Global Industries 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
For the quarterly period ended March 31, 2010
For the transition period from to
Commission File Number: 0-21086
Global Industries, Ltd.
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 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 o NO þ
The number of shares of the registrants common stock outstanding as of May 4, 2010, was 114,901,953.
Global Industries, Ltd.
Table of Contents
PART I FINANCIAL INFORMATION
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Global Industries, Ltd.
We have reviewed the accompanying condensed consolidated balance sheet of Global Industries, Ltd. and subsidiaries (the Company) as of March 31, 2010, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2010 and 2009. These interim financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009, and the related consolidated statements of operations, shareholders equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
May 6, 2010
GLOBAL INDUSTRIES, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
See Notes to Condensed Consolidated Financial Statements.
GLOBAL INDUSTRIES, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See Notes to Condensed Consolidated Financial Statements.
GLOBAL INDUSTRIES, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Fair Value Measurements at March 31, 2010
Fair Value Measurements at December 31, 2009
Changes in Level 3 Financial Instruments
Costs and Estimated Earnings on Uncompleted Contracts
the Global 1200 and Global 1201, our new generation derrick/pipelay vessels. This amount includes aggregate commitments of 100.4 million Singapore dollars (or $71.8 million as of March 31, 2010) and 9.5 million Euros or $12.7 million as of March 31, 2010). We have entered into forward contracts to purchase 28.8 million Singapore dollars to hedge certain purchase commitments related to the construction of the Global 1200 and Global 1201 and 8.3 million Singapore dollars to hedge operating expenses related to our Asia Pacific/Middle East segment.
Off Balance Sheet Arrangements In the normal course of our business activities, and pursuant to agreements or upon obtaining such agreements to perform construction services, we provide guarantees, bonds, and letters of credit to customers, vendors, and other parties. At March 31, 2010, the aggregate amount of these outstanding bonds was $57.6 million, which are scheduled to expire between April 2010 and January 2011, and the aggregate amount of outstanding letters of credit was $59.7 million, which are due to expire between April 2010 and March 2014.
During the fourth quarter of 2007, we received a payroll tax assessment for the years 2005 through 2007 from the Nigerian Revenue Department in the amount of $23.2 million. The assessment alleges that certain expatriate employees, working on projects in Nigeria, were subject to personal income taxes, which were not paid to the government. We filed a formal objection to the assessment on November 12, 2007. We do not believe these employees are subject to the personal income tax assessed; however, based on past practices of the Nigerian Revenue Department, we believe this matter will ultimately have to be resolved by litigation. We do not expect the ultimate resolution to have a material adverse effect on our future operating results.
During 2008, we received an additional assessment from the Nigerian Revenue Department in the amount of $40.4 million for tax withholding related to third party service providers. The assessment alleges that taxes were not withheld from third party service providers for the years 2002 through 2006 and remitted to the Nigerian government. We have filed an objection to the assessment. We do not expect the ultimate resolution to have a material adverse effect on our future operating results.
During the third quarter of 2009, we received a tax assessment from the Mexican Revenue Department in the amount of $5.9 million related to the 2003 tax year. The assessment alleges that chartered vessels should be treated as equipment leases and subject to tax at a rate of 10%. We have engaged outside counsel to assist us in this matter and have filed an appeal in the Mexican court system. We await disposition of that appeal. We do not expect the ultimate resolution to have a material adverse effect on our future operating results; however, if the Mexican Revenue Department prevails in its assessment, we could be exposed to similar liabilities for each of the tax years beginning with 2004 through the current year.
We have one unresolved issue related to an Algerian tax assessment received by us on February 21, 2007. The remaining amount in dispute is approximately $10.4 million of alleged value added tax for the years 2004 and 2005. We are contractually indemnified by our client for the full amount of the assessment that remains in dispute. We continue to engage outside tax counsel to assist us in resolving the tax assessment.
Investigations and Litigation
We are involved in various legal proceedings and potential claims that arise in the ordinary course of business, primarily involving claims for personal injury under the General Maritime Laws of the United States and Jones Act as a result of alleged negligence. We believe that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on our business or financial condition.
Accumulated Other Comprehensive Income (Loss) A roll-forward of the amounts included in accumulated other comprehensive income (loss), net of taxes, is shown below.
The amount of cumulative foreign currency translation adjustment included in accumulated other comprehensive income (loss) relates to prior translations of subsidiaries whose functional currency was not the U.S. dollar. The amount of gain (loss) on forward foreign currency contracts included in accumulated other comprehensive income (loss) hedges our exposure to changes in Norwegian kroners for commitments of a long-term vessel charter. The amount of loss on auction rate securities relates to a temporary decline in the fair value of certain investments that lack current market liquidity. See also Note 3 for further discussion on auction rate securities.
13. Stock-Based Compensation
We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards.
The table below sets forth the total amount of stock-based compensation expense for the three months ended March 31, 2010 and 2009.
During the quarter ended March 31, 2010 and 2009, 193,992 and 146,537 shares of restricted stock vested, respectively. In addition, during the quarter ended March 31, 2010, 360,000 shares of stock with immediate vesting were awarded to managerial employees. Pursuant to the terms of the Non-Employee Director Compensation Policy,
28,856 shares of stock with immediate vesting were awarded to our directors during the quarter ended March 31, 2010.
14. Other Income (Expense), net
Components of other income (expense), net are as follows:
15. Income Taxes
Our effective tax rate for the first quarter of 2010 was 16.1% compared to 35.4% for the first quarter of 2009. 2010 losses in foreign jurisdictions that could not be fully tax benefited resulted in a lower effective tax rate when compared to the corporate tax rate in the United States of 35%.
16. Earnings Per Share
Basic earnings per share (EPS) is computed by dividing earnings (loss) attributed to common shareholders during the period by the weighted average number of shares of common stock outstanding during each period. Diluted EPS is computed by dividing net income (loss) attributed to common shareholders during the period by the weighted average number of shares of common stock that would have been outstanding assuming the issuance of dilutive potential common stock as if outstanding during the reporting period, net of shares assumed to be repurchased using the treasury stock method. The dilutive effect of stock options and performance units is based on the treasury stock method. The dilutive effect of non-vested restricted stock awards is based on the more dilutive of the treasury stock method or the two-class method assuming a reallocation of undistributed earnings to common shareholders after considering the dilutive effect of potential shares of common stock other than the non-vested shares of restricted stock.
In accordance with current accounting guidance, certain instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to participate in computing earnings per share under the two-class method. Our non-vested restricted stock awards contain nonforfeitable rights to dividends and consequently are included in the computation of basic earnings per share under the two-class method.
The following table presents information necessary to calculate earnings (loss) per share of common stock for the three months ended March 31, 2010 and 2009:
Anti-dilutive shares primarily represent options where the strike price was in excess of the average market price of our common stock for the period reported and are excluded from the computation of diluted earnings per share. Excluded anti-dilutive shares totaled 2.2 million and 1.9 million for the quarters ended March 31, 2010 and 2009, respectively.
The net settlement premium obligation on the Senior Convertible Debentures was not included in the dilutive earnings per share calculation for the three months ended March 31, 2010 and 2009 because the conversion price of the debentures was in excess of our common stock price.
17. Segment Information
The following table presents information about the profit (or loss) for the three months ended March 31, 2010 and 2009 of each of our five reportable segments: North America Offshore Construction Division (OCD), North America Subsea, Latin America, West Africa, and Asia Pacific/Middle East.
Effective January 1, 2010, we combined our Middle East and Asia Pacific/India segments into the Asia Pacific/Middle East segment. The equipment and personnel assigned to each of these segments as well as the executive management thereof were consolidated during 2009; therefore, we made the decision to combine the segments. The combined reporting segment will continue to pursue projects in both regions. This change has been reflected as a retrospective change to the financial information for the three months ended March 31, 2009, presented below. This change did not affect our condensed consolidated balance sheets, condensed consolidated statements of operations, or condensed consolidated statements of cash flows.
The following table presents information about the assets of each of our reportable segments as of March 31, 2010 and December 31, 2009.
18. Related Party Transactions
Mr. William J. Doré, our founder and a member of our Board of Directors, is also a beneficial owner of more than 5% of our outstanding common stock. We are parties to a retirement and consulting agreement, as amended, with him. Pursuant to the terms of the agreement, we recorded expense of $100,000 for services provided for the three months ended March 31, 2010. We also recorded expenses of $16,800 for the three months ended March 31, 2010, for use of Mr. Dorés hunting lodge related to two business development trips.
19. Subsequent Events
On April 22, 2010, we hired C. Andrew Smith as Senior Vice President and Chief Financial Officer of the Company, effective April 26, 2010.
We are including the following discussion to inform our existing and potential shareholders generally of some of the risks and uncertainties that can affect us and to take advantage of the safe harbor protection for forward-looking statements that applicable federal securities law affords.
From time to time, our management or persons acting on our behalf make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, to inform existing and potential shareholders about us. These statements may include projections and estimates concerning the timing and success of specific projects and our future backlog, revenues, income and capital expenditures. Forward-looking statements are generally accompanied by words such as estimate, project, predict, believe, expect, anticipate, plan, goal or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.
In addition, various statements in this Quarterly Report on Form 10-Q, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. Those forward-looking statements appear in Part I, Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations and in the notes to our condensed consolidated financial statements in Part I, Item 1 of this report and elsewhere in this report. These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:
We believe the items we have outlined above are important factors that could cause actual results to differ materially from those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report. These factors are not necessarily all the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our security holders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements. For more detailed information regarding risks, see the discussion of risk factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.
The following discussion presents managements discussion and analysis of our financial condition and results of operations and should be read in conjunction with the condensed consolidated financial statements and related notes for the period ended March 31, 2010.
Results of Operations
We are a leading offshore construction company offering a comprehensive and integrated range of marine construction and support services in the North America, Latin America, West Africa, and Asia Pacific/Middle East regions. These services include pipeline construction, platform installation and removal, project management, construction support, diving services, diverless intervention, SURF (subsea equipment, umbilical, riser, and flow line), IRM (inspection, repairs, and maintenance), and decommissioning/plug and abandonment services.
Our results of operations, in terms of revenues, gross profit, and gross profit as a percentage of revenues (margins), are principally driven by three factors: (1) our level of offshore construction activity and subsea activity (activity), (2) pricing, which can be affected by contract mix (pricing), and (3) operating efficiency on any particular construction project (productivity).
Our business consists of two principal activities:
Offshore Construction Services
The level of our offshore construction activity in any given period has a significant impact on our results of operations. Our results of operations depend heavily upon our ability to obtain, in a very competitive environment, a sufficient quantity of offshore construction contracts with sufficient gross profit margins to recover the fixed costs associated with our offshore construction business. The offshore construction business is capital and personnel intensive, and as a practical matter, many of our costs, including the wages of skilled workers, are effectively fixed in the short run regardless of whether or not our vessels are being utilized in productive service. In general, as activity increases, a greater proportion of these fixed costs are recovered through operating revenues; consequently, gross profit and margins increase. Conversely, as activity decreases, our revenues decline, but our costs do not decline proportionally, thereby constricting our gross profit and margins. Our activity level can be affected by changes in demand due to economic or other conditions in the oil and gas exploration industry, seasonal conditions in certain geographical areas, and our ability to win the bidding for available jobs.
Most of our offshore construction revenues are earned through international contracts which are generally larger, more complex, and of longer duration than our typical domestic contracts. Most of these international contracts require a significant amount of working capital, are generally bid on a lump-sum basis, and are secured by a letter of credit or performance bond. Operating cash flows may be negatively impacted during periods of escalating activity due to the substantial amounts of cash required to initiate these projects and the normal delays between our cash expenditures and cash receipts from the customer. Additionally, lump-sum contracts for offshore construction services are inherently risky and are subject to many unforeseen circumstances and events that may affect productivity and thus, profitability. When productivity decreases with no offsetting decrease in costs or increases in revenues, our contract margins erode compared to our bid margins. In general, we traditionally bear a larger share of project related risks during periods of weak demand for our services and a smaller share of risks during periods of high demand for our services. Consequently, our revenues and margins from offshore construction services are subject to a high degree of variability, even as compared to other businesses in the offshore energy industry.
Most of our subsea revenues are the result of short-term work, involve numerous smaller contracts, and are usually based on a day-rate charge. Financial risks associated with these types of contracts are normally limited due to their short-term and non-lump sum nature. However, some subsea contracts, especially those that utilize dive support vessels (DSVs), may involve longer-term commitments that extend from the exploration, design, and installation phases of a field throughout its useful life by providing IRM services. The financial risks which are associated with these commitments remain low in
comparison with our offshore construction activities due to the day-rate structure of the contracts. Revenues and margins from our subsea activities tend to be more consistent than from our offshore construction activities.
Quarter Ended March 31, 2010 Compared to Quarter Ended March 31, 2009
Revenues Revenues decreased by 60% to $106.8 million for the first quarter of 2010, compared to $269.5 for the first quarter of 2009. This decrease was primarily due to lower activity in all reporting segments. For a detailed discussion of revenues and income before taxes for each reporting segment, see Segment Information below.
Gross Profit (loss) Gross loss for the first quarter of 2010 was $4.2 million, compared to gross profit for the first quarter of 2009 of $45.4 million. This change was primarily due to lower revenues attributable to decreased project activity and higher non-recovered vessel costs due to decreased vessel utilization. Profits from our Latin America segment were lower in the first quarter of 2010 due to decreased activity and decreased vessel utilization. Lower profits in our West Africa segment were primarily attributable to idle vessel costs coupled with no project activity since our curtailment of operations in the region in mid-2009. Although our Asia Pacific/Middle East segment experienced higher project margins in the first quarter of 2010 primarily due to an improvement on the completion of change orders on the project in Saudi Arabia, we experienced lower profits due to decreased project activity and decreased vessel utilization in the region. Our North America Subsea segment was negatively affected by the dry-docking of the Pioneer and the decreased utilization of the Global Orion. The Global Orion was undergoing major repairs to its crane for a significant portion of the first quarter of 2010 and was unavailable for work. Higher profits in our North America OCD segment were attributable to lower vessel costs primarily associated with the Hercules and Sea Constructor.
Loss (gain) on Asset Disposals and Impairments Loss on asset disposals and impairments was $0.6 million for the first quarter of 2010, compared to gain on asset disposals and impairments for the first quarter of 2009 of $4.8 million. In the first quarter of 2010, we recorded impairments of $0.7 million on two North America Subsea DSVs, the Sea Cat and Sea Fox, upon classification of these vessels to Assets held for sale. In comparison, we recorded a $4.9 million gain on the sale of a DSV, the Sea Lion, in the first quarter of 2009. The vessel was grounded in an incident in November 2008 and was damaged beyond economical repair. We settled the insurance claim in the first quarter of 2009, in which the insurance company purchased the vessel.
Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by $2.4 million, or 11.7%, to $17.5 million for the first quarter of 2010, compared to the first quarter of 2009. Decreased labor costs of $1.6 million in the North America Subsea, West Africa, and Corporate segments attributable to reductions in work force commensurate with our decline in revenues, as well as decreased expenses of $3.7 million for bad debt, legal, accounting, and other professional fees were the primary drivers of the decrease. Partially offsetting these decreases was an increase in equity compensation of $1.8 million for the first quarter of 2010.
Interest Income Interest income decreased by $0.4 million to $0.2 million in the first quarter of 2010, compared to the first quarter of 2009. Lower interest rates in 2010 contributed to lower return on cash balances and short-term investments compared to 2009.
Interest Expense Interest expense decreased by $0.6 million to $2.9 million in the first quarter of 2010, compared to the first quarter of 2009. Higher capitalized interest primarily driven by expenditures for ongoing construction of the Global 1200 and Global 1201, partially offset by increased interest on uncertain tax positions, was responsible for the majority of the decrease between the periods. Capitalized interest for the first quarter of 2010 was $4.4 million compared to $2.9 million for the first quarter of 2009.
Other Income (Expense), net Other expense, net was $0.4 million for the first quarter of 2010 compared to other income, net of $2.1 million for the first quarter of 2009. In the first quarter of 2010, we recognized a $0.5 million loss on the sale of auction rate securities. In comparison, we recorded proceeds from an insurance claim in our North America OCD segment in the first quarter of 2009 in connection with the insurance companys purchase of the Sea Lion.
Income Taxes Our effective tax rate for the first quarter of 2010 was 16.1% as compared to 35.4% for the first quarter of 2009. The decrease in our effective tax rate was due to losses in foreign jurisdictions that could not be fully tax benefited.
Segment Information - The following sections discuss the results of operations for each of our reportable segments for the quarters ended March 31, 2010 and 2009.
North America Offshore Construction Division
Revenues were $3.9 million for the first quarter of 2010 compared to $5.3 million for the first quarter of 2009. The decrease of $1.4 million was primarily due to a decrease in the utilization of the Cherokee which was partially offset by an increase in the utilization of the Hercules and Sea Constructor. Loss before taxes was $7.2 million for the first quarter of 2010 compared to $12.2 million for the first quarter of 2009. This improvement of $5.0 million was primarily due to the reduction in vessel costs for the first quarter of 2010 primarily due to the Hercules and Sea Constructor. The Hercules and Sea Constructor were transferred to the U.S. Gulf of Mexico in January 2009 and incurred repair and maintenance costs in the first quarter of 2009 associated with preparing the vessels to return to work in the U.S. Gulf of Mexico.
North America Subsea
Revenues were $27.8 million for the first quarter of 2010 compared to $31.6 million for the first quarter of 2009. The decrease of $3.8 million was primarily attributable to decreased utilization of the Global Orion, Pioneer, Sea Cat, and Sea Fox partially offset by increased utilization of the Olympic Challenger and the Normand (formerly REM) Commander. The Normand (formerly REM) Commander was assigned to our Latin America segment in the first quarter of 2009 and returned to the U.S. Gulf of Mexico in May 2009. The Pioneer was in dry-dock for most of the first quarter of 2010 and both the Sea Cat and Sea Fox were removed from the operating fleet and are held for sale. The Global Orion was undergoing major repairs to its crane for a significant portion of the first quarter of 2010 and was unavailable for work. Loss before taxes was $3.1 million for the first quarter of 2010 compared to income before taxes of $12.0 million for the first quarter of 2009. This negative impact of $15.1 million was primarily attributable to lower project margins. In addition, the results for the first quarter of 2009 included a $4.9 million gain on proceeds from sale of the Sea Lion.
Revenues were $42.8 million for the first quarter of 2010 compared to $76.3 million for the first quarter of 2009. The $33.5 million decrease is primarily attributable to decreased project activity and decreased vessel utilization. Activity during the first quarter of 2010 consisted primarily of one repair project in Mexico and a DSV charter project in Brazil, compared to two repair projects in Mexico and the Camarupim project in Brazil during the first quarter of 2009. Loss before taxes was $9.1 million for the first quarter of 2010 compared to income before taxes of $6.0 million for the first quarter of 2009. This negative impact of $15.1 million was primarily attributable to higher non-recovered vessel costs in the first quarter of 2010 due to decreased vessel utilization.
There were no revenues for the first quarter of 2010 compared to revenues of $65.1 million for the first quarter of 2009. Loss before taxes was $1.8 million for the first quarter of 2010 compared to income before taxes of $17.8 million for the first quarter of 2009. Activity in the first quarter of 2009 consisted of work on a large construction project for the replacement and repair of a 24-inch pipeline offshore Nigeria. Subsequent to the completion of that project in the second quarter of 2009, we curtailed our operations in the region and have had no project activity in West Africa since that time. The loss before taxes for the first quarter of 2010 was primarily due to non-recovered vessel costs associated with the Cheyenne and
Tornado which remain idle in Tema, Ghana and are held for sale. The income before taxes for the first quarter of 2009 was attributable to increased project profitability related to the one ongoing project in Nigeria in that quarter.
Asia Pacific/Middle East
Revenues were $33.6 million for the first quarter of 2010 compared to $92.1 million for the first quarter of 2009. The decrease of $58.5 was the result of decreased project activity in the region. Activity during the first quarter of 2010 consisted of two construction projects in Malaysia compared to two construction projects in India, one project in Indonesia, and the Berri and Qatif project in Saudi Arabia during the first quarter of 2009. Income before taxes was $4.4 million for the first quarter of 2010 compared to $13.7 million for the first quarter of 2009. This $9.3 million decrease in income before taxes was primarily attributable to higher non-recovered vessel costs in the first quarter of 2010 due to decreased vessel utilization attributable to decreased project activity, partially offset by favorable settlement of change orders on the Berri and Qatif project during the first quarter of 2010.
Utilization of Major Construction Vessels Worldwide utilization for our major construction vessels was 16.4% and 45.9% for the three month periods ended March 31, 2010 and 2009, respectively. Utilization of our major construction vessels is calculated by dividing the total number of days major construction vessels are assigned to project-related work by the total number of calendar days for the period. DSVs, cargo/launch barges, ancillary supply vessels and short-term chartered project-specific construction vessels are excluded from the utilization calculation. We frequently use chartered anchor handling tugs, DSVs, and, from time to time, construction vessels in our operations. In our international operations changes in utilization rarely impact revenues but can have an inverse relationship to changes in profitability.
Industry and Business Outlook
The offshore construction industry continues to be hindered by a low level of project activity worldwide. Increased competition in certain key areas attributable to a decrease in worldwide bid activity is leading to lower than historical success ratio on our bid outcomes. Opportunities remain and we continue to bid on new projects. However, the impact on our operations due to the duration and severity of the industry downturn cannot be predicted with certainty. We continue to expect weak demand for our services throughout 2010.
During 2010, our focus remains on successful execution of our projects, building additional backlog, cost cutting initiatives, and cash conservation. We continue to pursue new work; however, we have not yet been successful in obtaining new project awards sufficient for the size of our existing operations. To the extent that we are not successful in executing our projects or building sufficient backlog, further cost cutting and cash conservation measures will be required including closing offices, stacking idle vessels, asset sales, and further work force reductions.
As of March 31, 2010, our backlog totaled approximately $110.4 million ($97.7 million for international regions and $12.7 million for North America) compared to $394.0 million ($358.8 million for international regions and $35.2 million for North America) as of March 31, 2009. Of the total backlog, $106.4 million is scheduled to be performed in 2010. The amount of our backlog in North America is not a reliable indicator of the level of demand for our services due to the prevalence of short-term contractual arrangements in this region.
Liquidity and Capital Resources
Cash and cash equivalents as of March 31, 2010, were $307.0 million compared to $344.9 million as of December 31, 2009, a decrease of $37.9 million. The primary sources of cash and cash equivalents during the first quarter of 2010 have been cash provided from a net decrease in the working capital components and the sale of marketable securities. The primary uses of cash have been for capital projects.
Operating activities provided $14.6 million of net cash during the first quarter of 2010, compared to a use of $10.0 million of net cash during the first quarter of 2009. This increase in net cash provided from operating activities reflects a net decrease in the major working capital components partially offset by a net loss from operations. Changes in operating assets and liabilities were $21.0 million during the first quarter of 2010, compared to a negative $43.1 million during the first quarter of 2009. Contributing to the decrease in changes in operating assets and liabilities were decreases in accounts receivable and income taxes paid.
Investing activities used $24.4 million of net cash during the first quarter of 2010, compared to a use of $7.6 million of net cash during the first quarter of 2009. During the first quarter of 2010, we used $32.3 million to purchase property and
equipment, partially offset by cash provided from the sale of marketable securities of $10.7 million. Cash used in investing activities in the first quarter of 2009 was primarily related to the purchases of property and equipment of approximately $20.2 million, partially offset by a decrease in our restricted cash requirements of $11.4 million.
Financing activities used $28.5 million of net cash during the first quarter of 2010, compared to using $2.0 million of net cash during the first quarter of 2009. During the first quarter of 2010, we used $26.0 million to pay long-term payables related to the purchase of property and equipment.
The information below summarizes the contractual obligations as of March 31, 2010 for the Global 1200 and the Global 1201, which represents contractual agreements with third party service providers to procure material, equipment and services for the construction of these vessels. The actual timing of these expenditures will vary based on the completion of various construction milestones, which are generally beyond our control (in thousands).
As a result of operating performance, we did not meet the existing minimum fixed charge coverage ratio covenant in the Third Amended and Restated Credit Agreement (the Revolving Credit Facility) as of September 30, 2008. On November 7, 2008, the financial institutions participating in the Revolving Credit Facility waived compliance with the covenant condition. In consideration of this waiver, we and the participating financial institutions have amended the Revolving Credit Facility to:
On February 25, 2009, the Revolving Credit Facility was further amended to remove the requirement to maintain unencumbered liquidity of $100 million. The effective date of this amendment was December 31, 2008.
The length of the interim cash-collateralization period was dependent on our future financial performance and ended June 30, 2009. For the remaining duration of the Revolving Credit Facility after the cash-collateralization period, the facility was further amended to:
During the interim cash-collateralization period, no borrowings, letters of credit or bank guarantees unsecured by cash were available to us under the Revolving Credit Facility. All cash collateral was classified in our Condensed Consolidated Balance Sheets as Restricted Cash. As of March 31, 2010, we had no borrowing against the facility, $59.2 million in letters of credit outstanding thereunder, and available credit of $51.6 million. We also have a $16.0 million short-term credit facility at one of our foreign locations. At March 31, 2010, the available borrowing under this facility was $11.4 million.
At March 31, 2010, we were in compliance with the terms of our Revolving Credit Facility. Our current financial projections indicate that we may not meet our leverage ratio covenant beginning in the second quarter of 2010 and continuing through the fourth quarter of 2010. We are currently in discussion with our lenders regarding these potential violations. If we do not meet our leverage ratio, we may be required to cash collateralize our outstanding letters of credit or seek another remedy. If we are required to cash collateralize letters of credit, it would reduce our available cash and may impact our ability to bid on future projects. Further, upon a covenant violation and the declaration of an event of default by our lenders, under the cross default provisions of our Title XI bonds (1) we may be subject to additional reporting requirements, (2) we may be subject to additional covenants restricting our operations, and (3) the Maritime Administration of the U.S. Department of
Transportation(MarAd), guarantor of the bonds, may institute procedures that could ultimately allow the bondholders the right to demand payment of the bonds from MarAd. MarAd can alternatively assume the obligation to pay the bonds when due. As we have no outstanding indebtedness under our Revolving Credit Facility, an event of default related to the covenant failure would not trigger the cross default provision of our Senior Convertible Debentures. It is not possible at this time to predict the outcome of discussions with our lenders or the effect that these potential violations may have on our financial position.
As of March 31, 2010, approximately $30.8 million in par value of our marketable securities were held in auction rate securities. These securities are intended to provide liquidity through an auction process that resets the applicable interest rate at predetermined intervals, allowing investors to either roll over their holdings or sell them at par value. As a result of liquidity issues in the global credit markets, our outstanding auction rate securities, as of March 31, 2010, have failed to settle at auction. Consequently, these investments are not currently liquid and we will not be able to access these funds until a future auction of these investments is successful or a buyer is found outside the auction process. In November 2008, we agreed to accept auction rate security rights (the Settlement) from UBS related to $30.8 million in par value of auction rate securities. The Settlement permits us to sell or put our auction rate securities back to UBS at par value at any time during the period from June 30, 2010 through July 2, 2012. We expect to put these auction rate securities back to UBS on June 30, 2010, the earliest date allowable under the Settlement if not sold prior to that date.
During the next twelve months, we expect that balances of cash, cash equivalents, and marketable securities, supplemented by cash generated from operations will be sufficient to fund operations (including increases in working capital required to fund any increases in activity levels), scheduled debt retirement, and currently planned capital expenditures, including payments related to the Global 1200 and the Global 1201. Based on expected operating cash flows and other sources of cash, we do not believe that our reduced project backlog or the illiquidity of our investments in auction rate securities will have a material impact on our overall ability to meet our liquidity needs during the next twelve months. However, a significant amount of our expected operating cash flows is based upon projects that have been identified, but not yet awarded. If we are not successful in converting a sufficient number of our bids into project awards, we may not have sufficient liquidity to meet all of our needs and may be forced to postpone capital expenditures or take other actions including closing offices, stacking idle vessels, selling assets, and further reducing our workforce. Also, our current financial projections indicate that we may not meet our leverage ratio covenant under our Revolving Credit Facility beginning in the second quarter of 2010 and continuing through the fourth quarter of 2010. Consequently, we may be required to cash collateralize our outstanding letters of credit or explore other alternatives with respect to the covenant violation. We are currently in discussion with our lenders regarding these potential violations and cannot predict the outcome these potential violations may have on our financial position. Our liquidity position could affect our ability to bid on and accept projects, particularly where the project requires a letter of credit. This could have a material adverse effect on our ability to obtain project awards and our financial results.
Capital expenditures for the remainder of 2010 are expected to be between $200 million and $210 million. This range includes expenditures for the Global 1200, Global 1201, two new saturation diving systems, and various vessel upgrades. In addition, we will continue to evaluate the divesture of assets that are no longer critical to operations to reduce operating costs and preserve a solid financial position.
Our long-term liquidity will ultimately be determined by our ability to earn operating profits that are sufficient to cover our fixed costs, including scheduled principal and interest payments on debt, and to provide a reasonable return on shareholders investment. Our ability to earn operating profits in the long run will be determined by, among other things, the sustained viability of the oil and gas energy industry, commodity price expectations for crude oil and natural gas, the competitive environment of the markets in which we operate, and our ability to win bids and manage awarded projects to successful completion.
Due to the international nature of our business operations and the interest rate fluctuation, we are exposed to certain risks associated with changes in foreign currency exchange rates and interest rates.
Interest Rate Risk
We are exposed to changes in interest rates with respect to investments in cash equivalents and marketable securities. Our investments consist primarily of commercial paper, bank certificates of deposit, repurchase agreements, money market funds, and tax-exempt auction rate securities. These investments are subject to changes in short-term interest rates. We invest in high grade investments with a credit rating of AA-/Aa3 or better, with a main objective of preserving capital. A 0.5% increase or decrease in the average interest rate of cash equivalents and marketable securities at March 31, 2010 would have an approximate $1.7 million impact on pre-tax annualized interest income.
Foreign Currency Risk
As of March 31, 2010, our contractual obligations under a long-term vessel charter will require the use of approximately 89.1 million Norwegian kroners (or $14.9 million as of March 31, 2010) over the next two years. We have hedged most of our non-cancelable Norwegian kroner commitments related to this charter, and consequently, gains and losses from forward foreign currency contracts will be substantially offset by gains and losses from the underlying commitment.
As of March 31, 2010, we were committed to purchase certain equipment which will require the use of 9.5 million Euros (or $12.7 million as of March 31, 2010) over the next year. A 1% increase in the value of the Euro will increase the dollar value of these commitments by approximately $0.1 million.
The estimated cost to complete capital expenditure projects in progress at March 31, 2010 will require an aggregate commitment of 100.4 million Singapore dollars (or $71.8 million as of March 31, 2010). A 1% increase in the value of the Singapore dollar at March 31, 2010 will increase the dollar value of these commitments by approximately $0.7 million. We have entered into forward contracts to purchase 28.8 million Singapore dollars to hedge certain purchase commitments related to the construction of the Global 1200 and Global 1201 and 8.3 million Singapore dollars to hedge operating expenses related to our Asia Pacific/Middle East segment.
As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures. These disclosure controls and procedures are designed to provide us with a reasonable assurance that all of the information required to be disclosed by us in periodic reports filed under the Securities Exchange Act of 1934 as amended (Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed and maintained to ensure that all of the information required to be disclosed by us in reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow those persons to make timely decisions regarding required disclosure.
Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that material information relating to our Company is made known to management on a timely basis. The Chief Executive Officer and Chief Financial Officer noted no material weaknesses in the design or operation of the internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that are likely to adversely affect the ability to record, process, summarize, and report financial information. There have been no changes in internal control over financial reporting that occurred during the last fiscal quarter that have materially affected or are reasonably likely to materially affect internal control over financial reporting.
PART II OTHER INFORMATION
The information set forth under the heading Investigations and Litigation in Note 11, Commitments and Contingencies, to our condensed consolidated financial statements included in this Quarterly Report is incorporated by reference into this Item 1.
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition, or future results of operations. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2009, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect business, financial condition, or operating results.
The following table contains our purchases of equity securities during the first quarter of 2010.
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, thereto duly authorized.
May 6, 2010