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GLF > SEC Filings for GLF > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for GULFMARK OFFSHORE INC

Form 10-Q for GULFMARK OFFSHORE INC


7-Nov-2012

Quarterly Report


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

We provide marine support and transportation services to companies involved in the offshore exploration and production of oil and natural gas. Our vessels transport drilling materials, supplies and personnel to offshore facilities, as well as move and position drilling structures. A substantial portion of our operations are international. Our fleet has grown in both size and capability, to our present number of 85 active vessels, through strategic acquisitions and the new construction of technologically advanced vessels, partially offset by dispositions of certain older, less profitable vessels. At November 7, 2012, our active fleet includes 69 owned vessels and 16 managed vessels.

Our results of operations are affected primarily by day rates, fleet utilization and the number and type of vessels in our fleet. Utilization and day rates, in turn, are influenced principally by the demand for vessel services from the offshore exploration and production sectors of the oil and natural gas industry. The supply of vessels to meet this fluctuating demand is related directly to the perception of future activity in both the drilling and production phases of the oil and natural gas industry as well as the availability of capital to build new vessels to meet the changing market requirements. From time to time, we bareboat charter vessels with revenue and operating expenses reported in the same income and expense categories as our owned vessels. The chartered vessels, however, incur bareboat charter fees instead of depreciation expense. Bareboat charter fees are generally higher than the depreciation expense on owned vessels of similar age and specification. The operating income realized from these vessels is therefore adversely affected by the higher costs associated with the bareboat charter fees. These vessels are included in calculating fleet day rates and utilization in the applicable periods.

We also provide management services to other vessel owners for a fee. We do not include charter revenue and vessel expenses of these vessels in our operating results; however, management fees are included in operating revenue. These vessels are excluded for purposes of calculating fleet rates per day worked and utilization in the applicable periods.

The operations of our fleet may be subject to seasonal factors. Operations in the North Sea are often at their highest levels from April to August and at their lowest levels from November to February. Operations in our other areas, although involving some seasonal factors, tend to remain more consistent throughout the year.

Our operating costs are primarily a function of fleet configuration. The most significant direct operating cost is wages paid to vessel crews, followed by maintenance and repairs and insurance. Generally, fluctuations in vessel utilization have little effect on direct operating costs in the short term and, as a result, direct operating costs as a percentage of revenue may vary substantially due to changes in day rates and utilization.

In addition to direct operating costs, we incur fixed charges related to (i) the depreciation of our fleet, (ii) costs for routine drydock inspections,
(iii) modifications designed to ensure compliance with applicable regulations, and (iv) maintaining certifications for our vessels with various international classification societies. The number of drydockings and other repairs undertaken in a given period generally determines our maintenance and repair expenses. The demands of the market, the expiration of existing contracts, the start of new contracts, seasonal factors and customer preferences influence the timing of drydocks. During the first nine months of 2012, we completed 544 drydock days, compared to 433 in the same period last year.


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Critical Accounting Policies

There have been no significant changes to the critical accounting policies used in our reporting of results of operations and financial position. For a discussion of our critical accounting policies see Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2011.

Results of Operations

The table below sets forth, by region, the average day rates and utilization for
our vessels and the average number of vessels owned or chartered during the
periods indicated. This fleet generates substantially all of our revenues and
operating profit. We use the information that follows to evaluate the
performance of our business.



                                       Three Months Ended            Nine Months Ended
                                          September 30,                September 30,
                                       2012           2011          2012           2011
   Revenues by Region (000's) (a):
   North Sea Based Fleet (c)         $  41,757      $ 49,176      $ 124,796      $ 128,411
   Southeast Asia Based Fleet           17,633        16,660         46,899         47,873
   Americas Based Fleet                 42,477        37,942        122,491        105,694
   Rates Per Day Worked (a) (b):
   North Sea Based Fleet (c)         $  19,821      $ 21,358      $  20,148      $  19,796
   Southeast Asia Based Fleet           14,844        15,063         14,448         15,177
   Americas Based Fleet                 17,939        14,766         16,782         14,401
   Overall Utilization (a) (b):
   North Sea Based Fleet                  93.1 %        96.5 %         91.3 %         92.6 %
   Southeast Asia Based Fleet             88.7 %        87.9 %         82.5 %         84.7 %
   Americas Based Fleet                   82.7 %        81.5 %         82.2 %         78.8 %
   Average Owned Vessels (a) (d):
   North Sea Based Fleet (c)              24.0          25.0           24.0           25.0
   Southeast Asia Based Fleet             15.0          14.0           14.8           14.0
   Americas Based Fleet                   30.8          35.0           32.6           35.0

   Total                                  69.8          74.0           71.4           74.0

(a) Owned vessels.

(b) Rate per day worked is defined as total charter revenues divided by number of days worked. Utilization rate is defined as the total days worked divided by total days of availability in the period.

(c) Revenues for vessels in the North Sea based fleet are primarily earned in Pound Sterling (GBP), Norwegian Kroner (NOK) and Euros, and have been converted to U.S. Dollars (USD) at the average exchange rate for the period. See Currency Fluctuations and Inflation below for exchange rates.

(d) Average number of vessels is calculated based on the aggregate number of vessel days available during each period divided by the number of calendar days in such period. Includes owned and bareboat vessels only, and is adjusted for vessel additions and dispositions occurring during each period.


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Comparison of the Three Months Ended September 30, 2012 with the Three Months Ended September 30, 2011

For the quarter ended September 30, 2012, net income was $13.0 million, or $0.49 per diluted share on revenues of $101.9 million. For the same 2011 period, net income was $14.2 million, or $0.54 per diluted share on revenues of $103.8 million.

Our revenues for the quarter ended September 30, 2012 decreased $1.9 million or 1.8% compared to the third quarter of 2011. Overall utilization decreased from 87.8% in the prior year quarter to 87.6% in the current year quarter which negatively impacted revenue by $5.1 million. An increase in average day rates from $17,271 in the third quarter of 2011 to $17,953 in the current year quarter increased revenue by $4.4 million, which was offset by currency and capacity effects that negatively impacted revenue by $1.4 million and $0.2 million respectively.

Operating income for the period was $17.5 million compared to $23.2 million for the prior year quarter. The decrease is due primarily to the decrease in revenue, combined with higher direct operating cost, higher drydock expense and a $0.9 million impairment charge. The gain related to the sale of two vessels contributed $3.9 million to operating income. General and administrative expense was higher than the 2011 quarter by $2.5 million, due mainly to an increase in salaries and benefits related to termination costs and higher professional fees.

North Sea

Revenues in the North Sea region decreased by $7.4 million, or 15.1%, to $41.8 million in the third quarter of 2012 compared to the same period of 2011. Approximately $2.6 million of the decrease was a result of decreased day rates from $21,358 in 2011 to $19,821 in the current year quarter. In addition, the strengthening of the U.S. Dollar decreased revenue by $1.4 million. Utilization decreased from 96.5% in the third quarter of 2011 to 93.1% in the current year quarter, which decreased revenue by $2.5 million. Capacity also had a negative impact on revenue of $0.9 million, resulting from the effect of the sale of a vessel in 2011. Operating income decreased by $7.7 million compared to the prior year quarter due primarily to the decrease in revenue. Drydock expense decreased by $0.9 million and direct operating expenses increased by $0.8 million in the third quarter of 2012 compared to the prior year quarter. In the current year quarter, we also reduced the carrying value of a vessel held for sale by $0.9 million. General and administrative expense increased by $0.5 million due to mainly higher salaries and benefits.

Southeast Asia

Revenues for our Southeast Asia region increased from the prior year quarter by $1.0 million, or 5.8%, to $17.6 million. An increase in capacity in the region resulted in a $1.7 million increase in revenue as a result of the arrival of one vessel from our Americas region in the second quarter of 2012. Day rates decreased from $15,063 in the prior year quarter to $14,844 in the current quarter, which reduced revenue by $0.6 million. Utilization for the third quarter of 2012 increased from 87.9% to 88.7% in the current quarter, however due to the mix of days worked associated with vessels with lower day rates, revenue was negatively impacted by $0.1 million. Operating income for the region was $7.9 million in the third quarter of 2012 compared to $8.0 million in the prior year quarter. The revenue increase was offset by the increase in drydock expense and higher direct operating expense resulting from the mobilization of the vessel from our Americas region. General and administrative expense was slightly lower from the prior year quarter.


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Americas

Revenues in the Americas region increased by $4.5 million, or 12.0%, to $42.5 million in the third quarter of 2012 compared to the same prior year quarter. Day rates increased by 21.5% from $14,766 in 2011 to $17,939 in the current quarter, which increased revenue by $7.6 million. Utilization for the third quarter of 2012 increased from 81.5% to 82.7%, however due to the mix of days worked associated with vessels with lower day rates, revenue was negatively impacted by $1.1 million. In addition, as a result of the departure of one vessel to our Southeast Asia region and the net effect of vessel purchases and sales during 2012 revenue decreased by $2.0 million. Operating income for the region was $8.2 million in the third quarter of 2012 compared to $4.5 million in the prior year quarter. The increase is due mainly to the increase in revenue coupled with the gain on the sale of two vessels in the region. This was offset by a $4.5 million increase in drydock expense due to higher drydock days incurred during the current year quarter. General and administrative expense increased by $0.6 million from the prior year quarter due mainly to higher salaries, benefits and professional fees.

Other

Other expense of $3.9 million in the third quarter of 2012 decreased by $4.5 million compared to the prior year quarter. The decrease was due primarily to the decrease in net interest expense of $1.3 million as a result of higher capitalized interest associated with our new build program, and a $3.3 million decrease in foreign currency losses, partially offset by an additional $0.2 million loss related to the early extinguishment of our previous revolving credit facility.

Income Taxes

Our effective tax rate for the third quarter of 2012 was 7.1% excluding unusual items. This compares to an effective tax rate of 7.6% in the third quarter of 2011, excluding unusual items. The change in the effective tax rate from the prior year was primarily attributable to a change in the mix of earnings between our higher and lower tax jurisdictions.

Comparison of the Nine Months Ended September 30, 2012 with the Nine Months Ended September 30, 2011

For the nine months ended September 30, 2012 net income was $24.2 million, or $0.92 per diluted share on revenues of $294.2 million. During the same period in 2011, net income was $26.3 million or $1.00 per diluted share, on revenues of $282.0 million.

Revenue increased $12.2 million, or 4.3%, in the 2012 period over the 2011 period due mainly to higher day rates of $17,526 in 2012 compared to $16,544 in 2011 which had a positive impact to revenue of $18.7 million. Increased capacity from the additional work day in the year coupled with the positive net effect of the purchase and sale of vessels throughout the year had a positive impact to revenue of $1.3 million. The strengthening of the U.S. Dollar negatively impacted revenue by $3.7 million. Average utilization increased from 84.6% in 2011 to 85.3% in 2012, however, the mix of days worked associated with vessels with lower day rates, reduced revenue by $4.1 million.

Operating income for the nine-month period ended September 30, 2012 was $49.2 million compared to $48.0 million in 2011. The increase is primarily due to increased revenue coupled with a cumulative $8.7 million gain on five vessel sales, offset by higher direct operating expenses, higher drydock expense and a $0.9 million impairment charge. General and administrative expense was higher by $4.3 million than the 2011 period due primarily to higher salaries and benefits related to termination costs and higher professional fees.


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North Sea

North Sea revenue decreased by $3.6 million, or 2.8%, in the first nine months of 2012 compared to 2011. Utilization decreased from 92.6% in 2011 to 91.3% in 2012, negatively impacting revenue by $1.9 million. In 2011, we sold one of the older vessels which had a negative effect of $2.5 million on revenue. The increase in average day rates from $19,796 in 2011 to $20,148 in 2012, offset somewhat by the currency effects of the strengthening U.S. Dollar, positively impacted revenue by $0.8 million. Operating income decreased by $4.3 million resulting primarily from the decreased revenue as direct operating expenses were essentially flat year over year. Drydock expense increased by $0.6 million from the 2011 period due to higher drydock costs per day and we reduced the carrying value of a vessel held for sale by $0.9 million. General and administrative expense was higher by $1.7 million than the 2011 period due mainly to higher salaries and benefits.

Southeast Asia

Revenue for our Southeast Asia based fleet decreased by $1.0 million, or 2.0%, from $47.9 million in the first nine months of 2011 to $46.9 million in 2012. The decrease was attributable to a decrease in average day rates from $15,177 in 2011 to $14,448 in 2012, which decreased revenue by $1.2 million. Utilization also decreased from 84.7% in 2011 to 82.5% in the current year, negatively impacting revenue by $2.9 million. The increase in fleet size as a result of the arrival of one vessel from the Americas region in 2012 positively contributed $3.2 million to revenue. Operating income decreased from $25.2 million in 2011 to $19.8 million this year. The decrease resulted from lower revenue and higher direct operating and depreciation expense due to the arrival of the additional vessel from our Americas region. Drydock cost also increased due to higher drydock days in 2012. General and administrative expense increased slightly from the 2011 period, due mainly to higher salaries and benefits.

Americas

Our Americas region revenue increased $16.8 million, or 15.9%, from $105.7 million in 2011 to $122.5 million in 2012. The increase was largely due to the increase of 16.5% in average day rates from $14,401 in 2011 to $16,782 in 2012, contributing $15.6 million to revenue. Utilization also increased from 78.8% to 82.2% in the current year resulting in a $6.8 million increase in revenues. Capacity negatively impacted revenue by $5.6 million due to the departure of one vessel to our Southeast Asia region in the first quarter of 2012, partially offset by the net effect of vessel purchases and sales in the year. Operating income of $19.5 million is $12.6 million higher than the 2011 amount. The increase is due to the increase in revenue coupled with the gains recognized from the sale of five vessels in the region during 2012. This was offset by higher direct operating expenses, mainly crew salaries and benefits and higher drydock expense as a result of more drydock days. General and administrative expense also increased by $1.5 million due primarily to the increase in salaries and benefits and professional fees.

Other

In the nine months ended September 30, 2012, other expense totaled $22.1 million, an increase of $2.6 million from 2011. The increase was due primarily to the $3.8 million loss on the early extinguishment of the Old Notes and increased interest expense of $0.9 million due mainly to the acceleration of recognition of our unrealized losses in OCI related to interest rate swaps into earnings partially offset by higher capitalized interest. Foreign currency losses were lower by $2.3 million compared to the prior year period.


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Income Taxes

Our effective tax rate for the first nine months of 2012 was 11.9% excluding unusual items. This compares to an effective tax rate of 7.9% for the first nine months of 2011. The change in the effective tax rate from the prior year was primarily attributable to a change in the mix of earnings between our higher and lower tax jurisdictions.

Liquidity, Capital Resources and Financial Condition

Our ongoing liquidity requirements are generally associated with our need to service debt, fund working capital, maintain our fleet, finance the construction of new vessels and acquire or improve equipment or vessels. We plan to continue to be active in the acquisition of additional vessels through both the resale market and new construction. Bank financing, equity capital and internally generated funds have historically provided funding for these activities. Internally generated funds are directly related to fleet activity and vessel day rates, which are generally dependent upon the demand for our vessels which is ultimately determined by the supply and demand for offshore drilling for crude oil and natural gas.

In the third quarter of 2011, our Board of Directors approved the initiation of a new-build construction program. We began the program in the North Sea region where we contracted with three shipyards to build a total of six new platform supply vessels ("PSV"). In late 2011, we exercised an option with one of the shipyards to build an additional PSV. The estimated cost of these seven PSV's is $288.0 million. In June 2012, we signed an agreement with a U.S. shipyard to build two U.S. flagged PSV's for the U.S. Gulf of Mexico. In July 2012, we signed agreements with another U.S. shipyard to build an additional two U.S. flagged PSV's. The estimated total cost of these four PSV's is approximately $168.0 million.

In the first quarter of 2012, we issued $300.0 million of 6.375% Senior Notes due in 2022. The Senior Notes will pay interest on March 15 and September 15. The proceeds from this debt issuance were used to pay down borrowings under the Old Notes and the Facility Agreement. The issuance of Senior Notes has allowed us to extend a substantial portion of our debt maturities for ten years and to require only interest payments in the interim.

In the third quarter of 2012, we entered into an agreement with a group of banks ("Multicurrency Facility Agreement") that provides us with $150.0 million of borrowing capacity, secured by our Americas region vessels, through September 2017. This revolving credit line replaces our existing $175.0 million revolving credit ($145.0 million borrowing capacity) which was paid off and terminated. We borrowed $50.0 million on the line in September to fund a portion of our new build program.

In addition, we are currently in the final stages of negotiation with a group of financial institutions for a $600.0 million NOK revolving credit facility that will have similar terms as the Multicurrency Facility Agreement, however there is no assurance that we will finalize this agreement.

We are required to make expenditures for the certification and maintenance of our vessels. We expect our drydocking expenditures to be approximately $33.0 million in 2012, of which we have expensed $23.4 million in the first nine months of 2012.

Net working capital at September 30, 2012, was $210.8 million. Net cash provided by operating activities was $21.2 million for the three months ended September 30, 2012. Net cash used in investing activities was $59.9 million. Net cash provided by financing activities was $40.6 million.


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Net cash provided by operating activities was $65.2 million for the nine months ended September 30, 2012. Net cash used in investing activities was $117.3 million. Net cash provided by financing activities was $71.4 million.

At September 30, 2012, we had approximately $149.0 million of cash on hand and $50.0 million drawn under our Multicurrency Facility Agreement, $40.0 million outstanding under our Facility Agreement and $300.0 million outstanding on our newly issued Senior Notes. At September 30, 2012, we had approximately $100.0 million of borrowing capacity under our Multicurrency Facility Agreement.

As of September 30, 2012, approximately 84% of our cash and cash equivalents were held by our foreign subsidiaries. It is our intention to permanently reinvest all of our earnings generated outside the U.S. prior to December 31, 2011 that through that date had not been remitted (unremitted earnings), and as such we have not provided for U.S. income tax expense on these unremitted earnings.

In recent years, we repatriated cash from our foreign subsidiaries from current year foreign earnings and recognized U.S. tax expense, net of available credits, on those occasions. The incremental tax rate associated with these repatriations is approximately 30% with no U.S. cash tax requirement due to utilization of U.S. net operating losses. If any portion of the unremitted earnings were ever foreseen to not be permanently reinvested outside the U.S., or if we elect to repatriate a portion of current year foreign earnings, U.S. income tax expense would be required to be recognized and that expense could be material. Although subject to certain limitations, our U.S. net operating loss carryforwards and foreign tax credit carryforwards could be used to reduce a portion or all of the U.S. cash tax requirements of any such future foreign cash repatriations.

We anticipate that cash on hand, future cash flow from operations for 2012, and access to our revolving credit facilities will be adequate to fund our new-build construction program, to repay our debts due and payable during such period, to complete scheduled drydockings, to make normal recurring capital additions and improvements and to meet operating and working capital requirements. This expectation, however, is dependent upon the success of our operations.

Currency Fluctuations and Inflation

A majority of our operations are international; therefore we are exposed to currency fluctuations and exchange rate risks. In areas where currency risks are potentially high, we normally accept only a small percentage of charter hire in local currency, with the remainder paid in U.S. Dollars. Operating costs are substantially denominated in the same currency as charter hire in order to reduce the risk of currency fluctuations. Charters for vessels in our North Sea fleet are primarily denominated in Pounds Sterling (GBP), with a portion denominated in Norwegian Kroner (NOK) or Euros. The North Sea fleet generated 41.0% of our total consolidated revenue and 53.5% of operating income for the three months ended September 30, 2012, and 42.4% of our total consolidated revenue and 59.7% of operating income for the nine months ended September 30, 2012. Charters in our Americas fleet can be denominated in Brazilian Reais (BRL) and charters in our Southeast Asia fleet can be denominated in Singapore Dollars (SGD). In the third quarter of 2012, the exchange rates of GBP, NOK, Euros, BRL and SGD against the U.S. Dollar averaged as follows:


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                           Three Months Ended          Nine Months Ended
                              September 30,              September 30,
                            2012          2011          2012         2011
                                 1 US$=                      1 US$=
                  GBP         0.633        0.621          0.634       0.619
                  NOK         5.902        5.497          5.859       5.550
                  Euro        0.799        0.707          0.780       0.711
                  BRL         2.027        1.629          1.910       1.630
                  SGD         1.247        1.225          1.258       1.247

Our outstanding debt is denominated in U.S. Dollars, but a substantial portion of our revenue is generated in currencies other than the U.S. Dollar. We have evaluated these conditions and have determined that it is not in our best interest to use any financial instruments to hedge this exposure under present conditions. Our strategy is in part based on a number of factors including the following:

the cost of using hedging instruments in relation to the risks of currency fluctuations;

the propensity for adjustments in these foreign currency denominated vessel day rates over time to compensate for changes in the purchasing power of these currencies as measured in U.S. Dollars;

the level of U.S. Dollar-denominated borrowings available to us; and

the conditions in our U.S. Dollar-generating regional markets.

One or more of these factors may change and, in response, we may begin to use financial instruments to hedge risks of currency fluctuations. We will from time to time hedge known liabilities denominated in foreign currencies to reduce the effects of exchange rate fluctuations on our financial results, such as a fair value hedge associated with the construction of vessels. In this regard, in June 2012, we entered into forward currency contracts to specifically hedge the foreign currency exposure related to firm contractual commitments in the form of future payments for the construction of new vessels. As a result, by design, there was exact offset between the gain or loss exposure in the related underlying contractual commitment. There was a $1.1 million outstanding . . .

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