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DVR > SEC Filings for DVR > Form 10-Q on 2-Nov-2011All Recent SEC Filings

Show all filings for CAL DIVE INTERNATIONAL, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CAL DIVE INTERNATIONAL, INC.


2-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following management's discussion and analysis should be read in conjunction with our historical consolidated financial statements and their accompanying notes included elsewhere in this quarterly report on Form 10-Q, and the consolidated financial statements and their accompanying footnotes, Management's Discussion and Analysis of Financial Condition and Results of Operations, Business and Properties sections included in our 2010 Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under Item 1A, "Risk Factors" included in our 2010 Annual Report on Form 10-K.


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Overview

Financial Performance

We generated a net loss of $58.1 million for the nine months ended September 30, 2011, including $36.6 million of non-cash, pre-tax impairment charges related to certain fixed assets, compared to a net loss of $313.5 million for the same period in 2010, including $315.6 million of non-cash, pre-tax impairment charges related to goodwill and certain fixed assets. Excluding the after-tax impairment charges, we generated a net loss for the nine months ended September 30, 2011 of $29.3 million, and a net loss for the nine months ended September 30, 2010 of $11.0 million. During the nine months ended September 30, 2011, we generated revenues of $352.4 million compared to revenues of $375.4 million generated in the same period of 2010.

Our year-to-date 2011 performance continued to be affected by challenging market conditions in the Gulf of Mexico and the highly competitive market in Southeast Asia. While the recovery in the Gulf of Mexico following the Macondo well blowout has been slow, the permitting process, which affects all phases of our business, is continuing to improve. We believe this will benefit our results in 2012 as demand for our new construction services lags behind drilling activity by six to 18 months. Positive contributions to our financial results during the first nine months of 2011 included strong diving activity in Australia, the successful execution of a large construction project in the Bahamas which was completed in the second quarter and the commencement of a pipelay project in Mexico that we expect to be completed in the fourth quarter. During the nine months ended September 30, 2011, we also successfully completed the bulk of our cost saving initiatives, which included headcount reductions.

For the three months ended September 30, 2011, we generated revenues of $132.9 million and a net loss of $34.4 million, including $36.6 million of non-cash, pre-tax impairment charges related to certain fixed assets, as compared to revenues of $193.8 million and a net loss of $283.4 million, including $315.6 million of non-cash, pre-tax impairment charges related to goodwill and certain fixed assets, generated in the same period in 2010. Excluding the after-tax impairment charges, our net loss for the three months ended September 30, 2011 was $5.6 million and net income for the three months ended September 30, 2010 was $19.1 million.

Business and Outlook

The Macondo well disaster has had a dramatically negative effect on oil and gas exploration activities in the Gulf of Mexico, and there remains a significant amount of uncertainty in the market regarding the United States regulatory environment for our industry. We believe this uncertainty, coupled with reduced natural gas prices as a result of an increase in onshore shale gas development, will continue to suppress our customers' spending levels for the near term. Although permitting and drilling activity in the Gulf of Mexico is recovering, many of our services lag behind this new drilling activity by six to 18 months. As a result, we expect the challenging market conditions that we have been experiencing since 2010 to continue throughout the remainder of 2011 and into early 2012. However, it is unclear how long these factors will continue to disrupt the market conditions for our industry.

Internationally, we have an ongoing pipelay project in Mexico, which we expect to complete in the fourth quarter, and we remain busy with diving related work on the Gorgon project in Australia with continued activity expected in the fourth quarter and the first quarter of 2012 as we engage in a more active phase of the project. Markets in Southeast Asia continue to be highly competitive due to the increased marine construction capacity that has come into service and as a result we have reduced our cost and operational structure in that region.


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Ultimately, we believe the intermediate and long-term outlook for our business remains favorable in both domestic and international markets as capital spending will be required to replenish offshore oil and natural gas production, which should drive long-term demand for our services.

Backlog

As of September 30, 2011, our backlog supported by written agreements or contract awards totaled approximately $221 million, compared to approximately $191.5 million as of December 31, 2010 and $233.4 million as of September 30, 2010. Approximately 40% of our backlog is expected to be performed during the remainder of 2011 and the remainder is expected to be performed in 2012 and beyond. These backlog contracts are cancellable without penalty in most cases. Backlog is not a reliable indicator of total annual revenues because it does not include the substantial portion of our revenues that is derived from the spot market.

Vessel Utilization

We believe vessel utilization is one of the most important performance metrics for our business. Utilization provides a good indication of demand for our vessels and, as a result, the contract rates we may charge for our services. As a marine contractor with significant operations in the Gulf of Mexico, our vessel utilization is typically lower during the winter and early spring due to unfavorable weather conditions in the Gulf of Mexico. Accordingly, we attempt to schedule our drydock inspections and other routine and preventive maintenance programs during this period. The bid and award process during the first two quarters typically leads to the commencement of construction activities during the second and third quarters.

During the first nine months of 2011, we experienced customary seasonal conditions on the Gulf of Mexico OCS, the negative effect of which was further exacerbated by reduced construction work resulting from significantly less drilling activity in 2010, as well as reduced activity levels compared to the same period of 2010 when activity levels were higher due to oil spill cleanup efforts following the Macondo well blowout. Partially offsetting these factors was utilization related to the Bahamas project, which was completed in the second quarter 2011, and the Mexico project, which commenced in the second quarter 2011. These factors resulted in a net decrease in vessel utilization of 6% across our fleet for the nine months ended September 30, 2011 compared to the prior year period.

The following table shows the size of our fleet and effective utilization of our vessels during the three and nine months ended September 30, 2011 and 2010:

                                 Three Months Ended September 30,                      Nine Months Ended September 30,
                                   2011                        2010                     2011                     2010
                          Number                       Number                   Number                   Number
                            of          Utilization      of      Utilization      of      Utilization      of       Utilization
                          Vessels           (1)       Vessels        (1)       Vessels        (1)        Vessels        (1)
Saturation Diving                  8            67%          8           88%          8           59%           8           64%
Surface Diving                    11            55%         11           75%         11           46%          11           52%
Construction Barges               10            28%         10           46%         10           23%          10           27%
Entire Fleet                      29            49%         29           69%         29           41%          29           47%

(1) 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 period and does not reflect vessels in drydocking or taken out of service for upgrades.


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Results of Operations

Operating Results

                          Three Months Ended                                                    Nine Months Ended
                             September 30                   Increase/(Decrease)                    September 30                   Increase/(Decrease)
                         2011             2010                 2011 to 2010                    2011             2010                 2011 to 2010
                       (in thousands, except %)          (in thousands, except %)            (in thousands, except %)          (in thousands, except %)
 Revenues              $    132,906      $ 193,793       $       (60,887 )         (31 %)    $    352,377      $ 375,428       $       (23,051 )          (6 %)
 Gross profit                12,050         46,721               (34,671 )         (74 %)           6,478         38,769               (32,291 )         (83 %)

 Vessel Utilization              49 %           69 %                 (20 %)        (29 %)              41 %           47 %                  (6 %)        (13 %)

Revenues for the three months ended September 30, 2011 decreased from the same period ended September 30, 2010 by $60.9 million, or 31%. Revenues for the nine months ended September 30, 2011 decreased from the same period ended September 30, 2010 by $23.1 million, or 6%.

Gross profit for the three months ended September 30, 2011 decreased from the same period ended September 30, 2010 by $34.7 million, or 74%. Gross profit for the nine months ended September 30, 2011 decreased from the same period ended September 30, 2010 by $32.3 million, or 83%.

Our revenues and gross profit for the three and nine months ended September 30, 2011 decreased from the prior year three and nine month periods primarily due to reduced activity and lower margins in the Gulf of Mexico in the 2011 period resulting from slower than expected recovery in permitting activity levels and continued uncertainty in the region compared to the same period in 2010 when activity levels were higher due to oil spill cleanup efforts following the Macondo well blowout.

Goodwill impairment

                            Three Months Ended                                                    Nine Months Ended
                               September 30                    Increase/(Decrease)                   September 30                  Increase/(Decrease)
                        2011               2010                   2011 to 2010                  2011             2010                 2011 to 2010
                              (in thousands)                (in thousands, except %)                (in thousands)              (in thousands, except %)

Goodwill impairment $ - $ 292,469 $ (292,469 ) (100 %) $ - $ 292,469 $ (292,469 ) (100 %)

During the third quarter 2010 we incurred $292.5 million of goodwill impairment charges following our impairment test prompted by the significant decline in market capitalization, adverse change in the business climate and significant declines in operating results. As a result of this impairment, we do not carry an amount for goodwill as of September 30, 2011.

Fixed assets impairment

                      Three Months Ended                                                Nine Months Ended
                         September 30                  Increase/(Decrease)                 September 30                 Increase/(Decrease)
                       2011          2010                 2011 to 2010                  2011          2010                 2011 to 2010
                        (in thousands)              (in thousands, except %)              (in thousands)             (in thousands, except %)
 Fixed assets

impairment $ 36,638 $ 23,151 $ 13,487 58 % $ 36,638 $ 23,151 $ 13,487 58 %


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During the third quarter of 2011 and 2010 we incurred $36.6 million and $23.2 million, respectively, of impairment charges related to certain fixed assets. In the 2011 period, these impairment charges included a dive support vessel that experienced low utilization for an extended period of time in the Southeast Asia region, and an idle shallow water pipelay barge from which most of its equipment had been removed. In the 2010 period, these impairment charges included four construction barges, for which the outlook for their future utilization was uncertain.

Selling and administrative expenses

                         Three Months Ended                                                    Nine Months Ended
                            September 30                   Increase/(Decrease)                    September 30                    Increase/(Decrease)
                        2011             2010                 2011 to 2010                    2011             2010                  2011 to 2010
                      (in thousands, except %)          (in thousands, except %)            (in thousands, except %)           (in thousands, except %)
Selling and
administrative
expenses               $    13,438       $ 15,121       $         (1,683 )        (11 %)    $     46,274       $ 45,260       $          1,014              2 %
Selling and
administrative
expenses as a
percentage of
revenues                        10 %            8 %                    2 %         25 %               13 %           12 %                    1 %            8 %

Selling and administrative expenses for the three months ended September 30, 2011 decreased from the same period ended September 30, 2010 by $1.7 million, or 11% due to our cost saving initiatives, as well as decreases in certain accruals relating to certain employee benefit plans. These were partially offset by $1.7 million in one-time severance costs. For the nine months ended September 30, 2011, selling and administrative expenses increased from the same period ended September 30, 2010 by $1.0 million or 2%.

As a percentage of revenue, selling and administrative expenses were 10% and 13% for the three and nine months ended September 30, 2011 compared to 8% and 12% for the same periods of 2010, respectively.

Provision for doubtful accounts

                       Three Months Ended                                                   Nine Months Ended
                          September 30                     Increase/(Decrease)                 September 30               Increase/(Decrease)(1)
                     2011              2010                   2011 to 2010                   2011         2010                 2011 to 2010
                         (in thousands)                 (in thousands, except %)              (in thousands)             (in thousands, except %)
Provision for
doubtful
accounts             $       -         $       -        $        -                   - %    $  (2,240 )   $  (167 )     $        (2,073 )            - %

(1)    Percentage comparison is not meaningful.

No provision for doubtful accounts was recorded during the three and nine months ended September 30, 2011. The $2.2 million reversal of provision for doubtful accounts during the second quarter of 2011 is due to a collection of a receivable previously reserved as bad debt on a West Africa project. The $0.2 million reversal of provision for doubtful accounts recorded during the first quarter of 2010 resulted from the collection of trade receivables from the court administering the bankruptcy of a previous customer.


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Gain on sales of assets and other, and other expense, net

                     Three Months Ended                                                Nine Months Ended
                        September 30                Increase/(Decrease)                  September 30                Increase/(Decrease
                    2011           2010                 2011 to 2010                   2011         2010                2011 to 2010
                       (in thousands)             (in thousands, except %)              (in thousands)            (in thousands, except %)
Gain on sale of
assets and other    $    419       $      6       $         413              - %(1)    $  3,738     $ 1,313       $        2,425           185 %
Other expense,
net                       48            192                (144 )          (75 %)           210         124                   86            69 %

(1)   Percentage comparison is not meaningful.

During the three months ended September 30, 2011 we sold miscellaneous equipment to various third parties for $0.4 million, and we recognized a net gain on the sales of $0.4 million. We did not sell any significant assets during the three months ended September 30, 2010. During the second quarter of 2011 we sold our Sabine Pass facility, one of our barges that was previously damaged by fire and miscellaneous equipment to various third parties for $3.9 million, and we recognized a net gain on the sales of $0.5 million. During the first quarter of 2011, we received an insurance settlement in the amount of $2.8 million for a specific claim incurred in a prior year related to a fire that damaged one of our barges.

During the first quarter of 2010, we sold a portable saturation system to a third party for cash proceeds totaling $3.7 million and recognized a gain on the sale of $1.1 million. During the second quarter of 2010 we sold two utility vessels to different third parties for $0.6 million and recognized a gain on the sale of $0.1 million.

Other income (expense) is primarily from foreign currency gains and losses on transactions conducted in currencies other than the U.S. dollar.

Interest expense, net

                           Three Months Ended                                              Nine Months Ended
                              September 30                Increase/(Decrease)                September 30                 Increase/(Decrease)

2011 2010 2011 to 2010 2011 2010 2011 to 2010
(in thousands) (in thousands, except %) (in thousands) (in thousands, except %)

Interest expense, net $ 2,071 $ 2,544 $ (473 ) (19 %) $ 6,412 $ 6,835 $ (423 ) (6 %)

The decrease in interest expense, net from the three and nine months ended September 30, 2010 to the same periods in 2011 is primarily due to changes in variable interest rates.

Income tax benefit

                       Three Months Ended                                                 Nine Months Ended
                          September 30                  Increase/(Decrease)                 September 30                  Increase/(Decrease)
                        2011          2010                 2011 to 2010                  2011          2010                  2011 to 2010
                         (in thousands)              (in thousands, except %)              (in thousands)              (in thousands, except %)
Income tax benefit   $   (5,359 )   $ (3,378 )   $          1,981               59 %   $ (18,952 )   $ (14,123 )   $          4,829               34 %

Our effective tax benefit rate was 13.5% and 24.6% for the three and nine months ended September 30, 2011, respectively, compared to an effective tax benefit rate of 1.2% and 4.3% for the three and nine months ended September 30, 2010, respectively. The increase in the tax benefit was primarily due to the non-recurring goodwill impairment charge recorded in the third quarter of 2010, which had a minimal tax benefit, and a combination of changes in (i) the management structure of certain foreign operations and (ii) pricing agreements between the U.S. and certain foreign subsidiaries.


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Our income tax benefit for the three and nine months ended September 30, 2011 was computed by applying estimated annual effective tax rates to income before income taxes for the interim period. For the three and nine months ended September 30, 2010, we determined that a reliable estimate of our annual effective tax rate could not be determined for the year based on the volatility in pretax income or loss and its impact on estimating our annual effective tax rate for the year. Therefore, the interim effective tax benefit rate at September 30, 2010 was based on the actual year-to-date results.

Under the tax law in the countries in which we operate, the amount and availability of tax benefits are subject to a variety of interpretations and restrictive tests, such as estimates of future taxable income or reversals of temporary differences. We review the adequacy of our valuation allowance on a quarterly basis and adjust the valuation allowance based on management's opinion as to the likelihood we will be able to utilize the tax benefit.

Net Loss

                        Three Months Ended                                                  Nine Months Ended
                           September 30                  Increase/(Decrease)                  September 30                  Increase/(Decrease)
                        2011           2010                 2011 to 2010                   2011           2010                 2011 to 2010
                       (in thousands, except                                              (in thousands, except
                          per share data)             (in thousands, except %)               per share data)             (in thousands, except %)
Net loss               $ (34,367 )   $ (283,372 )     $       (249,005 )        (88 %)    $ (58,126 )   $ (313,467 )     $       (255,341 )        (81 %)
Weighted average
fully-diluted
shares outstanding        91,673         91,065                    608            1 %        91,689         91,042                    647            1 %
Fully-diluted loss
per share              $   (0.37 )   $    (3.11 )     $          (2.74 )        (88 %)    $   (0.63 )   $    (3.44 )     $          (2.81 )        (82 %)

Net loss, including the impairment charges, for the three and nine months ended September 30, 2011 improved from the same periods ended September 30, 2010 by $249.0 million, or 88%, and $255.3 million, or 81%, respectively, and fully-diluted loss per share improved from the same periods ended September 30, 2010 by $2.74, or 88%, and $2.81, or 82%, respectively, as a result of the factors described above.

Liquidity and Capital Resources

We require capital to fund ongoing operations, organic growth initiatives and pursue joint ventures or acquisitions. Our primary sources of liquidity are cash flows generated from our operations, available cash and cash equivalents and availability under our revolving credit facility. We use, and intend to continue using, these sources of liquidity to fund our working capital requirements, maintenance capital expenditures, strategic investments and acquisitions. For 2011, we anticipate capital expenditures, excluding acquisitions or investments in joint ventures, of approximately $48.0 million for vessel improvements and replacements, and $12.0 million for regulatory drydock costs. In connection with our business strategy, we regularly evaluate acquisition and joint venture opportunities, including vessels and marine contracting businesses. We expect to be able to fund our activities for the next twelve months with cash flows generated from our operations, available cash and cash equivalents and available borrowing under our revolving credit facility. Our access to liquidity to fund our business activities and achieve our near-term and long-term growth objectives depends on the availability of financing in the capital markets which have experienced significant volatility during recent times. Given the current market conditions and our reliance on our credit facility for liquidity purposes, further deterioration in the market conditions could adversely impact this.


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Credit Facility

At September 30, 2011, we had a credit facility, consisting of a variable-interest term loan and a variable-interest $300 million revolving credit facility, with certain financial institutions. At September 30, 2011, we had outstanding debt of $150 million under our term loan, including current maturities and $34.5 million outstanding under our revolving credit facility. The revolving credit facility and the term loan mature on April 26, 2016. We may prepay all or any portion of the outstanding balance of the term loan without prepayment penalty. We may borrow from or repay the revolving credit facility as business needs merit. At September 30, 2011 and December 31, 2010, respectively, we were in compliance with all debt covenants under our credit facility.

By an amendment dated October 7, 2011, but effective as of October 11, 2011, we amended the credit agreement to, among other things, (i) increase our permitted maximum consolidated leverage (debt to EBITDA) ratio to 5.0x for the fiscal quarter ending December 31, 2011; (ii) permanently reduce the size of the revolving credit facility from $300 million to $150 million and temporarily remove the $100 million accordion feature; (iii) for the fiscal quarter ending March 31, 2012, temporarily limit the amount available for borrowing and letters of credit under the $150 million revolving credit facility to $75 million and waive the leverage ratio covenant; (iv) eliminate the current EBITDA to interest financial covenant effective immediately, and, beginning in the fiscal quarter ending June 30, 2012, replace it with a fixed charge coverage ratio covenant of not less than 1.25x; and (v) temporarily add a collateral coverage sublimit on the amount available for borrowing under the revolving credit facility.

At September 30, 2011, we had $6.7 million of cash on hand, issued and outstanding letters of credit of $0.2 million under our revolving credit facility, and $2.4 million of outstanding warranty and bid bonds. The amount we . . .

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