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DVR > SEC Filings for DVR > Form 10-K on 11-Mar-2014All Recent SEC Filings

Show all filings for CAL DIVE INTERNATIONAL, INC.

Form 10-K for CAL DIVE INTERNATIONAL, INC.


11-Mar-2014

Annual Report


Item 7. 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 the notes thereto included elsewhere in this 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" and elsewhere in this annual report on Form 10-K.

Fiscal 2013 Performance

We generated a loss of $36.6 million, or $0.39 per diluted share, for the year ended December 31, 2013, which includes a $13.7 million after-tax, non-cash impairment charge related to fixed assets. This compares to a loss of $65.0 million, or $0.70 per diluted share, for the year ended December 31, 2012, which included a $19.7 million after-tax, non-cash impairment charge related to fixed assets. We generated revenues of $516.9 million during the year ended December 31, 2013, compared to revenues of $464.8 million in the year ended December 31, 2012.

The improvement in our 2013 performance over 2012 was primarily due to significantly increased activity in Mexico and the cost savings initiatives we implemented in 2012. The improvement was partially offset by deterioration in our domestic utilization and more competitive pricing for our derrick barges and dive support vessels in the U.S. Gulf of Mexico, particularly during the first half of 2013, as one of our largest domestic customers significantly curtailed its offshore spending as it completed the sale of its U.S. Gulf of Mexico OCS properties.

Market Conditions and Outlook

Internationally, revenues for 2013 increased significantly over 2012. Utilization continued to be strong in the markets we serve and bidding remains active. In Mexico, during 2013, we were awarded four large contracts by Pemex that commenced in the second quarter of 2013 and will continue through the third quarter of 2014. In addition, our two-year bareboat charter of the DSV Kestrel with a major Mexican contractor that commenced during the fourth quarter 2012 will keep the vessel utilized through the third quarter of 2014. We generated $221.2 million in revenue in Mexico in 2013 compared to $98.4 million during 2012, and we continue to bid on additional projects. Australia diving activity remained steady throughout the year, with the first and fourth quarters of 2013 (which is its summer and most active work season) producing solid results. Two of our three dive support vessels in Australia are booked on contracts that should keep them utilized through the end of 2014. In Southeast Asia, the DLB Sea Horizon had steady utilization. Our international outlook remains positive as we continue to implement our strategy of increasing our international operations.

We continued to experience a decline in both utilization and pricing during 2013 for our services on the U.S. Gulf of Mexico OCS. Capital spending by customers on new construction on the U.S. Gulf of Mexico OCS remains suppressed compared to historical levels. In addition, one of our largest domestic customers significantly curtailed spending on the U.S. Gulf of Mexico OCS in 2013 as it completed the sale of its U.S. Gulf of Mexico OCS properties. We expect the new owner of these properties to spend significant amounts of capital on these properties as it seeks to achieve a positive return on its investment. Weather disruptions occurred throughout the summer months negatively impacting our summer work season, and permitting delays postponed several decommissioning and salvage projects that we expected to occur during the year. In the current commodity price environment, the timing and amount of our customers' spending on the U.S. Gulf of Mexico OCS are difficult to predict. Moreover, our domestic customer base has significantly changed with numerous sale and purchase transactions occurring over the last several years. Although it is unclear how long the challenging market conditions will continue, we believe the intermediate and long-term outlook for our business remains favorable in domestic markets as offshore drilling in the U.S. Gulf of Mexico OCS is improving, with an increased emphasis on oil and condensates. Additionally, the permitting approval environment has improved and we anticipate increases in both new construction and decommissioning and salvage work during 2014.


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For the second consecutive year, our international revenues for 2013 were more than 50% of consolidated revenues as we continue to implement our strategy to increase our international operations. For the year ended December 31, 2013, our international revenues were 70% of our consolidated revenues, of which our revenues generated in Mexico were 43% of our consolidated revenues and our revenues from our contracts with Pemex were 37% of our consolidated revenues. The following table shows our consolidated revenue mix for the fiscal years ended December 31, 2013, 2012 and 2011:

                                            Year Ended December 31,
                                          2013          2012      2011
                 International Revenue         70%         53%       41%
                 Domestic Revenue              30%         47%       59%

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. Marine operations are typically seasonal and depend, in part, on weather conditions. Historically, we have experienced our lowest vessel utilization rates during the winter and early spring, when weather conditions are least favorable for offshore exploration, development and construction activities. 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. In addition, certain of our recent project awards in Mexico are being performed with a combination of our owned vessels and third party chartered vessels. 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 past three fiscal years:

                                     2013                 2012                 2011
                                Utilization(1)       Utilization(1)       Utilization(1)
Saturation Diving                           63%                  69%                  56%
Surface and Mixed Gas Diving                39%                  36%                  39%
Construction Barges                         24%                  35%                  25%
Entire Fleet                                40%                  44%                  39%


__________


(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 year, 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

                      Year Ended December 31,                       Increase/(Decrease)
                 2013          2012          2011           2013 to 2012           2012 to 2011
                          (in thousands)                          (in thousands, except %)
     Revenues   $ 516,958     $ 464,847     $ 479,811     $ 52,111       11%     $ (14,964 )     (3% )

Revenues for 2013 increased by $52.1 million, or 11%, compared to 2012, due to a 47% increase in international revenues primarily related to significantly higher revenues in Mexico, as well as higher revenues in Southeast Asia compared to 2012. The increase in our international revenues was partially offset by a $63.5 million, or 29%, decrease in domestic revenues due primarily to weather interruptions in the summer work season and lower utilization and a competitive pricing environment for all our domestic services.

Revenues decreased in 2012 from 2011 by $15.0 million, or 3% due to a 22% decline in domestic revenues. In the first quarter 2012, three of our largest assets were in drydock and did not generate revenue. Additionally, the DSV Kestrel was deployed on lower margin projects after completing its drydock until we successfully secured a two-year bareboat charter in Mexico during the fourth quarter 2012. This vessel was highly utilized on a higher margin project for most of 2011. The decline in domestic revenues was partially offset by an increase in international revenues, mainly due to growth in Mexico and our expansion into West Africa, with Australia revenues decreasing due to less diving activity in 2012 compared to 2011. Although total fleet utilization increased to 44% in 2012 from 39% in 2011, revenues for 2011 included a significant amount of diving activity performed from third party vessels in Australia that is not reflected in our 2011 vessel utilization.

Gross profit (loss)

                     Year Ended December 31,                            Increase/(Decrease)
                2013          2012          2011             2013 to 2012                2012 to 2011
                         (in thousands)                              (in thousands, except %)
Gross profit   $  12,056     $  (2,288 )   $  14,266     $  14,344          627%     $ (16,554 )       (116% )
(loss)

Gross profit for 2013 improved $14.3 million compared to 2012. This improvement is primarily due to increased activity in Mexico, higher utilization for the MSV Uncle John and from the bareboat charter of the DSV Kestrel in Mexico. Partially offsetting this improvement was the deterioration in utilization and a competitive pricing environment for our domestic services.

Results decreased in 2012 from 2011 by $16.6 million to a gross loss of $2.3 million. The decrease in 2012 as compared to 2011 was primarily the result of the regulatory drydock of three of our most profitable assets during the first quarter 2012, the DSV Kestrel working on lower margin projects in 2012 compared to higher utilization and margins in 2011, weather disruptions during the second quarter 2012, and an unexpected interruption in the operations of one of our largest assets which idled the vessel for almost half of the third quarter 2012. Also, profit in Australia declined with the completion of the large Gorgon project in early 2012. These declines were partially offset by increased profit in Mexico due to increased activity and in West Africa due to our expansion into the region.


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General and administrative expenses

                               Year Ended December 31,                       Increase/(Decrease)
                            2013         2012         2011          2013 to 2012            2012 to 2011
                               (in thousands, except %)                   (in thousands, except %)
General and
administrative expenses    $ 44,778     $ 52,934     $ 59,181     $ (8,156 )     (15% )   $ (6,247 )     (11% )
General and
administrative expenses
as a percentage of
revenues                         9%          11%          12%          (2% )                   (1% )

General and administrative expenses for 2013 decreased from 2012 by $8.2 million, or 15%, due to our cost savings initiatives, including headcount reductions, in 2012. Included in general and administrative expenses for 2012 are severance costs of $1.9 million related to our cost savings initiatives implemented during the third quarter 2012.

General and administrative expenses decreased in 2012 from 2011 by $6.3 million, or 11% primarily due to our cost saving initiatives, including headcount reductions during the second half of 2011, as well as lower litigation costs. During the third quarter 2012 we had further headcount reductions as part of a restructuring plan in response to challenging market conditions in the U.S. Gulf of Mexico. Included in general and administrative expenses for 2012 and 2011 are severance costs of $1.9 million and $2.5 million, respectively.

Asset impairments

                          Year Ended December 31,                       Increase/(Decrease)
                       2013         2012         2011          2013 to 2012            2012 to 2011
                               (in thousands)                        (in thousands, except %)
  Asset impairments   $ 21,010     $ 28,756     $ 38,199     $ (7,746 )     (27% )   $ (9,443 )     (25% )

During the fourth quarter 2013, we recorded a $0.8 million pre-tax, non-cash impairment charge related to an idle portable saturation diving system that we wrote down to fair market value. During the third quarter 2013, we recorded a $20.0 million pre-tax, non-cash impairment charge primarily related to four construction barges that we wrote down to fair market value. Additionally, during the first quarter 2013, we recorded a $0.1 million impairment charge relating to a facility that was held for sale and sold in April 2013.

As part of a restructuring plan to reduce costs and repay debt in response to a challenging U.S. Gulf of Mexico market, during the third and fourth quarters of 2012 we entered into a plan to sell four dive support vessels, two construction barges, four portable saturation diving systems and two facilities. In conjunction with placing these assets as held for sale, we recorded $27.4 million of pre-tax, non-cash impairment charges over the third and fourth quarters of 2012 related to the adjustment of the carrying value of these assets to their estimated fair value. During the first quarter 2012 we incurred $1.4 million in pre-tax impairment charges relating to a non-core asset, reducing the fair value of the asset to zero.

During 2011 we incurred $38.2 million of pre-tax, non-cash impairment charges related to certain fixed assets. In 2011, these impairment charges included a dive support vessel that experienced low utilization in the Southeast Asia region, and an idle shallow water pipelay barge from which most of its equipment had been removed, both of which were sold in 2012.


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

                     Year Ended December 31,                            Increase/(Decrease)
                2013          2012          2011             2013 to 2012                2012 to 2011
                         (in thousands)                              (in thousands, except %)
(Gain) on
sale of
assets and
other          $  (3,773 )   $  (3,363 )   $  (3,670 )   $     410           12%     $    (307 )         (8% )
Other
(income)
expense, net      (1,030 )        (178 )         337           852          479%           515          153%

During the fourth quarter 2013, we sold a construction barge that was held for sale for $1.3 million. We did not recognize a gain or loss on this sale. During the third quarter 2013, we sold miscellaneous equipment for a small gain. During the second quarter 2013, we sold a shore-based facility in Louisiana that was held for sale for net proceeds of $6.1 million. We did not recognize a gain or loss on this sale. During the second quarter 2013, we also sold certain dive equipment for $3.4 million, and received net proceeds of $1.7 million, representing the first installment of the purchase price, with the remainder expected to be received by mid-2014. We recorded a gain of $3.4 million on this sale. The net proceeds received from these sales were used to repay a portion of our secured term loan.

In 2012, we sold a dive support vessel, our Singapore facility and other assets, including a construction barge, and miscellaneous equipment for an aggregate of $22.0 million and we recorded a net gain on the sales of $3.4 million, including a loss of $0.1 million we recognized on the sale of the dive support vessel.

In 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 also sold our Sabine Pass facility, one of our barges that was previously damaged by fire and miscellaneous equipment to various third parties for an aggregate of $3.9 million, and we recognized a net gain on the sales of $0.5 million. During 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.

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

(Recovery of) doubtful accounts

Year Ended December 31, Increase/(Decrease) 2013 2012 2011 2013 to 2012 2012 to 2011

(in thousands) (in thousands, except %)

(Recovery of)
doubtful accounts $ - $ - $ (2,240 ) $ - - % $ 2,240 100 %

No provision for doubtful accounts was recorded during 2013, 2012 or 2011. The $2.2 million reversal of provision for doubtful accounts during 2011 related to the collection of a receivable that was previously reserved as bad debt on a West Africa project.

Interest expense

                     Year Ended December 31,                            Increase/(Decrease)
                2013          2012          2011             2013 to 2012                2012 to 2011
                         (in thousands)                              (in thousands, except %)
Interest                                                 $   6,489           44%     $   5,559           60%
expense, net   $  21,275     $  14,786     $   9,227
Interest
expense -
adjustment
to
conversion
feature of
convertible
debt              (6,362 )      (2,139 )           -        (4,223 )       (197% )      (2,139 )       (100% )


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The increase in interest expense, net for 2013 from 2012 is primarily due to the full year impact of our Convertible Notes issued during the third quarter 2012, including the accretion of the debt discount on our Convertible Notes through interest expense over the term of the Convertible Notes. Additionally, interest expense increased due to a higher applicable margin on our variable interest rate debt, interest on our Unsecured Term Loan entered into in June 2013 and an increase in the average amount outstanding on our revolving credit facility during 2013. The increase was partially offset by the reduction in the principal balance of our secured term loan under our Credit Agreement over the last two years. Cash paid for interest on our indebtedness was $11.6 million, $8.0 million and $6.7 million, for 2013, 2012 and 2011, respectively.

At our 2013 Annual Meeting on May 14, 2013, we obtained stockholder approval to issue the maximum number of shares of our common stock necessary to accommodate full conversion of the Convertible Notes, and we now have the ability to settle the conversion feature fully in shares of our common stock. As a result, after May 14, 2013, the embedded conversion feature is no longer required to be separately valued and accounted for as a derivative liability. Prior to obtaining stockholder approval, the adjustment to the conversion feature on our Convertible Notes was recorded to interest expense. The reduction of interest expense for 2013 reflects the final marked-to-market adjustment of the fair value of our derivative liability through May 14, 2013, and reflects the decrease in our stock price from January 1, 2013 through May 14, 2013.

The increase in interest expense, net in 2012 from 2011 is primarily due to the accretion of the debt discount related to our Convertible Notes through interest expense over the term of our Convertible 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 2012.

During 2013 and 2012, we recorded a $6.4 million and $2.1 million, respectively, pre-tax net gain for the marked-to-market adjustment of the fair value of our derivative liability related to the conversion feature of the Convertible Notes. The adjustment reflects the decrease in our stock price during these periods and a decrease in the yields.

Income tax expense (benefit)

                                        Year Ended December 31,                  Increase/(Decrease)
                                   2013          2012          2011        2013 to 2012      2012 to 2011
                                            (in thousands)                         (in thousands)
Income tax expense (benefit)      $ (26,250 )   $ (24,739 )   $ (19,871 )     $    (1,511 )    $     (4,868 )

Our effective tax benefit rate was 41.1%, 26.6% and 22.9%, for the years ended December 31, 2013, 2012, and 2011, respectively. The effective tax benefit rate for 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 2012 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. Additionally, we recorded a $5.2 million valuation allowance during the fourth quarter 2012 related to certain foreign tax credits and foreign losses. The effective tax benefit rate for 2011 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 as well as the recognition of a valuation allowance related to certain foreign tax credits.


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Loss attributable to Cal Dive

                         Year Ended December 31,                                       Increase/(Decrease)
                  2013                 2012           2011                2013 to 2012                         2012 to 2011
                  (in thousands, except per share data)                    (in thousands, except per share data and %)
Loss
attributable
to Cal Dive     $    (36,634 )     $    (65,029 )   $ (66,897 )    $      28,395              44%       $      1,868            3%
Weighted
average
diluted
shares
outstanding           93,827             92,751        91,742              1,076               1%              1,009            1%
Diluted loss
per share       $      (0.39 )     $      (0.70 )   $   (0.73 )    $        0.31              44%       $       0.03            4%

The loss for 2013 decreased from 2012 primarily due to significantly increased activity in Mexico and the cost saving initiatives we implemented in 2012, partially offset by deterioration in our domestic utilization and more competitive pricing for our derrick barges and dive support vessels in the U.S. Gulf of Mexico.

The loss for 2012 decreased from 2011 primarily due to the recognition of a larger impairment charge during 2011 and the benefit recorded during the third quarter 2012 for the marked-to-market adjustment of the fair value of our derivative liability related to the conversion feature of our Convertible Notes.

Liquidity and Capital Resources

We require capital to fund ongoing operations and organic growth initiatives, and to pursue acquisitions. Also, our larger international contracts typically require significant working capital. 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, 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.

Our ability to fund our business activities and achieve our near-term and long-term objectives of increasing our international operations continues to be adversely affected by liquidity constraints caused by the challenging market conditions that we have discussed elsewhere in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "- Fiscal 2013 Performance" and "- Market Conditions and Outlook". In 2013, we relied on our revolving credit facility, together with our Unsecured Term Loan, to fund a significant portion of our working capital needs. If these unfavorable market conditions continued for an extended period, they could have a more direct and adverse impact on our liquidity position, as availability under our revolving credit facility is reduced by outstanding borrowings and letters of credit, and can be limited by our consolidated leverage ratio and our collateral coverage sublimit.

Our working capital needs tend to increase during the summer months in the U.S. Gulf of Mexico as we experience a seasonal increase in activity. Additionally, our contract awards in Mexico require us to make large up-front purchases of pipe and other project materials. These contracts also contain milestone billing provisions under which we may only invoice for our work when the overall project has met certain milestones. As we continue to implement our strategy to increase our international activity, we will have increasing demands on our working capital due to these and similar requirements of the contracts typical of the international markets in which we operate. In June 2013, we obtained the Unsecured Term Loan in order to fund a portion of the working capital needed for our contract awards in Mexico. However, our ability to maintain sufficient liquidity to pursue future large international project awards could depend on an . . .

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