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TDW Tidewater

Filed: 5 Nov 20, 4:32pm
 

      

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


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

For the quarterly period ended September 30, 2020

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: 1-6311

Tidewater Inc.

(Exact name of registrant as specified in its charter)

tdw.jpg

Delaware

72-0487776

(State of incorporation)

(I.R.S. Employer Identification No.)

 

6002 Rogerdale Road, Suite 600

Houston, Texas 77072

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code:     (713) 470-5300

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value per share

TDW

New York Stock Exchange

Series A Warrants to purchase shares of common stock

TDW.WS.A

New York Stock Exchange

Series B Warrants to purchase shares of common stock

TDW.WS.B

New York Stock Exchange

Warrants to purchase shares of common stock

TDW.WS

NYSE American

Preferred stock purchase rights

N/A

New York Stock Exchange

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,  a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ☒

 

 

Accelerated filer  ☐

Non-accelerated filer  ☐

Emerging Growth Company ☐

 

 

Smaller reporting 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  ☒

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ☒    No  ☐

 

 40,546,647 shares of Tidewater Inc. common stock $0.001 par value per share were outstanding on October 29, 2020. 

 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.       FINANCIAL STATEMENTS

 

TIDEWATER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and par value data)

 

  

September 30,

  

December 31,

 

ASSETS

 

2020

  

2019

 

Current assets:

        

Cash and cash equivalents

 $192,243  $218,290 

Restricted cash

  26,401   5,755 

Trade and other receivables, less allowance for credit losses of $651 as of September 30, 2020 and less allowance for doubtful accounts of $70 as of December 31, 2019

  100,583   110,180 

Due from affiliate less allowance for credit losses of $72,696 as of September 30, 2020 and less due from affiliate allowance of $20,083 as of December 31, 2019

  65,692   125,972 

Marine operating supplies

  17,808   21,856 

Assets held for sale

  19,163   39,287 

Prepaid expenses and other current assets

  18,925   15,956 

Total current assets

  440,815   537,296 

Net properties and equipment

  820,876   938,961 

Net deferred drydocking and survey costs

  63,975   66,936 

Other assets

  25,108   36,335 

Total assets

 $1,350,774  $1,579,528 
         

LIABILITIES AND EQUITY

        

Current liabilities:

        

Accounts payable

 $12,953  $27,501 

Accrued costs and expenses

  55,811   74,000 

Due to affiliates

  53,355   50,186 

Current portion of long-term debt

  9,576   9,890 

Other current liabilities

  31,599   24,100 

Total current liabilities

  163,294   185,677 

Long-term debt

  246,179   279,044 

Other liabilities

  87,724   98,397 
         

Contingencies (Note 10)

          
         

Equity:

        

Common stock of $0.001 par value, 125,000,000 shares authorized, 40,460,982 and 39,941,327 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

  40   40 

Additional paid-in capital

  1,370,778   1,367,521 

Accumulated deficit

  (519,684)  (352,526)

Accumulated other comprehensive income (loss)

  1,106   (236)

Total stockholders’ equity

  852,240   1,014,799 

Noncontrolling interests

  1,337   1,611 

Total equity

  853,577   1,016,410 

Total liabilities and equity

 $1,350,774  $1,579,528 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

 

2

 

 

TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

Revenues:

                

Vessel revenues

 $85,395  $117,173  $298,344  $360,476 

Other operating revenues

  1,072   2,592   6,835   7,296 
   86,467   119,765   305,179   367,772 

Costs and expenses:

                

Vessel operating costs

  61,784   80,619   205,383   243,261 

Costs of other operating revenues

  219   534   3,063   1,884 

General and administrative

  17,438   30,474   56,455   81,310 

Depreciation and amortization

  30,777   25,735   86,028   73,705 

Long-lived asset impairments

  1,945   5,224   67,634   5,224 

Affiliate credit loss impairment expense

  0   0   53,581   0 

Affiliate guarantee obligation

  0   0   2,000   0 

Gain on asset dispositions, net

  (520)  (270)  (7,511)  (1,047)
   111,643   142,316   466,633   404,337 

Operating loss

  (25,176)  (22,551)  (161,454)  (36,565)

Other income (expense):

                

Foreign exchange gain (loss)

  (1,153)  173   (2,365)  (324)

Equity in net earnings of unconsolidated companies

  0   (468)  0   (435)

Dividend income from unconsolidated company

  0   0   17,150   0 

Interest income and other, net

  272   1,579   1,084   5,908 

Interest and other debt costs, net

  (6,071)  (7,468)  (18,172)  (22,786)
   (6,952)  (6,184)  (2,303)  (17,637)

Loss before income taxes

  (32,128)  (28,735)  (163,757)  (54,202)

Income tax expense

  5,953   15,071   3,512   26,443 

Net loss

 $(38,081) $(43,806) $(167,269) $(80,645)

Net income (loss) attributable to noncontrolling interests

  (154)  394   (274)  1,245 

Net loss attributable to Tidewater Inc.

 $(37,927) $(44,200) $(166,995) $(81,890)
Basic loss per common share $(0.94) $(1.15) $(4.15) $(2.17)
Diluted loss per common share $(0.94) $(1.15) $(4.15) $(2.17)

Weighted average common shares outstanding

  40,405   38,537   40,271   37,767 

Adjusted weighted average common shares

  40,405   38,537   40,271   37,767 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

3

 

 

TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

Net loss

 $(38,081) $(43,806) $(167,269) $(80,645)

Other comprehensive income:

                

Change in pension plan and supplemental pension plan liability, net of tax of $0.2 million and $0.4 million, respectively

  525   0   1,342   0 

Total comprehensive loss

 $(37,556) $(43,806) $(165,927) $(80,645)

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

4

 

 

TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

  

Nine Months

  

Nine Months

 
  

Ended

  

Ended

 
  

September 30, 2020

  

September 30, 2019

 

Operating activities:

        

Net loss

 $(167,269) $(80,645)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Depreciation

  53,614   57,629 

Amortization of deferred drydocking and survey costs

  32,414   16,076 

Amortization of debt premium and discounts

  2,418   (1,562)

Provision for deferred income taxes

  107   759 

Gain on asset dispositions, net

  (7,511)  (1,047)

Affiliate credit loss impairment expense

  53,581   0 

Affiliate guarantee obligation

  2,000   0 

Long-lived asset impairments

  67,634   5,224 

Changes in investments in unconsolidated companies

  0   435 

Compensation expense - stock-based

  3,959   16,599 
Changes in assets and liabilities, net:        

Trade and other receivables

  9,434   (11,796)

Changes in due to/from affiliate, net

  9,852   14,898 

Accounts payable

  (14,548)  (8,267)

Accrued costs and expenses

  (18,189)  (10,574)

Cash paid for deferred drydocking and survey costs

  (29,499)  (43,701)

Other, net

  3,809   9,268 

Net cash provided by (used in) operating activities

  1,806   (36,704)

Cash flows from investing activities:

        

Proceeds from sales of assets

  31,498   25,092 

Additions to properties and equipment

  (4,682)  (13,931)

Net cash provided by investing activities

  26,816   11,161 

Cash flows from financing activities:

        

Principal payments on long-term debt

  (33,520)  (6,458)

Taxes on share-based awards

  (702)  (3,112)

Other

  0   1 

Net cash used in financing activities

  (34,222)  (9,569)

Net change in cash, cash equivalents and restricted cash

  (5,600)  (35,112)

Cash, cash equivalents and restricted cash at beginning of period

  227,608   397,744 

Cash, cash equivalents and restricted cash at end of period (A)

 $222,008  $362,632 

Supplemental disclosure of cash flow information:

        

Cash paid during the period for:

        

Interest, net of amounts capitalized

 $16,169  $24,482 

Income taxes

 $9,940  $10,386 

 

 

(A)

Cash, cash equivalents and restricted cash at September 30, 2020 includes $3.4 million in long-term restricted cash.

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

5

 

 

TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In thousands)

 

  

Three Months Ended

 
              

Accumulated

         
      

Additional

      

other

  

Non

     
  

Common

  

paid-in

  

Accumulated

  

comprehensive

  

controlling

     
  

stock

  

capital

  

deficit

  

income

  

interest

  

Total

 

Balance at June 30, 2020

 $40   1,369,645   (481,757)  581   1,491   890,000 

Total comprehensive loss

  0   0   (37,927)  525   (154)  (37,556)

Amortization/cancellation of restricted stock units

  0   1,133   0   0   0   1,133 

Balance at September 30, 2020

 $40   1,370,778   (519,684)  1,106   1,337   853,577 
                         

Balance at June 30, 2019

 $38   1,359,842   (248,473)  2,194   1,938   1,115,539 

Total comprehensive loss

  0   0   (44,200)  0   394   (43,806)

Issuance of common stock from exercise of warrants

  1   (1)  0   0   0   0 

Amortization/cancellation of restricted stock units

  0   6,031   0   0   0   6,031 

Balance at September 30, 2019

 $39   1,365,872   (292,673)  2,194   2,332   1,077,764 

 

  

Nine Months Ended

 
              

Accumulated

         
      

Additional

      

other

  

Non

     
  

Common

  

paid-in

  

Accumulated

  

comprehensive

  

controlling

     
  

stock

  

capital

  

deficit

  

income (loss)

  

interest

  

Total

 

Balance at December 31, 2019

 $40   1,367,521   (352,526)  (236)  1,611   1,016,410 

Total comprehensive loss

  0   0   (166,995)  1,342   (274)  (165,927)

Adoption of credit loss accounting standard

  0   0   (163)  0   0   (163)

Amortization/cancellation of restricted stock units

  0   3,257   0   0   0   3,257 

Balance at September 30, 2020

 $40   1,370,778   (519,684)  1,106   1,337   853,577 
                         

Balance at December 31, 2018

 $37   1,352,388   (210,783)  2,194   1,087   1,144,923 

Total comprehensive loss

  0   0   (81,890)  0   1,245   (80,645)

Issuance of common stock from exercise of warrants

  2   0   0   0   0   2 

Amortization/cancellation of restricted stock units

  0   13,484   0   0   0   13,484 

Balance at September 30, 2019

 $39   1,365,872   (292,673)  2,194   2,332   1,077,764 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

6

 

 

(1)

INTERIM FINANCIAL STATEMENTS

 

The unaudited condensed consolidated financial statements for the interim periods presented herein have been prepared in conformity with United States generally accepted accounting principles and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the unaudited condensed consolidated financial statements at the dates and for the periods indicated as required by Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (SEC). Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020.

 

The unaudited condensed consolidated financial statements include the accounts of Tidewater Inc. and its subsidiaries. Intercompany balances and transactions are eliminated in consolidation. We use the equity method to account for equity investments over which we exercise significant influence but do not exercise control and are not the primary beneficiary. Unless otherwise specified, all per share information included in this document is on a diluted earnings per share basis.

 

 

(2)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

 

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance to simplify the accounting for income taxes.  The guidance is effective for annual and interim periods beginning after December 15, 2020 with early adoption permitted.  We are currently evaluating the effect the standard may have in our consolidated financial statements.

 

In August 2018 the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General, which modifies the disclosure requirements for employers that sponsor defined benefit plans or other postretirement plans. This ASU removes certain disclosures that no longer are considered cost beneficial, clarifies the specific requirements of certain other disclosures, and adds disclosure requirements identified as relevant.  The guidance is effective for annual and interim periods beginning after December 15, 2020 with early adoption permitted.  We do not expect the standard to have a significant impact on our consolidated financial statement disclosures.

 

7

 
 

(3)

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement: - Changes to The Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. We adopted this standard on January 1, 2020 and it did not have any impact on our financial position, net earnings, or cash flow.  However, we have incorporated the modified disclosure requirements of ASU 2018-13 into note 15 of our financial statements.

 

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses, which introduced a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. This model applies to: (i) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (ii) loan commitments and certain other off-balance sheet credit exposures, (iii) debt securities and other financial assets measured at fair value through other comprehensive income and (iv) beneficial interests in securitized financial assets.

 

Expected credit losses are recognized on the initial recognition of our trade accounts receivable and contract assets.  In each subsequent reporting period, even if a loss has not yet been incurred, credit losses are recognized based on the history of credit losses and current conditions, as well as reasonable and supportable forecasts affecting collectability.  We developed an expected credit loss model applicable to our trade accounts receivable and contract assets that considers our historical performance and the economic environment, as well as the credit risk and its expected development for each group of customers that share similar risk characteristics.  We segmented our trade accounts receivable and contract assets by type of client, except for individual account balances that have deteriorated in credit quality, which are evaluated individually.  We then determined, for each of these client asset groups, the average expected credit loss utilizing our actual credit loss experience over the last five years, which was adjusted as discussed above, and was applied to the balance attributable to each segment in our trade accounts receivable and contract asset balances.  This standard was adopted through a cumulative-effect adjustment to the accumulated deficit as of January 1, 2020, which is the beginning of the first period in which this guidance is effective.  Periods prior to the adoption date that are presented for comparative purposes are not adjusted.  Adopting this standard on January 1, 2020 increased the allowance for expected credit losses by approximately $0.2 million.

 

Activity in the allowance for credit losses for the nine months ended September 30, 2020 is as follows:

 

  

Trade

  

Due

 
  

and

  

from

 

(In thousands)

 

Other Receivables

  

Affiliate

 

Balance at January 1, 2020

 $70  $20,083 

Cumulative effect adjustment upon adoption of standard

  163   0 

Current period provision for expected credit losses

  418   54,550 

Other

  0   (1,937)

Balance at September 30, 2020

 $651  $72,696 

 

 

(4)

REVENUE RECOGNITION

 

Refer to Note (13) for the amount of revenue by segment and in total for the worldwide fleet.

 

Contract Balances

 

At September 30, 2020, we had $6.2 million and $1.0 million of deferred mobilization costs included within other current assets and other assets, respectively.

 

At September 30, 2020 we have $0.9 million of deferred mobilization revenue, included within other current liabilities, related to unsatisfied performance obligations which will be primarily recognized during the remainder of 2020 and 2021.

 

8

 
 

(5)

STOCKHOLDERS' EQUITY AND DILUTIVE EQUITY INSTRUMENTS

 

Accumulated Other Comprehensive Income (Loss) (OCI)

 

The changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended September 30, 2020 and 2019 are as follows:

 

  

Three Months Ended

 
  

September 30,

  

September 30,

 

(In thousands)

 

2020

  

2019

 

Balance at June 30, 2020 and 2019

 $581  $2,194 

Pension benefits recognized in AOCI

  525   0 

Balance at September 30, 2020 and 2019

 $1,106  $2,194 

 

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(In thousands)

 

2020

  

2019

 

Balance at December 31, 2019 and 2018

 $(236) $2,194 

Pension benefits recognized in AOCI

  1,342   0 

Balance at September 30, 2020 and 2019

 $1,106  $2,194 

 

Dilutive Equity Instruments

 

We had 2,488,752 and 3,397,110 incremental "in-the-money" warrants and restricted stock units at September 30, 2020 and 2019, respectively, which are as follows:

 

Total shares outstanding including warrants and restricted stock units

 

September 30, 2020

  

September 30, 2019

 

Common shares outstanding

  40,460,982   39,110,938 

New creditor warrants (strike price $0.001 per common share)

  761,395   1,329,884 

GulfMark creditor warrants (strike price $0.01 per common share)

  930,027   1,300,359 

Restricted stock units

  797,330   766,867 

Total

  42,949,734   42,508,048 

 

We also had 5,923,399 shares of “out-of-the-money” warrants outstanding at September 30, 2020 and 2019, respectively. Included in these “out-of-the-money” warrants are Series A Warrants, Series B Warrants and GLF Equity Warrants which have exercise prices of $57.06, $62.28, and $100.00, respectively. No warrants or restricted stock units, whether in the money or out of the money, are included in our loss per share calculations because the effect of such inclusion is antidilutive.

 

Tax Benefits Preservation Plan

 

On April 13, 2020, we adopted a Tax Benefits Preservation Plan (the “Plan”) as a measure to protect our existing net operating loss carryforwards ($280 million at September 30, 2020) and foreign tax credits (“Tax Attributes”) and to reduce our potential future tax liabilities.  Use of our Tax Attributes will be substantially limited if we experience an “ownership change” as defined in Section 382 of the Internal Revenue Code (“Section 382”).

 

While the Plan is in effect, any person or group that acquires beneficial ownership of 4.99% or more of our common stock then outstanding without approval from our Board of Directors (the Board) or without meeting certain customary exceptions would be subject to significant dilution in their ownership interest in our company. Stockholders who currently own 4.99% or more of our outstanding common stock will not trigger the Plan unless they acquire 0.5% or more additional shares of common stock.

 

Pursuant to the Plan, 1 right will be distributed to our stockholders for each share of our common stock owned of record at the close of business on April 24, 2020. Each right would initially represent the right to purchase from the Company one one-thousandth of a share of our Series A Junior Participating Preferred Stock, 0 par value (the “Preferred Stock”) at a purchase price of $38.00 per one one-thousandth of a share. The preferred stock will entitle the holder to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of preferred stock. The Board may redeem the rights in whole, but not in part, for $0.001 per right (subject to adjustment) at any time prior to the close of business on the tenth business day after the first date of public announcement that any person or group has triggered the Plan.

 

The rights will expire on the earliest of (i) the close of business on April 13, 2023, (ii) the time at which the rights are redeemed or exchanged, or (iii) the time at which the Board determines that the Tax Attributes are fully utilized, expired, no longer necessary or become limited under Section 382.

 

9

 
 

(6)

INCOME TAXES

 

We use a discrete effective tax rate method to calculate taxes for interim periods instead of applying the annual effective tax rate to an estimate of the full fiscal year due to the level of volatility and unpredictability of earnings in our industry, both overall and by jurisdiction.

 

Income tax expense for the quarter and nine months ended September 30, 2020, reflects tax liabilities in various jurisdictions that are either based on revenue (deemed profit regimes) or pre-tax profits.

 

The tax liabilities for uncertain tax positions are primarily attributable to permanent establishment issues related to a foreign joint venture, subpart F income inclusions and withholding taxes on foreign services. Penalties and interest related to income tax liabilities are included in income tax expense. Income tax payable is included in other current liabilities.

 

As of December 31, 2019, our balance sheet reflected approximately $101.3 million of net deferred tax assets prior to a valuation allowance analysis, with a valuation allowance of $103.5 million. As of September 30, 2020, we had net deferred tax assets of approximately $106.3 million prior to a valuation allowance analysis of $108.6 million.

 

Management assesses all available positive and negative evidence to estimate the company’s ability to generate sufficient future taxable income of the appropriate character, and in the appropriate taxing jurisdictions, to permit use of existing deferred tax assets. A significant piece of objective negative evidence is a cumulative loss incurred over a three-year period in a taxing jurisdiction. Prevailing accounting practice is that such objective evidence would limit the ability to consider other subjective evidence, such as projections for future growth.

 

The amount of deferred tax assets considered realizable could be adjusted if future estimates of U.S. taxable income change, or if objective negative evidence in the form of cumulative losses is no longer present and subjective evidence, such as financial projections for future growth and tax planning strategies, are given additional weight.

 

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. The CARES Act includes several significant business tax provisions, that are available to the Company, that, among other things, would allow businesses to carry back net operating losses arising after 2017 to the five prior tax years.  Considering the available carryback, we have recorded a tax benefit of $6.9 million related to the realization of net operating loss deferred tax assets on which a valuation allowance was previously recorded.

 

With limited exceptions, we are no longer subject to tax audits by U.S. federal, state, local or foreign taxing authorities for years prior to 2014. We are subject to ongoing examinations by various foreign tax authorities and do not believe that the results of these examinations will have a material adverse effect on our financial position, results of operations, or cash flows.

 

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(7)

AFFILIATES BALANCES

 

We maintained the following balances with our unconsolidated affiliates:

 

(In thousands)

 

September 30, 2020

  

December 31, 2019

 

Due from affiliates:

        

Sonatide (Angola)

 $45,627  $89,246 

DTDW (Nigeria)

  20,065   36,726 
   65,692   125,972 

Due to affiliates:

        

Sonatide (Angola)

 $33,290  $31,475 

DTDW (Nigeria)

  20,065   18,711 
   53,355   50,186 

Net due from affiliates

 $12,337  $75,786 

 

Amounts due from Sonatide

 

Amounts due from Sonatide represent cash received by Sonatide from customers and due to us, amounts due from customers that are expected to be remitted to us by Sonatide and costs incurred by us on behalf of Sonatide.

 

  

Nine Months

 
  

Ended

 

(In thousands)

 

September 30, 2020

 

Due from Sonatide at December 31, 2019

 $89,246 

Revenue earned by the company through Sonatide

  34,378 

Less amounts received from Sonatide

  (27,761)

Less amounts used to offset due to Sonatide obligations (A)

  (8,145)

Affiliate credit loss impairment expense

  (41,500)

Other

  (591)

Total due from Sonatide at September 30, 2020

 $45,627 

 

 

(A)

We reduced the respective due from affiliates and due to affiliates balances each period through netting transactions based on agreement with the joint venture.

 

The amounts due from Sonatide are denominated in U.S. dollars; however, the underlying third-party customer payments to Sonatide were satisfied, in part, in Angolan kwanzas.  In late 2019, we were informed that, as part of a broad privatization program, Sonangol, our partner in Sonatide, intends to seek to divest itself from the Sonatide joint venture.

 

In the second quarter of 2020 Sonatide declared a $35.0 million dividend.  On June 22, 2020, Sonangol received $17.8 million and we received $17.2 million.  All of our share of the dividend is reflected as dividend income from unconsolidated company in the consolidated statement of operations because (i) our investment in the Sonatide joint venture had previously been written down to zero, (ii) the distributions are not refundable and (iii) we are not liable for the obligations of or committed to provide financial support to the Sonatide joint venture.  In addition, as a result of the aforementioned dividend payment, the cash balances of the joint venture were significantly reduced and we determined that, as a result, a significant portion of our net due from Sonatide balance was compromised.

 

After offsetting the amounts due to Sonatide, the net amount due from Sonatide at September 30, 2020 was approximately $12.3 million. Sonatide had approximately $8.9 million of cash on hand (approximately $1.0 million denominated in Angolan kwanzas) at September 30, 2020 plus approximately $12.9 million of net trade accounts receivable to satisfy the net due from Sonatide. Given prior discussions with our partner regarding how the net losses from the devaluation of certain Angolan kwanza denominated accounts should be shared, we continue to evaluate our net due from Sonatide balance for possible additional impairment in future periods based in part on available liquidity held by Sonatide. In the nine months ended September 30, 2020, we recorded $41.5 million in credit loss impairment expense.

 

11

 

Amounts due to Sonatide

 

Amounts due to Sonatide represent commissions payable and other costs paid by Sonatide on our behalf.

 

  

Nine Months

 
  

Ended

 

(In thousands)

 

September 30, 2020

 

Due to Sonatide at December 31, 2019

 $31,475 

Plus additional commissions payable to Sonatide

  3,240 

Plus amounts paid by Sonatide on behalf of the company

  6,763 

Less amounts used to offset due from Sonatide obligations (A)

  (8,145)

Other

  (43)

Total due to Sonatide at September 30, 2020

 $33,290 

 

 

(A)

We reduced the respective due from affiliates and due to affiliates balances each period through netting transactions based on agreement with the joint venture.

 

Sonatide Operations

 

Sonatide’s principal earnings are from the commissions paid by us to the joint venture for company vessels chartered in Angola. In addition, Sonatide owns 2 vessels that may generate operating income and cash flow.

 

Company operations in Angola

 

Vessel revenues generated by our Angolan operations, percent of consolidated vessel revenues, average number of company owned vessels and average number of stacked company owned vessels of our Angolan operations for the periods indicated were as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

Revenues of Angolan operations (in thousands)

 $10,660  $11,534  $35,086  $41,194 

Percent of consolidated vessel revenues

  12%  10%  12%  11%

Number of company owned vessels in Angola

  24   31   26   33 

Number of stacked company owned vessels in Angola

  8   14   9   14 

 

Amounts due from DTDW (Nigeria)

 

We own 40% of the DTDW joint venture in Nigeria.  Our partner, who owns 60%, is a Nigerian national.  DTDW owns 1 offshore service vessel and has long term debt of $4.7 million which is secured by the vessel and guarantees from the DTDW partners. We also operate company owned vessels in Nigeria for which our partner receives a commission.  As of September 30, 2020, we had no company owned vessels operating in Nigeria and the DTDW owned vessel was not employed.  At the beginning of 2020 we had expected that we would be operating numerous vessels in Nigeria, but in the second quarter of 2020 the COVID-19 pandemic and resulting oil price reduction caused our primary customer in Nigeria to eliminate all planned operations for 2020.  As a result, the near-term cash flow projections indicate that DTDW does not have sufficient funds to meet its obligations to us or to the holder of its long-term debt.  Therefore, we recorded affiliate credit loss impairment expense for the nine months ending September 30, 2020 totaling $12.1 million.  In addition, based on our analysis we have determined that DTDW will be unable to pay its debt obligation and the debt will not be satisfied by liquidating the vessel and, as a result, we recorded additional impairment expense of $2.0 million for our expected share of the obligation guarantee during the nine  months ended September 30, 2020. 

 

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(8)

EMPLOYEE BENEFIT PLANS

 

U.S. Defined Benefit Pension Plan

 

We have a defined benefit pension plan (pension plan) that covers certain U.S. citizen employees and other employees who are permanent residents of the United States. The pension plan was frozen during 2010.  We did not contribute to the pension plan during the three and nine months ended September 30, 2020 and we are not required to contribute to the pension plan during the remaining quarter of calendar year 2020; however, we may, at our discretion, make contributions to the pension plan in order to manage our plan expenses.  We contributed $1.1 million to the pension plan during the third quarter of 2019.  Actuarial valuations are performed annually and an assessment of the future pension obligations and market value of the assets will determine if contributions are made in the future.

 

Supplemental Executive Retirement Plan

 

We also support a non-contributory and non-qualified defined benefit supplemental executive retirement plan (supplemental plan) which was closed to new participants during 2010, that provided pension benefits to certain employees in excess of those allowed under our tax-qualified pension plan.  We contributed $0.4 million and $1.2 million during the three and nine months ended September 30, 2020 and $2.1 million and $2.9 million during the three and nine months ended September 30, 2019, respectively. We expect to contribute $0.4 million to the supplemental plan during the remainder of 2020. Our obligations under the supplemental plan were $21.0 million and $21.4 million as of September 30, 2020 and December 31, 2019, respectively, and are included in “accrued costs and expenses” and “other liabilities” on the consolidated balance sheet.

 

Other Defined Benefit Pension Plans

 

We also have defined benefit pension plans that cover a small number of former Norwegian employees. Benefits are based on years of service and employee compensation. Our contributions to the Norwegian defined benefit pension plans during 2020 and 2019, were immaterial and we expect that any contributions for the remainder of calendar year 2020 will be immaterial. Substantially, all of our Norwegian employees were transferred from our defined benefit pension plans into a defined contribution plan during 2020.

 

Net Periodic Benefit Costs

 

The net periodic benefit cost for our defined benefit pension plans and supplemental plan (referred to collectively as “Pension Benefits”) is comprised of the following components:

 

  

Three Months Ended

  

Nine Months Ended

 

(In thousands)

 

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

Pension Benefits:

                

Service cost

 $97  $316  $111  $328 

Interest cost

  239   1,006   2,737   2,853 

Expected return on plan assets

  (114)  (711)  (2,208)  (1,787)

Administrative expenses

  52   83   64   90 

Settlement loss

  79   (46)  910   46 

Amortization of net actuarial losses

  5   0   (4)  0 

Net periodic pension cost

 $358  $648  $1,610  $1,530 

 

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(9)

DEBT

 

The following is a summary of all debt outstanding:

 

  

September 30,

  

December 31,

 

(In thousands)

 

2020

  

2019

 

Secured notes:

        

8.00% Senior secured notes due August 2022 (A) (B) (C)

 $197,049  $224,793 

Troms Offshore borrowings (D):

        
NOK denominated notes due May 2024  8,683   10,260 

NOK denominated notes due January 2026

  16,746   20,788 

USD denominated notes due January 2027

  17,816   20,273 

USD denominated notes due April 2027

  20,240   21,545 
  $260,534  $297,659 

Debt premiums and discounts, net

  (4,779)  (8,725)

Less: Current portion of long-term debt

  (9,576)  (9,890)

Total long-term debt

 $246,179  $279,044 

 

 

(A)

As of September 30, 2020 and December 31, 2019 the fair value (Level 2) of the Secured Notes was $193.9 million and $237.6 million, respectively.  

 

(B)

The $26.4 million restricted cash on the balance sheet at September 30, 2020, represents approximately 65% of net proceeds from asset dispositions since the date of the last tender offer and is restricted by the terms of the Indenture. In connection with the asset dispositions, we have commenced a mandatory tender offer for $28.7 million aggregate principal amount of Secured Notes in accordance with the Senior Notes Indenture, which will be terminated if the consent solicitation described below is approved by the requisite holders of Senior Notes, allowing the tender offer for $50 million aggregate principal amount of Senior Notes described below to proceed.

 (C)During the three and nine months ended September 30, 2020, we repurchased $27.7 million of the Secured Notes at a discount of $1.5 million in open market transactions.

 

(D)

We pay principal and interest on these notes semi-annually.  As of September 30, 2020 and December 31, 2019, the aggregate fair value (Level 2) of the Troms Offshore borrowings was $62.6 million and $72.9 million, respectively. The weighted average interest rate of the Troms Offshore borrowings as of September 30, 2020 was 5.0%. 

 

We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers, exchange offers, redemptions, one or more additional offers, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

 

In October 2020 we executed a consent to conform the TROMS offshore borrowing covenants to those of the Senior Secured Notes.  As a condition of this consent, we will be prepaying approximately $12.4 million of the TROMS debt in the fourth quarter of 2020 and another $8 million in the first half of 2021.  If the company were to make additional prepayments of Senior Secured Notes, we would be obliged to make additional prepayments of Troms debt up to a cumulative balance of $35 million.

 

On November 3, 2020, we launched a consent solicitation and concurrent tender offer for $50 million aggregate principal amount of Senior Notes. We are soliciting consents to approve amendments to several covenants under the Senior Notes Indenture, as well as a waiver of  the mandatory tender offer discussed in Item B under the Debt table above.

 

 

(10)

COMMITMENTS AND CONTINGENCIES

 

Currency Devaluation and Fluctuation Risk

 

Due to our international operations, we are exposed to foreign currency exchange rate fluctuations against the U.S. dollar. For some of our international contracts, a portion of the revenue and local expenses are incurred in local currencies with the result that we are at risk for changes in the exchange rates between the U.S. dollar and foreign currencies. We generally do not hedge against any foreign currency rate fluctuations associated with foreign currency contracts that arise in the normal course of business, which exposes us to the risk of exchange rate losses. To minimize the financial impact of these items, we attempt to contract a significant majority of our services in U.S. dollars. In addition, we attempt to minimize the financial impact of these risks by matching the currency of our operating costs with the currency of our revenue streams when considered appropriate. We continually monitor the currency exchange risks associated with all contracts not denominated in U.S. dollars.  

 

Legal Proceedings

 

Various legal proceedings and claims are outstanding which arose in the ordinary course of business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions, will not have a material adverse effect on our financial position, results of operations, or cash flows.

 

 

(11)

FAIR VALUE MEASUREMENTS

 

Other Financial Instruments

 

Our primary financial instruments consist of cash and cash equivalents, restricted cash, trade receivables and trade payables with book values that are considered to be representative of their respective fair values.

 

The carrying value for cash equivalents is considered to be representative of its fair value due to the short duration and conservative nature of the cash equivalent investment portfolio.  As of September 30, 2020 and December 31, 2019, we had $222.0 and $227.6 million of cash equivalents, respectively.

 

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(12)

PROPERTIES AND EQUIPMENT, ACCRUED COSTS AND EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES          

 

Our property and equipment consist primarily of 146 active vessels, which excludes the 24 vessels we have classified as held for sale, located around the world.

 

A summary of properties and equipment at September 30, 2020 and December 31, 2019 is as follows:

 

  

September 30,

  

December 31,

 

(In thousands)

 

2020

  

2019

 

Properties and equipment:

        

Vessels and related equipment

 $968,411  $1,051,558 

Other properties and equipment

  15,674   13,119 
   984,085   1,064,677 

Less accumulated depreciation and amortization

  163,209   125,716 

Properties and equipment, net

 $820,876  $938,961 

 

During the three months ended September 30, 2020 we revised our estimates of salvage value for our vessels which will increase our depreciation expense on a prospective basis.  The effect of the change in estimate on our results of operations for the three months ended September 30, 2020 was to increase depreciation expense by $3.8 million (or $0.09 per share).

 

A summary of accrued cost and expenses is as follows:

 

  

September 30,

  

December 31,

 

(In thousands)

 

2020

  

2019

 

Payroll and related payables

 $16,364  $16,351 

Accrued vessel expenses

  17,968   38,383 

Accrued interest expense

  4,053   4,570 

Other accrued expenses

  17,426   14,696 
  $55,811  $74,000 

 

A summary of other current liabilities at September 30, 2020 and December 31, 2019 is as follows:

 

  

September 30,

  

December 31,

 

(In thousands)

 

2020

  

2019

 

Taxes payable

 $22,416  $18,661 

Other

  9,183   5,439 
  $31,599  $24,100 

 

A summary of other liabilities at September 30, 2020 and December 31, 2019 is as follows:

 

  

September 30,

  

December 31,

 

(In thousands)

 

2020

  

2019

 

Pension liabilities

 $29,832  $32,545 

Liability for uncertain tax positions

  44,876   48,577 

Deferred tax liability

  2,692   2,571 

Other

  10,324   14,704 
  $87,724  $98,397 

 

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(13)

SEGMENT AND GEOGRAPHIC DISTRIBUTION OF OPERATIONS

 

The following table provides a comparison of segment revenues, vessel operating profit (loss), depreciation and amortization, and additions to properties and equipment for the three and nine months ended September 30, 2020 and 2019. Vessel revenues and operating costs relate to vessels owned and operated by us while other operating revenues relate to other miscellaneous marine-related businesses.

 

  

Three Months Ended

  

Nine Months Ended

 

(In thousands)

 

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

Revenues:

                

Vessel revenues:

                

Americas

 $28,705  $33,147  $94,608  $103,624 

Middle East/Asia Pacific

  23,280   22,765   72,091   63,670 

Europe/Mediterranean

  17,716   30,946   67,827   94,531 

West Africa

  15,694   30,315   63,818   98,651 

Other operating revenues

  1,072   2,592   6,835   7,296 
  $86,467  $119,765  $305,179  $367,772 

Vessel operating profit (loss):

                

Americas

 $107  $(168) $3,448  $1,702 

Middle East/Asia Pacific

  (2,222)  (809)  (2,479)  (4,098)

Europe/Mediterranean

  (3,883)  (276)  (4,086)  (768)

West Africa

  (10,168)  678   (19,015)  11,891 

Other operating profit

  853   2,052   3,772   5,381 
   (15,313)  1,477   (18,360)  14,108 

Corporate expenses

  (8,438)  (19,074)  (27,390)  (46,496)

Long-lived asset impairments

  (1,945)  (5,224)  (67,634)  (5,224)

Affiliate credit loss impairment expense

  0   0   (53,581)  0 

Affiliate guarantee obligation

  0   0   (2,000)  0 

Gain on asset dispositions, net

  520   270   7,511   1,047 

Operating loss

 $(25,176) $(22,551) $(161,454) $(36,565)

Depreciation and amortization:

                

Americas

 $8,076  $6,929  $23,645  $19,706 

Middle East/Asia Pacific

  6,332   5,685   17,504   15,454 

Europe/Mediterranean

  8,248   7,436   21,860   22,623 

West Africa

  7,330   5,335   20,484   14,876 

Corporate

  791   350   2,535   1,046 
  $30,777  $25,735  $86,028  $73,705 

Additions to properties and equipment:

                

Americas

 $(10) $326  $(10) $967 

Middle East/Asia Pacific

  5   594   1,188   4,231 

Europe/Mediterranean

  (13)  1,847   913   3,070 

West Africa

  (11)  684   667   2,267 

Corporate

  636   1,632   1,924   3,396 
  $607  $5,083  $4,682  $13,931 

 

16

 

The following table provides a comparison of total assets at September 30, 2020 and December 31, 2019:

 

  

September 30,

  

December 31,

 

(In thousands)

 

2020

  

2019

 

Total assets:

        

Americas

 $343,792  $375,297 

Middle East/Asia Pacific

  231,514   270,413 

Europe/Mediterranean

  312,651   358,943 

West Africa

  260,121   376,087 

Corporate

  202,696   198,788 
  $1,350,774  $1,579,528 

  

 

(14)

RESTRUCTURING CHARGES

 

In the fourth quarter of 2018, we finalized plans and made accruals of expected costs to abandon the duplicate office facilities in four locations in the USA and Scotland with the final lease agreement ending in October 2026. Activity for the lease exit and severance liabilities for the nine months ended September 30, 2020 and 2019 was as follows:

 

  

Lease

         

(In thousands)

 

Exit Costs

  

Severance

  

Total

 

Balance at December 31, 2019

 $4,109  $272  $4,381 

General and administrative charges

  198   1,076   1,274 

Cash payments

  (720)  (1,274)  (1,994)

Balance at September 30, 2020

 $3,587  $74  $3,661 

 

Activity for the lease exit and severance liabilities for the nine months ended September 30, 2019 was as follows:

 

  

Lease

         

(In thousands)

 

Exit Costs

  

Severance

  

Total

 

Balance at December 31, 2018

 $6,468  $285  $6,753 

General and administrative charges

  251   5,634   5,885 

Cash payments

  (1,960)  (4,220)  (6,180)

Balance at September 30, 2019

 $4,759  $1,699  $6,458 

 

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(15)

ASSET DISPOSITIONS, ASSETS HELD FOR SALE AND ASSET IMPAIRMENTS

 

In the fourth quarter of 2019, we evaluated our fleet for vessels to be considered for disposal and identified 46 vessels to be classified as held for sale.  In the second quarter of 2020, we identified 22 additional vessels to be sold.  The second quarter determination was largely a result of a worldwide downturn in the oil and gas industry precipitated by a global pandemic.  In the first quarter of 2020, we sold 8 vessels that were held for sale and revalued the remaining 38 vessels to estimated net realizable value recording additional impairment expense of $10.2 million.  In the second quarter of 2020, we sold 14 vessels that were held for sale and revalued the remaining 24 vessels to net realizable value recording additional impairment expense of $5.6 million.  At June 30, 2020, when we identified the additional 22 vessels to be reclassified as assets held for sale, we recognized impairment expense of $49.9 million associated with those vessels. In the third quarter of 2020, we sold 22 vessels that were held for sale.  At September 30, 2020, we have 24 vessels remaining in assets held for sale.  See the following table for activity in our assets held for sale account:

 

(in thousands, except for number of vessels data)

 

Number of Vessels

  

Three Months Ended March 31, 2020

  

Number of Vessels

  

Three Months Ended June 30, 2020

  

Number of Vessels

  

Three Months Ended September 30, 2020

  

Number of Vessels

  

Nine Months Ended September 30, 2020

 

Beginning balance

  46   39,287   38  $26,142   46  $29,064   46  $39,287 

Additions

  0       22   15,931   0   0   22   15,931 

Sales

  (8)  (2,938)  (14)  (7,408)  (22)  (9,901)  (44)  (20,247)

Additional impairment

     (10,207)     (5,601)           (15,808)

Ending balance

  38   26,142   46  $29,064   24  $19,163   24  $19,163 

 

During the nine months ended September 30, 2020, we have recorded $65.7 million in impairment related to our assets held for sale.  In the three months ended September 30, 2020, we did not designate any additional vessels to be sold and did not record any additional impairment related to assets held for sale.  We consider the valuation approach for our assets held for sale to be a Level 3 fair value measurement due to the level of estimation involved in valuing assets to be recycled or sold.  We determined the fair value of the vessels held for sale using three methodologies depending on the vessel and on our planned method of disposition.  We designated certain vessels to be recycled and valued those vessels using recycling yard pricing schedules based on dollars per ton.  Other vessels were valued based on sales agreements or using comparative sales in the marketplace reduced by 10% to factor in the effects of completing a quick sale within the next twelve months.  We do not separate our asset impairment expense by segment because of the significant movement of our assets between segments.

 

In 2020, we have sold 47 vessels, 44 of which were classified as assets held for sale and 3 of which were sold from the active fleet.  We recognized gains on the asset sales of $5.3 million in the first quarter, $1.7 million in the second quarter, $0.5 million in the third quarter, and $7.5 million combined for the nine months ended September 30, 2020.

 

We evaluated our inventory as of September 30, 2020 and 2019 and charged $1.9 million and $5.2 million, respectively, to impairment expense for obsolete marine service and vessel supplies and parts inventory.  We considered this valuation approach to be a Level 3 fair value measurement due to the level of estimation involved in valuing obsolete inventory.

 

In early 2020, it became evident that a novel coronavirus originating in Asia (COVID-19) could become a pandemic with worldwide reach.  By mid- March, when the World Health Organization declared the outbreak to be a pandemic (the “COVID-19 pandemic”), much of the industrialized world had initiated severe measures to lessen its impact.  The ongoing COVID-19 pandemic created significant volatility, uncertainty, and economic disruption during the first quarter of 2020.  With respect to our particular sector, the COVID-19 pandemic resulted in a much lower demand for oil as national, regional, and local governments impose travel restrictions, border closings, restrictions on public gatherings, stay at home orders, and limitations on business operations in order to contain its spread.  During this same time period, oil-producing countries struggled to reach consensus on worldwide production levels, resulting in both a market oversupply of oil and a precipitous fall in oil prices. Combined, these conditions adversely affected our operations and business beginning in the latter part of the first quarter of 2020 and continuing throughout the second and third quarters of 2020.  We expect our operations and business in the remainder of 2020 to continue to be negatively impacted. The reduction in demand for hydrocarbons together with an unprecedented decline in the price of oil has resulted in our primary customers, the oil and gas companies, making material reductions to their planned spending on offshore projects, compounding the effect of the virus on offshore operations. Further, these conditions, separately or together, are expected to continue to impact the demand for our services, the utilization and/or rates we can achieve for our assets and services, and the outlook for our industry in general.

 

In the first and second quarters of 2020, we considered these events to be indicators that the value of our active offshore vessel fleet may be impaired.  As a result, as of March 31, 2020 and  June 30, 2020 , we performed Step 1 evaluations of our active offshore fleet under FASB Accounting Standards Codification 360, which governs the methodology for identifying and recording impairment of long-lived assets to determine if any of our asset groups have net book value in excess of undiscounted future net cash flows. Our evaluations did not indicate impairment of any of our asset groups.  As of September 30, 2020, conditions related to the pandemic and oil price environment have not worsened from the second quarter.  In addition, we have not significantly changed our outlook for our vessels since the second quarter forecast was updated to reflect the expected effect on our operations of the pandemic and reduced oil prices.  As a result, we did not identify additional events or conditions that would require us to perform a Step 1 evaluation. We will continue to monitor the expected future cash flows and the fair market value of our asset groups for impairment.

 

18

 
 

ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

FORWARD-LOOKING STATEMENT

 

 

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, this Quarterly Report on Form 10-Q and the information incorporated herein by reference contain certain forward-looking statements which reflect our current view with respect to future events and future financial performance. Forward-looking statements are all statements other than statements of historical fact. All such forward-looking statements are subject to risks and uncertainties, many of which are beyond the control of the Company, and our future results of operations could differ materially from our historical results or current expectations reflected by such forward-looking statements. Some of these risks and uncertainties include, without limitation, the risks related to fluctuations in worldwide energy demand and oil and natural gas prices, and continuing depressed levels of oil and natural gas prices without a clear indication of if, or when, prices will recover to a level to support renewed offshore exploration activities; fleet additions by competitors and industry overcapacity; our limited capital resources available to replenish our asset base as needed, including through acquisitions or vessel construction, and to fund our capital expenditure needs; uncertainty of global financial market conditions and potential constraints in accessing capital or credit if and when needed with favorable terms, if at all; changes in decisions and capital spending by customers in the energy industry and the industry expectations for offshore exploration, field development and production; consolidation of our customer base; loss of a major customer; changing customer demands for vessel specifications, which may make some of our older vessels technologically obsolete for certain customer projects or in certain markets; rapid technological changes; delays and other problems associated with vessel maintenance; the continued availability of qualified personnel and our ability to attract and retain them; the operating risks normally incident to our lines of business, including the potential impact of liquidated counterparties; our ability to comply with covenants in our indentures and other debt instruments; acts of terrorism and piracy; the impact of regional or global public health crises or pandemics; the impact of potential information technology, cybersecurity or data security breaches; integration of acquired businesses and entry into new lines of business; disagreements with our joint venture partners; natural disasters or significant weather conditions; unsettled political conditions, war, civil unrest and governmental actions, such as expropriation or enforcement of customs or other laws that are not well developed or consistently enforced; the risks associated with our international operations, including local content, local currency or similar requirements especially in higher political risk countries where we operate; interest rate and foreign currency fluctuations; labor changes proposed by international conventions; increased regulatory burdens and oversight; changes in laws governing the taxation of foreign source income; retention of skilled workers; enforcement of laws related to the environment, labor and foreign corrupt practices; the potential liability for remedial actions or assessments under existing or future environmental regulations or litigation; the effects of asserted and unasserted claims and the extent of available insurance coverage; and the resolution of pending legal proceedings.

 

Forward-looking statements, which can generally be identified by the use of such terminology as “may,” “can,” “potential,” “expect,” “project,” “target,” “anticipate,” “estimate,” “forecast,” “believe,” “think,” “could,” “continue,” “intend,” “seek,” “plan,” and similar expressions contained in this Quarterly Report on Form 10-Q, are not guarantees or assurances of future performance or events. Any forward-looking statements are based on our assessment of current industry, financial and economic information, which by its nature is dynamic and subject to rapid and possibly abrupt changes, which we may or may not be able to control.  Further, we may make changes to our business plans that could or will affect our results. While management believes that these forward-looking statements are reasonable when made, there can be no assurance that future developments that affect us will be those that we anticipate and have identified. The forward-looking statements should be considered in the context of the risk factors listed above, discussed in this Quarterly Report on Form 10-Q, and discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020, as updated by subsequent filings with the SEC. Investors and prospective investors are cautioned not to rely unduly on such forward-looking statements, which speak only as of the date hereof. Management disclaims any obligation to update or revise any forward-looking statements contained herein to reflect new information, future events, or developments.

 

In certain places in this Quarterly Report on Form 10-Q, we may refer to reports published by third parties that purport to describe trends or developments in energy production and drilling and exploration activity and we specifically disclaim any responsibility for the accuracy and completeness of such information and have undertaken no steps to update or independently verify such information.

 

The following information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and related disclosures and our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020.

 

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About Tidewater

 

Our vessels and associated vessel services provide support for all phases of offshore oil and natural gas exploration, field development and production as well as windfarm development and maintenance. These services include towing of, and anchor handling for, mobile offshore drilling units; transporting supplies and personnel necessary to sustain drilling, workover and production activities; offshore construction and seismic and subsea support; geotechnical survey support for windfarm construction, and a variety of other specialized services such as pipe and cable laying. In addition, we have one of the broadest geographic operating footprints in the offshore vessel industry. Our global operating footprint allows us to react quickly to changing local market conditions and to be responsive to the changing requirements of the many customers with which we believe we have strong relationships. We are also one of the most experienced international operators in the offshore energy industry with a history spanning over 65 years.

 

At September 30, 2020, we owned 170 vessels (excluding 3 joint venture vessels), 146 of which are available to serve the global energy industry and 24 of which are available for immediate sale. The average age of our 146 active vessels at September 30, 2020 is 10.4 years.  In October 2020, we purchased 11 crew boats in Angola for $5.3 million to increase our active vessel count to 157.

 

Principal Factors That Drive Our Results

 

Our revenues, net earnings and cash flows from operations are largely dependent upon the activity level of our offshore marine vessel fleet. As is the case with the numerous other vessel operators in our industry, our business activity is largely dependent on the level of exploration, field development and production activity of our customers. Our customers’ business activity, in turn, is dependent on current and expected crude oil and natural gas prices, which fluctuate depending on expected future levels of supply and demand for crude oil and natural gas, and on estimates of the cost to find, develop and produce crude oil and natural gas reserves.

 

Our revenues in all segments are driven primarily by our fleet size, vessel utilization and day rates. Because a sizeable portion of our operating and depreciation costs do not change proportionally with changes in revenue, our operating profit is largely dependent on revenue levels.

 

Operating costs consist primarily of crew costs, repair and maintenance costs, insurance costs, fuel, lube oil and supplies costs and other vessel operating costs. Fleet size, fleet composition, geographic areas of operation, supply and demand for marine personnel, and local labor requirements are the major factors which affect overall crew costs in all segments. In addition, our newer, more technologically sophisticated vessels generally require a greater number of specially trained, more highly compensated fleet personnel than our older, smaller and less sophisticated vessels. Crew costs may increase if competition for skilled personnel intensifies, though a weaker offshore energy market should somewhat mitigate any potential inflation of crew costs.

 

Costs related to the recertification of vessels are deferred and amortized over 30 months on a straight-line basis. Maintenance costs incurred at the time of the recertification drydocking that are not related to the recertification of the vessel are expensed as incurred. Costs related to vessel improvements that either extend the vessel’s useful life or increase the vessel’s functionality are capitalized and depreciated.

 

Insurance costs are dependent on a variety of factors, including our safety record and pricing in the insurance markets, and can fluctuate over time. Our vessels are generally insured for up to their estimated fair market value in order to cover damage or loss.  We also purchase coverage for potential liabilities stemming from third-party losses with limits that we believe are reasonable for our operations, but do not generally purchase business interruption insurance or similar coverage. Insurance limits are reviewed annually, and third-party coverage is purchased based on the expected scope of ongoing operations and the cost of third-party coverage.

 

Fuel and lube costs can also fluctuate in any given period depending on the number and distance of vessel mobilizations, the number of active vessels off charter, drydockings, and changes in fuel prices. We also incur vessel operating costs that are aggregated as “other” vessel operating costs. These costs consist of brokers’ commissions, training costs, satellite communication fees, agent fees, port fees and other miscellaneous costs. Brokers’ commissions are incurred primarily in our non-United States operations where brokers sometimes assist in obtaining work. Brokers generally are paid a percentage of day rates and, accordingly, commissions paid to brokers generally fluctuate in accordance with vessel revenue.

 

20

 

Sonatide Joint Venture (Angola)

 

We previously disclosed the significant financial and operational challenges that we confront with respect to operations in Angola, as well as steps that we have taken to address or mitigate those risks. Most of our attention has been focused in three areas: (i) reducing the net receivable balance due from Sonatide, our Angolan joint venture with Sonangol, for vessel services; (ii) reducing the foreign currency risk created by virtue of provisions of Angolan law that require that payment for a  portion of the services provided by Sonatide be paid in Angolan kwanza; and (iii) optimizing opportunities, consistent with Angolan law, for services provided by us to be paid for directly in U.S. dollars.  The amounts due from Sonatide are denominated in U.S. dollars; however, the underlying third-party customer payments to Sonatide were satisfied, in part, in Angolan kwanzas. We and Sonangol, our partner in Sonatide, have had discussions regarding how the net losses from the devaluation of certain Angolan kwanza denominated accounts should be shared.  In late 2019, we were informed that, as part of a broad privatization program, Sonangol intends to seek to divest itself from the Sonatide joint venture.

 

In the second quarter of 2020, Sonatide declared a $35.0 million dividend.  On June 22, 2020, Sonangol received $17.8 million and we received $17.2 million.  All of our share of the dividend is reflected as dividend income from unconsolidated company in the consolidated statement of operations because (i) our investment in the Sonatide joint venture had previously been written down to zero, (ii) the distributions are not refundable and (iii) we are not liable for the obligations of or committed to provide financial support to the Sonatide joint venture.  In addition, as a result of the aforementioned dividend payment, the cash balances of the joint venture were significantly reduced and we determined that, as a result, a significant portion of our net due from Sonatide balance was compromised.  During the nine months ended September 30, 2020, we recorded a $41.5 million affiliate credit loss impairment expense.

 

Refer to Note (7) of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details on the Sonatide joint venture.

 

DTDW Joint Venture (Nigeria)

 

We own 40% of the DTDW joint venture in Nigeria.  Our partner, who owns 60%, is a Nigerian national.  DTDW owns one offshore service vessel and has long term debt of $4.7 million which is secured by the vessel and guarantees from the DTDW partners. We also operate company owned vessels in Nigeria for which our partner receives a commission.  As of September 30, 2020, we had no company owned vessels operating in Nigeria and the DTDW owned vessel was not employed.  At the beginning of 2020 we had expected that we would be operating numerous vessels in Nigeria, but in the second quarter of 2020 the COVID-19 pandemic and resulting oil price reduction caused our primary customer in Nigeria to eliminate all planned operations for 2020.  As a result, the near-term cash flow projections indicate that DTDW does not have sufficient funds to meet its obligations to us or to the holder of its long-term debt.  Therefore, we recorded affiliate credit loss impairment expense for the nine months ended September 30, 2020 totaling $12.1 million.  In addition, based on our analysis we have determined that DTDW will be unable to pay its debt obligation and the debt will not be satisfied by liquidating the vessel and, as a result, we recorded additional impairment expense of $2.0 million for our expected share of the obligation guarantee during the nine months ended September 30, 2020.  

 

Refer to Note (7) of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details on the Nigeria joint venture.

 

21

 

Industry Conditions and Outlook

 

Our business is directly impacted by the level of activity in worldwide offshore oil and natural gas exploration, development and production, which in turn is influenced by trends in oil and natural gas prices. In addition, oil and natural gas prices are affected by a host of geopolitical and economic forces, including the fundamental principles of supply and demand.  In particular, the oil price is significantly influenced by actions of the Organization of Petroleum Exporting Countries, or OPEC.  Prices are subject to significant uncertainty and, as a result, are extremely volatile. The industry experienced a severe downturn beginning in late 2014 that lasted through 2018 with prices falling into the high $20’s per barrel before recovering to average between $50.00 and $65.00 per barrel in 2019.  We had expected to begin to experience consistent operating cash flow in 2020.

 

In early 2020, it became evident that a novel coronavirus originating in Asia (COVID-19) could become a pandemic with worldwide reach.  By mid-March, when the World Health Organization declared the outbreak to be a pandemic (the “COVID-19 pandemic”), much of the industrialized world had initiated severe measures to lessen its impact.  The ongoing COVID-19 pandemic created significant volatility, uncertainty, and economic disruption during the first nine months of 2020.  

 

With respect to our particular sector, the COVID-19 pandemic resulted in a much lower demand for oil as national, regional, and local governments impose travel restrictions, border closings, restrictions on public gatherings, stay at home orders, and limitations on business operations in order to contain its spread.  During this same time period, oil-producing countries struggled to reach consensus on worldwide production levels, resulting in both a market oversupply of oil and a precipitous fall in oil prices.

 

Combined, these conditions adversely affected our operations and business beginning in late March 2020 and continuing through the third quarter of 2020 and we expect our operations and business during the remainder of 2020 to be negatively impacted. The reduction in demand for hydrocarbons together with an unprecedented decline in the price of oil has resulted in our primary customers, the oil and gas companies, making material reductions to their planned spending on offshore projects, compounding the effect of the virus on offshore operations. Further, these conditions, separately or together, are expected to continue to impact the demand for our services, the utilization and/or rates we can achieve for our assets and services, and the outlook for our industry in general.

 

As the pandemic spread throughout the world, its impact on one or more of our locations, including our vessels, has affected our operations.  We have implemented various protocols for both onshore and offshore personnel in efforts to limit this impact, but there is no assurance that those efforts will be fully successful. The spread of COVID-19 to our onshore workforce could prevent us from supporting our offshore operations, we may experience reduced productivity as our onshore personnel continue to work remotely, and any spread to our key management personnel may disrupt our business. Any outbreak on our vessels may result in the vessel, or some or all of a vessel crew, being quarantined and therefore impede the vessel’s ability to generate revenue.  We have experienced challenges in connection with our offshore crew changes due to health and travel restrictions related to COVID-19, and those challenges and/or restrictions are expected to continue despite our efforts at mitigating them.  To the extent the COVID-19 pandemic adversely affects our operations and business, it may also have the effect of heightening many of the other risks set forth in our SEC filings.

 

The effect on our business includes lockdowns of shipyards where we have vessels performing drydocks which will delay vessels returning to service and the cancellation and/or temporary delay of certain revenue vessel contracts allowed either under the contract provisions or by mutual agreement with our customers. These cancellations and delays affect approximately 19% of our 2020 contracts with durations in excess of three months which typically comprise over 90% of our contractual revenue.  It is possible that there will be additional cancellations or delays.

 

As a company, we have undertaken the following temporary measures to assist us in weathering the COVID 19 pandemic and allow us to recover as soon as possible:

 

 

Planned capital and drydock expenditures tied to contracts referenced above will be temporarily delayed or cancelled.  As a result of the ongoing contract cancellations and delays we have postponed drydocks expected to cost approximately $23.0 million in 2020.  It is possible that additional planned drydocks will be cancelled or delayed due to contract cancellations or delays.  We cannot predict the number or cost of any additional cancellations or delays.

 

We have the ability to rapidly respond to contract cancellations and delays.  We have or will remove the crews and shut down all operations, depending on contract terms, on vessels associated with cancelled or delayed contracts.  We continue to evaluate our general and administrative costs to reflect the current demand for our offshore support vessels.

 

The full impact of the COVID-19 pandemic is unknown and is rapidly evolving. The extent to which it impacts our business and operations will depend on the severity, location, and duration of the effects and spread of the pandemic itself, the actions undertaken by national, regional, and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume.  As we cannot predict the duration or scope of this pandemic, the anticipated negative financial impact to our operating results cannot be reasonably estimated but could be both material and long-lasting.

 

22

 

In the first and second quarters of 2020, we considered these events to be indicators that the value of our offshore vessel fleet may be impaired.  As a result, in the first quarter of 2020 we performed a Step 1 evaluation of our offshore fleet under FASB Accounting Standards Codification 360, which governs the methodology for identifying and recording impairment of long-lived assets to determine if any of our asset groups have net book value in excess of undiscounted future net cash flows. Our evaluation did not indicate impairment of any of our asset groups.  Our evaluation did, however, identify one asset group with a net book value of approximately $40.0 million where the undiscounted future net cash flows total was within 10% of the net book value of that asset group as of March 31, 2020. In the second quarter of 2020, we identified 22 vessels in our active fleet that were designated as assets held for sale. In conjunction with reclassifying the vessels to assets held for sale and revaluing the vessels’ carrying value to net realizable value, we recorded $49.9 million of impairment expense. In addition, at June 30, 2020, we performed another Step 1 impairment evaluation of our offshore fleet and did not identify any asset groups that had carrying values in excess of undiscounted future net cash flows. We also did not identify any asset group that had undiscounted future net cash flows within 10% of the net book value of that asset group. As of September 30, 2020, conditions related to the pandemic and oil price environment have not worsened from the second quarter.  In addition, we have not significantly changed our outlook for our vessels since the second quarter forecast was updated to reflect the expected effect on our operations of the pandemic and reduced oil prices. As a result, we did not identify additional events or conditions that would require us to perform a Step 1 evaluation. The eventual impact of the oil price reduction and the COVID 19 pandemic on our future operations is not known.  Depending on the severity of the impact, our expected cash flows in future periods could indicate impairment of one or more asset groups in our vessel fleet. We will continue to monitor the expected future cash flows and the fair market value of our asset groups for impairment.

 

 

Results of Operations – Three Months Ended September 30, 2020 compared to September 30, 2019

 

Revenues for the quarters ended September 30, 2020 and 2019, were $86.5 million and $119.8 million, respectively.  The decrease in revenue is primarily due to decreases in our West Africa segment, with 21 less active vessels and our Europe/Mediterranean segment, with 17 less active vessels. Both segments were significantly affected by the decrease in demand caused by the pandemic.  Overall, we had 45 less average active vessels in the third quarter of 2020 than in the third quarter of 2019.  Active utilization decreased from 80.4% in 2019  to 78.2% in 2020.

 

Vessel operating costs for the quarters ended September 30, 2020 and 2019, were $61.8 million and $80.6 million, respectively. The decrease is primarily due to a decrease in vessel activity, as we have 45 less active vessels in our fleet in the third quarter 2020 largely due to the downturn caused by the pandemic.

 

Depreciation and amortization expense for the quarters ended September 30, 2020 and 2019, was $30.8 million and $25.7 million, respectively. The increase in amortization expense related to deferred drydock expenditures was partially offset by the decrease in depreciation from the sale in 2019 of over 40 vessels and the reclassification of 46 vessels at year end 2019 and 22 additional vessels at June 30, 2020 from property and equipment to assets held for sale.

 

General and administrative expenses for the quarters ended September 30, 2020 and 2019, were $17.4 million and $30.5 million, respectively.  The decrease is primarily due to decreased personnel and benefit costs related to the significant restructuring of our executive management and corporate administrative functions in 2019 and cost cutting measures being implemented due to the current downturn.

 

Included in gain on asset dispositions, net for the quarter ended September 30, 2020, are $0.5 million of net gains from the disposal of 22 vessels and other assets. During the quarter ended September 30, 2019, we recognized gains of $0.3 million related to the disposal of 3 vessels and other assets.

 

In the three months ended September 30, 2020 and September 30, 2019 we recorded $1.9 million and $5.2 million, respectively, of impairment expense related to obsolete marine service and vessel supplies and parts inventory.

 

In November 2019, we paid down $125.0 million of our Senior Notes.  In the third quarter of 2020, we repurchased an additional $27.7 million of our Senior Notes (See Note 9). This reduced our interest expense, partially offset by the acceleration of our debt premium, by $1.4 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.  In addition, the reduction in cash plus a reduction in interest rates received on our cash balances reduced our interest income by $1.3 million for the same period.  

 

During the quarter ended September 30, 2020 we recognized foreign exchange losses of $1.2 million and during the quarter ended September 30, 2019 we recognized  foreign exchange gains of $0.2 million.

 

The tax expense for the three months ended  September 30, 2020 was $6.0 million compared to $15.1 million for the three months ending September 30, 2019.  The reduction of $9.2 million is due to increased foreign losses and a decrease in uncertain tax positions.  The tax expense for the three months ended September 30, 2020 is mainly attributable to foreign taxes where tax is not calculated on the basis of taxable income or loss.  This includes deemed profit regimes, minimum tax regimes and withholding tax on revenue and lease payments.  Additionally, the inability to offset profits in one country with losses in a different country contributes to having a tax liability in the face of large consolidated pre-tax losses.

 

23

 

Results of Operations – Nine Months Ended September 30, 2020 compared to September 30, 2019

 

Revenues for the nine months ended September 30, 2020 and 2019, were $305.2 million and $367.8 million, respectively.  The decrease in revenue is primarily due to decreases in our West Africa and Europe/Mediterranean segments, with 13 less active vessels in each segment. Both segments were significantly affected by the decrease in demand caused by the pandemic. Overall, we had 29 less average active vessels in the nine months ended September 30, 2020 than in the nine months ended September 30, 2019.  Active utilization decreased from 80.1% in 2019 to 77.0% in 2020.

 

Vessel operating costs for the nine months ended September 30, 2020 and 2019, were $205.4 million and $243.3 million, respectively. The decrease is primarily due to a decrease in vessel activity, as we have 29 less active vessels in our fleet in the nine months of 2020.

 

Depreciation and amortization expense for the nine months ended September 30, 2020 and 2019, was $86.0 million and $73.7 million, respectively. The increase in amortization expense related to deferred drydock expenditures was partially offset by the decrease in depreciation from the sale in 2019 of over 40 vessels and the reclassification of 46 vessels at year end 2019 and 22 additional vessels at June 30, 2020 from property and equipment to assets held for sale. 

 

General and administrative expenses for the nine months ended September 30, 2020 and 2019, were $56.5 million and $81.3 million, respectively.  The decrease is primarily due to decreased personnel and benefit costs related to the significant restructuring of our executive management and corporate administrative functions in 2019 and cost cutting measures being implemented due to the current downturn.

 

Included in gain on asset dispositions, net for the nine months ended September 30, 2020, are $7.5 million of net gains from the disposal of 47 vessels and other assets. During the nine months ended September 30, 2019, we recognized net gains of $1.0 million related to the sale of 37 vessels and other assets.

 

In the nine months ended September 30, 2020 we recorded $1.9 million of impairment expense related to obsolete marine service and vessel supplies and parts inventory, $65.7 million of impairment expense related to valuation of our assets held for sale, $53.6 million affiliate credit loss impairment expense relating to the valuation of our net receivables from our joint ventures in Africa and $2.0 million of impairment related to a guarantee of long term debt of one of our African joint ventures.  

 

We recorded $17.2 million of dividend income from one of our African joint ventures in the nine months ended September 30, 2020.

 

In November 2019, we paid down $125.0 million of our Senior Notes.   In the third quarter of 2020, we repurchased an additional $27.7 million of our Senior Notes (See Note 9). This reduced our interest expense by $4.6 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.  In addition, the reduction in cash plus a reduction in interest rates received on our cash balances reduced our interest income by $4.8 million for the same period.

 

During the nine months ended September 30, 2020 we recognized foreign exchange losses of $2.4 million and during the nine months ended September 30, 2019 we recognized foreign exchange losses of $0.3 million.

 

The tax expense for the nine months ended  September 30, 2020 was $3.5 million compared to a tax expense of $26.4 million for the nine months ending September 30, 2019.  The decrease in expense is related to changes in tax laws (primarily Cares Act refund) and also change in income. The tax expense for the nine months ended September 30, 2020, excluding the Cares Act refund, is $10.4 million and is mainly attributable to foreign taxes where tax is not calculated on the basis of taxable income or loss.  This includes deemed profit regimes, minimum tax regimes and withholding tax on revenue and lease payments.  Additionally, the inability to offset profits in one country with losses in a different country contributes to having a tax liability in the face of large consolidated pre-tax losses. 

 

24

 

The following table compares vessel revenues and vessel operating costs by geographic segment for our owned and operated vessel fleet and the related percentage of vessel revenue for the periods indicated:

 

  

Three Months Ended

  

Three Months Ended

  

Nine Months Ended

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

(In thousands)

      %      %      %      %

Vessel revenues:

                                

Americas

 $28,705   34% $33,147   28% $94,608   32% $103,624   29%

Middle East/Asia Pacific

  23,280   27%  22,765   19%  72,091   24%  63,670   18%

Europe/Mediterranean

  17,716   21%  30,946   26%  67,827   23%  94,531   26%

West Africa

  15,694   18%  30,315   26%  63,818   21%  98,651   27%

Total vessel revenues

 $85,395   100% $117,173   100% $298,344   100% $360,476   100%

Vessel operating costs:

                                

Americas:

                                

Crew costs

 $11,711   41% $15,108   46% $39,035   41% $48,215   47%

Repair and maintenance

  1,259   4%  3,061   9%  5,133   5%  9,009   9%

Insurance

  426   1%  305   1%  1,270   1%  (72)  (0)%

Fuel, lube and supplies

  1,754   6%  1,919   6%  5,742   6%  6,479   6%

Other

  2,486   9%  2,461   7%  7,115   8%  8,003   8%
  $17,636   61% $22,854   69% $58,295   62% $71,634   69%

Middle East/Asia Pacific:

                                

Crew costs

 $10,468   45% $9,243   41% $29,279   41% $26,856   42%

Repair and maintenance

  2,385   10%  2,317   10%  7,167   10%  5,571   9%

Insurance

  562   2%  356   2%  1,892   3%  1,131   2%

Fuel, lube and supplies

  1,783   8%  2,431   12%  5,853   8%  7,116   11%

Other

  2,057   9%  1,318   6%  6,165   9%  4,896   8%
  $17,255   74% $15,665   69% $50,356   70% $45,570   72%

Europe/Mediterranean :

                                

Crew costs

 $7,952   45% $12,974   42% $29,355   43% $39,034   41%

Repair and maintenance

  869   5%  3,307   11%  5,288   8%  9,798   10%

Insurance

  448   3%  503   2%  1,299   2%  1,756   2%

Fuel, lube and supplies

  592   3%  1,614   5%  2,614   4%  4,819   5%

Other

  1,274   7%  2,658   9%  5,343   8%  8,555   9%
  $11,135   63% $21,056   68% $43,899   65% $63,962   68%

West Africa:

                                

Crew costs

 $6,555   42% $8,868   29% $22,195   35% $27,423   28%

Repair and maintenance

  1,419   9%  3,282   11%  5,598   9%  8,201   8%

Insurance

  517   3%  863   3%  1,287   2%  2,140   2%

Fuel, lube and supplies

  2,628   17%  2,817   9%  8,683   14%  8,163   8%

Other

  4,639   30%  5,214   17%  15,070   24%  16,168   16%
  $15,758   100% $21,044   69% $52,833   83% $62,095   63%

Vessel operating costs:

                                

Crew costs

 $36,686   43% $46,193   39% $119,864   40% $141,528   39%

Repair and maintenance

  5,932   7%  11,967   10%  23,186   8%  32,579   9%

Insurance

  1,953   2%  2,027   2%  5,748   2%  4,955   1%

Fuel, lube and supplies

  6,757   8%  8,781   7%  22,892   8%  26,577   7%

Other

  10,456   12%  11,651   10%  33,693   11%  37,622   10%

Total vessel operating costs

 $61,784   72% $80,619   69% $205,383   69% $243,261   67%

 

25

 

The following table presents general and administrative expenses in our four geographic segments both individually and in total and the related general and administrative expenses as a percentage of the vessel revenues of each segment and in total for the three and nine months ended September 30, 2020 and 2019:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

(In thousands)

      %      %      %      %

Segment general and administrative expenses:

                                

Americas

 $2,886   10% $3,532   11% $9,220   10% $10,583   10%

Middle East/Asia Pacific

  1,914   8%  2,224   10%  6,709   9%  6,745   11%

Europe/Mediterranean

  2,217   13%  2,731   9%  6,155   9%  8,715   9%

West Africa

  2,773   18%  3,257   11%  9,515   15%  9,787   10%

Total segment general and administrative expenses

 $9,790   11% $11,744   10% $31,599   11% $35,830   10%

 

The following table presents segment depreciation and amortization expense by our four geographic segments, the related segment vessel depreciation and amortization expense as a percentage of segment vessel revenues, total segment depreciation and amortization expense and the related total segment depreciation and amortization expense as a percentage of total vessel revenues for the three and nine months ended September 30, 2020 and 2019:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

(In thousands)

      %      %      %      %

Segment depreciation and amortization expense:

                                

Americas

 $8,076   28% $6,929   21% $23,645   25% $19,706   19%

Middle East/Asia Pacific

  6,332   27%  5,685   25%  17,504   24%  15,454   24%

Europe/Mediterranean

  8,248   52%  7,436   24%  21,860   32%  22,623   24%

West Africa

  7,330   41%  5,335   18%  20,484   32%  14,876   15%

Total segment depreciation and amortization expense

 $29,986   35% $25,385   22% $83,493   28% $72,659   20%

 

The following table compares operating loss and other components of loss and its related percentage of total revenue for the three and nine months ended September 30, 2020 and 2019:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

(In thousands)

      %      %      %      %

Vessel operating profit (loss):

                                
Americas $107   0% $(168)  0% $3,448   1% $1,702   0%
Middle East/Asia Pacific  (2,222)  (3)%  (809)  (1)%  (2,479)  (1)%  (4,098)  (1)%
Europe/Mediterranean  (3,883)  (4)%  (276)  0%  (4,086)  (1)%  (768)  0%
West Africa  (10,168)  (12)%  678   1%  (19,015)  (6)%  11,891   3%

Other operating profit

  853   1%  2,052   2%  3,772   1%  5,381   1%
   (15,313)  (18)%  1,477   1%  (18,360)  (6)%  14,108   4%
Corporate expenses  (8,438)  (10)%  (19,074)  (16)%  (27,390)  (9)%  (46,496)  (13)%
Gain on asset dispositions, net  520   1%  270   0%  7,511   2%  1,047   1%
Affiliate credit loss impairment expense     0%     0%  (53,581)  (18)%     0%
Affiliate guarantee obligation     0%     0%  (2,000)  (1)%     0%
Long-lived asset impairments  (1,945)  (2)%  (5,224)  (4)%  (67,634)  (22)%  (5,224)  (1)%
Operating loss $(25,176)  (29)% $(22,551)  (19)% $(161,454)  (53)% $(36,565)  (9)%

 

26

 

 

Results for three months ended September 30, 2020 compared to September 30, 2019

 

Americas Segment Operations. Vessel revenues in the Americas segment decreased 13%, or $4.4 million, during the quarter ended September 30, 2020, as compared to the quarter ended September 30, 2019. This decrease is primarily the result of less demand due to the pandemic.  We had 7 less active vessels in the quarter ended September 30, 2020 than the comparable prior year period.

 

Vessel operating profit for the Americas segment for the quarter ended September 30, 2020 was $0.1 million, compared to a $0.2 million operating loss for the quarter ended September 30, 2019. The increase in operating profit was due to a $5.2 million reduction in operating expenses, resulting from intensive cost saving measures taken in the third quarter of 2020 in response to the effect of the pandemic and a $0.6 million reduction in general and administrative costs primarily due to our ongoing cost saving initiatives as we react to the current downturn partially offset by the decrease in revenue coupled with a $1.1 million increase in depreciation and amortization.  The increase in depreciation and amortization was due to a change in estimated vessel salvage values in the third quarter of 2020 and increased amortization of deferred drydock costs.

 

Middle East/Asia Pacific Segment Operations.  Vessel revenues in the Middle East/Asia Pacific segment increased 2%, or $0.5 million, during the quarter ended September 30, 2020, as compared to the quarter ended September 30, 2019. Active utilization for the quarter ended September 30, 2020 decreased to 76.8% from 80.7%, however average day rates increased almost 7% and average active vessels in the segment remained unchanged.

 

The Middle East/Asia Pacific segment reported an operating loss of $2.2 million for the quarter ended September 30, 2020, compared to an operating loss of $0.8 million for the quarter ended September 30, 2019 primarily due to increased operating expenses resulting increased vessel personnel costs related to pandemic restrictions and precautions.  We operated the same number of active vessels in the third quarter of 2020 as in the prior year quarter. The current downturn has not impacted this segment’s operations other than the marginal cost increases.

 

Europe/Mediterranean Segment Operations.  Vessel revenues in the Europe/Mediterranean segment decreased 43%, or $13.2 million, during the quarter ended September 30, 2020, as compared to the quarter ended September 30, 2019.  The decreased revenue was primarily attributable to 17 less active vessels.  This was partially offset by the increase in average day rates of 10% during these same periods due to the mix of vessels working after the reduction resulting from the pandemic. Active utilization also increased 8.8 percentage points during the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019.

 

The Europe/Mediterranean segment reported an operating loss of $3.9 million for the quarter ended September 30, 2020, compared to an operating loss of $0.3 million for the quarter ended September 30, 2019 due to decreased revenue partially offset by $9.9 million in decreased operating costs, resulting from intensive cost saving measures taken in the third quarter of 2020 in response to the effect of the pandemic.

 

West Africa Segment Operations.  Vessel revenues in the West Africa segment decreased 48% or $14.6 million, during the quarter ended September 30, 2020, as compared to the quarter ended September 30, 2019. The West Africa active vessel fleet decreased by 21 vessels during the comparative periods. West Africa segment active utilization decreased as well from 74.4% during the third quarter of 2019 to 66.3% during the third quarter of 2020. However, average day rates increased 5% due to the change in the mix of remaining contracts.  The decreases in revenue are almost entirely the result of lower demand caused by the effect of the pandemic.

 

Vessel operating profit for the West Africa segment decreased from $0.7 million for the quarter ended September 30, 2019 to an operating loss of $10.2 million in the quarter ended September 30, 2020 primarily due to decreased revenue and $2.0 million in increased depreciation and amortization, partially offset by $5.3 million in lower operating costs resulting from intensive cost saving measures taken in the third quarter of 2020 in response to the effect of the pandemic. The increase in depreciation and amortization was due to a change in estimated vessel salvage values in the third quarter of 2020 and increased amortization of deferred drydock costs.

 

27

 

Results for nine months ended September 30, 2020 compared to September 30, 2019

 

Americas Segment Operations. Vessel revenues in the Americas segment decreased 9%, or $9.0 million, during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. This decrease is primarily the result of lower demand caused by the effect of the pandemic.  The segment has 5 less vessels operating in the first nine months of 2020 compared to the same period in 2019.

 

Vessel operating profit for the Americas segment for the nine months ended September 30, 2020 was $3.4 million, which was $1.7 million more than the operating profit for the nine months ended September 30, 2019.  Even though revenues decreased from period to period, the increase in operating profit was primarily due to $13.3 million less operating costs resulting from the decrease in vessel activity due to the pandemic and $1.4 million lower general and administrative costs due to ongoing cost saving efforts.  This is partially offset by a $3.9 million increase in depreciation expense due to a change in estimated vessel salvage values in the third quarter of 2020 and increased amortization of deferred drydock costs.

 

Middle East/Asia Pacific Segment Operations.  Vessel revenues in the Middle East/Asia Pacific segment increased 13%, or $8.4 million, during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. This segment had 2 more vessels operating in the first nine months of 2020 compared to the same period in 2019. Active utilization for the nine months ended September 30, 2020 decreased from 77.2% to 76.8%, however average day rates increased by 9%.

 

The Middle East/Asia Pacific segment reported an operating loss of $2.5 million for the nine months ended September 30, 2020, compared to an operating loss of $4.1 million for the nine months ended September 30, 2019 primarily due to increased revenue offset by increased operating costs, an increase in depreciation due to a change in estimated vessel salvage values in the third quarter of 2020 and increased amortization of deferred drydock costs.

 

Europe/Mediterranean Segment Operations.  Vessel revenues in the Europe/Mediterranean segment decreased 28%, or $26.7 million, during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.  The segment has 13 less vessels operating in the first nine months of 2020 compared to the same period in 2019. The reduction is due mainly to the effects of the pandemic.  However, average day rates during these same periods increased 6% and active utilization increased 4 percentage points during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

 

The Europe/Mediterranean segment reported an operating loss of $4.1 million for the nine months ended September 30, 2020, compared to an operating loss of $0.8 million for the nine months ended September 30, 2019.  This is due mainly to the lower revenue offset somewhat with lower operating costs associated with the lower vessel activity and lower general and administrative costs resulting from our ongoing cost reduction efforts.

 

West Africa Segment Operations.  Vessel revenues in the West Africa segment decreased 35% or $34.8 million, during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The West Africa active vessel fleet decreased by 13 vessels during the comparative periods. In addition, West Africa segment active utilization decreased from 75.8% to 62.7% primarily due to the effects of the pandemic. However, day rates increased by 6 percent due to the change in the mix of contracts.

 

The West Africa segment reported an operating loss of $19.0 million for the nine months ended September 30, 2020 compared to an operating profit of $11.9 million in the nine months ended September 30, 2019 primarily due to decreased revenue and $5.6 million of increased depreciation and amortization resulting from changes in salvage value and amortization of drydock costs partially offset by $9.3 million in lower operating costs associated with the lower vessel activity.  This segment had the most negative impact from the pandemic due to significant contract cancellations.

 

28

 

Vessel Utilization and Average Day Rates by Segment

 

Vessel utilization is determined primarily by market conditions and to a lesser extent by drydocking requirements. Vessel day rates are determined by the demand created largely through the level of offshore exploration, field development and production spending by energy companies relative to the supply of offshore support vessels. Specifications of available equipment and the scope of service provided may also influence vessel day rates. Vessel utilization rates are calculated by dividing the number of days a vessel works during a reporting period by the number of days the vessel is available to work in the reporting period. As such, stacked vessels depress utilization rates because stacked vessels are considered available to work and are included in the calculation of utilization rates. Average day rates are calculated by dividing the revenue a vessel earns during a reporting period by the number of days the vessel worked in the reporting period.

 

Total vessel utilization is calculated on all vessels in service (which includes stacked vessels, vessels held for sale and vessels in drydock) but do not include vessels owned by joint ventures (3 and 4 vessels at September 30, 2020 and 2019, respectively). Active utilization is calculated on active vessels (which excludes vessels held for sale).  Average day rates are calculated based on total vessel days worked.

 

The following tables compare day-based utilization percentages, average day rates and average total, active and stacked vessels by segment for the three and nine months ended September 30, 2020 and 2019:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

SEGMENT STATISTICS:

                

Americas fleet:

                

Utilization

  52.2%  56.9%  55.9%  52.9%

Active utilization

  82.0%  82.6%  85.5%  83.9%

Average vessel day rates

  12,581   11,783   12,423   11,843 

Average total vessels

  47   54   50   61 

Average stacked vessels

  (17)  (17)  (17)  (23)

Average active vessels

  30   37   33   38 
                 

Middle East/Asia Pacific fleet:

                

Utilization

  69.9%  63.6%  65.1%  62.2%

Active utilization

  76.8%  80.7%  76.8%  77.2%

Average vessel day rates

  8,040   7,520   7,968   7,343 

Average total vessels

  45   52   51   51 

Average stacked vessels

  (4)  (11)  (8)  (10)

Average active vessels

  41   41   43   41 
                 

Europe/Mediterranean fleet:

                

Utilization

  45.1%  61.4%  53.1%  61.4%

Active utilization

  95.1%  86.3%  89.5%  85.6%

Average vessel day rates

  13,361   12,147   12,779   12,050 

Average total vessels

  32   45   36   47 

Average stacked vessels

  (17)  (13)  (15)  (13)

Average active vessels

  15   32   21   34 
                 

West Africa fleet:

                

Utilization

  30.6%  50.9%  37.5%  50.8%

Active utilization

  66.3%  74.4%  62.7%  75.8%

Average vessel day rates

  9,643   9,174   9,946   9,421 

Average total vessels

  58   70   62   75 

Average stacked vessels

  (31)  (22)  (25)  (25)

Average active vessels

  27   48   37   50 
                 

Worldwide fleet:

                

Utilization

  48.5%  57.5%  52.0%  55.9%

Active utilization

  78.2%  80.4%  77.0%  80.1%

Average vessel day rates

  10,503   10,021   10,510   10,087 

Average total vessels

  182   221   199   234 

Average stacked vessels

  (69)  (63)  (65)  (71)

Average active vessels

  113   158   134   163 

 

Average active vessels exclude stacked vessels. We consider a vessel to be stacked if the vessel crew is furloughed or substantially reduced and limited maintenance is being performed on the vessel. We reduce operating costs by stacking vessels when management does not foresee opportunities to profitably or strategically operate the vessels in the near future. Vessels are stacked when market conditions warrant and they are no longer considered stacked when they are returned to active service, sold, or otherwise disposed. When economically practical marketing opportunities arise, the stacked vessels can be returned to active service by performing any necessary maintenance on the vessel and either rehiring or returning fleet personnel to operate the vessel. Although not currently fulfilling charters, stacked vessels are included in the calculation of utilization statistics. We had 60 stacked vessels at September 30, 2020 and 2019, respectively.  Total stacking costs for the three and nine months ended September 30, 2020 were $9.8 million and $18.0 million, respectively.

 

29

 

Vessel Dispositions

 

We seek opportunities to sell and/or recycle our older vessels when market conditions warrant and opportunities arise. The majority of our vessels are sold to buyers who do not compete with us in the offshore energy industry. Vessels sales in 2020 included 44 vessels that were classified as assets held for sale and 3 vessels from our active fleet.

 

 

Liquidity, Capital Resources and Other Matters

 

Availability of Cash

 

At September 30, 2020, we had $192.2 million in cash and cash equivalents (excluding $29.8 million of restricted cash), including amounts held by foreign subsidiaries, the majority of which is available to us without adverse tax consequences. Included in foreign subsidiary cash are balances held in U.S. dollars and foreign currencies that await repatriation due to various currency conversion and repatriation constraints, or partner or tax related matters, prior to the cash being made available for remittance to our domestic accounts. We currently intend that earnings by foreign subsidiaries will be indefinitely reinvested in foreign jurisdictions in order to fund strategic initiatives (such as investment, expansion and acquisitions), fund working capital requirements and repay debt (both third-party and intercompany) of our foreign subsidiaries in the normal course of business. Moreover, we do not currently intend to repatriate earnings of our foreign subsidiaries to the U. S. because cash generated from our domestic businesses and the repayment of intercompany liabilities from foreign subsidiaries are currently deemed to be sufficient to fund the cash needs of our operations in the U. S. Restricted cash of $26.4 million represents the portion of proceeds from vessel sales reserved for a cash tender of Senior Notes that may be required if certain conditions in the underlying indenture are satisfied. We will be commencing a tender in the fourth quarter of 2020 in accordance with the indenture.

 

 

During the first quarter of 2020, the industry was impacted by a world-wide pandemic that had the effect of isolating people across the world and significantly reducing the demand and price for crude oil.  See a detailed discussion under “Industry Conditions and Outlook” above.  The reduced oil price will impact our industry in the near term and if it is prolonged could impact us beyond this year.  We have significant cash on hand and the substantial portion of our debt is not due until 2022. As a company, we have undertaken the following temporary measures to assist us in weathering the pandemic and allow us to recover as soon as possible:

 

 

Planned capital and drydock expenditures tied to contracts referenced in “Industry Conditions and Outlook” above will be temporarily delayed or cancelled. As a result of the ongoing contract cancellations and delays we have postponed drydocks expected to cost approximately $23.0 million in 2020.  It is possible that additional planned drydocks will be cancelled or delayed due to contract cancellations or delays.  We cannot predict the number or cost of such possible cancellations or delays.

 

 

We have the ability to rapidly respond to contract cancellations and delays.  We have or will remove the crews and shut down all operations, depending on contract terms on vessels associated with cancelled or delayed contracts.  We continue to dispose of vessels and their related stacking cost. We have also been reducing our general and administrative costs to reflect the current demand for our offshore support vessels.

 

Our objective in financing our business is to maintain adequate financial resources and access to sufficient levels of liquidity. We do not have a revolving credit facility. Cash and cash equivalents and net cash provided by operating activities provide us, in our opinion, with sufficient liquidity to meet our liquidity requirements.

 

Debt

 

Refer to Note (9) of Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details on our indebtedness.

 

We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

 

30

 

Operating Activities

 

Net cash provided by operating activities for the nine months ended September 30, 2020 was $1.8 million and net cash used in operating activities for the nine months ended September 30, 2019 was $36.7 million, respectively.

 

Net cash provided by operations for the nine months ended September 30, 2020, reflects a net loss of $167.3 million, which includes non-cash depreciation and amortization of $86.0 million, net gains on asset dispositions of $7.5 million, an affiliate credit loss impairment expense of $53.6 million and long-lived asset impairments of $67.6 million.  Combined changes in operating assets and liabilities and in amounts due to/from affiliate, net used $9.6 million in cash and cash paid for deferred drydock and survey costs was $29.5 million.

 

Net cash used in operations for the nine months ended September 30, 2019 reflects a net loss of $80.6 million, which includes non-cash depreciation and amortization of $73.7 million, asset impairments of $5.2 million, stock-based compensation expense of $16.6 million and approximately $1.0 million of gains on asset sales. Cash paid for drydock used $43.7 million and combined changes in operating assets and liabilities and in amounts due to/due/from affiliate, net, used $6.5 million of cash.

 

Investing Activities

 

Net cash provided by investing activities for the nine months ended September 30, 2020 and 2019, was $26.8 million and $11.2 million, respectively. Net cash provided by investing activities for the nine months ended September 30, 2020 primarily reflects the receipt of $31.5 million related to the sale or recycling of 47 vessels.  Additions to properties and equipment were comprised of approximately $2.8 million in capitalized upgrades to existing vessels and equipment and $1.9 million for other property and equipment purchases.

 

Net cash provided by investing activities for the nine months ended September 30, 2019 primarily reflects the receipt of $25.1 million related to the disposal of 37 vessels. Additions to properties and equipment were comprised of approximately $13.9 million in capitalized upgrades to existing vessels and equipment and property and equipment purchases. 

 

Financing Activities

 

Net cash used in financing activities for the nine months ended September 30, 2020 and 2019, was $34.2 million and $9.6 million, respectively.  Net cash used in financing activities for the nine months ended September 30, 2020 included $26.2 million of repurchases of the Secured Notes in open market transactions, $7.3 million of scheduled semiannual principal payments on Troms offshore debt and $0.7 million of taxes paid to related share-based compensation.

 

Net cash used in financing activities for the nine months ended September 30, 2019 was a result of $6.3 million of scheduled semiannual principal payments on Troms offshore debt, $3.1 million of taxes paid to related share-based compensation and the repurchase of $0.2 million of New Secured Notes resulting from a tender offer.

 

Other Liquidity Matters

 

Contractual Obligations and Other Contingent Commitments

 

We did not have any material changes in our contractual obligations and commercial commitments since the end of fiscal year 2019. Refer to Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2019, for information regarding our contractual obligations and other contingent commitments.

 

Application of Critical Accounting Policies and Estimates

 

Our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020, describes the accounting policies that are critical to reporting our financial position and operating results and that require management’s most difficult, subjective or complex judgments. This Quarterly Report on Form 10-Q should be read in conjunction with the discussion contained in our Annual Report on Form 10-K for the year ended December 31, 2019, regarding these critical accounting policies.

 

31

 

New Accounting Pronouncements

 

For information regarding the effect of new accounting pronouncements, refer to Notes (2) and (3) of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There were no material changes in the quarter ended September 30, 2020 to the market risk disclosures contained in Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

ITEM 4.       CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed with the objective of ensuring that all information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (Exchange Act), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. However, any control system, no matter how well conceived and followed, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met.

 

We evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

32

 

 

PART II. OTHER INFORMATION

 

ITEM 1.       LEGAL PROCEEDINGS

 

Various legal proceedings and claims are outstanding which arose in the ordinary course of business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions, will not have a material adverse effect on our financial position, results of operations, or cash flows. Information related to various commitments and contingencies, including legal proceedings, is disclosed in Note (10) of Notes to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

ITEM 1A.       RISK FACTORS

 

The significant factors known to us that could materially adversely affect our business, financial condition, or operating results are described in Item 2 of Part I of this Quarterly Report on Form 10-Q and in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020, except for the addition of the following risk factors.

 

Risks Related to our Business

 

The COVID-19 pandemic has adversely affected and may, in the future, have a material negative impact on our operations and business.  In early 2020, it became evident that a novel coronavirus originating in Asia (COVID-19) could become a pandemic with worldwide reach.  By mid-March, when the World Health Organization declared the outbreak to be a pandemic (the “COVID-19 pandemic”), much of the industrialized world had taken severe measures to lessen its impact.  The ongoing COVID-19 pandemic has created significant volatility, uncertainty, and economic disruption during the first nine months of 2020.

 

The spread of COVID-19 to one or more of our locations, including our vessels, could significantly impact our operations.  While we have implemented various protocols for both onshore and offshore personnel in efforts to limit the impact of COVID-19, there is no assurance that those efforts will be fully successful. The spread of COVID-19 to our onshore workforce could prevent us from supporting our offshore operations, we may experience reduced productivity as our onshore personnel works remotely, and any spread to our key management personnel may disrupt our business. Any outbreak on our vessels may result in the vessel, or some or all of a vessel crew, being quarantined and therefore impede the vessel’s ability to generate revenue.  We have experienced challenges in connection with our offshore crew changes due to health and travel restrictions related to COVID-19, and those challenges and/or restrictions may continue or worsen despite our efforts at mitigating them.  To the extent the COVID-19 pandemic adversely affects our operations and business, it may also have the effect of heightening many of the other risks set forth in our SEC filings, such as those relating to our financial performance and debt obligations.

 

The full impact of the COVID-19 pandemic is unknown and is rapidly evolving. The extent to which it impacts our business and operations and ability to preserve our liquidity will depend on the severity, location, and duration of the effects and spread of the pandemic itself, the actions undertaken by national, regional, and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume.  As we cannot predict the duration or scope of this pandemic, the anticipated negative financial impact to our operating results cannot be reasonably estimated but could be both material and long-lasting.

 

Recent disruptions in the global market for oil and natural gas, which have led to market oversupply and depressed commodity prices, have adversely affected our operations and may, in the future, materially disrupt our operations and adversely impact our business and financial results.  With respect to our particular sector, the COVID-19 pandemic has resulted in a much lower demand for oil as national, regional, and local governments impose travel restrictions, border closings, restrictions on public gatherings, stay at home orders, and limitations on business operations in order to contain its spread.  During this same time period, oil-producing countries have struggled to reach consensus on worldwide production levels, resulting in both a market oversupply of oil and a precipitous fall in oil prices.

 

Combined, these conditions have adversely affected our operations and business beginning with the latter part of the first fiscal quarter of 2020 and we do expect our operations and business in 2020 to be negatively impacted. The reduction in demand for hydrocarbons together with an unprecedented decline in the price of oil has resulted in our primary customers, the oil and gas companies, making material reductions to their planned spending on offshore projects, compounding the effect of the virus on offshore operations. Further, these conditions, separately or together, may continue to impact the demand for our services, the utilization and/or rates we can achieve for our assets and services, and the outlook for our industry in general. Although, as of the date of this filing, oil-producing countries have reached a tentative agreement regarding future output, oil prices will remain depressed as long as the market is oversupplied and demand will remain depressed until global economic conditions improve.

 

33

 

ITEM 6.       EXHIBITS

 

 

Exhibit

Number

 

Description

 

 

 

2.1

 

Joint Prepackaged Chapter 11 Plan of Reorganization of Tidewater Inc. and its Affiliated Debtors dated May 11, 2017 (filed with the Commission as Exhibit A to Exhibit T3E.1 to the company’s application for the qualification of indentures on Form T-3 filed on May 12, 2017, File No. 22-29043).

 

 

 

2.2

 

Disclosure Statement for Joint Prepackaged Chapter 11 Plan of Reorganization of Tidewater Inc. and its Affiliated Debtors dated May 11, 2017 (filed with the Commission as Exhibit T3E.1 to the company’s application for the qualification of indentures on Form T-3 filed on May 12, 2017, File No. 22-29043).

 

 

 

2.3

 

Second Amended Joint Prepackaged Chapter 11 Plan of Tidewater Inc. and Its Affiliated Debtors dated July 13, 2017 (filed with the Commission as Exhibit 2.1 to the company’s current report on Form 8-K filed on July 18, 2017, File No. 1-6311).

 

 

 

2.4

 

Agreement and Plan of Merger by and between Tidewater Inc. and GulfMark Offshore, Inc., dated as of July 15, 2018 (filed with the Commission as Exhibit 2.1 to the company’s current report on Form 8-K filed on July 16, 2018, File No. 1-6311).

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation of Tidewater Inc. dated July 31, 2017 (filed with the Commission as Exhibit 3.1 to the company’s current report on Form 8-K filed on July 31, 2017, File No. 1-6311).

 

 

 

3.2

 

Second Amended and Restated By-Laws of Tidewater Inc. dated November 15, 2018 (filed with the Commission as Exhibit 3.2 to the company’s registration statement on Form 8-A filed on November 15, 2018, File No. 1-6311).

 

 

 

3.3

 

Certificate of Designations of Series A Junior Participating Preferred Stock of Tidewater Inc. (filed with the Commission as Exhibit 3.1 to the company’s current report on Form 8-K filed on April 14, 2020, File No. 1-6311).

 

 

 

4.1

 

Indenture for 8.00% Senior Secured Notes due 2022 among Tidewater Inc., each of the Guarantors party thereto, and Wilmington Trust, National Association, as Trustee and Collateral Agent dated as of July 31, 2017 (filed with the Commission as Exhibit 4.1 to the company’s current report on Form 8-K filed on July 31, 2017, File No. 1-6311).

 

 

 

4.2

 

Tax Benefits Preservation Plan by and between the Company and Computershare Trust Company, N.A., a federally chartered trust company, as Rights Agent, dated as of April 13, 2020, which includes the Form of Certificate of Designations as Exhibit A, Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C. (filed with the Commission as Exhibit 3.1 to the company’s current report on Form 8-K filed on April 14, 2020, File No. 1-6311).

 

 

 

10.1

 

Restructuring Support Agreement, dated May 11, 2017 (filed with the Commission as Schedule 1 to Exhibit A to Exhibit T3E.1 to the company’s application for the qualification of indentures on Form T-3 filed on May 12, 2017, File No. 22-29043).

 

 

 

10.2

 

Amendment and Restatement Agreement No. 4 to the Troms Facility Agreement, dated May 11, 2017 (filed with the Commission as Exhibit C to Schedule 1 to Exhibit A to Exhibit T3E.1 to the company’s application for the qualification of indentures on Form T-3 filed on May 12, 2017, File No. 22-29043).

 

 

 

10.3

 

Creditor Warrant Agreement between Tidewater Inc., as Issuer and Computershare Inc. and Computershare Trust Company, N.A., collectively as Warrant Agent dated July 31, 2017 (filed with the Commission as Exhibit 10.1 to the company’s current report on Form 8-K filed on July 31, 2017, File No. 1-6311).

 

34

 

Exhibit

Number

 

Description

10.4

 

Existing Equity Warrant Agreement between Tidewater Inc., as Issuer and Computershare Inc. and Computershare Trust Company, N.A., collectively as Warrant Agent dated July 31, 2017 (filed with the Commission as Exhibit 10.2 to the company’s current report on Form 8-K filed on July 31, 2017, File No. 1- 6311).

 

 

 

10.5

 

Equity Warrant Agreement, dated as of November 14, 2017, between GulfMark Offshore, Inc. and American Stock Transfer & Trust Company, LLC, as Warrant Agent (filed with the Commission as Exhibit 4.1 to the company’s registration statement on Form 8-A filed on November 15, 2018, File No. 1-6311).

 

 

 

10.6

 

Assignment, Assumption and Amendment Agreement, dated as of and effective November 15, 2018, by and among GulfMark Offshore, Inc., Tidewater Inc. and American Stock Transfer & Trust Company, LLC, as Warrant Agent (filed with the Commission as Exhibit 4.2 to the company’s registration statement on Form 8-A filed on November 15, 2018, File No. 1-6311).

 

 

 

10.7

 

Noteholder Warrant Agreement, dated as of November 14, 2017, between GulfMark Offshore, Inc. and American Stock Transfer & Trust Company, LLC, as Warrant Agent (filed with the Commission as Exhibit 4.1 to the company's current report on Form 8-K filed on November 16, 2018, File No. 1-6311).

 

 

 

10.8

 

Assignment, Assumption and Amendment Agreement – Jones Act Warrants, dated as of and effective November 15, 2018, by and among GulfMark Offshore, Inc., Tidewater Inc. and American Stock Transfer & Trust Company, LLC, as Warrant Agent (filed with the Commission as Exhibit 4.2 to the company’s current report on Form 8-K filed on November 16, 2018, File No. 1-6311).

 

 

 

31.1*

 

Certification of the Chief Executive and Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1**

 

Certification of the Chief Executive and Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS*

 

Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH*

 

Inline XBRL Taxonomy Extension Schema.

 

 

 

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase.

 

 

 

101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase.

 

 

 

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase.

 

 

 

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase.

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document).

 

*

Filed with this quarterly report on Form 10-Q.

 

**

Furnished with the quarterly report on Form 10-Q.

 

+

Indicates a management contract or compensatory plan or arrangement

 

35

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized

 

 

TIDEWATER INC.

 

(Registrant)

 

 

Date:  November 5, 2020

/s/ Samuel R. Rubio

 

Samuel R. Rubio

 

Vice President, Chief Accounting Officer and Controller

 

(Principal Accounting Officer and authorized signatory)

 

36