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DVR > SEC Filings for DVR > Form 10-Q on 6-May-2013All 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.


6-May-2013

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 notes, Management's Discussion and Analysis of Financial Condition and Results of Operations, Business and Properties sections included in our 2012 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 Part I, Item 1A, "Risk Factors" included in our 2012 Form 10-K.

Overview

Financial Performance

We generated a loss of $17.7 million, or $0.19 per diluted share, for the three months ended March 31, 2013 compared to a loss of $24.3 million, or $0.26 per diluted share, for the same period of 2012. During the three months ended March 31, 2013, we generated revenues of $80.9 million compared to revenues of $60.0 million for the same period in 2012. The improvement in our first quarter 2013 performance from the prior year was primarily due to strong utilization for the Uncle John and the Kestrel during the quarter, compared to the first quarter 2012 when they were idle while undergoing required regulatory drydocks. The improvement was partially offset by deterioration in domestic diving utilization and pricing. Additionally, we incurred a loss on a lump sum project in Australia due to project scheduling changes with demobilization of third party equipment and cost overruns from adverse weather conditions that caused delays in project execution.

Market Conditions and Outlook

In addition to historically consistent seasonal factors affecting our business during the first quarter 2013 in the U.S. Gulf of Mexico, we also experienced a decline in both utilization and pricing for our domestic diving fleet as customer demand for these services declined. We also continue to experience a challenging market and pressure on pricing for all of our services on the U.S. Gulf of Mexico Outer Continental Shelf (or "OCS") (both day rate and lump sum projects) at current demand levels. Capital spending by customers on new construction on the OCS remains suppressed. We believe the uncertainty around commodity prices will continue to suppress our customers' spending levels in the new construction market on the OCS for the near term. Although drilling activity in the deepwater U.S. Gulf of Mexico as well as on the OCS has improved over the last 12 months, this activity is not expected to materially benefit our operations in the near term. However, we believe the intermediate and long-term outlook for our business remains favorable in domestic markets as the permitting approval environment is improving, and we expect decommissioning and salvage work to remain steady and active in 2013.

Internationally, revenues for the first quarter 2013 doubled from the first quarter 2012. International bidding activity continues to be strong in the markets we serve. In Mexico, we have been awarded a large contract with Pemex that will be performed between the third and fourth quarters 2013. In addition, our two-year bareboat charter of the Kestrel with a major Mexican contractor that commenced during the fourth quarter 2012 will keep the vessel booked through the third quarter 2014. In West Africa we completed a diving project for a major international contractor in the first quarter 2013. An additional project scheduled for the first and second quarters 2013 was canceled due to a change in the customer's project plans, but we continue to actively bid for work in the region. In Australia, diving activity remained at high levels throughout the quarter. Two of our three dive support vessels are booked on contracts that should keep them utilized through the remainder of 2013. Our international outlook remains positive.

Our consolidated revenue mix for the quarter ended March 31, 2013 was 73% international revenue and 27% domestic revenue. This compares to a revenue mix for the quarter ended March 31, 2012 of 49% international revenue and 51% domestic revenue. Our international revenue is expected to continue to be more than 50% of consolidated revenues as we continue to implement our strategy to increase our international presence.


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Backlog

As of March 31, 2013, our backlog supported by written agreements or contract awards totaled approximately $221 million, compared to approximately $172 million as of December 31, 2012 and $260 million at March 31, 2012. Of the backlog as of March 31, 2013, 85% is expected to be performed during 2013, with the remainder expected to be performed in 2014 and beyond. Of the backlog at March 31, 2013, approximately $168 million relates to international projects with the remainder relating to projects in the U.S. Gulf of Mexico. The contracts included in our backlog 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 a key performance metric for our business.
Utilization is a strong indicator of demand for our vessels and, as a result, the contract rates we may charge for our services. As a marine contractor with a continuing presence in the Gulf of Mexico, our vessel utilization is typically suppressed 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 preventative maintenance programs during this period. From time to time, we temporarily remove from service certain vessels based on current market conditions. The bid and award process during the first two quarters typically leads to the commencement of construction activities during the second and third quarters.

A significant portion of our international revenues, particularly in the Southeast Asia and Australia regions, are derived from our provision of diving services without the use of Company-owned vessels. For example, we provide surface diving services from third party vessels or structures, and we provide saturation diving services from our portable saturation diving systems placed on chartered vessels, the customer's vessel or other third party vessels, and in some cases from a third party portable saturation diving system. As a result, we may realize additional revenues in these international regions that will not be reflected in our utilization rates.

The following table shows the effective utilization of our vessels during the three months ended March 31, 2013 and 2012:

                                                                      Three Months Ended March 31,
                                                                     2013                     2012
                                                               Utilization (1)           Utilization (1)
Saturation Diving                                                       50%                       52%
Surface and Mixed Gas
Diving                                                                  22%                       23%
Construction Barges                                                      6%                       20%
Entire Fleet                                                            24%                       28%

(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, including those temporarily removed from service, but excluding vessels permanently removed from service or while in drydock.



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Results of Operations

Revenues

                     Three Months Ended March 31,            Increase/(Decrease)
                       2013                2012                  2013 to 2012
                            (in thousands)                 (in thousands, except %)
       Revenues     $      80,919       $      60,017       $        20,902       35%


The $20.9 million, or 35%, increase in revenues over first quarter 2012 is primarily attributable to the Uncle John working for almost the entire quarter in 2013 compared to no utilization during the same quarter last year, higher revenue in Australia from a large lump sum project, and higher revenues in West Africa (as we did not commence operations in this region until the second half of 2012). Also, our revenues for the first quarter last year were negatively affected by the regulatory drydock of our three most profitable assets, including the Uncle John.

Gross loss

                      Three Months Ended March 31,           Increase/(Decrease)
                         2013               2012                 2013 to 2012
                             (in thousands)                (in thousands, except %)
       Gross loss     $      (11,517 )     $  (16,420 )     $       4,903         30%


Gross loss improved $4.9 million, or 30%, primarily due to high utilization on the Uncle John and from the bareboat charter of the Kestrel in Mexico. Both of these vessels had no utilization during the first quarter 2012. Partially offsetting this improvement was the deterioration in utilization and pricing of our domestic diving vessels and a loss incurred on a lump sum project in Australia.

General and administrative expenses

                                                      Three Months Ended March 31,             Increase/(Decrease)
                                                        2013                2012                   2013 to 2012
                                                             (in thousands)                  (in thousands, except %)
General and administrative
expenses                                             $      11,909       $      13,492        $     (1,583)       (12)%
General and administrative expenses as a
percentage of revenues                                         15%                  22%                (7)%       (32)%


General and administrative expenses decreased $1.6 million, or 12%, from first quarter 2012 due to our cost savings initiatives, including headcount reductions in 2012.

Asset Impairment

                                                      Three Months Ended March 31,               Increase/(Decrease)
                                                      2013                  2012                    2013 to 2012
                                                             (in thousands)                   (in thousands, except %)
Asset
impairment                                           $       125         $         1,351       $     (1,226 )       (91)%


During the first quarter 2013, we recorded a $0.1 million impairment charge relating to a facility that was held for sale at March 31, 2013. During the first quarter 2012, we recorded a $1.4 million impairment charge relating to a non-core asset, reducing the fair value of the asset to zero.


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Loss on sale of assets and other (income) expense, net

                                                   Three Months Ended March 31,               Increase/(Decrease)
                                                    2013                  2012                    2013 to 2012
                                                          (in thousands)                    (in thousands, except %)
Loss on sale of
assets                                                $      20             $     189          $     (169 )        (89)%
Other (income) expense,
net                                                   $      79          $       (341 )        $      420           123%


There were no significant asset sales during the first quarter 2013. During the first quarter 2012 we sold a dive support vessel located in Southeast Asia to a third party for net proceeds of $9.9 million. We recognized a loss of $0.1 million on the sale. We prepaid a portion of our term loan with the net proceeds from this sale as required by our credit facility.

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

Interest expense

                                               Three Months Ended March 31,             Increase/(Decrease)
                                                 2013                2012                   2013 to 2012
                                                      (in thousands)                  (in thousands, except %)
Interest expense,
net                                           $       4,632       $       2,300       $       2,332          101%
Interest expense - adjustment to
conversion feature of convertible debt        $          63       $           -       $          63          100%


The increase in interest expense, net for the three months ended March 31, 2013 from the same period in 2012 is primarily due to the accretion of the debt discount related to our convertible debt issued during the third quarter 2012 through interest expense over the term of the Notes. Additionally, interest expense increased due to a higher applicable margin on our variable interest rate debt and an increase in the average amount outstanding on our revolving credit facility during the first quarter 2013. Cash paid for interest was $4.0 million and $2.5 million for the three months ended March 31, 2013 and 2012, respectively.

During the first quarter 2013, we recorded a $0.1 million pre-tax charge for the marked-to-market adjustment of the fair value of our derivative liability related to the conversion feature of the Notes. The adjustment reflects a slight increase in our stock price during the period offset by a decrease in yields.

Income tax benefit

                                                   Three Months Ended March 31,             Increase/(Decrease)
                                                     2013                2012                   2013 to 2012
                                                          (in thousands)                  (in thousands, except %)
Income tax
benefit                                           $      (9,319 )     $      (8,389 )     $       930            11%


Our effective tax benefit rate was 32.9% and 25.1% for the three months ended March 31, 2013 and 2012, respectively. The effective tax benefit rate for the first quarter 2013 differs from the statutory rate primarily due to the mix of pre-tax profit or loss between U.S. and international taxing jurisdictions with varying statutory rates. The effective tax benefit rate for the three months ended March 31, 2012 differs from the statutory rate primarily due to a one-time change in the management structure of certain foreign operations and the transfer pricing agreements between the U.S. and certain foreign subsidiaries.


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Loss attributable to Cal Dive

                                                Three Months Ended March 31,             Increase/(Decrease)
                                                   2013                 2012                2013 to 2012
                                                       (in thousands)                 (in thousands, except %)
Loss attributable to Cal
Dive                                            $      (17,650 )     $  (24,305 )     $       6,655            27%
Weighted average diluted shares outstanding             93,732           92,677               1,055             1%
Diluted loss per
share                                           $        (0.19 )     $    (0.26 )     $        0.07            27%


The loss for the three months ended March 31, 2013 decreased from the same period ended March 31, 2012 by $6.7 million, or 27%, and diluted loss per share decreased, as a result of the factors described above.

Liquidity and Capital Resources

We require capital to fund ongoing operations and organic growth initiatives, and to pursue joint ventures or acquisitions. Also, our larger international contracts sometimes require upfront procurement of materials. Our primary sources of liquidity are cash flows from our operations, available cash and cash equivalents and borrowing 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.

We expect to be able to fund our activities for the next 12 months with cash flows generated from our operations, available cash and cash equivalents and available borrowings under our revolving credit facility. However, our liquidity to fund our business activities and achieve our near-term and long-term objectives continues to be affected by challenging market conditions.
Due to our reliance on our revolving credit facility, if these unfavorable market conditions continued for an extended period, they could have a more direct and adverse impact on our liquidity position.

At March 31, 2013, we had total debt outstanding of $160.4 million including the principal balance under a term loan, outstanding borrowings under a revolving credit facility, and the principal amount of the Notes, and we had $11.1 million of cash on hand. We have no significant debt maturities during 2013.

Subsequent to March 31, 2013, we sold a shore-based facility in Louisiana that was held for sale for net proceeds of $6.1 million and we sold certain dive equipment for $3.4 million, receiving net proceeds of $1.7 million, representing the first installment of the purchase price, in April with the remainder expected to be received before the end of 2013. These net proceeds were used to repay a portion of the term loan, leaving a remaining balance of $33.7 million.
Additionally, we have classified certain non-core assets as held for sale at March 31, 2013. We intend to use the net proceeds from the sale of these assets to repay debt under the Credit Agreement.

Credit Facility

We have a Credit Agreement providing for a senior secured credit facility, consisting of a variable-interest term loan and a variable-interest $125 million revolving credit facility, with certain financial institutions, which matures on April 26, 2016. At March 31, 2013, we had outstanding term loan debt of $41.5 million and at April 30, 2013, after prepayments in April 2013, we had a term loan balance of $33.7 million, including current maturities. The quarterly principal payments on the balance of the term loan are $1.0 million for the remaining term of the Credit Agreement. A final payment on the term loan of approximately $21.7 million will be due at maturity on April 26, 2016. Pursuant to the terms of the Credit Agreement, the required quarterly principal payments may be reduced based on the pro-rata prepayment of the term loan. We may prepay all or any portion of the outstanding balance of the term loan without prepayment penalty.

At March 31, 2013, we had $32.7 million borrowed and $13.8 million of letters of credit issued and outstanding under our revolving credit facility. At March 31, 2013, we had $78.5 million available for borrowing under our revolving credit facility. The availability under our revolving credit facility is reduced by outstanding borrowings and letters of credit, and can be limited by our consolidated leverage (debt to earnings before interest, income taxes and depreciation and amortization (or "EBITDA") as defined in the Credit Agreement) ratio covenant at each quarter end and by our collateral coverage sublimit.
However, our revolver is not otherwise restricted during the year provided we are in compliance with existing financial covenants. We may borrow from or repay the revolving credit facility as business needs merit.

At March 31, 2013, we were in compliance with all debt covenants under our Credit Agreement.


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Convertible Notes

The Notes bear interest at a rate of 5.0% per year, payable semi-annually in arrears on January 15 and July 15 of each year, which payments commenced January 15, 2013, and mature on July 15, 2017.

We may not redeem the Notes prior to the maturity date. Prior to April 15, 2017, holders may not convert their Notes (all or a portion thereof) except under certain circumstances. These circumstances, as set forth in the indenture governing the Notes, relate to (i) the price of our common stock; (ii) the price of the Notes; or (iii) upon the occurrence of specified corporate events. On and after April 15, 2017 until the maturity date, holders may convert all or a portion of their Notes at any time. Upon conversion of a Note, we will pay or deliver, at our election, cash, shares of our common stock or a combination thereof, based on an initial conversion rate of 445.6328 shares of our common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $2.24 per share of our common stock). Upon the occurrence of certain fundamental changes, holders of the Notes will have the right to require us to purchase all or a portion of their Notes for cash at a price equal to 100% of the principal amount of such Notes, plus any accrued and unpaid interest. Upon the occurrence of certain significant corporate transactions, holders who convert their Notes in connection with a change of control may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, the Notes contain certain events of default as set forth in the indenture. As of March 31, 2013, none of the conditions allowing holders of the Notes to convert, or requiring us to repurchase the Notes, had been met. Our intent is to repay the principal amount of the Notes in cash and the conversion feature in shares of our common stock. In the event of a conversion of the Notes prior to our obtaining stockholder approval of the issuance of shares of our common stock in excess of the NYSE 19.99% limitation, we will be required to pay cash to converting holders in lieu of delivering shares of our common stock in excess of such limitation.

Capital Expenditures

During the quarter ended March 31, 2013, we incurred $1.7 million for equipment purchases, improvements and replacements and $2.2 million for regulatory drydock costs. For 2013, we expect capital expenditures, excluding acquisitions or investments in joint ventures, to approximate $30 million, primarily related to expenditures for asset maintenance such as regulatory drydock costs. Our capital expenditure program for 2013 is subject to market conditions, including activity levels, commodity prices and industry capacity. We currently anticipate funding our 2013 capital expenditures through a combination of cash on hand and borrowings under our revolving credit facility.

Cash Flows

Our cash flows depend on the level of spending by oil and natural gas companies
for marine contracting services. Certain sources and uses of cash, such as the
level of discretionary capital expenditures, issuance and repurchases of debt
and our common stock, are within our control and are adjusted as necessary based
on market conditions.  The following is a discussion of our cash flows for the
three months ended March 31, 2013 and 2012.

                                                                              Three Months Ended
                                                                                  March 31,
                                                                             2013            2012
Net cash provided by (used in):
Operating                                                                 $     3,519     $  (20,686 )
activities
Investing                                                                      (1,081 )       (5,671 )
activities
Financing                                                                         297         20,000
activities
Effect of exchange rate changes on cash and cash equivalents                      (28 )            2
Net increase (decrease) in cash and cash                                  $     2,707     $   (6,355 )
equivalents


Operating Activities. Net cash provided by operating activities totaled $3.5 million for the three months ended March 31, 2013 compared to net cash used of $20.7 million for the three months ended March 31, 2012. Net cash provided for the first quarter 2013 was primarily due to the receipt of a $7.1 million tax refund related to the 2012 tax year offset by our first quarter loss adjusted for non-cash items, such as depreciation and amortization and stock-based compensation, as well as changes in working capital.


Table of Contents

Investing Activities. Net cash used for investing activities was $1.1 million for the three months ended March 31, 2013 compared to $5.7 million for the three months ended March 31, 2012. During the three months ended March 31, 2013 and 2012, cash paid for capital expenditures was $1.1 million and $15.7 million, respectively. For the first quarter 2012, we received cash proceeds of $10.1 million primarily from the sale of a dive support vessel. . . .

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