SEACOR Marine Holdings Inc. - Quarter Report: 2018 March (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 March 31, 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒     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 ☒ (Do not check if a smaller reporting company)

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 May 9, 2018 was 20,020,155. 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 March 31, 2018 and December 31, 2017	1
		Condensed Consolidated Statements of Loss for the Three Months Ended March 31, 2018 and 2017	2
		Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017	3
		Condensed Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2018	4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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	36
	Item 4.	Controls and Procedures	37
Part II.	Other Information		38
	Item 1.	Legal Proceedings	38
	Item 1A.	Risk Factors	38
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
	Item 3.	Default Upon Senior Securities	38
	Item 4.	Mine Safety Disclosures	38
	Item 5.	Other Information	38
	Item 6.	Exhibits	38

 

 

		March 31, 2018				December 31, 2017
ASSETS
Current Assets:
Cash and cash equivalents		$	62,738			$	110,234
Restricted cash			2,316				2,317
Receivables:
Trade, net of allowance for doubtful accounts of $3,858 and $4,039 in 2018 and 2017, respectively			45,664				45,616
Other			17,039				12,341
Inventories			3,975				3,756
Prepaid expenses and other			3,613				3,026
Total current assets			135,345				177,290
Property and Equipment:
Historical cost			1,320,496				1,179,836
Accumulated depreciation			(580,461	)			(560,160	)
			740,035				619,676
Construction in progress			80,682				70,157
Net property and equipment			820,717				689,833
Investments, at Equity, and Advances to 50% or Less Owned Companies			112,219				92,169
Construction Reserve Funds			45,361				45,361
Other Assets			3,736				3,851
		$	1,117,378			$	1,008,504
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt		$	22,858			$	22,858
Accounts payable and accrued expenses			25,551				24,024
Due to SEACOR Holdings			1,583				1,358
Accrued wages and benefits			4,958				5,087
Accrued income taxes			4,339				4,290
Accrued capital, repair and maintenance expenditures			23,818				19,618
Deferred revenues			9,430				10,104
Other current liabilities			12,820				11,879
Total current liabilities			105,357				99,218
Long-Term Debt			405,234				292,041
Conversion Option Liability on Convertible Senior Notes			18,991				6,832
Deferred Income Taxes			56,024				55,506
Deferred Gains and Other Liabilities			28,600				31,741
Total liabilities			614,206				485,338
Equity:
SEACOR Marine Holdings Inc. stockholders’ equity:
Common stock, $.01 par value, 60,000,000 shares authorized; 17,786,569 and 17,675,356 shares issued in 2018 and 2017			178				177
Additional paid-in capital			306,639				303,996
Retained earnings			175,609				216,511
Accumulated other comprehensive loss, net of tax			(10,424	)			(12,493	)
			472,002				508,191
Noncontrolling interests in subsidiaries			31,170				14,975
Total equity			503,172				523,166
		$	1,117,378			$	1,008,504

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		Three Months Ended March 31,
		2018				2017
Operating Revenues		$	51,721			$	34,304
Costs and Expenses:
Operating			41,173				33,379
Administrative and general			12,807				11,826
Depreciation and amortization			19,512				12,503
			73,492				57,708
Gains (Losses) on Asset Dispositions and Impairments, Net			(2,643	)			4,819
Operating Loss			(24,414	)			(18,585	)
Other Income (Expense):
Interest income			216				850
Interest expense			(6,133	)			(3,182	)
SEACOR Holdings management fees			-				(1,925	)
SEACOR Holdings guarantee fees			(12	)			(76	)
Marketable security gains (losses), net			-				11,738
Derivative gains (losses), net			(11,516	)			(89	)
Foreign currency losses, net			139				(189	)
Other, net			-				(1	)
			(17,306	)			7,126
Loss Before Income Tax Benefit and Equity in Earnings of 50% or Less Owned Companies			(41,720	)			(11,459	)
Income Tax Benefit			(9,824	)			(3,422	)
Loss Before Equity in Earnings of 50% or Less Owned Companies			(31,896	)			(8,037	)
Equity in Earnings of 50% or Less Owned Companies, Net of Tax			208				438
Net Loss			(31,688	)			(7,599	)
Net Loss attributable to Noncontrolling Interests in Subsidiaries			(2,855	)			(204	)
Net Loss attributable to SEACOR Marine Holdings Inc.		$	(28,833	)		$	(7,395	)
Basic and Diluted Loss Per Common Share of SEACOR Marine Holdings Inc.		$	(1.64)			$	(0.42	)
Basic and Diluted Weighted Average Common Shares Outstanding:			17,571,490				17,671,356

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		Three Months Ended March 31,
		2018				2017
Net Loss		$	(31,688	)		$	(7,599	)
Other Comprehensive Income (Loss):
Foreign currency translation gains (losses)			1,912				919
Derivative gains (losses) on cash flow hedges			131				(9	)
Reclassification of derivative losses on cash flow hedges to interest expense			1				12
Reclassification of derivative losses on cash flow hedges to equity in earnings of 50% or less owned companies			129				188
			2,173				1,110
Income tax (expense) benefit			(27	)			(354	)
			2,146				756
Comprehensive Loss			(29,542	)			(6,843	)
Comprehensive Loss attributable to Noncontrolling Interests in Subsidiaries			(2,778	)			(106	)
Comprehensive Loss attributable to SEACOR Marine Holdings Inc.		$	(26,764	)		$	(6,737	)

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		Common Stock				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Noncontrolling 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			1				1,792				—				—				—				1,793
Amortization of employee share awards			—				476				—				—				—				476
Acquisition of a consolidated joint venture			—				—				—				—				(12,037	)			(12,037	)
Issuance of non-controlling interests			—				375				—				—				31,010				31,385
Net loss			—				—				(28,833	)			—				(2,855	)			(31,688	)
Other comprehensive income			—				—				—				2,069				77				2,146
March 31, 2018		$	178			$	306,639			$	175,609			$	(10,424	)		$	31,170			$	503,172

 

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		Three Months Ended March 31,
		2018				2017
Cash Flows from Operating Activities
Net Loss		$	(31,688	)		$	(7,599	)
Adjustments to reconcile net loss to net cash (used in)provided by operating activities
Depreciation and amortization			19,512				12,503
Deferred financing costs amortization			237				897
Restricted stock amortization			258				—
Option amortization			218				—
Debt discount/(premium) amortization			1,494				1,109
Amortization of deferred gains against charter expense			(2,009	)			(2,050	)
Bad debt expense (income)			(26	)			1,559
(Gain)/loss from equipment sales or retirements			2,643				(4,819	)
(Gains)/losses from sale of marketable securities, net			—				(11,738	)
Proceeds from sale of securities			—				51,877
Derivative (income) / losses			11,516				89
Cash settlement on derivative transactions, net			(129	)			(22	)
Currency (gain) / loss			(139	)			189
Deferred income taxes			(11,286	)			(4,503	)
Equity earnings, net			(208	)			(438	)
Changes in Operating Assets and Liabilities:
Accounts receivables			(3,342	)			4,909
Other assets			(346	)			19,025
Accounts payable and accrued liabilities			1,786				4,308
Net cash (used in) provided by operating activities			(11,509	)			65,296
Cash Flows from Investing Activities:
Purchases of property and equipment			(8,557	)			(10,143	)
Cash settlements on derivative transactions, net			—				(324	)
Proceeds from disposition of property and equipment			282				8,297
Investments in and advances to 50% or less owned companies			(19,950	)			(2,394	)
Return of investments and advances from 50% or less owned companies			99				7,350
Payments received on third party notes receivable, net			—				1,943
Net (increase) decrease in construction reserve funds			—				(5,268	)
Net cash used in investing activities			(28,126	)			(539	)
Cash Flows from Financing Activities:
Payments on long-term debt			(28,807	)			(1,173	)
Proceeds from issuance of long-term debt, net of issue costs			18,471				3,396
Proceeds from issuance of Common Stock			1,793				—
Net cash (used in) provided by financing activities			(8,543	)			2,223
Effects of Exchange Rate Changes on Cash and Cash Equivalents			682				269
Net (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash			(47,496	)			67,249
Cash, Cash Equivalents and Restricted Cash, Beginning of Period			112,551				118,771
Cash, Cash Equivalents and Restricted Cash, End of Period		$	65,055			$	186,020

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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 and is 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 to 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 11).

 

 

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 11).

 

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 three months ended March 31 were as follows (in thousands):

 

 

As of March 31, 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 March 31, 2018, contract liabilities of $2.4 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.

 

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 March 31, 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 three months ended March 31, 2018, capitalized interest totaled $0.5 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 three months ended March 31, 2018, the Company recognized $2.9 million of impairment charges related to four anchor-handling 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 three months ended March 31, 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 three months ended March 31, 2018, the Company's effective income tax rate of 23.5% was primarily due to taxes not provided on income attributable to noncontrolling interests, foreign sourced income not subject to U.S. income taxes, and a reversal of an unrecognized tax benefit. During the three months ended March 31, 2017, the Company’s effective income tax rate of 29.9% was primarily due to losses of foreign subsidiaries not benefited.

 

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 three months ended March 31 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 issued and outstanding during the relevant periods. Diluted loss per common share of the Company is computed based on the weighted average number of common shares 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 each of the three months ended March 31, 2018 and 2017, diluted earnings per common share of the Company excluded 4,070,500 common shares issuable pursuant to the Company’s Convertible Senior Notes (see Note 12) as the effect of their inclusion in the computation would be anti-dilutive.  In addition, diluted loss per common share of the Company excluded 94,507 shares of restricted stock and 653,700 outstanding stock options as the effect of their inclusion in the computation would be anti-dilutive.

 

New Accounting Pronouncements. On February 25, 2016, the FASB issued a comprehensive new leasing standard, which improves transparency and comparability among companies by requiring lessees to recognize a lease liability and a corresponding lease 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 use the modified retrospective approach upon adoption. The Company expects the adoption of the new standard will have a material impact on its consolidated financial position, results of operations and cash flows, although it has not yet determined the extent of the impact.

 

 

 

 

2.	EQUIPMENT ACQUISITIONS AND DISPOSITIONS

 

During the three months ended March 31, 2018, capital expenditures were $8.6 million. Equipment deliveries during the three months ended March 31, 2018 included six liftboats contributed from Montco Offshore, LLC (“MOI”) to certain designated wholly-owned subsidiaries of Falcon Global Holdings LLC (“FGH”) as described in Note 4 below and two platform supply vessels constructed through the SEACOSCO joint venture as described in Note 3 below. 

 

During the three months ended March 31, 2018, the Company sold one fast support vessel previously retired and removed from service, property and other equipment for net proceeds of $0.4 million ($0.3 million in cash and $0.1 million of previously received deposits) and gains of $0.2 million, all of which were recognized currently.

 

 

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, and will take title to another five of the PSVs in 2018 and one 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's total committed investment for construction and working capital requirements is approximately $27.5 million for an unconsolidated 50% interest in SEACOSCO.  During the three months ended March 31, 2018, the Company and its partner each contributed additional capital of $20.0 million in cash. The remaining committed investment will be due over the next 14 months as the vessel and equipment are delivered.  The Company is responsible for full commercial, operational, and technical management of the vessels on a worldwide basis.

 

SEACOR Grant DIS.   As of March 31, 2018, the Company estimates that SEACOR Grant DIS will be unable to meet all its liabilities, and has recorded a bad debt reserve of $0.3 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.

 

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 March 31, 2018, the total amount guaranteed by the Company under this arrangement was $0.4 million.

 

In addition, as of March 31, 2018, two of the Company's 50% or less owned companies have bank debt secured by, among other things, a first preferred mortgage on their 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 $1.4 million in the aggregate.

 

 

 

4.	LONG-TERM DEBT

 

Convertible Senior Notes.  As of March 31, 2018, the Company had issued and outstanding $175.0 million aggregate principal amount of its Convertible Senior Notes due December 1, 2022 (the “Convertible Senior Notes”) to affiliates of the Carlyle Group (collectively “Carlyle”).  Interest on the Convertible Senior Notes is payable semi-annually on June 15 and December 15 of each year.  The Convertible Senior Notes are convertible into shares of Common Stock. On May 2, 2018, certain terms of the Convertible Senior Notes were amended and the Company exchanged $50 million in principal amount of the Convertible Senior Notes for warrants to purchase shares of Common Stock (see Note 12).

 

 

MOI Joint Venture. On February 8, 2018, a wholly-owned subsidiary of the Company 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 6.44%), maturing in 2024, and secured by vessels owned by wholly-owned subsidiaries of FGUSA (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 preliminary 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. The preliminary fair market valuation is subject to revision as additional information regarding the fair market value of assets and liabilities acquired becomes available. Scheduled principal payments begin in 2020.   During the quarter ending March 31, 2018, the Company borrowed $10.0 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 three months ended March 31, 2018, the Company converted €6.0 million denominated debt to pound sterling debt, paying off approximately $7.5 million in euro debt and borrowing approximately $8.5 million in pound sterling debt, resulting in a net increase in USD borrowings of $1.0 million to be used for future capital commitments.

 

Letters of Credit. As of March 31, 2018, the Company had outstanding letters of credit for labor and performance guarantees of $1.8 million.

 

 

 

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 three months ended March 31, 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 the Company is removing the valuation allowance previously established against the net operating loss carryforwards.

 

 

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 March 31, 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 three months ended March 31, 2018. As of March 31, 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 $18.5 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 $110.8 million and receive a variable interest rate based on LIBOR on the aggregate amortized notional value.

 

•

Sea-Cat Crewzer II had an interest rate swap agreement maturing in 2019 that calls for Sea-Cat Crewzer II to pay a fixed rate of interest of 1.52% on the amortized notional value of $20.3 million and receive a variable interest rate based on LIBOR on the amortized notional value.

 

•

Sea-Cat Crewzer had an interest rate swap agreement maturing in 2019 that calls for Sea-Cat Crewzer to pay a fixed rate of interest of 1.52% on the amortized notional value of $18.0 million and receive a variable interest rate based on LIBOR on the amortized notional value.

 

Other Derivative Instruments. The Company recognized gains (losses) on derivative instruments not designated as hedging instruments for the three months ended March 31 as follows (in thousands):

 

 

The conversion option liability relates to the bifurcated embedded conversion option in the Convertible Senior Notes (see 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 March 31, 2018, the interest rate swaps held by the Company or its 50% or less owned companies were as follows:

 

•

Falcon Global International had an interest rate swap agreement maturing in 2022 that calls for the Company to pay a fixed interest rate of 2.06% on the amortized notional value of $54.7 million and receive a variable interest rate based on LIBOR on the amortized notional value.

 

•

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 $33.0 million and receive a variable interest rate based on LIBOR on the aggregate amortized notional value.

 

•      Dynamic Offshore had an interest rate swap agreement maturing in 2018 that calls for Dynamic Offshore to pay a fixed interest rate of 1.30% on the amortized notional value of $64.2 million and receive a variable interest rate based on LIBOR on the amortized notional value.     

 

 

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 March 31, 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 marine transportation and energy industries. 

 

The estimated fair values of the Company’s other financial assets and liabilities as of March 31, 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. The long-term debt includes $121.6 million, net, assumed from FGUSA. 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 three months ended March 31, 2018 were as follows (in thousands):

 

 

Property and equipment. During the three months ended March 31, 2018, the Company recognized impairment charges of $2.9 million 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.	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 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.

 

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 preliminary 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.  The preliminary fair market valuation is subject to revision as additional information regarding the fair market value of assets and liabilities acquired becomes available. 

 

 

In April 2018, the Company participated in the Private Placement and in May 2018, the Company participated in the Exchange, each as described in note 12.

 

9.	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, $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%.

 

 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 March 31, 2018, the net assets of Windcat Workboats were $19.5 million. During the three months ended March 31, 2018, the net loss of Windcat Workboats was $1.9 million, of which $0.2 million was attributable to noncontrolling interests.

 

 

10.     COMMITMENTS AND CONTINGENCIES

 

As of March 31, 2018, the Company’s unfunded capital commitments were $48.8 million for two fast support vessels, three supply vessels, four wind farm utility vessels, and conversions of two supply vessels to standby safety vessels.  Of the amount of unfunded capital commitments, $18.8 million is payable during the remainder of 2018, $21.1 million is payable during 2019 and $8.9 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.  

 

As of March 31, 2018, SEACOR Holdings has guaranteed $56.5 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.

 

 

 

11.     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 March 31, 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 $62.5 million and $47.8 million, respectively. Equity in earnings (losses) of 50% or less owned companies, net of tax for the three months ended March 31 were as follows (in thousands):

 

 

 

 

12.  SUBSEQUENT EVENT

 

On April 26, 2018, the Company issued an aggregate of 2,168,586 shares of Common Stock and warrants to purchase 674,164 shares of Common Stock, at an exercise price of $0.01 per share, in a private placement in reliance on the exemption from registration set forth in Section 4(a)(2) of the Securities Act (the “Private Placement”). The Company received $20.00 per share and warrant for a total of $56.9 million in gross proceeds to be used for general corporate purposes.

 

On May 2, 2018, the Company entered into an amendment and exchange agreement with Carlyle pursuant to which:

 

Carlyle exchanged $50 million in aggregate principal amount of the Convertible Senior Notes for warrants to purchase approximately 1.9 million shares of Common Stock, at an exercise price of $0.01 per share representing an exchange rate of 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 “Exchange”) in in reliance on the exemption from registration set forth in Section 4(a)(2) of the Securities Act; and

 

The Company and Carlyle amended the $125.0 million in principal amount of Convertible Senior Notes that remained outstanding after 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 2023.

 

 

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