Overview

Business and Financial Market Outlook

The recent volatility in the equity and financial markets has led to increased uncertainty regarding the outlook for the global economy. Due to the deterioration of the credit markets and the failure of many financial institutions, businesses have intensified their focus on liquidity and access to capital. The heightened uncertainty and the possibility of a worldwide decrease in hydrocarbon demand has led to declining commodity prices, which may negatively impact our operations as these factors may cause many oil and gas companies to curtail capital spending. Leading into this unprecedented financial market turmoil there was high demand for our services as reflected in our third quarter results. Additionally, we are now experiencing an increase in demand driven by the need for inspection, repair and salvage of damaged platforms and infrastructure following hurricanes Gustav and Ike, which hit the Gulf of Mexico this September. Given the volatility and uncertainty in the macro economic environment coupled with the otherwise favorable demand indicators for our business, it is difficult to predict to what extent these events will affect our overall activity level in 2009. Our outlook remains positive through the fourth quarter in both domestic and international markets; however, we do expect some seasonality impact due to winter weather conditions.
Generally, tendering activity remains solid and the long-term outlook for our business remains favorable as the required continuity of capital spending to replenish oil and gas production should drive long-term demand for our services.

Year-to-Date Performance

We earned net income of $45.9 million and $63.4 million for the three and nine months ended September 30, 2008, respectively, compared to $37.5 million and $79.2 million for the same periods in 2007, respectively. The harsh weather conditions in the Gulf of Mexico experienced in the first quarter of 2008 continued into the first two months of the second quarter of 2008. These offshore conditions adversely impacted our overall U.S. fleet utilization, particularly our construction barges and our surface diving fleet. However, the majority of the U.S. fleet returned to work offshore in June and our effective vessel utilization increased from 60% during the second quarter of 2008 to 80% during the third quarter of 2008. These expected activity levels in the third quarter produced record financial performance despite the substantial work interruptions caused by hurricanes Gustav and Ike. The increased demand from the hurricanes coupled with the otherwise strong domestic and international tendering activity referred to above is evidenced by our growing backlog of awarded work, which is $506 million at September 30, 2008. This compares favorably to $484 million at June 30, 2008 and $175 million at December 31, 2007.

Backlog

As of September 30, 2008, our backlog supported by written agreements or contract awards totaled approximately $506 million, compared to approximately $175 million as of December 31, 2007. Prior to our acquisition of Horizon, our backlog had not been significant. Approximately one-third of our backlog is expected to

Recent Acquisitions

On December 11, 2007, we completed an acquisition of Horizon, following which Horizon became our wholly-owned subsidiary. Upon completion of the acquisition, each share of common stock, par value $0.00001 per share, of Horizon was converted into the right to receive $9.25 in cash and 0.625 shares of our common stock. All shares of Horizon restricted stock that had been issued but had not vested prior to the effective time of the merger became fully vested at the effective time of the merger and converted into the right to receive the merger consideration. We issued an aggregate of approximately 20.3 million shares of common stock and paid approximately $300 million in cash to the former Horizon stockholders upon completion of the acquisition. The cash portion of the merger consideration was paid from cash on hand and from borrowings of $375 million under our $675 million credit facility, which consists of a $375 million senior secured term loan and a $300 million senior secured revolving credit facility.
See "Liquidity and Capital Resources - Credit Facility."

Vessel Utilization

We believe vessel utilization is one of the most important performance measurements for our business. As a marine contractor, our vessel utilization is typically lower during the winter and early spring due to weather conditions in the Gulf of Mexico. From 2005 through the first three quarters of fiscal 2007, we did not experience the typical seasonal trends in our business due to the impact of hurricanes Ivan, Katrina and Rita in the Gulf of Mexico. However, beginning in the fourth quarter of 2007 we began to experience a return to customary seasonal conditions as the amount of hurricane-related repair activity decreased. The damage resulting from hurricanes Gustav and Ike may lead to higher vessel utilization during the winter and early spring of 2009 than we would experience under more customary seasonal conditions.

The following table shows the size of our fleet and effective utilization of our vessels during the three and nine months ended September 30, 2008 and 2007:

                           Three Months Ended September 30,                   Nine Months Ended September 30,
                             2008                    2007                      2008                    2007
                     Number of  Utilization  Number of  Utilization    Number of  Utilization  Number of  Utilization
                    Vessels (1)     (2)     Vessels (1)     (2)       Vessels (1)     (2)     Vessels (1)     (2)
Saturation Diving   8               95%     7           95%           8               86%     7           94%
Surface and Mixed   13              80%     16          67%           13              56%     16          67%
Gas Diving

As of the end of the period and excludes acquired vessels prior to their in-service dates, and vessels taken out of service.

Effective vessel utilization is calculated by dividing the total number of days the vessels generated revenues by the total number of days the vessels were available for operation in each quarter and does not reflect acquired vessels prior to their in-service dates, vessels in drydocking, and vessels taken out of service for upgrades.

Our Relationship with Helix

Certain administrative and operational services of Helix have been shared between us and other Helix business segments for all periods presented. For purposes of financial statement presentation, the costs included in our condensed consolidated statements of operations for these shared services have been allocated to us based on actual direct costs incurred, headcount, work hours or revenues. We and Helix consider these allocations to be a reasonable reflection of our respective utilization of services provided. Pursuant to the Corporate Services Agreement between Helix and us, we are required to utilize these services from Helix in the conduct of our business until such time as Helix owns less than 50% of the total voting power of our common stock, or earlier, if mutually agreed between Helix and us.

Critical Accounting Estimates and Policies

Our accounting policies are described in the notes to our audited consolidated financial statements included in our 2007 Annual Report on Form 10-K. We prepare our financial statements in conformity with GAAP. Our results of operations and financial condition, as reflected in our financial statements and related notes, are subject to management's evaluation and interpretation of business conditions, changing capital market conditions and other factors that could affect the ongoing viability of our business and our customers. We believe the most critical accounting policies in this regard are those described in our 2007 Annual Report on Form 10-K. While these issues require us to make judgments that are somewhat subjective, they are generally based on a significant amount of historical data and current market data. There have been no material changes or developments in authoritative accounting pronouncements or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be critical accounting policies and estimates as disclosed in our 2007 Annual Report on Form 10-K.

Recently Issued Accounting Principles

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. Our adoption of SFAS 157 effective January 1, 2008 did not have a material impact on our results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 ("SFAS 161"). SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under SFAS 133. The provisions of SFAS No. 161 are effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently evaluating the impact, if any, this standard will have on our financial statements.

In June 2008, the FASB issued FSP Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities ("FSP EITF 03-6-1"). This FSP would require unvested share-based payment awards containing non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be included in the computation of basic EPS according to the two-class method. The effective date of FSP EITF 03-6-1 is for fiscal years beginning after December 15, 2008 and requires all prior-period EPS data presented to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP. FSP EITF 03-6-1 does not permit early application. This FSP changes our calculation of basic and diluted EPS and will lower previously reported basic and diluted EPS as weighted-average shares outstanding used in the EPS calculation will increase. We are currently evaluating the impact of this statement on our consolidated financial statements.

Results of Operations

Comparison of Three Months Ended September 30, 2008 and 2007

Revenues. For the three months ended September 30, 2008, our revenues increased $101.8 million, or 58%, to $278.7 million, compared to $176.9 million for the three months ended September 30, 2007. This increase was primarily a result of revenue contributions from certain Horizon assets acquired in December 2007.
This increase was partially offset by adverse weather downtime due to the impact of hurricanes Gustav, Hanna and Ike in the U.S. Gulf of Mexico.

Selling and administrative expenses. Selling and administrative expenses of $19.8 million for the three months ended September 30, 2008 were $6.7 million higher than the $13.1 million incurred in the three months ended September 30, 2007 primarily due to the Horizon acquisition, including non-cash amortization of related intangible assets, increased employee benefits costs and increased information technology costs.

Net interest expense. Net interest expense in the third quarter of 2008 was $5.2 million as compared to $2.1 million in the third quarter of 2007. This increase was due to increased borrowings in December 2007 in conjunction with the Horizon acquisition.

Income taxes. Income taxes were $21.6 million and $17.4 million for the three months ended September 30, 2008 and 2007, respectively. The effective tax rate for the respective periods was 32.0% for 2008 and 31.6% for 2007.

Net income. Net income of $45.9 million for the three months ended September 30, 2008 was $8.4 million more than net income of $37.5 million for the three months ended September 30, 2007 as a result of the factors described above.

Comparison of Nine Months Ended September 30, 2008 and 2007

Revenues. For the nine months ended September 30, 2008, our revenues increased $133.9 million, or 29%, to $595.3 million, compared to $461.4 million for the nine months ended September 30, 2008. This increase was primarily a result of the revenue contributions from certain Horizon assets acquired in December 2007.
This increase was partially offset by lower vessel utilization related to winter seasonality and harsh weather conditions which continued into May 2008, and adverse weather downtime related to hurricanes Gustav, Hanna and Ike.

Gross profit. Gross profit for the nine months ended September 30, 2008 decreased $9.0 million, or 5%, to $164.5 million, compared to $173.5 million for the nine months ended September 30, 2007. This decrease was attributable to lower vessel utilization referred to above and increased depreciation and amortization. The utilization impact from continued harsh weather in the Gulf of Mexico during the first five months of 2008 and adverse weather conditions thereafter was compounded by our increased exposure in terms of fleet size following the Horizon acquisition. Cost of sales related depreciation and amortization increased to $48.0 million for the nine months ended September 30, 2008 from $26.3 million for the same period in 2007 due primarily to assets purchased in the Horizon acquisition.

Selling and administrative expenses. Selling and administrative expenses of $54.9 million for the nine months ended September 30, 2008 were $21.0 million higher than the $33.9 million incurred in the nine months ended September 30, 2007. This increase was primarily due to the Horizon acquisition, including non-cash amortization of related intangible assets and one-time integration costs, increased employee benefit costs and increased information technology costs. Included in the nine months ended September 30, 2007 is a $2 million settlement with the Department of Justice related to a civil claim.

Equity in earnings (loss) of investment. During the second quarter 2007, we determined there was an other than temporary impairment in OTSL and the full value of our investment of $11.8 million was impaired.

Net interest expense. Net interest expense in the first nine months of 2008 was $16.9 million as compared to $7.0 million in the first nine months of 2007. The increase in interest expense is related to increased debt assumed in December 2007 in connection with the Horizon acquisition.

Net income. Net income of $63.4 million for the nine months ended September 30, 2008 was $15.8 million less than net income of $79.2 million for the nine months ended September 30, 2007 as a result of the factors described above.

Liquidity and Capital Resources

We require capital to fund ongoing operations, organic growth initiatives and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, available cash and cash equivalents and availability under a revolving credit facility we secured in connection with our acquisition of Horizon. We intend to use these sources of liquidity to fund our working capital requirements, maintenance capital expenditures, strategic investments and acquisitions. In connection with our business strategy, we regularly evaluate acquisition opportunities, including vessels and marine contracting businesses. We believe that our liquidity, along with other financing alternatives, will provide the necessary capital to fund these transactions and achieve our long-term growth objectives. We expect to be able to fund our activities for the remainder of 2008 and 2009 with cash flows generated from our operations and available borrowings under our revolving credit facility.

In December 2007, we entered into a five-year $675 million credit facility, which consists of a $375 million term loan and a $300 million revolving credit facility, with certain financial institutions. The revolving and term loans under this facility mature in December 2012 with quarterly principal payments of $20 million being payable on the term loan. On December 11, 2007, we borrowed $375 million under the term loan and used those proceeds, along with cash on hand, to fund the cash portion of the merger consideration in connection with our acquisition of Horizon and to retire Horizon's and our existing debt. At September 30, 2008, we had outstanding debt of $335 million under this credit facility, $22.9 million of cash on hand, and $293.8 million available under our revolving credit facility. We may pay down or borrow from the revolving credit facility as business needs merit. See "Credit Facility" below.

At September 30, 2008, we had issued outstanding letters of credit of $6.2 million under our revolving credit facility and $12.5 million on an unsecured basis with another financial institution.

We are closely monitoring the relatively recent and ongoing volatility and uncertainty in the financial markets and have intensified our internal focus on liquidity, planned spending and access to capital. Externally we have also been engaged with our clients and the lending institutions in our credit facility as they go through the same exercise. It is too early to predict to what extent these current events may affect our overall activity levels in 2009. As of today our lenders have not made us aware that they would not be able to fund any commitments under our revolving credit facility. Additionally, despite the uncertainty, we also have reasonable visibility of our prospective cash flows supported by our backlog and the recent increased demand for our services following hurricanes Gustav and Ike, which should be sufficient to fund our operations over the near term.

Cash Flows

During the nine months ended September 30, 2008 and 2007, we generated positive operating cash flow of approximately $70.6 million and $103.5 million, respectively We utilized our operating cash flow to fund capital expenditures and recertification costs and to reduce our debt obligations. For the nine months ended September 30, 2008 and 2007, our cash flows are summarized as follows (in thousands):

                                                         Nine Months       Nine Months
                                                            Ended             Ended
                                                        September 30,     September 30,
                                                            2008              2007
Cash flow operations:
Net income                                              $      63,403     $      79,170
Other non-cash income adjustments                              68,402            47,825
Change in accounts receivable and other current assets          7,775           (26,544)
Change in accounts payable and accrued liabilities            (53,906)           31,585
Additions to deferred drydock costs                           (15,361)          (18,444)
Other noncurrent, net                                             293           (10,080)
Total cash flow from operations                                70,606           103,512

Other cash inflows:
Net proceeds from drawdowns on credit facility                 61,100                -
Proceeds from sales of assets                                   1,778               517
Total other cash inflows                                       62,878               517

Other cash outflows:
Capital expenditures                                          (70,750)          (26,390)
Repayment on credit facility                                 (101,100)          (84,000)
Total other cash outflows                                    (171,850)         (110,390)

Net change in cash                                      $     (38,366)    $      (6,361)

Capital Expenditures

We incur capital expenditures for recertification costs relating to regulatory drydocks as well as costs for major replacements and improvements, which extend the vessel's economic useful life. Total capital expenditures planned for 2008 include $36.1 million for recertification costs and $79.3 million for vessel improvements, equipment purchases and operating lease improvements. We also incur capital expenditures for strategic investments and acquisitions. During the nine months ended September 30, 2008, we incurred $16.1 million for recertification costs and $82.7 million for vessel improvements, equipment purchases and operating lease improvements.

Credit Facility

In December 2007, we entered into a secured credit facility with certain financial institutions consisting of a $375 million term loan and a $300 million revolving credit facility. This credit facility replaced the revolving credit facility we entered into in November 2006 prior to our initial public offering.
The following is a summary description of the terms of the credit agreement and other loan documents.

The term loans and the revolving loans may consist of loans bearing interest in relation to the Federal Funds Rate or to the lenders' base rate, known as Base Rate Loans, and loans bearing interest in relation to a LIBOR rate, known as Eurodollar Rate Loans, in each case plus an applicable margin. The margins on the revolving loans range from 0.75% to 1.50% on Base Rate Loans and 1.75% to 2.50% on Eurodollar Rate Loans. The margins on the term loan are 1.25% on Base Rate Loans and 2.25% on Eurodollar Rate Loans. The revolving loans and the term loan mature on December 11, 2012, with quarterly principal payments of $20 million being payable on the term loan. We may prepay all or any portion of the outstanding balance of the term loan without prepayment penalty. In addition, a commitment fee ranging from 0.375% to 0.50% will be payable on the portion of the lenders' aggregate commitment which from time to time is not used for a borrowing or a letter of credit. Margins on the revolving loans and the commitment fee will fluctuate in relation to our consolidated leverage ratio as provided in the credit agreement.

The credit agreement and the other documents entered into in connection with the credit facility include terms and conditions, including covenants, that we consider customary for this type of transaction. The covenants include restrictions on our and our subsidiaries' ability to grant liens, incur indebtedness, make investments, merge or

On December 11, 2007, we borrowed $375 million under the term loan and used those proceeds to fund the cash portion of the merger consideration in connection with our acquisition of Horizon and to retire Horizon's and our existing debt. On February 19, 2008, we used a portion of cash on hand to make an optional prepayment on the term loan in the amount of $40 million resulting in an outstanding balance of $335 million. As a result of the prepayment, our next quarterly installment of $20 million is due on December 31, 2008. We had no borrowings outstanding, and letters of credit totaling $6.2 million to secure performance bonds outstanding, under our revolving credit facility at September 30, 2008. At September 30, 2008 there was $293.8 million available under the revolving credit facility. We expect to use the remaining availability under the revolving credit facility for working capital and other general corporate purposes.

Contractual and Other Obligations

At September 30, 2008, our contractual obligations for long-term debt, payables
and operating leases were as follows (in thousands):

                                                       Payments Due by Period
                                                Less than                               More than
                                     Total        1 Year     1-3 Years    3-5 Years      5 Years
Payable to Helix                   $   5,143    $   2,143    $   2,039    $     754    $      207
Noncancelable operating leases and
charters                              22,617        4,277        5,262        4,594         8,484
. . .