaining useful life, typically the next survey or certification date. In addition, the Company has retrofitted one and is in the process of retrofitting a second of its tankers with double-hulls to extend their useful lives beyond their original Oil Pollution Act 1990 ("OPA 90") mandated retirement dates. 60 As of December 31, 2007, the estimated useful life (in years) of each of the Company's major categories of new equipment is as follows:
Equipment maintenance and repair costs and the costs of routine drydock inspections performed on vessels are charged to operating expense as incurred. Expenditures that extend the useful life or improve the marketing and commercial characteristics of equipment as well as major renewals or improvements to other properties are capitalized. Certain interest costs incurred during the construction of equipment are capitalized as part of the assets' carrying values and are amortized over such assets estimated useful lives. Impairment of Long-Lived Assets. The Company accounts for the impairment of long-lived assets, including intangible assets, under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires an impairment analysis on long-lived assets used in operations when indicators of impairment are present. If the carrying value of the assets is not recoverable, as determined by the estimated undiscounted cash flows, the carrying value of the assets is reduced to fair value. Generally, fair value is determined using valuation techniques such as expected discounted cash flows or appraisals, as appropriate. Impairment of 50% or Less Owned Companies. The Company performs regular reviews of each investee's financial condition, the business outlook for its products and services and its present and projected results and cash flows. When an investee has experienced consistent declines in financial performance or difficulties in raising capital to continue operations, the investment is written down to fair value when the Company expects the decline to be other-than-temporary. Actual results may vary from estimates due to the uncertainties regarding the projected financial performance of investees, the severity and expected duration of declines in value, and the available liquidity in the capital markets to support the continuing operations of the investees in which the Company has investments. Goodwill. Goodwill is accounted for under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired. In accordance with SFAS No. 142, the Company performs an annual impairment test of goodwill and further periodic tests to the extent indicators of impairment develop between annual impairment tests. The Company's impairment review process compares the fair value of the reporting unit to its carrying value, including the goodwill related to the reporting unit. To determine the fair value of the reporting unit, the Company uses a discounted future cash flow approach that uses estimates for revenues, costs and appropriate discount rates, among others. These estimates are reviewed each time the Company tests goodwill for impairment and many are developed as part of its routine business planning and forecasting process. The Company believes its estimates and assumptions are reasonable; however, variations from those estimates could produce materially different results. Income Taxes. The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes and Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes ("FIN 48") which was adopted on January 1, 2007 with no material impact to the Company's consolidated 61 financial position and results of operations. Deferred income tax assets and liabilities have been provided in recognition of the income tax effect attributable to the book and tax basis differences of assets and liabilities reported in the consolidated financial statements. Deferred tax assets or liabilities are provided using the enacted tax rates expected to apply to taxable income in the periods in which they are expected to be settled or realized, except for a special one-time dividends received deduction on the repatriation of certain foreign earnings in 2005 as described below. Interest and penalties relating to uncertain tax positions are recognized in the Company's income tax provision. In accordance with SFAS No. 109, the Company records a valuation allowance to reduce its deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. New Accounting Pronouncements On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and therefore should be determined based on the assumptions that market participants would use in pricing an asset or liability. SFAS No. 157 sets out a fair value hierarchy and requires companies to disclose fair value measurements within that hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact, if any, the adoption of SFAS No. 157 will have on its consolidated financial position or results of operations. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities—Including an amendment of FASB Statement No. 155. SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities, and certain non-financial instruments that are similar to financial instruments, at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact, if any, the adoption of SFAS No. 159 will have on its consolidated financial position or results of operations. On December 4, 2007 the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) changes SFAS No. 141 by requiring acquiring companies to recognize, with certain exceptions, 100 percent of the fair values of assets acquired, liabilities assumed, and non-controlling interests in acquisitions of less than a 100 percent controlling interest when the acquisition constitutes a change in control of the acquired entity, establishes that shares issued in consideration for a business combination be at fair value on the acquisition date, requires the recognition of contingent consideration arrangements at their acquisition-date fair values, with subsequent changes in fair value generally reflected in earnings, requires recognition of pre-acquisition loss and gain contingencies at their acquisition-date fair values, provides for the capitalization of in-process research and development assets acquired, requires acquisition-related transaction costs to be expensed as incurred, allows for the capitalization of acquisition-related restructuring costs only if the criteria in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities are met as of the acquisition date and requires as an adjustment to income tax expense, changes in an acquirer's existing income tax valuation allowances and tax uncertainty accruals. SFAS No. 141(R) is required to be adopted concurrently with SFAS No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. On December 4, 2007, the FASB also issued SFAS No. 160 which requires that a non-controlling interest in a consolidated subsidiary be displayed in the consolidated statement of financial position as a separate component of equity because noncontrolling interests meet the definition of equity of the consolidated entity. After control is obtained, a change in ownership interests that does not result in a loss of control will be accounted for as an equity transaction, and a change in ownership of a consolidated subsidiary that results in a loss of control and deconsolidation is a significant event that triggers gain or loss 62 recognition, with the establishment of a new fair value basis in any remaining ownership interests. SFAS No. 160 is required to be adopted concurrently with SFAS No. 141(R) and is effective for the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. The Company has not yet determined what impact, if any, the adoption of SFAS No. 160 will have on its consolidated financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company has foreign currency exchange risks primarily related to its vessel operations that are conducted from ports located in the United Kingdom where its functional currency is the pound sterling. Net consolidated assets of $35.8 million, or £18.0 million, and $28.6 million, or £14.6 million, before translation to U.S. dollars, are included in the Company's accompanying consolidated balance sheets at December 31, 2007 and 2006, respectively. In addition, SEACOR has provided net cash advances to these operations of $35.0 million, or £17.5 million, and $25.0 million, or £12.8 million, as of December 31, 2007 and 2006, respectively. SEACOR considers these advances to be intercompany loans with payment expected in the foreseeable future. A 10% weakening in the exchange rate of the pound sterling against the U.S. dollar as of December 31, 2007 would reduce other comprehensive income by approximately $2.3 million, net of tax, due to translation and would reduce income by approximately $2.3 million, net of tax, due to foreign currency losses on the revaluing of intercompany advance transactions. At December 31, 2007, the Company held available-for-sale marketable securities with a fair value of $28.8 million, including $4.0 million in fixed income investments consisting of corporate debt securities and foreign government bonds and $24.8 million in equity securities. At December 31, 2006, the Company held available-for-sale marketable securities with a fair value of $28.5 million, including $0.9 million in fixed income investments and $27.6 million in equity securities. From time to time, the Company may increase its level of investment in fixed income securities which has included U.S. government bonds, foreign government bonds, state and municipal bonds, and corporate notes with maturities ranging from a few months to many years. The fair value of such investments fluctuates based on market interest rates and the creditworthiness of the issuers of the securities. When making substantial investments in fixed income securities, the Company manages its risk associated with these investments by maintaining a ladder of maturities and analyzing the creditworthiness of issuers. The Company's investments in equity securities primarily include positions in energy, marine, transportation and other related businesses. The Company monitors its investments in available-for-sale marketable securities on a regular basis and disposes of investments when it judges the risk profile to be too high or when it believes that the investments have reached an attractive valuation. A 10% decline in the value of available-for-sale marketable securities as of December 31, 2007 would reduce other comprehensive income by $1.9 million, net of tax. The Company held positions in short sales of marketable equity securities with a fair value of $109.4 and $84.8 million as of December 31, 2007 and 2006, respectively. The Company's short sales of marketable equity securities primarily include positions in energy, marine, transportation and other related businesses. A 10% increase in the value of equity securities underlying the short sale positions of the Company as of December 31, 2007, would reduce income by $7.1 million, net of tax. The Company held positions in publicly traded equity options that convey to the Company the right, but not the obligation, to engage in a future transaction on the underlying equity security. The Company's investment in equity options primarily includes positions in energy, marine, transportation and other related businesses. For the year ended December 31, 2007, the Company recognized net gains of $1.6 million and is included in the accompanying consolidated statements of income as derivative gains (losses), net. The fair market value of the Company's outstanding equity options is an unrealized loss of $2.1 million and $0.2 million as of December 31, 2007 and 2006, respectively, and is included in the accompanying consolidated balance sheets as other receivables. 63 The Company's outstanding debt is primarily in fixed interest rate instruments. While the fair value of these debt instruments will vary with changes in interest rates, the Company has fixed most of its cash flow requirements and operations are not significantly affected by interest rate fluctuations. The Company's only significant variable rate debt instrument is its revolving credit facility, under which the Company had no outstanding borrowings at December 31, 2007 and 2006. While available for liquidity requirements, the Company has not historically utilized significant portions of the revolving credit facility for any extended period of time and thus has not been significantly impacted by fluctuations in interest rates. The Company entered into an interest rate swap agreement expiring in 2013 with members of its lending group in order to take advantage of lower available interest rates. Through this derivative instrument, which covered a notional amount of $150.0 million, the Company in effect converted the fixed interest rate on its outstanding 9.5% Senior Notes due August 2013 to a floating rate based on LIBOR. The floating rate was adjusted semi-annually in February and August of each year. The swap agreement was secured by a second lien on certain assets. The Company's position in this interest rate swap was terminated in March 2007, and for the year ended December 31, 2007, the Company recorded a gain of $0.2 million with respect to the swap agreement and is included in the accompanying consolidated statements of income as derivative gains (losses), net. At December 31, 2006, an unrealized loss of $4.7 million is included in the accompanying consolidated balance sheet as other current liabilities. The Company has entered into and settled various positions in forward exchange, option and future contracts with respect to the pound sterling, euro, yen, rupee, Singapore dollar, won, Taiwanese dollar, ringgit, dinar, renminbi, dirham and rand. These contracts enable the Company to buy these currencies in the future at fixed exchange rates, which could offset possible consequences of changes in foreign exchange rates with respect to the Company's business conducted in Europe, Africa, the Middle East and the Far East. At December 31, 2007, the Company had foreign currency forward exchange contracts which aggregated $417.4 million. As of December 31, 2007 and 2006, the Company designated certain of the foreign currency forward contracts, with a notional value of €122.5 and €73.5 million, respectively, as fair value hedges for capital commitments. For the year ended December 31, 2007, the Company recorded $8.1 million of net gains from these forward exchange, option and future contracts. For the year ended December 31, 2007, the Company reduced its capital commitment obligations by $18.4 million as a result of the foreign currency forward contracts designated as fair value hedges. The fair market value of the Company's outstanding currency positions as of December 31, 2007 and 2006, is a net unrealized loss of $1.6 million and a net unrealized gain of $6.4 million, respectively, and is included in the accompanying consolidated balance sheets as other receivables. The Company has entered into and settled positions in various commodity swap, option and future contracts (primarily natural gas, crude oil and ethanol) pursuant to which the Company net settles its position based upon the difference between the contract price and the market price. The general purpose of these transactions is to provide value to the Company should the price of commodities decline, which over time, if sustained, could lead to a decline in the Company's offshore and inland river assets' market values and cash flows. As of December 31, 2007 and 2006, the fair value of these exchange based commodity contracts was an unrealized loss of $0.4 million and unrealized gain of $1.6 million, respectively, and is included in the accompanying consolidated balance sheets as other receivables. The Company also enters into various future contracts with unrelated third parties to buy and sell commodities. These contracts are non-exchange traded and typically result in physical delivery of the underlying commodity. As of December 31, 2007, the fair value of these non-exchange based commodity contracts is an unrealized gain of $1.0 million and is included in the accompanying consolidated balance sheet as other receivables. There were no non-exchange based commodity contracts in 2006. Additionally, the Company carried inventory (primarily ethanol) relating to the physical delivery of product from these transactions with a fair value of $1.3 million at December 31, 2007. There was no inventory related to these contracts at December 31, 2006. For the year ended December 31, 2007, the Company recognized net gains of $1.0 million from both exchange and non-exchange transactions. 64 The Company has entered into and settled various positions in U.S. treasury notes and bonds via futures or options on futures and rate-lock agreements on U.S. treasury notes pursuant to which the Company settles its position based upon the difference between the contract price and the market price. The general purpose of these hedge transactions is to provide value to the Company should the price of U.S. treasury notes and bonds decline, leading to generally higher interest rates which, if sustained over time, might lead to higher interest costs for the Company. The fair market value of the Company's outstanding positions at December 31, 2007, is an unrealized loss of $0.2 million and is included in the accompanying consolidated balance sheets as other receivables. The Company did not have any of these positions at December 31, 2006.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and related notes are included in Part IV of this Form 10-K and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures With the participation of the Company's principal executive officer and principal financial officer, management evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of December 31, 2007. Based on their evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2007. There have been no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during 2007 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, other than the implementation of a suite of software applications used to accumulate financial data for reporting business activities of Seabulk. This software application implementation was not made in response to any deficiency in the Company's internal controls and the same suite of software applications has been generally used in the Company's worldwide operations since 2003. Set forth in Part IV of this Annual Report and incorporated herein by reference are: Management's Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting. None. 65
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required to be disclosed pursuant to this Item 10 is incorporated in its entirety herein by reference to the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year. NYSE Annual Certification. The Chief Executive Officer of the Company has previously submitted to the NYSE the annual certification required by Section 303A.12(a) of the NYSE Listed Company Manual, and there were no qualifications to such certification. SEACOR Holdings Inc. has filed the certifications of its Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 with the SEC as exhibits to this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION The information required to be disclosed pursuant to this Item 11 is incorporated in its entirety herein by reference to the Compensation Disclosure and Analysis portion of the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required to be disclosed pursuant to this Item 12 is incorporated in its entirety herein by reference to the Security Ownership of Certain Beneficial Owners and Management portion of the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required to be disclosed pursuant to this Item 13 is incorporated in its entirety herein by reference to the Certain Relationships and Related Transactions portion of the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required to be disclosed pursuant to this Item 14 is incorporated in its entirety herein by reference to the Ratification or Appointment of Independent Auditors portion of the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year. 66
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. and 2. Financial Statements and Financial Statement Schedules. See Index to Consolidated Financial Statements and Financial Statement Schedule of this Form 10-K 3. Exhibits
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72 Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form 10-K for the fiscal year ended December 31, 2007, to be signed on its behalf by the undersigned, and in the capacities indicated, thereunto duly authorized.
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