SEACOR Marine Holdings Inc. - Quarter Report: 2018 September (Form 10-Q)

 

 Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

________________________________________

FORM 10-Q

________________________________________

(Mark One)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018              or             

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to

 

Commission file number 1-37966

 

SEACOR Marine Holdings Inc.

(Exact Name of Registrant as Specified in Its Charter)

________________________________________

 

Delaware		47-2564547
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
7910 Main Street, 2nd Floor
Houma, LA		70360
(Address of Principal Executive Offices)		(Zip Code)

 

985-876-5400

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒     No  ☐

 

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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☐

Accelerated filer  ☐

Non-accelerated filer ☒

Smaller reporting company  ☐

Emerging growth company  ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☒

 

The total number of shares of common stock, par value $.01 per share, outstanding as of November 13, 2018 was 20,437,818. The Registrant has no other class of common stock outstanding.

 

 

 

SEACOR MARINE HOLDINGS INC.

 

Table of Contents

 

 

Part I.	Financial Information		1
	Item 1.	Financial Statements (Unaudited)	1
		Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	1
		Condensed Consolidated Statements of Loss for the Three and Nine Months Ended September 30, 2018 and 2017	2
		Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017	3
		Condensed Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2018	4
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
	Item 4.	Controls and Procedures	38
Part II.	Other Information		39
	Item 1.	Legal Proceedings	39
	Item 1A.	Risk Factors	39
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
	Item 3.	Default Upon Senior Securities	39
	Item 4.	Mine Safety Disclosures	39
	Item 5.	Other Information	39
	Item 6.	Exhibits	40

 

 

		September 30, 2018				December 31, 2017
ASSETS
Current Assets:
Cash and cash equivalents		$	102,864			$	110,234
Restricted cash			1,655				2,317
Receivables:
Trade, net of allowance for doubtful accounts of $4,077 and $4,039 in 2018 and 2017, respectively			75,349				45,616
Other			16,552				12,341
Inventories			3,646				3,756
Prepaid expenses and other			2,692				3,026
Total current assets			202,758				177,290
Property and Equipment:
Historical cost			1,279,000				1,179,836
Accumulated depreciation			(568,752	)			(560,160	)
			710,248				619,676
Construction in progress			82,953				70,157
Net property and equipment			793,201				689,833
Investments, at Equity, and Advances to 50% or Less Owned Companies			120,340				92,169
Construction Reserve Funds			35,596				45,361
Other Assets			3,582				3,851
		$	1,155,477			$	1,008,504
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt		$	17,426			$	22,858
Accounts payable and accrued expenses			20,480				24,024
Due to SEACOR Holdings			463				1,358
Accrued wages and benefits			4,497				5,087
Accrued income taxes			4,454				4,290
Accrued capital, repair and maintenance expenditures			27,812				19,618
Deferred revenues			9,754				10,104
Other current liabilities			17,255				11,879
Total current liabilities			102,141				99,218
Long-Term Debt			397,738				292,041
Conversion Option Liability on Convertible Senior Notes			17,928				6,832
Deferred Income Taxes			46,120				55,506
Deferred Gains and Other Liabilities			26,662				31,741
Total liabilities			590,589				485,338
Equity:
SEACOR Marine Holdings Inc. stockholders’ equity:
Common stock, $.01 par value, 60,000,000 shares authorized; 20,441,590 and 17,675,356 shares issued in 2018 and 2017, respectively			204				177
Additional paid-in capital			414,460				303,996
Retained earnings			134,628				216,511
Shares held in treasury			(86	)			—
Accumulated other comprehensive loss, net of tax			(13,945	)			(12,493	)
			535,261				508,191
Noncontrolling interests in subsidiaries			29,627				14,975
Total equity			564,888				523,166
		$	1,155,477			$	1,008,504

 

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Operating Revenues		$	70,255			$	47,813			$	182,677			$	124,440
Costs and Expenses:
Operating			51,423				41,258				141,416				119,119
Administrative and general			12,234				10,318				40,573				43,849
Depreciation and amortization			17,342				15,622				55,260				42,758
			80,999				67,198				237,249				205,726
Gains (Losses) on Asset Dispositions and Impairments, Net			586				(9,744	)			(1,002	)			(11,243	)
Operating Loss			(10,158	)			(29,129	)			(55,574	)			(92,529	)
Other Income (Expense):
Interest income			309				354				877				1,479
Interest expense			(7,761	)			(4,295	)			(20,383	)			(12,023	)
SEACOR Holdings management fees			—				—				—				(3,208	)
SEACOR Holdings guarantee fees			(5	)			(21	)			(24	)			(172	)
Loss on Debt Extinguishment			(638	)			—				(638	)			—
Marketable security (losses) gains, net			—				(698	)			—				10,931
Derivative gains (losses), net			4,387				13,022				(9,797	)			12,720
Foreign currency losses, net			(302	)			(106	)			(981	)			(1,389	)
Other, net			678				—				678				(1	)
			(3,332	)			8,256				(30,268	)			8,337
Loss Before Income Tax Benefit and Equity in Earnings of 50% or Less Owned Companies			(13,490	)			(20,873	)			(85,842	)			(84,192	)
Income Tax Expense (Benefit)			1,249				(5,823	)			(13,299	)			(23,045	)
Loss Before Equity in Earnings of 50% or Less Owned Companies			(14,739	)			(15,050	)			(72,543	)			(61,147	)
Equity in (Losses) Earnings of 50% or Less Owned Companies, Net of Tax			(1,027	)			(7,306	)			(1,540	)			(5,297	)
Net Loss			(15,766	)			(22,356	)			(74,083	)			(66,444	)
Net Income (Loss) attributable to Noncontrolling Interests in Subsidiaries			191				(1,881	)			(4,269	)			(4,582	)
Net Loss attributable to SEACOR Marine Holdings Inc.		$	(15,957	)		$	(20,475	)		$	(69,814	)		$	(61,862	)
Basic Loss Per Common Share and Warrants of SEACOR Marine Holdings Inc.		$	(0.71	)		$	(1.17	)		$	(3.42	)		$	(3.51	)
Diluted Loss Per Common Share and Warrants of SEACOR Marine Holdings Inc.		$	(0.71	)			(1.25	)		$	(3.42	)			(3.51	)
Weighted Average Common Shares and Warrants Outstanding:
Basic			22,512,886				17,550,663				20,391,297				17,617,420
Diluted			22,512,886				21,621,163				20,391,297				17,617,420

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Net Loss		$	(15,766	)		$	(22,356	)		$	(74,083	)		$	(66,444	)
Other Comprehensive Loss:
Foreign currency translation (losses) gains			(533	)			1,433				(1,406	)			4,217
Derivative (losses) gains on cash flow hedges			(32	)			91				36				(347	)
Reclassification of derivative (gains) losses on cash flow hedges to interest expense			(305	)			32				(305	)			81
Reclassification of derivative losses on cash flow hedges to equity in earnings of 50% or less owned companies			46				49				217				384
			(824	)			1,605				(1,458	)			4,335
Income tax benefit			(11	)			(541	)			(46	)			(1,428	)
			(835	)			1,064				(1,504	)			2,907
Comprehensive Loss			(16,601	)			(21,292	)			(75,587	)			(63,537	)
Comprehensive Income (Loss) attributable to Noncontrolling Interests in Subsidiaries			172				(1,822	)			(4,321	)			(4,327	)
Comprehensive Loss attributable to SEACOR Marine Holdings Inc.		$	(16,773	)		$	(19,470	)		$	(71,266	)		$	(59,210	)

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		Common Stock				Additional Paid-In Capital				Shares Held in  Treasury				Retained Earnings				Accumulated Other Comprehensive Loss				Non- Controlling Interests In Subsidiaries				Total Equity
December 31, 2017			177				303,996				—				216,511				(12,493	)			14,975				523,166
Impact of adoption of accounting principle			—				—				—				(12,069	)			—				—				(12,069	)
December 31, 2017 as adjusted			177				303,996				—				204,442				(12,493	)			14,975				511,097
Issuance of Common Stock			23				42,973				—				—				—				—				42,996
Issuance of Warrants			—				62,809				—				—				—				—				62,809
Amortization of employee share awards			—				2,602				—				—				—				—				2,602
Exercise of options			1				812				—				—				—				—				813
Exercise of Warrants			3				—				(3	)			—				—				—				—
Restricted stock vesting			—				—				(83	)			—				—				—				(83	)
Director share awards			—				893				—				—				—				—				893
Acquisition of consolidated joint venture			—				—				—				—				—				(12,037	)			(12,037	)
Issuance of noncontrolling interests			—				375				—				—				—				31,010				31,385
Net loss			—				—				—				(69,814	)			—				(4,269	)			(74,083	)
Other comprehensive loss			—				—				—				—				(1,452	)			(52	)			(1,504	)
September 30, 2018			204				414,460				(86	)			134,628				(13,945	)			29,627				564,888

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		Nine Months Ended September 30,
		2018				2017
Cash Flows from Operating Activities
Net Loss		$	(74,083	)		$	(66,444	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			55,260				42,758
Deferred financing costs amortization			1,784				2,028
Restricted stock amortization			2,602				363
Restricted stock vesting			(83	)			—
Director share awards			893				—
Debt discount amortization			4,025				3,316
Amortization of deferred gains against charter expense			(6,028	)			(6,109	)
Bad debt expense			86				(516	)
Loss from equipment sales, retirements or impairments			1,002				11,243
Gain from other sales			(428	)			—
Gains from sale of marketable securities, net			—				(10,931	)
Proceeds from sale of securities			—				51,877
Derivative losses (gains)			9,797				(12,720	)
Cash settlement on derivative transactions, net			(48	)			(372	)
Currency loss			980				1,389
Deferred income taxes			(20,980	)			(12,534	)
Equity losses, net			1,540				5,297
Dividends received from equity investees			1,324				2,442
Changes in Operating Assets and Liabilities:
Accounts receivables			(29,246	)			735
Other assets			1,003				3,575
Accounts payable and accrued liabilities			479				19,747
Net cash (used in) provided by operating activities			(50,121	)			35,144
Cash Flows from Investing Activities:
Purchases of property and equipment			(37,763	)			(52,353	)
Cash settlements on derivative transactions, net			—				(369	)
Proceeds from disposition of property and equipment			5,384				9,797
Net change in construction reserve fund			9,765				32,754
Sale of subsidiary joint venture			8,017				—
Investments in and advances to 50% or less owned companies			(30,253	)			(5,302	)
Return of investments and advances from 50% or less owned companies			—				7,350
Capital distributions from equity investees			6,463				—
Proceeds from sale of investment in equity investees			—				89
Payments received on third party notes receivable, net			99				—
Principal payments on notes due from equity investees			—				313
Cash assumed on consolidation of 50% or less owned companies			—				1,943
Business acquisitions, net of cash acquired			—				(9,751	)
Net cash used in investing activities			(38,288	)			(15,529	)
Cash Flows from Financing Activities:
Payments on long-term debt			(38,053	)			(8,572	)
Proceeds from issuance of long-term debt, net of issue costs			62,353				6,845
SMHI Restricted Stock			—				(2,656	)
Purchase of subsidiary shares from noncontrolling interests			—				(3,693	)
Proceeds from exercise of stock options and Warrants			813				—
Issuance of stock			42,996				—
Issuance of Warrants			12,809				—
Net cash provided by (used in) financing activities			80,918				(8,076	)
Effects of Exchange Rate Changes on Cash and Cash Equivalents			(541	)			1,666
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash			(8,032	)			13,205
Cash, Restricted Cash and Cash Equivalents, Beginning of Period			112,551				118,771
Cash, Restricted Cash and Cash Equivalents, End of Period		$	104,519			$	131,976

 

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1.	BASIS OF PRESENTATION AND ACCOUNTING POLICIES

 

The condensed consolidated financial statements include the accounts of SEACOR Marine Holdings Inc. and its consolidated subsidiaries (the “Company”). In the opinion of management, all adjustments (consisting of normal recurring adjustments) have been made to fairly present the unaudited condensed consolidated financial statements for the periods indicated.  Results of operations for the interim periods presented are not necessarily indicative of operating results for the full year or any future periods.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.  

 

Unless the context otherwise indicates, any reference in this Quarterly Report on Form 10-Q to the “Company” refers to SEACOR Marine Holdings Inc. and its consolidated subsidiaries and any reference in this Quarterly Report on Form 10-Q to “SEACOR Marine” refers to SEACOR Marine Holdings Inc. without its consolidated subsidiaries. Capitalized terms used and not specifically defined herein have the same meaning given those terms in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

 

SEACOR Marine was previously a subsidiary of SEACOR Holdings Inc. (along with its consolidated subsidiaries, other than SEACOR Marine and its subsidiaries, collectively referred to as “SEACOR Holdings”). On June 1, 2017, SEACOR Holdings completed a spin-off of SEACOR Marine by way of a pro rata dividend of SEACOR Marine’s common stock, par value $0.01 per share (“Common Stock”), all of which was then held by SEACOR Holdings, to SEACOR Holdings’ shareholders of record as of May 22, 2017 (the “Spin-off”). SEACOR Marine entered into certain agreements with SEACOR Holdings to govern SEACOR Marine’s relationship with SEACOR Holdings following the Spin-off, including a Distribution Agreement, two Transition Services Agreements, an Employee Matters Agreement and a Tax Matters Agreement. Immediately following the Spin-off, SEACOR Marine began to operate as an independent, publicly traded company.

 

Recently Adopted Accounting Standards. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements. The new standard supersedes current revenue recognition requirements and industry-specific guidance. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The Company adopted this new standard on January 1, 2018 using the modified retrospective approach by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of accumulated deficit. The Company implemented the necessary changes to its business processes, systems and controls to support recognition and disclosure of this ASU upon adoption. The Company's revenues are primarily based on leases or rental agreements with customers which are not addressed in the new standard. As a result, the adoption of the standard did not have a material effect on the Company's financial position, results of operations or cash flows, but did result in increased disclosures related to revenue recognition policies.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash”, which requires that amounts generally described as restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The Company adopted this new standard on January 1, 2018. Retrospective presentation was required. The adoption of the standard did not have a material effect on the Company's financial position, results of operations or cash flows. In accordance with ASU 2016-18, the Company has included restricted cash as part of the beginning-of-period and end-of-period cash balances on the condensed consolidated statement of cash flows.

 

Revenue Recognition. Revenue is recognized when (or as) the Company transfers promised goods or services to its customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services, which occurs when (or as) the Company satisfies its contractual obligations and transfers over control of the promised goods or services to its customers. Costs to obtain or fulfill a contract are expensed as incurred.

 

Lease Revenues. The primary source of the Company’s revenues is earned through time charter and bareboat agreements. Time charter and bareboat agreements are rental agreements that are recognized ratably over the lease term as the services are provided, typically on a per day basis. The charterer will take the vessel on hire for a specific period of time and uses the vessel to move cargo, people or equipment and will pay the Company a rate per day. Under a time charter the Company provides a vessel to a customer for a set term and is responsible for all operating expenses, typically excluding fuel. Under a bareboat charter, the Company provides a vessel to a customer for a set term and the customer assumes responsibility for all operating expenses and the risk of operation (see Note 15).

 

 

Revenues from Customers. The Company contracts with various customers to carry out management services for vessels as agents for and on behalf of ship owners.  These services include crew management, technical management, commercial management, insurance arrangements, sale and purchase of vessel, provisions and bunkering. As the manager, the Company undertakes to use its best endeavors to provide the agreed management services as agents for and on behalf of the owners in accordance with sound ship management practice and to protect and promote the interest of the owners in all matters relating to the provision of services hereunder. The Company also contracts with various customers to carry out management services regarding engineering for vessel construction and vessel conversions. The vast majority of the ship management agreements span over the length of one to three years and are typically billed on a monthly basis. The Company transfers control of the service to the customer and satisfies its performance obligation over the term of the contract, and therefore recognizes revenue over the term of the contract while related costs are expensed as incurred (see Note 15).

 

Revenue that does not meet these criteria is deferred until the criteria is met and are considered contract liabilities. Contract liabilities, included in other current liabilities in the accompanying condensed consolidated balance sheets, for the nine months ended September 30 were as follows (in thousands):

 

 

As of September 30, 2018, contract liabilities of $6.8 million related to the time charter of several offshore support vessels paid through the conveyance of an overriding royalty interest (the “Conveyance”) in developmental oil and gas producing properties operated by a customer in the U.S. Gulf of Mexico. Payments under the Conveyance, and the timing of such payments, were contingent upon production and energy sale prices. On August 17, 2012, the customer filed a voluntary petition for Chapter 11 bankruptcy. The Company is vigorously defending its interest in connection with the bankruptcy filing; however, payments received under the Conveyance subsequent to May 19, 2012 are subject to creditors’ claims in bankruptcy court.  The Company will recognize revenues when reasonably assured of a judgment in its favor. All costs and expenses related to these charters were recognized as incurred.

 

As of September 30, 2018, contract liabilities of $2.5 million related to the time charter of an offshore support vessel to a customer for which collection was not reasonably assured. The Company will recognize revenues when collected or when collection is reasonably assured. All costs and expenses related to this charter were recognized as incurred.

 

The remaining balance of $0.4 million as of September 30, 2018 is comprised of contract liabilities to two customers for which collection is not reasonably assured.

 

Property and Equipment. 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 based upon a newly built asset being placed into service and represents the time period beyond 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 that 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.

 

As of September 30, 2018, the estimated useful life (in years) of each of the Company’s major categories of new equipment was as follows:

 

 

Equipment maintenance and repair costs and the costs of routine overhauls, drydockings and inspections performed on vessels and equipment 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 and 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. During the nine months ended September 30, 2018, capitalized interest totaled $1.6 million.

 

Impairment of Long-Lived Assets. The Company performs an impairment analysis of long-lived assets used in operations, including intangible assets, when indicators of impairment are present. These indicators may include a significant decrease in the market price of a long-lived asset or asset group, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group. If the carrying values of the assets are not recoverable, as determined by the estimated undiscounted cash flows, the estimated fair value of the assets or asset groups are compared to their current carrying values and impairment charges are recorded if the carrying value exceeds fair value. The Company performs its testing on an asset or asset group basis. Generally, fair value is determined using valuation techniques, such as expected discounted cash flows or appraisals, as appropriate. During the nine months ended September 30, 2018, the Company recognized $3.0 million of impairment charges primarily related to four anchor handling towing supply vessels removed from service and adjusted to scrap value.

 

Impairment of 50% or Less Owned Companies. Investments in 50% or less owned companies are reviewed periodically to assess whether there is an other-than-temporary decline in the carrying value of the investment. In its evaluation, the Company considers, among other items, recent and expected financial performance and returns, impairments recorded by the investee and the capital structure of the investee. When the Company determines the estimated fair value of an investment is below carrying value and the decline is other-than-temporary, the investment is written down to its estimated fair value. Actual results may vary from the Company’s estimates due to the uncertainty regarding projected financial performance, the severity and expected duration of declines in value and the available liquidity in the capital markets to support the continuing operations of the investee, among other factors. Although the Company believes its assumptions and estimates are reasonable, the investee’s actual performance compared with the estimates could produce different results and lead to additional impairment charges in future periods. During the nine months ended September 30, 2018, the Company recognized impairment charges of $1.2 million related to one of its 50% or less owned companies which the Company believes will be unable to meet all of its liabilities.

 

Income Taxes. During the nine months ended September 30, 2018, the Company's effective income tax rate of 15.5% was primarily due to taxes provided on income attributable to noncontrolling interests, foreign sourced income not subject to U.S. income taxes, foreign taxes not creditable against U.S. income taxes, a return-to-provision adjustment and a reversal of an unrecognized tax benefit. During the nine months ended September 30, 2017, the Company’s effective income tax rate of 27.4% was primarily due to losses of foreign subsidiaries not benefited, non-deductible expenses associated with the Company's participation in SEACOR Holdings' share award plans and non-deductible Spin-off related expenses reimbursed to SEACOR Holdings.

 

Deferred Gains. The Company has sold certain equipment to its 50% or less owned companies, entered into vessel sale-leaseback transactions with finance companies and provided seller financing on sales of its equipment to third parties and its 50% or less owned companies. A portion of the gains realized from these transactions were deferred and recorded in deferred gains and other liabilities in the accompanying condensed consolidated balance sheets. Deferred gain activity related to these transactions for the nine months ended September 30 was as follows (in thousands):

 

Accumulated Other Comprehensive Income (Loss). The components of accumulated other comprehensive loss were as follows (in thousands):

 

 

Loss Per Share. Basic loss per common share of the Company is computed based on the weighted average number of common shares and warrants to purchase common shares at an exercise price of $0.01 per share (“Warrants”) issued and outstanding during the relevant periods.  The Warrants are included in the basic loss per common share because the shares issuable upon exercise of the Warrants are issuable for de minimis cash consideration and therefore not anti-dilutive.  Diluted loss per common share of the Company is computed based on the weighted average number of common shares and Warrants issued and outstanding plus the effect of potentially dilutive securities through the application of the if-converted method that assumes all common shares have been issued and outstanding during the relevant periods pursuant to the conversion of the Convertible Senior Notes.  For the nine months ended September 30, 2018 and 2017, diluted earnings per common share of the Company excluded 2,183,708 and 4,070,500 common shares, respectively, issuable pursuant to the Company’s Convertible Senior Notes (see Note 4) as the effect of their inclusion in the computation would be anti-dilutive.  In addition, for the nine months ended September 30, 2018, diluted loss per common share of the Company excluded 196,338 shares of restricted stock and 732,191 shares of stock issuable upon exercise of outstanding stock options as the effect of their inclusion in the computation would be anti-dilutive.

 

While calculating the weighted average basic and diluted number of common shares and warrants issued and outstanding for the quarter ending September 30, 2018, the Company discovered that it had understated the weighted average basic and diluted common shares and warrants issued and outstanding for both the three months and six months ended June 30, 2018.  As a result of this error, the Company also overstated the basic and diluted loss per common share and warrant for the same two periods.  The correct weighted average basic and diluted common shares and warrants for the three months ended June 30, 2018 was 21,035,214, an increase of 1,056,698 versus the number previously reported.  This increase results in a corrected basic and diluted loss per common share and warrant of $1.19 versus $1.25 previously reported.  The correct weighted average basic and diluted common shares and warrants for the six months ended June 30, 2018 was 19,312,923, an increase of 1,345,681 versus the number previously reported.  This increase results in a corrected basic and diluted loss per common share and warrant of $2.79 versus $3.00 previously reported.  The net loss attributable to the Company for the three and six months ended June 30, 2018, as well as all prior year numbers were not impacted. 

 

Upon assessing the error from both a quantitative and qualitative perspective, the Company concluded the error was not material to the June 30, 2018 financial statements and has no impact on the September 30, 2018 financial statements presented herein.

 

New Accounting Pronouncements. On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new leasing standard meant to improve transparency and comparability among companies by requiring lessees to recognize a lease liability and a corresponding right-of-use asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. The Company will adopt the new standard on January 1, 2019 and will apply the transition provisions of the new standard at its adoption date with recognition of a cumulative-effect adjustment to the opening balance of retained earnings. The Company believes the adoption of the new standard will have a material impact on its consolidated financial position, results of operations and cash flows, estimated to be $40 million to $75 million in new right-of-use assets and corresponding lease liabilities for certain of its equipment, office and land leases.  The Company's estimates are preliminary and are based on its current inventory of leases.  If the Company enters into or exits material lease arrangements prior to adoption or makes material changes to certain of its assumptions, including lease discount rates, the Company's estimates may change and those changes may be material.

 

In February 2018, the FASB issued a new accounting standard which allows a reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the Tax Cuts and Jobs Act passed in December 2017.  The standard is effective for interim and annual periods beginning after December 15, 2018.  The Company does not expect the adoption of the new standard to have a material impact on its consolidated financial position or its results of operations and cash flows.

 

In June 2018, the FASB issued a new accounting standard which addresses aspects of the accounting for nonemployee share-based payment transactions.  The standard is effective for interim and annual periods beginning after December 15, 2018.  The Company does not expect the adoption of the new standard to have a material impact on its consolidated financial position or its results of operations and cash flows.

 

In August 2018, the FASB issued a new accounting standard which provided guidance regarding the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement).  The standard is effective for interim and annual periods beginning after December 15, 2019.  The Company is evaluating the provisions of the standard, but does not expect the adoption of the new standard to have a material impact on its consolidated financial position or its results of operations and cash flows.

 

 

2.	EQUIPMENT ACQUISITIONS AND DISPOSITIONS

 

During the nine months ended September 30, 2018, capital acquisitions were $44.6 million. Equipment deliveries during the nine months ended  September 30, 2018 include two wind farm utility vessels and two platform supply vessels which were constructed through the SEACOSCO joint venture as described in Note 3 below. Equipment acquisitions include six liftboats contributed from Montco Offshore, LLC (“MOI”) to certain wholly-owned subsidiaries of Falcon Global Holdings LLC (“FGH”) as described in Note 4 below, and two anchor handling towing supply vessels that were previously managed (but not owned) by the Company. 

 

During the nine months ended September 30, 2018, the Company sold one fast support vessel and two supply vessels previously retired and removed from service, one anchor handling towing supply vessel, two standby safety vessels, three fast support vessels, one wind farm utility vessel, and other property and equipment for net proceeds of $4.0 million ($3.9 million in cash and $0.1 million of previously received deposits) and gains of $2.0 million.  In addition, the Company received $1.4 million in deposits for future asset sales.

 

 

3.	INVESTMENTS, AT EQUITY AND ADVANCES TO 50% OR LESS OWNED COMPANIES

 

SEACOSCO. On January 17, 2018, the Company announced the formation of SEACOSCO Offshore LLC (“SEACOSCO”), a Marshall Islands entity jointly owned by the Company and affiliates of COSCO SHIPPING GROUP (“COSCO SHIPPING”).  SEACOSCO entered into contracts for the purchase of eight Rolls-Royce designed, new construction platform supply vessels (“PSVs”) from COSCO SHIPPING HEAVY INDUSTRY (GUANGDONG) CO., LTD (the “Shipyard”), an affiliate of COSCO SHIPPING, for approximately $161.1 million, of which 70% will be financed by the Shipyard and secured by the PSVs on a non-recourse basis to the Company.  SEACOSCO took delivery of two vessels in the quarter ending  March 31, 2018, took title to another five of the PSVs in the quarter ending June 30, 2018 and expects to take title to one vessel in 2019.  Thereafter, the Shipyard, at its cost, will store the PSVs at its facility for periods ranging from six to 18 months.  The Company owns an unconsolidated 50% interest in SEACOSCO.  During the nine months ended September 30, 2018, the Company contributed capital of $27.0 million in cash. The expected remaining capital commitment of approximately $5.3 million will be due over the remainder of 2018 and the first half of 2019. The Company is responsible for full commercial, operational, and technical management of the vessels on a worldwide basis.

 

SEACOR Grant DIS.   As of September 30, 2018, the Company estimates that SEACOR Grant DIS will be unable to meet all its liabilities and has recorded a bad debt reserve of $0.5 million against SEACOR Grant DIS’s liability to the Company and an impairment charge of $1.2 million to reduce its investment carrying value to zero. SEACOR Grant DIS is currently in discussions to sell its one vessel to a third party, which may provide proceeds that are available to its debt holders including the Company.

 

SEACOR Marlin.  The Company created a new subsidiary, SEACOR Marlin LLC (“SMLLC”) and contributed the Seacor Marlin supply vessel into SMLLC. On September 13, 2018, the Company sold 51% of SMLLC to MexMar Offshore (MI) LLC (“MexMar Offshore”), a wholly-owned subsidiary of MexMar, for $8.0 million in cash, which generated a gain of $0.4 million. The Seacor Marlin supply vessel was pledged as collateral under the MexMar credit facility, for which the Company receives an annual collateral fee. SMLLC is a 50% or less owned company and will be accounted for using the equity method of accounting.

 

OSV Partners. SEACOR OSV Partners I LP (“OSV Partners”), which owns and operates five offshore support vessels, had been in non-compliance with certain financial covenants under its term loan facility. On September 28, 2018, such facility, in the principal amount outstanding of $27.3 million, was restructured to, among other things, extend its maturity to September 28, 2021 and, in connection therewith, the Company participated in a $5.0 million preferred equity offering of OSV Partners and a subordinated loan in the amount of $5.0 million, investing $1.1 million in such preferred equity (and committing to invest an additional $1.1 million in such preferred equity if called by the general partner of OSV Partners prior to September 30, 2020) and providing $2.1 million of such loan.  The lenders to OSV Partners have no recourse to the Company for outstanding amounts under the facility and the Company is not obligated to make any future investment in or loan any money to OSV Partners.

 

Guarantees. The Company has guaranteed certain of the outstanding charter receivables of one of its managed 50% or less owned companies if a customer defaults in payment and the Company either fails to take enforcement action against the defaulting customer or fails to assign its right of recovery against the defaulting customer. As of September 30, 2018, the total amount guaranteed by the Company under this arrangement is $0.5 million.

 

 In addition, as of  September 30, 2018, two of the Company's 50% or less owned companies have bank debt secured by, among other things, a first preferred mortgage on the Company's vessels.  The banks also have the authority to require the Company and its partners to fund uncalled capital commitments, as defined in the partnership agreements.  In such event, the Company would be required to contribute its allocable share of uncalled capital, which was, as of September 30, 2018, $1.0 million in the aggregate.  This liability is included in other long-term liabilities.

 

 

 

 

4.	LONG-TERM DEBT

 

Convertible Senior Notes.  On December 1, 2015, the Company issued $175.0 million in aggregate principal amount of its Convertible Senior Notes (the “Convertible Senior Notes”), at an interest rate of 3.75%, due December 1, 2022, to investment funds managed and controlled by the Carlyle Group (collectively “Carlyle”). The Convertible Senior Notes are convertible into shares of Common Stock at a conversion rate of 23.26 shares per $1,000 in principal amount of such notes, subject to certain conditions, or, into Warrants to purchase an equal number of shares of Common Stock at an exercise price of $0.01 per share in order to facilitate the Company's compliance with the provisions of the Jones Act.

 

On May 2, 2018, the Company and Carlyle entered into an exchange transaction (the “Exchange”) pursuant to which Carlyle exchanged $50 million in principal amount of the Convertible Senior Notes for Warrants to purchase 1,886,792 shares of Common Stock (to facilitate compliance with the provisions of the Jones Act) at an exercise price of $0.01 per share, subject to adjustments (the “Carlyle Warrants”), representing an implied exchange rate of approximately 37.73 shares per $1,000 in principal amount of the Convertible Senior Notes (equivalent to an exchange price of $26.50 per share). The Carlyle Warrants have a 25-year term, which commenced May 2, 2018. The Company and Carlyle also amended the $125.0 million in principal amount of Convertible Senior Notes that remained outstanding following the Exchange to (i) increase the interest rate from 3.75% per annum to 4.25% per annum and (ii) extend the maturity date of the Convertible Senior Notes by 12 months to December 1, 2023.  Interest on the Convertible Senior Notes is payable semi-annually on June 15 and December 15 of each year.  

 

 

MOI Joint Venture. On February 8, 2018, a wholly-owned subsidiary of SEACOR Marine and MOI formed and capitalized a joint venture named Falcon Global Holdings LLC.  In connection therewith and MOI’s plan of reorganization, which was confirmed on January 18, 2018, MOI emerged from its Chapter 11 bankruptcy case. In accordance with the terms of a Joint Venture Contribution and Formation Agreement, the Company and MOI contributed certain liftboat vessels and other related assets to FGH and its designated subsidiaries and FGH and its designated subsidiaries assumed certain operating liabilities and indebtedness associated with the liftboat vessels and related assets. On February 8, 2018, Falcon Global USA LLC (“FGUSA”), a wholly-owned subsidiary of FGH, paid $15.0 million of MOI’s debtor-in-possession obligations and entered into a $131.1 million credit agreement comprised of a $116.1 million term loan (the “FGUSA Term Loan”) and a $15.0 million revolving loan facility (the “FGUSA Revolving Loan Facility”) bearing interest at a variable rate (currently 6.63%), maturing in 2024 and secured by vessels owned by wholly-owned subsidiaries of FGUSA (collectively, the “FGUSA Credit Facility”). The full amount of the FGUSA Term Loan and other amounts paid by affiliates of MOI satisfied in full the amounts outstanding under MOI’s pre-petition credit facilities. The FGUSA Credit Facility, apart from a guarantee of certain interest payments and participation fees for two years after the closing of the transactions, is non-recourse to SEACOR Marine and its subsidiaries other than FGUSA. The Company performed a fair market valuation of the debt reflecting a debt discount of $10.0 million, which will be amortized over the life of the FGUSA Credit Facility. Scheduled principal payments begin in 2020. During the nine months ending September 30, 2018, the Company borrowed $15.0 million under the FGUSA Revolving Loan Facility for working capital purposes.  The Company consolidates FGH as the Company holds 72% of the equity interest in FGH and is entitled to appoint a majority of the board of managers of FGH.

 

Windcat. During the nine months ended September 30, 2018, the Company converted €6.0 million denominated debt to pound sterling denominated debt, paying off approximately $7.5 million in euro denominated debt and borrowing approximately $8.5 million in pound sterling denominated debt, resulting in a net increase in USD borrowings of $1.0 million to be used for future capital commitments.

 

Seacor 88/888. On July 5, 2018, a wholly-owned subsidiary of SEACOR Marine entered into a new term loan of $11.0 million and used the funds to acquire two vessels that were previously managed (but not owned) by the Company.  The term loan matures in 2023, bears interest at a variable rate (currently 5.9%) and is secured by the two vessels. SEACOR Marine provided a limited guaranty of such loan under which claims recoverable from SEACOR Marine shall not exceed the lesser of (x) $5.5 million and (y) 50% of the obligations outstanding at the time a claim is made thereunder. In October 2018, the Company entered into an interest rate swap agreement on the notional value of $5.5 million related to this loan. 

 

Seacor Marine Foreign Holdings.  On September 26, 2018, SEACOR Marine Foreign Holdings Inc. (“SMFH”), a wholly-owned subsidiary of SEACOR Marine, entered into a $130.0 million loan facility with a syndicate of lenders administered by DNB Bank ASA.  SMFH's obligations pursuant to the loan facility are secured by mortgages on 20 vessels owned by the Company's vessel owning subsidiaries as well as an assignment of earnings from those subsidiaries.  The loan matures in 2023 and bears interest at a variable rate (currently 6.1875%).  The obligations of SMFH under the loan facility are guaranteed by SEACOR Marine. The proceeds from the syndicated loan facility were used to pay off other credit facilities of subsidiaries of the Company ($101.3 million, made up of $99.9 million principal and $1.4 million accrued interest), resulting in a net increase in term debt of $30.1 million.  Principal payments of $3.3 million per quarter will begin in December 2018.  In October 2018, the Company entered into an interest rate swap agreement on the notional value of $65.5 million related to this debt.  As a result of this transaction, the Company recognized a loss of $0.6 million upon the extinguishment of debt.

 

Letters of Credit. As of September 30, 2018, the Company had outstanding letters of credit of $5.8 million securing one long-term debt obligation, $0.3 million securing one lease obligation and $2.5 million for labor and performance guarantees.

 

 

 

5.	INCOME TAXES

 

The following table reconciles the difference between the statutory federal income tax rate for the Company and the effective income tax rate on continuing operations for the nine months ended September 30, 2018:

 

 

As of December 31, 2017, the Company's net operating loss carryforwards excluded potential tax benefits of $3.9 million as a result of uncertainty regarding interpretation of the new U.S. tax legislation signed into law on December 22, 2017. Subsequent guidance has confirmed that the Company should recognize the tax benefits of $3.9 million and therefore, for the nine months ending September 30, 2018, the Company removed the valuation allowance previously established against the net operating loss carryforwards.

 

During the preparation of the 2017 federal income tax return in the third quarter of 2018, the Company realized management overestimated the available foreign taxes that could be credited against the 2017 transition tax.  This resulted in an additional tax liability of $3.4 million on its 2017 federal income tax return.  This additional liability was recorded as a return-to-provision adjustment to tax expense during the three months ended September 30, 2018.  Upon assessing the out of period adjustment from both a quantitative and qualitative perspective, the Company believes that this out of period adjustment is immaterial to both the year ended December 31, 2017 and the three months ended September 30, 2018 financial statements. 

 

 

6.	DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES

 

Derivative instruments are classified as either assets or liabilities based on their individual fair values. The fair values of the Company’s derivative instruments as of September 30, 2018 were as follows (in thousands):

 

 

______________________

(1)	Included in other receivables in the accompanying condensed consolidated balance sheets.

(2)	Included in other current liabilities in the accompanying condensed consolidated balance sheets.

Cash Flow Hedges. The Company and certain of its 50% or less owned companies have interest rate swap agreements designated as cash flow hedges. By entering into these interest rate swap agreements, the Company and its 50% or less owned companies have converted the variable LIBOR or EURIBOR component of certain of their outstanding borrowings to a fixed interest rate. The Company recognized immaterial losses on derivative instruments designated as cash flow hedges during the nine months ended September 30, 2018. As of September 30, 2018, the interest rate swaps held by the Company and its 50% or less owned companies were as follows:

 

•

Windcat Workboats had two interest rate swap agreements maturing in 2021 that call for the Company to pay a fixed rate of interest of (0.03)% on the aggregate notional value of €15.0 million (approximately $17.5 million) and receive a variable interest rate based on EURIBOR on the aggregate notional value.

 

•

MexMar had five interest rate swap agreements with maturities in 2023 that call for MexMar to pay a fixed rate of interest ranging from 1.71% to 2.10% on the aggregate amortized notional value of $100.5 million and receive a variable interest rate based on LIBOR on the aggregate amortized notional value.

Other Derivative Instruments. The Company recognized (losses) gains on derivative instruments not designated as hedging instruments for the nine months ended  September 30 as follows (in thousands):

 

 

The conversion option liability relates to the bifurcated embedded conversion option in the Convertible Senior Notes (see Note 4 in this Quarterly Report on Form 10-Q and Note 7 in the Company's Annual Report on Form 10-K for the year ended December 31, 2017).

 

The Company and certain of its 50% or less owned companies have entered into interest rate swap agreements for the general purpose of providing protection against increases in interest rates, which might lead to higher interest costs. As of September 30, 2018, the interest rate swaps held by the Company or its 50% or less owned companies were as follows:

 

•

OSV Partners had two interest rate swap agreements with maturities in 2020 that call for OSV Partners to pay a fixed rate of interest ranging from 1.89% to 2.27% on the aggregate amortized notional value of $29.2 million and receive a variable interest rate based on LIBOR on the aggregate amortized notional value.

 

On September 28, 2018, the Company refinanced and extinguished its debts related to the following interest rate swaps:

 

•

Falcon Global International had an interest rate swap agreement maturing in 2022 that called for the Company to pay a fixed interest rate of 2.06% on the amortized notional value of $51.6 million and receive a variable interest rate based on LIBOR on the amortized notional value.  The swap was terminated on September 28, 2018 with de minimis breakage costs, and the $1.2 million fair market value of the swap was received in October 2018.

 

•

Sea-Cat Crewzer II had an interest rate swap agreement maturing in 2019 that called for Sea-Cat Crewzer II to pay a fixed rate of interest of 1.52% on the amortized notional value of $19.1 million and receive a variable interest rate based on LIBOR on the amortized notional value. The swap was terminated on September 28, 2018 with de minimis breakage costs, and the $0.2 million fair market value of the swap was received in October 2018.

 

•

Sea-Cat Crewzer had an interest rate swap agreement maturing in 2019 that called for Sea-Cat Crewzer to pay a fixed rate of interest of 1.52% on the amortized notional value of $16.9 million and receive a variable interest rate based on LIBOR on the amortized notional value. The swap was terminated on September 28, 2018 with de minimis breakage costs, and the $0.2 million fair market value of the swap was received in October 2018.

 

 

 

7.	FAIR VALUE MEASUREMENTS

 

The fair value of an asset or liability is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value and defines three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived from observable market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.

 

The Company’s financial assets and liabilities as of September 30, 2018 that are measured at fair value on a recurring basis were as follows (in thousands):

 

Level 3 Measurement.  The fair value of the conversion option liability on the Convertible Senior Notes is estimated with significant inputs that are both observable and unobservable in the market and therefore is considered a Level 3 fair value measurement. The Company used a binomial lattice model that assumes the holders will maximize their value by finding the optimal decision between redeeming at the redemption price or converting into shares of Common Stock.  This model estimates the fair value of the conversion option as the differential in the fair value of the notes including the conversion option compared with the fair value of the notes excluding the conversion option.  The significant observable inputs used in the fair value measurement include the price of Common Stock and the risk free interest rate.  The significant unobservable inputs are the estimated Company credit spread and Common Stock volatility, which were based on comparable companies in the transportation and energy industries. 

 

The estimated fair values of the Company’s other financial assets and liabilities as of September 30, 2018 were as follows (in thousands):

 

 

The carrying value of cash, cash equivalents and restricted cash approximates fair value. The fair value of the Company’s long-term debt was estimated based upon quoted market prices or by using discounted cash flow analysis based on estimated current rates for similar types of arrangements. It was not practicable to estimate the fair value of certain of the Company’s investments, at cost, in 50% or less owned companies because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. Considerable judgment was required in developing certain of the estimates of fair value and, accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

 

The Company’s other assets and liabilities that were measured at fair value during the nine months ended September 30, 2018 were as follows (in thousands):

 

 

Property and equipment. During the nine months ended September 30, 2018, the Company recognized impairment charges of $3.0 million primarily associated with certain vessels (see Note 1).  The Level 2 fair values were determined based on the sales prices of similar property and equipment at scrap value. 

 

The Level 3 vessels listed above were contributed by MOI to wholly-owned subsidiaries of FGH and recorded at fair value. The Level 3 fair values were determined based on two separate third party valuations using significant inputs that are unobservable in the market. Due to limited market transactions, the primary valuation methodology applied by both appraisers was an estimated cost approach less economic depreciation for comparable aged vessels. The Level 3 fair value of the vessels was based on a simple average between the two appraisals.

 

The significant unobservable inputs used in the fair value measurement for the liftboats provided by the appraisers were based on i) quotes from local shipyards, ii) economic life ranging from 25 to 40 years and iii) economic obsolescence factor ranging from 45% to 50%. The calculated yearly physical depreciation was multiplied by the remaining useful life of each vessel, based on the date of build and the residual value was added back to arrive at a base cost approach value for each vessel.

 

 

8.

WARRANTS

 

On April 26, 2018, the Company closed a private placement of its Common Stock and Warrants to purchase its Common Stock (which were issued to certain investors in place of Common Stock to facilitate compliance with Jones Act restrictions) for aggregate gross proceeds of $56,855,000 (the “PIPE Private Placement”) with certain qualified institutional buyers and other accredited investors. The PIPE Private Placement included the issuance of 2,168,586 shares of Common Stock (the “PIPE Shares”) and Warrants to purchase 674,164 shares of the Common Stock at an exercise price of $0.01 per share (the “PIPE Warrants”). The PIPE Warrants were issued to Proyectos Globales de Energia y Servicios CME, S.A. de C.V. a variable capital corporation (sociedad anónima de capital variable) incorporated and existing under the laws of the United Mexican States (“CME”) and have a 25-year term, which commenced April 26, 2018.

 

As indicated in Note 4, on May 2, 2018, the Company and Carlyle entered into the Exchange pursuant to which Carlyle exchanged $50.0 million in principal amount of the Convertible Senior Notes for the Carlyle Warrants. The Carlyle Warrants have a 25-year term, which commenced May 2, 2018. 

 

 

On May 31, 2018, Carlyle exercised Carlyle Warrants to purchase a total of 250,585 shares of Common Stock (after giving effect to the withholding of 108 shares of Common Stock as payment for the exercise price of the Warrants - see Note 14) (the “Carlyle Warrant Exercise”). Following the Carlyle Warrant Exercise, Carlyle holds Warrants to purchase 1,636,099 shares of Common Stock at an exercise price of $0.01 per share.

 

On June 8, 2018, CME exercised PIPE Warrants and paid an aggregate cash exercise price of $0.01 per share to purchase a total of 38,857 shares of Common Stock (the “CME Warrant Exercise”). Following the CME Warrant Exercise, CME holds Warrants to purchase 635,307 shares of Common Stock at an exercise price of $0.01 per share. 

 

 

 

9.	STOCKHOLDERS' EQUITY

 

On January 1, 2018, the Company adopted a new accounting standard issued by the FASB on October 24, 2016, which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventory.  The impact of the adoption of the new standard resulted in a reduction of $12.1 million to the Company’s opening retained earnings.

 

On February 8, 2018, the Company formed FGH, a joint venture between the Company and MOI.  In accordance with the terms of the Joint Venture Contribution and Formation Agreement, the Company and MOI contributed certain liftboat vessels and other related assets to the joint venture and assumed certain operating liabilities and indebtedness associated with the liftboat vessels and related assets.  The transaction consolidates the fifteen liftboat vessels operated by the Company and six liftboat vessels previously operated by MOI. FGUSA, a wholly-owned subsidiary of FGH, paid $15.0 million of MOI's debtor-in-possession obligations and entered into a $131.1 million credit agreement comprised of the FGUSA Term Loan and the FGUSA Revolving Loan Facility. The Company performed a fair market valuation of the debt reflecting a debt discount of $10.0 million, which will be amortized over the life of the FGUSA Credit Facility.  

 

On March 26, 2018, the Company issued 103,213 shares of Common Stock to an accredited investor for a total of $1.8 million in gross proceeds pursuant to a private placement in reliance on the exemption from registration set forth in Section 4(a)(2) of the Securities Act.

 

As indicated in Note 8, on April 26, 2018, the Company closed the PIPE Private Placement for aggregate gross proceeds of $56,855,000 with certain qualified institutional buyers and other accredited investors. The PIPE Private Placement included the issuance of the PIPE Shares and the PIPE Warrants. The PIPE Shares and PIPE Warrants were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

As indicated in Notes 4 and 8, on May 2, 2018, the Company and Carlyle entered into the Exchange pursuant to which Carlyle exchanged $50.0 million in principal amount of the Convertible Senior Notes for the Carlyle Warrants. The Carlyle Warrants were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

10.	NONCONTROLLING INTERESTS IN SUBSIDIARIES

 

Noncontrolling interests in the Company’s consolidated subsidiaries were as follows (in thousands):

 

 

Falcon Global Holdings.  The Company formed FGH, a joint venture between the Company and MOI.  The Company and MOI contributed certain liftboat vessels and other related assets to FGH and its designated subsidiaries and assumed certain operating liabilities and indebtedness associated with the liftboat vessels and related assets, including a previous joint venture (“Falcon Global International” or “FGI”) that owned and operated two liftboats.  The transaction consolidates the 15 liftboat vessels operated by the Company and six liftboat vessels previously operated by MOI.   The total capital contributed to FGH was approximately $112.5 million of which, $43.3 million was transferred from FGI and $18.8 million was contributed by MOI and recorded at fair value, with the remaining capital contributed by the Company.  As a result of the transaction, the noncontrolling interest in the joint venture held by MOI is 28.0%.

 

During the nine months ended September 30, 2018, the net loss of Falcon Global Holdings was $14.2 million, of which $4.0 million was attributable to noncontrolling interests.

 

 Windcat Workboats. Windcat Workboats owns and operates the Company’s wind farm utility vessels that are primarily used to move personnel and supplies in the major offshore wind markets of Europe. As of September 30, 2018, the net assets of Windcat Workboats were $18.5 million. During the nine months ended September 30, 2018, the net loss of Windcat Workboats was $2.0 million, of which $0.2 million was attributable to noncontrolling interests.

 

11.    COMMITMENTS AND CONTINGENCIES

 

As of September 30, 2018, the Company’s unfunded capital commitments were $34.5 million for two fast support vessels, three supply vessels, two wind farm utility vessels and a conversion of one supply vessel to standby safety vessel.  Of the amount of unfunded capital commitments, $2.7 million is payable during the remainder of 2018, $17.3 million is payable during 2019 and $14.5 million is payable during 2020.  The Company has indefinitely deferred an additional $20.8 million of orders with respect to two fast support vessels for which the Company had previously reported unfunded capital commitments. The delivery dates and payment of certain costs (originally scheduled for payment in 2018, 2019 and 2020) for such vessels are uncertain as the Company, at its option, may defer their construction for an indefinite period of time.  The Company's remaining commitment related to capital commitments for SEACOSCO is approximately $5.3 million.

 

As of September 30, 2018, the Company has guaranteed certain performance contracts of one of its subsidiaries by setting aside £0.9 million from its available borrowing under an unsecured line of credit.  If the contract were not fulfilled, the line of credit would be drawn to fund the guarantee.

 

As of September 30, 2018, SEACOR Holdings has guaranteed $46.1 million on behalf of the Company for various obligations including: letter of credit obligations, performance obligations under sale-leaseback arrangements and invoiced amounts for funding deficits under the MNOPF. Pursuant to a Distribution Agreement with SEACOR Holdings, SEACOR Holdings charges the Company a fee of 0.5% on outstanding guaranteed amounts, which declines as the obligations are settled by the Company.

 

In the normal course of its business, the Company becomes involved in various other litigation matters including, among other things, claims by third parties for alleged property damages and personal injuries. Management has used estimates in determining the Company’s potential exposure to these matters 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 would have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

 

12.    MULTI-EMPLOYER PENSION PLANS

 

Merchant Navy Ratings Pension Fund (“MNRPF”). The cumulative funding deficits of the MNRPF are being recovered by additional annual contributions from current employers that are subject to adjustment following the results of tri-annual actuarial valuations. Based on an actuarial valuation as of March 2017, the cumulative funding deficit of the MNRPF was $291.9 million (£221.0 million). On July 20, 2018, the Company was notified of additional contributions due and recognized in the second quarter of 2018 payroll related expenses of $1.19 million (£0.9 million) for its allocated share of the cumulative funding deficit including portions deemed uncollectible due to the non-existence or liquidation of certain former employers. These additional contributions are payable in four annual installments, which began in October 2018. Depending upon the results of future actuarial valuations, it is possible that the plan could experience further funding deficits that will require the Company to recognize payroll related operating expenses for those periods.

 

 

13.     SHARE BASED COMPENSATION

 

Transactions in connection with the Company's 2017 Equity Incentive Plan during the nine months ended September 30, 2018 were as follows:

 

 

 

14.     STOCK REPURCHASES

 

For the nine months ended September 30, 2018, the Company acquired for treasury 3,664 shares of Common Stock for an aggregate purchase price of $83,922 from its employees to cover their tax withholding obligations upon the lapsing of restrictions on share awards. These shares were purchased in accordance with the terms of the Company's 2017 Equity Incentive Plan and not pursuant to the repurchase authorizations granted by the Company's Board of Directors. On May 24, 2018, in connection with the net settlement of the Carlyle Warrant Exercise, the Company acquired for treasury 108 shares of Common Stock for an aggregate purchase price of $2,562 from Carlyle to cover the $0.01 exercise price of the Carlyle Warrants. (See Note 8).  

 

 

15.    SEGMENT INFORMATION

 

The Company’s segment presentation and basis of measurement of segment profit or loss are as previously described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The following tables summarize the operating results, capital expenditures and assets of the Company’s reportable segments (in thousands).

 

 

The Company’s investments in 50% or less owned companies, which are accounted for under the equity method, also contribute to its consolidated results of operations. As of September 30, 2018, the Company’s investments, at equity and advances to 50% or less owned companies in MexMar and its other 50% or less owned companies were $63.8 million and $56.5 million, respectively. Equity in (losses) earnings of 50% or less owned companies, net of tax for the nine months ended September 30 were as follows (in thousands):