The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Cal Dive International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
1.
General
Organization
We are a marine contractor that provides manned diving, pipelay and pipe burial, platform installation and salvage and light well intervention services to a diverse customer base in the offshore oil and natural gas industry. We offer our customers these complementary services on an integrated basis for more complex offshore projects, which maximizes efficiencies for our customers and enhances the utilization of our fleet. Our headquarters are located in Houston, Texas.
Our global footprint encompasses operations on the Gulf of Mexico Outer Continental Shelf (or "OCS"), and in the Northeastern U.S., Latin America, Southeast Asia, China, Australia, West Africa, the Middle East and Europe. We own a diversified fleet of dive support vessels and construction barges.
Preparation of Interim Financial Statements
These interim consolidated financial statements are unaudited and have been prepared pursuant to instructions for quarterly reporting required to be filed with the Securities and Exchange Commission (or "SEC") and do not include all information and notes normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (or "GAAP").
The accompanying consolidated financial statements have been prepared in conformity with GAAP, and our application of GAAP for purposes of preparing the accompanying consolidated financial statements is consistent in all material respects with the manner applied to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2013 (or "2013 Form 10-K"). The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements and the related disclosures. Actual results may differ from our estimates. Management has reflected all adjustments (which were normal recurring adjustments unless otherwise disclosed herein) that it believes are necessary for a fair presentation of the consolidated balance sheets, results of operations and cash flows, as applicable.
Our balance sheet as of December 31, 2013 included herein has been derived from the audited balance sheet as of December 31, 2013 included in our 2013 Form 10-K. These consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto included in our 2013 Form 10-K, which contains a summary of our significant accounting policies and estimates and other disclosures. Interim results should not be taken as indicative of the results that may be expected for any other interim period or the year ending December 31, 2014.
Subsequent Events
We conducted our subsequent events review through the date these interim consolidated financial statements were issued with the SEC. See note 12 for a discussion of subsequent events, including constraints on our liquidity due to our second quarter results, waivers by our lenders of our non-compliance of certain financial covenants, and a refinancing of our revolving credit facility.
Seasonality
Marine operations are typically seasonal and depend, in part, on weather conditions. Historically, we have experienced our lowest vessel utilization rates during the winter and early spring, when weather conditions are least favorable for offshore exploration, development and construction activities.
Significant Accounting Policies and Estimates
There have been no material changes or developments to the significant accounting policies discussed in our
2013
Form 10-K or new accounting pronouncements issued or adopted significantly affecting our financial statements, other than the following:
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contract with Customers (Topic 606)
. The objective of this ASU is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016 and must be adopted using either a full retrospective method or a modified retrospective method. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.
2.
Details of Certain Accounts
Included in accounts receivable at December 31, 2013 is $5.2 million owed from a customer in China which was overdue but could not be collected timely due to our customer's involvement in certain customs issues with a local government. In 2012 we won an arbitration award of the entire amount due and obtained an order of a Hong Kong court permitting us to enforce the arbitration award as a judgment of the court. We collected the full amount of the receivable plus attorney's fees and interest of $2.0 million in early April 2014.
Also included in accounts receivable at June 30, 2014 and December 31, 2013 is $5.5 million owed from a customer in Indonesia for work that we successfully completed. The customer has acknowledged the amount is due but has continually delayed payment. Our receivable is secured by a guarantee by the customer's parent company and we have commenced arbitration proceedings against both our customer and its parent company to enforce our rights under the terms of the contract. We believe that we will ultimately collect this receivable from either our customer or its parent company.
Also included in accounts receivable at June 30, 2014 and December 31, 2013 is $9.5 million and $6.8 million, respectively, owed from a contractor in Mexico under a two-year bareboat charter of the DSV
Kestrel
that commenced during the fourth quarter 2012. In July 2014 we were notified that bankruptcy proceedings had been commenced against the contractor in Mexico. We are listed as a creditor in the bankruptcy proceedings and are working with the administrator of the contractor on a termination of the bareboat charter and a redelivery of the vessel to us, reserving all of our rights under the charter. We have reserved the full amount unpaid to us by the contractor under the charter through June 30, 2014.
Included in contracts in progress at June 30, 2014 and December 31, 2013 is $97.8 million and $99.2 million, respectively, relating to our four projects in Mexico for Pemex. These contracts contain milestone billing provisions under which we may only invoice for our work when the overall project has met certain milestones, creating a significant delay between our performance of the work and our ability to invoice and collect payment. One of these projects was completed during the second quarter 2014 and we estimate the second project is approximately 98% complete. The remaining two projects have been temporarily suspended by Pemex as it waits for platforms to be installed by other contractors. These suspensions have impeded our ability to meet the milestones on these two projects, and, as a consequence, invoice and collect payment for the work we have completed. This has resulted in significant constraints on our liquidity. Once each of these platforms is installed, we will complete our remaining scopes of work and will invoice and receive payment for our work. Based on Pemex's current project schedule, we expect to complete these two projects in the fourth quarter of 2014.
Other current assets consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Insurance claims to be reimbursed
|
|
$
|
-
|
|
|
$
|
22
|
|
Prepaid job costs
(1)
|
|
|
4,992
|
|
|
|
9,368
|
|
Prepaid insurance
|
|
|
12
|
|
|
|
3,166
|
|
Prepaid other
|
|
|
3,227
|
|
|
|
1,286
|
|
VAT receivable
|
|
|
2,624
|
|
|
|
7,578
|
|
Other receivables
(2)
|
|
|
4,818
|
|
|
|
3,633
|
|
Assets held for sale
(3)
|
|
|
7,782
|
|
|
|
11,068
|
|
Supplies and spare parts inventory
|
|
|
485
|
|
|
|
1,148
|
|
Other
|
|
|
9
|
|
|
|
2
|
|
|
|
$
|
23,949
|
|
|
$
|
37,271
|
|
________________________
(1)
|
Prepaid job costs primarily relate to our projects in Mexico.
|
(2)
|
Includes the current portion of a note receivable related to the sale of a portable saturation diving system during the first quarter 2014 to a customer in China. We monitor the credit worthiness of the buyer and have remedies under the note receivable, including lien rights.
|
(3)
|
The amount recorded in assets held for sale at June 30, 2014 includes three portable saturation diving systems, one facility located in Louisiana and other miscellaneous equipment no longer used in our operations. The amount recorded in assets held for sale at December 31, 2013 includes three dive support vessels, one construction barge, three portable saturation diving systems and one facility located in Louisiana. During the first quarter 2014, we completed the sale of one of the dive support vessels and the construction barge, and during the second quarter 2014 we completed the sale of the other two dive support vessels. We expect to sell the remaining assets over the next 12 months and have engaged brokers to assist in facilitating these divestitures.
|
Other long-term assets, net, consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Intangible assets with finite lives, net
|
|
$
|
31
|
|
|
$
|
66
|
|
Deferred financing costs, net
|
|
|
6,969
|
|
|
|
7,664
|
|
Non-current notes receivables
|
|
|
2,683
|
|
|
|
-
|
|
Equity investments
(1)
|
|
|
2,430
|
|
|
|
67
|
|
Long-term tax receivable
|
|
|
1,688
|
|
|
|
-
|
|
Equipment deposits and other
|
|
|
1,094
|
|
|
|
765
|
|
|
|
$
|
14,895
|
|
|
$
|
8,562
|
|
________________________
(1)
|
Primarily represents the value of our 19.9% equity interest in the entity that bought our U.S. Gulf of Mexico shallow water surface diving fleet during the second quarter 2014. See note 5.
|
Accrued liabilities consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Accrued payroll and related benefits
|
|
$
|
4,502
|
|
|
$
|
6,181
|
|
Unearned revenue
|
|
|
-
|
|
|
|
60
|
|
Insurance claims to be reimbursed
|
|
|
-
|
|
|
|
22
|
|
Self-insurance reserves
|
|
|
6,582
|
|
|
|
5,807
|
|
Accrued taxes other than income
|
|
|
4,983
|
|
|
|
10,164
|
|
Accrued interest
|
|
|
2,950
|
|
|
|
3,342
|
|
Financed insurance premium
|
|
|
8
|
|
|
|
2,379
|
|
Other
|
|
|
1,455
|
|
|
|
1,329
|
|
|
|
$
|
20,480
|
|
|
$
|
29,284
|
|
Other long-term liabilities consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):
|
June 30,
|
|
December 31,
|
|
|
2014
|
|
2013
|
|
Uncertain tax position liabilities
|
|
$
|
6,102
|
|
|
$
|
6,329
|
|
Other
|
|
|
1,417
|
|
|
|
2,094
|
|
|
|
$
|
7,519
|
|
|
$
|
8,423
|
|
Indebtedness consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Revolving credit loans due 2016
|
|
$
|
77,600
|
|
|
$
|
75,300
|
|
Secured term loan
|
|
|
-
|
|
|
|
30,658
|
|
Unsecured term loan
|
|
|
-
|
|
|
|
20,000
|
|
Second lien secured term loans due 2019
|
|
|
100,000
|
|
|
|
-
|
|
Convertible notes due 2017, net of unamortized discount of $
16,552
and $
18,755
, respectively
|
|
|
69,698
|
|
|
|
67,495
|
|
Total debt
|
|
|
247,298
|
|
|
|
193,453
|
|
Less current portion
|
|
|
(247,298
|
)
|
|
|
(13,989
|
)
|
Long-term debt
(1)
|
|
$
|
-
|
|
|
$
|
179,464
|
|
_________________
(1)
|
Under the terms of certain waivers of our non-compliance as of June 30, 2014 of financial covenants under our loan facilities, we are required to refinance the revolving credit loans due 2016 by September 30, 2014. Because of this requirement and certain cross default provisions contained in our loan facilities, all of our indebtedness has been reflected as current on our balance sheet. We have received financing proposals in the form of preliminary commitment letters from four lenders providing for the refinancing, which we expect to close during the third quarter 2014. Upon completion of the refinancing and related amendments to our financial covenants, we expect that our indebtedness will be reclassified to long-term debt on our balance sheet. See below and note 12.
|
Senior Secured Credit Facility
At June 30, 2014, we had a senior secured credit facility with certain financial institutions, which matures on April 26, 2016, consisting of a variable-interest $115.0 million revolving credit facility (the "Credit Agreement"). Prior to May 9, 2014, the Credit Facility also provided for a variable-interest term loan, under which $29.7 million was outstanding. On May 9, 2014, we repaid the term loan in full with the proceeds of the Second Lien Facility discussed below. At June 30, 2014, we had $77.6 million borrowed and $2.5 million of letters of credit issued and outstanding under our revolving credit facility. At June 30, 2014 we had $34.9 million of borrowing capacity under our revolving credit facility. The availability under our revolving credit facility is reduced by outstanding borrowings and letters of credit, and can be limited by our consolidated leverage (debt to earnings before interest, income taxes and depreciation and amortization (or "EBITDA") as defined in the Credit Agreement) ratio covenant (the "Leverage Covenant") at each quarter end and by our collateral coverage sublimit. We may borrow from or repay the revolving portion of our Credit Agreement as business needs merit. Amounts borrowed under the Credit Agreement bear interest at a rate per annum of, depending on the type of loan: (i) LIBOR plus the applicable margin or (ii) the higher of (x) Bank of America's prime rate, (y) the Federal Funds rate plus 0.5% or (z) one-month LIBOR plus 1.0%, plus the applicable margin. The applicable margin for LIBOR loans ranges from 5.50% to 7.25%, and the applicable margin for all other loans ranges from 4.50% to 6.25%, depending upon our consolidated leverage ratio as defined in the Credit Facility.
Effective May 9, 2014, we entered into Amendment No. 8 ("Amendment No. 8") to our Credit Agreement to among other things: (i)
reduce the aggregate principal amount of second lien debt that we may incur to $100.0 million;
(ii) give pro forma effect to the
second lien debt
in calculating the
Leverage Covenant
for the fiscal quarter ended March 31, 2014; and (iii) increase the amount we are allowed to incur in project financing for foreign projects from $30.0 million to $75.0 million. Amendment No. 8 also required the size of the revolving credit facility under the Credit Agreement to be reduced by $5.0 million per month from May 31, 2014 to December 31, 2014 until reduced to $85.0 million.
In July and August 2014, we obtained waivers (the "Credit Agreement Waivers") of our non-compliance at June 30, 2014 of: (i) the consolidated fixed charge coverage ratio covenant (the "FCCR Covenant"), (ii) the Leverage Covenant, and (iii) the consolidated EBITDA covenant (the "EBITDA Covenant" and collectively with the FCCR Covenant and the Leverage Covenant, the "Credit Agreement Financial Covenants") under the Credit Agreement through September 30, 2014, provided we refinance our Credit Agreement with a new group of lenders by September 30, 2014, and deliver a commitment letter for such refinancing by August 27, 2014. If we fail to deliver the commitment letter by August 27, 2014, the waiver will expire on September 2, 2014. See note 12.
The credit facility is secured by vessel mortgages on all of our domestically owned vessels, a pledge of all of the stock of all of our domestic subsidiaries and
66%
of the stock of
three
of our foreign subsidiaries, and a security interest in, among other things, all of our equipment, inventory, accounts receivable and general tangible assets.
Unsecured Term Loan
On June 27, 2013, we entered into a credit agreement with a financial institution providing for a $20.0 million unsecured term loan (the "Unsecured Term Loan"). The Unsecured Term Loan consisted of two tranches of $10.0 million. Effective December 31, 2013, we amended the Unsecured Term Loan to extend the maturity date for the first tranche from January 2, 2014 to April 30, 2014, and effective April 30, 2014, we further amended the Unsecured Term Loan to extend the maturity date for the first tranche from April 30, 2014 to May 30, 2014. The second tranche was scheduled to mature on June 26, 2015 and the interest rate on the Unsecured Term Loan was 13.5% per annum, payable on the first day of each calendar quarter in arrears. The net proceeds of the Unsecured Term Loan were used for certain working capital requirements relating to our contract awards in Mexico. On May 9, 2014, the Unsecured Term Loan was converted from an unsecured term loan to a second lien term loan under the Second Lien Facility discussed below.
Senior Secured Second Lien Term Loan Facility
On May 9, 2014, we entered into an amendment and restatement of the credit agreement for the Unsecured Term Loan that provided for a
$
100.0
million
Senior Secured Second Lien Term Loan Facility (the "Second Lien Facility") maturing in 2019. The $20.0 million Unsecured Term Loan was converted from an unsecured term loan to a second lien term loan of equivalent amount, constituting the first tranche under the Second Lien Facility. A second tranche consisting of an $80.0 million second lien term loan under the Second Lien Facility was funded at closing. The net proceeds of the Second Lien Facility of $76.0 million (after deducting transaction fees and expenses) were used to repay in full the term loan under the Credit Agreement and to repay a portion of the outstanding amounts under the revolving credit facility under the Credit Agreement.
Both tranches of the term loan under the Second Lien Facility mature on May 9, 2019, with no scheduled amortization of the term loans prior to maturity. Interest on the Second Lien Facility is payable on the last day of each calendar month in arrears. The interest rate per annum for the Second Lien Facility is, depending on the type of loan: (i) LIBOR (1% floor) plus the applicable margin or (ii) the higher of (x) a prime rate defined in the Second Lien Facility, (y) the Federal Funds rate plus 0.5% or (z) one-month LIBOR plus 1.0% plus the applicable margin. The applicable margin on the $20.0 million tranche for LIBOR loans ranges from 6.75% to 8.0%, and the applicable margin for all other loans ranges from 5.75% to 7.0%. The applicable margin on the $80.0 million tranche for LIBOR loans ranges from 11.75% to 13.0%, and the applicable margin for all other loans ranges from 10.75% to 12.0%, depending upon our consolidated leverage ratio as defined in the Second Lien Facility.
The Second Lien Facility contains representations and affirmative covenants similar to those in the Credit Agreement. The Second Lien Facility requires that we meet certain financial covenants, including a minimum fixed charge coverage ratio of 1.0x (the "Second Lien FCCR Covenant"), minimum trailing twelve month EBITDA of $30.0 million (the "Second Lien EBITDA Covenant"), and a consolidated secured leverage ratio (the "Second Lien Leverage Covenant", and collectively with the Second Lien FCCR Covenant and the Second Lien EBITDA Covenant, the "Second Lien Financial Covenants") of no more than 5.25x for the quarter ended June 30, 2014, reducing to 5.00x for the quarter ending September 30, 2014, and 4.75x for the quarter ending December 31, 2014. The ratio is further reduced to 4.50x for the quarters ending March 31 and June 30, 2015, and to 4.25x for the quarters ending September 30 and December 31, 2015, and to 4.00x thereafter. The Second Lien Leverage Covenant excludes any third party project financing for foreign projects we may obtain up to $75.0 million.
The Second Lien Facility also contains certain negative covenants, including, restrictions or limits on (i) liens; (ii) investments; (iii) indebtedness; (iv) dispositions; and (v) capital expenditures, all similar to those contained in the Credit Agreement.
The Second Lien Facility is secured, on a second priority basis, by vessel mortgages on all of our domestically owned vessels, a pledge of all the stock of our domestic subsidiaries and 66% of the stock of three of our foreign subsidiaries, and a security interest in, among other things, all our equipment, inventory, accounts receivable and general tangible assets.
We may not voluntarily prepay the term loans under the Second Lien Facility prior to the second anniversary, and thereafter will be subject to a 3% penalty in the third year and a 1% penalty in the fourth year. We may repay the term loans at par in the fifth year up to maturity.
The Second Lien Facility contains other terms and conditions, including events of default that we consider reasonable and customary for this type of indebtedness. The events of default include failure to timely pay amounts due under the Second Lien Facility, non-compliance with covenants, failure to pay other outstanding third party debt above a stated threshold, material breaches of representations, insolvency, a change of control and other events of default customary for this type of indebtedness (subject to applicable notice and cure periods for some defaults). We may be subject to additional interest of 2.0% during a period of default. During the existence of any uncured events of default, the lenders under the Second Lien Facility have the right to declare the outstanding amounts immediately due and payable. The Second Lien Facility also contains cross-default provisions relating to the covenants in the Credit Agreement.
In July and August 2014, we obtained waivers (the "Second Lien Facility Waivers") of our non-compliance at June 30, 2014 of the Second Lien Financial Covenants through September 30, 2014, provided we refinance our Credit Agreement with a new group of lenders by September 30, 2014, and deliver a commitment letter for such refinancing by August 27, 2014. If we fail to deliver the commitment letter by August 27, 2014, the waiver will expire on September 2, 2014. See note 12.
Loss on early extinguishment of debt
In connection with entering into the Second Lien Facility on May 9, 2014, we recorded a $4.7 million loss on early extinguishment of debt related to the repayment of the secured term loan under the Credit Agreement as well as the reduction of the capacity of the revolving credit facility under the Credit Agreement. The loss consisted of the write-off of the unamortized portion of certain deferred financing costs and transaction fees.
Convertible Notes
On July 18, 2012, we issued $86.25 million aggregate principal amount of 5.0% convertible senior notes due 2017 (the "Convertible Notes"). We received approximately $
83.0
million of net proceeds, after deducting the initial purchasers' commissions and transaction expenses. We used all of the net proceeds to repay a substantial portion of the then outstanding term loan under our Credit Agreement. In connection with the issuance of the Convertible Notes, we paid and capitalized approximately $3.5 million of loan fees which is being amortized to interest expense over the term of the Convertible Notes.
The Convertible Notes bear interest at a rate of
5.0%
per year, payable semi-annually in arrears on January 15 and July 15 of each year, and mature on July 15, 2017. The Convertible Notes are our general unsecured and unsubordinated obligations, and are guaranteed by all of our wholly-owned domestic subsidiaries. The Convertible Notes rank senior in right of payment to any of our future indebtedness that is expressly subordinated in right of payment to the Convertible Notes, rank equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated, and are effectively subordinated in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and are structurally subordinated to all existing and future indebtedness and liabilities of our subsidiaries. The Convertible Notes are governed by an indenture, as supplemented, dated July 18, 2012 with The Bank of New York Mellon Trust Company, N.A., as trustee.
We may not redeem the Convertible Notes prior to the maturity date. Prior to April 15, 2017, holders may convert their Convertible Notes only under the following circumstances: (i) the closing sale price of our common stock equals or exceeds $2.69 for 20 days during a 30 consecutive trading day period; (ii) the trading price per $1,000 principal amount of the Convertible Notes is less than 98% of the product of the closing sale price of our common stock and the conversion price for the Convertible Notes for each of five consecutive trading days; or (iii) upon the occurrence of specified corporate events. On and after April 15, 2017
until the maturity date, holders may convert all or a portion of their Convertible Notes at any time with settlement of all Convertible Notes converted during the period occurring on July 15, 2017. Upo
n conversion of a Convertible Note, we will pay or deliver, at our election, cash, shares of our common stock or a combination thereof, based on an initial conversion rate of 445.6328 shares of our common stock per $1,000 principal amount of Convertible Notes (which is equivalent to an initial conversion price of approximately $2.24 per share of our common stock). Upon the occurrence of certain fundamental changes, holders of the Convertible Notes will have the right to require us to purchase all or a portion of their Convertible Notes for cash at a price equal to
100% of t
he principal amount of such Convertible Notes, plus any accrued and unpaid interest. Upon the occurrence of certain significant corporate transactions, holders who convert their Convertible Notes in connection with a change of control may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, the Convertible Notes contain certain events of default as set forth in the indenture. As of June 30, 2014, none of the conditions allowing holders of the Convertible Notes to convert, or requiring us to repurchase the Convertible Notes, had been met.
Neither the Convertible Notes nor the shares of our common stock, if any, issuable upon conversion of the Convertible Notes have been registered under the Securities Act or the securities laws of any other jurisdiction. We do not intend to file a shelf registration statement for the resale of the Convertible Notes or the shares, if any, issuable upon conversion of the Convertible Notes. We are required, however, to pay additional interest under specified circumstances if the Convertible Notes are no longer freely tradable by holders other than our affiliates.
At the time of issuance of the Convertible Notes, NYSE rules limited the number of shares of our common stock that we were permitted to issue upon conversion of the Convertible Notes to no more than 19.99% of our common stock outstanding immediately before the issuance of the Convertible Notes unless we received stockholder approval for such issuance, and the number of shares of our common stock that would be issued upon a full conversion of the Convertible Notes was greater than permitted by such NYSE rules. We obtained the requisite stockholder approval to accommodate full conversion of the Convertible Notes at our 2013 Annual Meeting on May 14, 2013.
Prior to obtaining stockholder approval, we determined that the conversion feature of the Convertible Notes did not meet the criteria for equity classification based on the settlement terms of the Convertible Notes. As a result, from the time of issuance to
May 14, 2013
, the conversion feature was recognized as a derivative liability and presented under long-term debt in the accompanying consolidated balance sheet, with offsetting changes in the fair value recognized as interest expense in the consolidated statement of operations. The initial value allocated to this derivative liability was $24.6 million of the $86.25 million principal amount of the Convertible Notes, which also represented the amount of the debt discount to be amortized through interest expense using the effective interest method through the maturity of the Convertible Notes. Accordingly, the effective interest rate used to amortize the debt discount on the Convertible Notes is 13.3%. Now that we have the ability to settle the conversion feature fully in shares of our common stock, the embedded conversion feature is no longer required to be separately valued and accounted for as a derivative liability. The mark-to-market adjustment on the conversion feature for the period from December 31, 2012 through
May 14, 2013
(the final valuation date) was a reduction to interest expense of $6.4 million. Since the original date of issuance, we recorded an $8.5 million adjustment, as a reduction of interest expense for the change in fair value of the derivative liability. As of
May 14, 2013,
the conversion feature's cumulative value of $16.1 million was reclassified to capital in excess of par within equity and will no longer be subject to a mark-to-market adjustment through earnings. The deferred tax liability and its tax basis at the date of issuance (July 18, 2012) was also reclassified to capital in excess of par within equity.
The Second Lien Facility limits our ability to settle the Convertible Notes in cash; therefore, it is our expectation that we will settle the principal portion of the Convertible Notes and the conversion feature in shares of our common stock. We will use the as if converted method in calculating the diluted earnings per share effect for the number of shares necessary to settle the Convertible Notes. This may cause a significant increase in the number of shares used in calculating diluted earnings per share. The Convertible Notes were anti-dilutive for the
three and six months ended June 30, 2014
.
4.
|
Derivative Instruments and Fair Value Measurements
|
Conversion Feature of Convertible Debt
At the time of issuance of the Convertible Notes, we recognized a derivative liability for their embedded conversion feature, as the Convertible Notes did not meet the criteria for equity classification based on their settlement terms. The initial value allocated to the derivative liability at issuance of the Convertible Notes on July 18, 2012 was $24.6 million. Changes in the fair value of the derivative liability were recognized in earnings. On May 14, 2013, we obtained stockholder approval enabling the issuance of the maximum number of shares of our common stock necessary to accommodate full conversion of the Convertible Notes. As of that date, the embedded conversion feature was no longer required to be separately valued and accounted for as a derivative liability and was reclassified to capital in excess of par within equity. The mark-to-market adjustment on the conversion feature for the period from December 31, 2012 through May 14, 2013 (the final valuation date) was a reduction to interest expense of $6.4 million. The estimated fair value of the derivative liability for the conversion feature was computed using a binomial lattice model using Level 3 inputs. The main inputs and assumptions into the binomial lattice model were our stock price at the date of valuation, expected volatility, credit spreads and the risk-free interest rate.
Fair Value Measurements
Measurements on a Recurring Basis
The fair values of our cash and cash equivalents, accounts receivable, accounts payable, and certain other current assets and current liabilities approximate their carrying value due to their short-term maturities. The fair value of our variable rate debt under our Credit Agreement was calculated using a market approach based upon Level 3 inputs including interest rate margins reflecting current market conditions. The fair value approximates the carrying value due to the variable nature of the underlying interest rates.
Convertible Debt
The fair value of the Convertible Notes is determined based on similar debt instruments that do not contain a conversion feature. At June 30, 2014, the Convertible Notes were trading a
t 85.5% of par value based on limited quotations (Level 2 inputs), and include a value associated with the conversion feature of the
Convertible
Notes. The Convertible Notes had a fair value of $57.1 m
illion at June 30, 2014 and $72.7 million at December 31, 2013.
Measurements on a Non-recurring Basis
For the six months ended June 30, 2014, we recorded a $
1.9
million impairment charge relating to certain equipment that had been removed from a construction barge and miscellaneous other equipment not currently being utilized in our operations, using Level 3 inputs based on expected proceeds. For the
six months ended June 30, 2013
,
we recorded a $
0.1
million impairment charge relating to a facility that was held for sale
using Level 3 inputs based on expected proceeds. We did not have any other fair value adjustments for assets and liabilities measured at fair value on a
non-recurring basis
for the
six months ended June 30, 2014 and 2013
, respectively.
5.
Dispositions
Effective May 31, 2014, we completed the sale of our U.S. Gulf of Mexico shallow water surface diving fleet to a privately held company for cash of $18.5 million and a 19.9% equity interest in the entity acquiring the assets. The assets sold are comprised of eight surface dive support vessels and miscellaneous inventory and equipment utilized in our U.S. operations. The value of the 19.9% equity interest was determined to be $2.4 million based on the fair value of the net assets of the acquiring entity using a market approach based on Level 3 inputs including asset appraisals and applicable fair value discounts. Management determined to sell these assets as part of our strategic plan to divest non-core assets. We recorded a gain of $8.2 million during the second quarter of 2014 as a result of the transaction. Net proceeds from the sale were used to repay a portion of our revolving credit facility under our Credit Agreement. We also entered into a multi-year alliance agreement with the buyer under which the buyer will have the exclusive right to provide any surface diving services we require in the U.S. Gulf of Mexico to support pipelay, decommissioning, platform installation and other integrated services. The assets sold represented less than 5% of the total net book value of our assets, and the transaction is expected to have a minimal impact to our full year 2014 financial results.
6.
Commitments and Contingencies
Self-Insurance Reserves
We incur maritime employers' liability, workers' compensation and other insurance claims in the normal course of business, which management believes are covered by insurance. We analyze each claim for potential exposure and estimate the ultimate liability of each claim. Amounts due from insurance companies, above the applicable
deductible limits, are reflected in other current assets in the consolidated balance sheets. Such amounts were zero and less than $0.1 million as of June 30, 2014 and December 31, 2013, respectively. We have not historically incurred significant losses as a result of claims denied by our insurance carriers.
Litigation and Claims
We are involved in various legal proceedings, primarily involving claims for personal injury under the general maritime laws of the United States and the Jones Act as a result of alleged negligence. In addition, we from time to time incur other claims, such as contract disputes, in the normal course of business. Although these matters have the potential for significant additional liability, we believe the outcome of all such matters and proceedings will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
On January 2, 2013, Cary Dale Kelley filed a lawsuit against us under the Fair Labor Standards Act ("FLSA") in the U.S. District Court, Southern District, Texas, Galveston Division, claiming that we failed to pay him and others for all wages due. The suit was brought as a collective action pursuant to section 216(b) of the FLSA on behalf of current and former hourly offshore personnel employed within the past three years. We answered the suit on February 4, 2013, denying the claims in their entirety and asserting certain affirmative defenses. On August 2, 2013, the district court granted plaintiff's motion to preliminarily certify the proposed class, following which notices were mailed to over 1,000 current and former hourly offshore employees advising them of their opportunity to participate in the lawsuit. Approximately 270 persons submitted consent forms seeking to participate in the case. Trial has not yet been scheduled and discovery has begun. At this time, it is highly speculative to accurately predict the likelihood of a liability finding against us or the potential damages that might be awarded in the case of such a finding. We continue to deny liability and intend to vigorously contest the claims asserted against us.
7.
Income Taxes
As of June 30, 2014 and December 31, 2013 we had $6.1 million and $6.3 million, respectively, recorded as a long-term liability for uncertain tax benefits, interest and penalty.
Our effective tax benefit rate was 36.8% and 36.1% for the three and six months ended June 30, 2014, respectively, compared to an effective tax benefit rate of 38.0% and 33.5% for the three and six months ended June 30, 2013, respectively. The effective tax benefit rate for the six months ended June 30, 2014 and 2013 differs from the statutory rate primarily due to the mix of pre-tax profit or loss between U.S. and international taxing jurisdictions with varying statutory rates. Our income tax benefit rate for the six months ended June 30, 2014 and 2013 was computed by applying estimated annual effective tax rates to income before income taxes for the interim period.
While we believe our recorded assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and tax litigation is inherently uncertain. As a result, our assessments involve a series of complex judgments about future events and rely heavily on estimates and assumptions.
8.
Performance Share Units
We have granted certain of our officers and employees performance share units, which constitute restricted stock units under our 2006 incentive plan and other stock-based awards under our 2013 incentive plan, that vest 100% following the end of a three-year performance period. Each performance share unit represents a contingent right to receive the cash value of one share of our common stock dependent upon our total stockholder return relative to a peer group of companies over a three-year performance period. The awards are payable in cash. A maximum value of 200% of the number of performance share units granted may be earned if performance at the maximum level is achieved.
The fair value of the performance share units is re-measured at each reporting period until the awards are settled. At June 30, 2014, the fair value of all awards granted was $1.3 million. The fair value is calculated using a Monte-Carlo simulation model which incorporates the historical performance, volatility and correlation of our stock price with our peer group. At June 30, 2014 and December 31, 2013, the performance share unit liability, reflected in accrued liabilities in the consolidated balance sheets, was $0.4 million and $1.2 million, respectively.
Stock-based compensation expense (benefit) recognized for the performance share units for the three and six months ended June 30, 2014 was $(0.6) million and $(0.8) million, respectively, and for the three and six months ended June 30, 2013 was $0.3 million and $0.5 million, respectively. The amount and timing of the recognition of additional expense or benefit will be dependent on the estimated fair value at each quarterly reporting date. Any increases or decreases in the fair value may not occur ratably over the remaining performance periods; therefore, compensation expense related to the performance share units could vary significantly in future periods.
9.
Loss Per Share
Basic loss per share (or "EPS") is computed by dividing loss attributable to Cal Dive by the weighted average shares of outstanding common stock. The calculation of diluted EPS is similar to basic EPS, except the denominator includes dilutive common stock equivalents using the treasury stock
and as if converted method
. The components of basic and diluted EPS for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands, except per share amounts):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to Cal Dive
|
|
$
|
(29,075
|
)
|
|
$
|
(1,668
|
)
|
|
$
|
(42,126
|
)
|
|
$
|
(19,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
95,242
|
|
|
|
93,748
|
|
|
|
95,108
|
|
|
|
93,808
|
|
Dilutive outstanding securities
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average shares outstanding
|
|
|
95,242
|
|
|
|
93,748
|
|
|
|
95,108
|
|
|
|
93,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to Cal Dive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.31
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.21
|
)
|
________________________
(1)
|
Approximately 3.3 million shares of unvested restricted stock have been excluded from the computation of basic and diluted earnings per share as the effect would be anti-dilutive. Additionally, the Convertible Notes are only dilutive to the extent we generate net income.
|
10.
|
Variable Interest Entities
|
In 2011, we formed a joint venture with Petrolog International, Ltd. to provide offshore installation and support services for companies operating in the offshore oil and gas industry in the West Africa region. Cal Dive owns a 60% interest in the joint venture and Petrolog owns the remaining 40% interest. Due to our financial support of the joint venture, we have determined it to be a variable interest entity of which we are the primary beneficiary. As a result, we consolidate this joint venture entity in our financial statements.
For the three and six months ended June 30, 2014, the joint venture generated no revenue and recognized a loss of $0.3 million and $0.6 million, respectively. For the three and six months ended June 30, 2013, the joint venture generated revenues of $0.5 million and $7.6 million, respectively, and recorded a loss of $1.4 million and $4.9 million, respectively. At June 30, 2014, there were approximately $9.1 million of assets and $21.2 million of liabilities in the joint venture. There are no restrictions on the use of assets or settlement of liabilities associated with the joint venture. Also, creditors of the joint venture have no recourse against Cal Dive directly.
For the three and six months ended June 30, 2014, loss attributable to non-controlling interest was $0.1 million and $0.2 million, respectively, compared to loss attributable to non-controlling interest of $0.6 million and $1.9 million, respectively, for the three and six months ended June 30, 2013.
11.
Business Segment Information
We have one reportable segment, Marine Contracting. We perform a significant portion of our marine contracting services in foreign waters. We derived revenues from foreign locations of $91.2 million and $196.3 million for the three and six months ended June 30, 2014, respectively, and $78.2 million and $136.9 million for the three and six months ended June 30, 2013, respectively. The remainder of our revenues was generated in the U.S. Gulf of Mexico and other U.S. waters.
We strategically evaluate the deployment of our assets and globally reposition vessels based on the demands of our clients and the markets in which they operate. Thus, the location of our vessels can change from period to period. Net property and equipment in
foreign locations was $221.6 million and
$259.8
million at
June 30, 2014 and December 31, 2013
, respectively
.
12. Subsequent Events
The significant deterioration in our financial performance in the second quarter 2014, discussed in Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q, resulted in our failure to comply with the Credit Agreement Financial Covenants and the Second Lien Financial Covenants as of June 30, 2014.
On July 17, July 21 and July 28, 2014, we obtained the Credit Agreement Waivers that waived our non-compliance at June 30, 2014 of the Credit Agreement Financial Covenants through successive dates ending with August 13, 2014. On August 8, 2014 we obtained a fourth Credit Agreement Waiver that waived our non-compliance at June 30, 2014 of the Credit Agreement Financial Covenants through September 30, 2014 provided we refinance the Credit Agreement with a new group of lenders by September 30, 2014 and provide an executed commitment letter for such refinancing by August 27, 2014. If we fail to deliver the commitment letter by August 27, 2014, the waiver will expire on September 2, 2014.
On July 17, July 21 and July 20, 2014, we also obtained the Second Lien Facility Waivers that waived our non-compliance at June 30, 2014 of the Second Lien Financial Covenant through successive dates ending with August 13, 2014. On August 8, 2014 we obtained a fourth Second Lien Facility Waiver that waived our non-compliance at June 30, 2014 of the Second Lien Facility Financial Covenants through September 30, 2014 provided we refinance the Credit Agreement with a new group of lenders by September 30, 2014 and provide an executed commitment letter for such refinancing by August 27, 2014. If we fail to deliver the commitment letter by August 27, 2014, the waiver will expire on September 2, 2014.
Both the Credit Agreement Waiver and the Second Lien Facility Waiver dated August 8, 2014 contain certain restrictions on our cash expenditures prior to the earlier of the date we refinance the Credit Agreement and September 30, 2014, and limit the amount we may borrow under the Credit Agreement to $107.94 million until August 31, 2014, when the amount we may borrow is reduced to $105.0 million.
On August 10, 2014, we received financing proposals in the form of preliminary commitment letters from four lenders providing for the refinancing of the Credit Agreement in an amount up to its previous capacity of $125.0 million. Under the terms of the most recent amendment to the Credit Agreement, the size of that facility was required to be reduced by $5.0 million per month from May 31, 2014 to December 31, 2014 until reduced to $85.0 million. All four commitment letters are subject to customary closing conditions, and we expect such refinancing to close during the third quarter 2014.
If we are not successful in refinancing the Credit Agreement as required by the August 8, 2014 Credit Agreement Waiver and Second Lien Facility Waiver, we would breach the Credit Agreement, causing an event of default under the Credit Agreement. In addition, both the Credit Agreement and the Second Lien Facility contain cross default provisions that would be triggered in this event, affording the lenders under both the Credit Agreement and the Second Lien Facility the right to request acceleration of the respective debt under each agreement. Should either group of lenders vote to accelerate the debt under their respective agreements, the cross default provisions of the Indenture under which the Convertible Notes were issued would also be triggered.
Because of the requirement to refinance the Credit Agreement and these cross default provisions, all of our indebtedness is reflected as current on our balance sheet as of June 30, 2014. We expect to close the refinancing during the third quarter 2014. Following the refinancing of our Credit Agreement and related amendments to our financial covenants, we will have no significant debt maturing in 2014 or 2015 and all of our indebtedness will be reclassified to long-term debt on our balance sheet.