Company Quick10K Filing
Quick10K
Helix Energy Solutions Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$6.83 148 $1,010
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-04-25 Quarter: 2017-04-25
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-01-22 Enter Agreement, Other Events, Exhibits
8-K 2018-12-14 Officers, Exhibits
8-K 2018-10-22 Earnings, Regulation FD, Exhibits
8-K 2018-08-21 Officers
8-K 2018-07-23 Earnings, Regulation FD, Exhibits
8-K 2018-05-10 Shareholder Vote
8-K 2018-04-23 Earnings, Regulation FD, Exhibits
8-K 2018-03-20 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-03-13 Enter Agreement, Exhibits
8-K 2018-03-02 Regulation FD, Exhibits
8-K 2018-02-20 Earnings, Regulation FD, Exhibits
PUMP Propetro Holding
FI Frank's
SEMG SemGroup
CJ C&J Energy Services
NESR National Energy Services Reunited
QES Quintana Energy Services
BAS Basic Energy Services
CCLP CSI Compressco
KEG Key Energy Services
RCON Recon Technology
HLX 2018-09-30
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation and New Accounting Standards
Note 2 - Company Overview
Note 3 - Details of Certain Accounts
Note 4 - Statement of Cash Flow Information
Note 5 - Equity Investments
Note 6 - Long-Term Debt
Note 7 - Income Taxes
Note 8 - Shareholders' Equity
Note 9 - Revenue From Contracts with Customers
Note 10 - Earnings per Share
Note 11 - Employee Benefit Plans
Note 12 - Business Segment Information
Note 13 - Commitments and Contingencies and Other Matters
Note 14 - Fair Value Measurements
Note 15 - Derivative Instruments and Hedging Activities
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 hlx09302018-ex311.htm
EX-31.2 hlx09302018-ex312.htm
EX-32.1 hlx09302018-ex321.htm

Helix Energy Solutions Group Earnings 2018-09-30

HLX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 hlx09302018-10q.htm HELIX ENERGY SOLUTIONS GROUP, INC. 3Q18 FORM 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
þ
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
or
¨
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from__________ to__________
Commission File Number 001-32936
logo.jpg
 
HELIX ENERGY SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction
of incorporation or organization)
 
95–3409686
(I.R.S. Employer
Identification No.)
  
 
 
3505 West Sam Houston Parkway North, Suite 400 
Houston, Texas
(Address of principal executive offices)
 
 
77043
(Zip Code)
 
(281) 618–0400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
 
 
(Do not check if a smaller reporting company)
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
As of October 19, 2018, 148,152,672 shares of common stock were outstanding.
 




TABLE OF CONTENTS
PART I.
 
FINANCIAL INFORMATION
PAGE
 
 
 
 
Item 1.
 
Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
 
OTHER INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 

2



PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
September 30,
2018
 
December 31,
2017
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
325,092

 
$
266,592

Accounts receivable:
 
 
 
Trade, net of allowance for uncollectible accounts of $2,752
91,001

 
113,336

Unbilled and other
66,396

 
29,947

Other current assets
47,450

 
41,768

Total current assets
529,939

 
451,643

Property and equipment
2,727,760

 
2,695,772

Less accumulated depreciation
(956,209
)
 
(889,783
)
Property and equipment, net
1,771,551

 
1,805,989

Other assets, net
76,985

 
105,205

Total assets
$
2,378,475

 
$
2,362,837

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
62,844

 
$
81,299

Accrued liabilities
84,431

 
71,680

Income tax payable
5,859

 
2,799

Current maturities of long-term debt
46,784

 
109,861

Total current liabilities
199,918

 
265,639

Long-term debt
401,265

 
385,766

Deferred tax liabilities
102,742

 
103,349

Other non-current liabilities
42,382

 
40,690

Total liabilities
746,307

 
795,444

 


 


Shareholders equity:
 
 
 
Common stock, no par, 240,000 shares authorized, 148,147 and 147,740 shares issued, respectively
1,306,703

 
1,284,274

Retained earnings
396,781

 
352,906

Accumulated other comprehensive loss
(71,316
)
 
(69,787
)
Total shareholders equity
1,632,168

 
1,567,393

Total liabilities and shareholders equity
$
2,378,475

 
$
2,362,837

The accompanying notes are an integral part of these condensed consolidated financial statements.

3



HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts) 
 
Three Months Ended
September 30,
 
2018
 
2017
 
 
 
 
Net revenues
$
212,575

 
$
163,260

Cost of sales
160,582

 
142,119

Gross profit
51,993

 
21,141

Gain on disposition of assets, net
146

 

Selling, general and administrative expenses
(20,762
)
 
(16,374
)
Income from operations
31,377

 
4,767

Equity in losses of investment
(107
)
 
(153
)
Net interest expense
(3,249
)
 
(3,615
)
Loss on extinguishment of long-term debt
(2
)
 

Other expense, net
(709
)
 
(551
)
Other income – oil and gas
652

 
303

Income before income taxes
27,962

 
751

Income tax provision (benefit)
841

 
(1,539
)
Net income
$
27,121

 
$
2,290

 
 
 
 
Earnings per share of common stock:
 
 
 
Basic
$
0.18

 
$
0.02

Diluted
$
0.18

 
$
0.02

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
146,700

 
145,958

Diluted
146,964

 
145,958

The accompanying notes are an integral part of these condensed consolidated financial statements.

4



HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts) 
 
Nine Months Ended
September 30,
 
2018
 
2017
 
 
 
 
Net revenues
$
581,462

 
$
418,117

Cost of sales
473,589

 
379,434

Gross profit
107,873

 
38,683

Gain (loss) on disposition of assets, net
146

 
(39
)
Selling, general and administrative expenses
(52,986
)
 
(46,532
)
Income (loss) from operations
55,033

 
(7,888
)
Equity in losses of investment
(378
)
 
(457
)
Net interest expense
(10,744
)
 
(15,480
)
Loss on extinguishment of long-term debt
(1,183
)
 
(397
)
Other expense, net
(3,225
)
 
(619
)
Other income – oil and gas
4,068

 
3,196

Income (loss) before income taxes
43,571

 
(21,645
)
Income tax provision (benefit)
1,226

 
(1,117
)
Net income (loss)
$
42,345

 
$
(20,528
)
 
 
 
 
Earnings (loss) per share of common stock:
 
 
 
Basic
$
0.29

 
$
(0.14
)
Diluted
$
0.29

 
$
(0.14
)
 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
146,679

 
145,057

Diluted
146,761

 
145,057

The accompanying notes are an integral part of these condensed consolidated financial statements.

5



HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)
 
Three Months Ended
September 30,
 
2018
 
2017
 
 
 
 
Net income
$
27,121

 
$
2,290

Other comprehensive income (loss), net of tax:
 
 
 
Net unrealized gain (loss) on hedges arising during the period
(88
)
 
2,297

Reclassifications to net income
1,799

 
3,383

Income taxes on hedges
(357
)
 
(1,992
)
Net change in hedges, net of tax
1,354

 
3,688

Foreign currency translation gain (loss)
(1,421
)
 
5,513

Other comprehensive income (loss), net of tax
(67
)
 
9,201

Comprehensive income
$
27,054

 
$
11,491

 
Nine Months Ended
September 30,
 
2018
 
2017
 
 
 
 
Net income (loss)
$
42,345

 
$
(20,528
)
Other comprehensive income, net of tax:
 
 
 
Net unrealized gain on hedges arising during the period
839

 
4,141

Reclassifications to net income (loss)
5,233

 
10,822

Income taxes on hedges
(1,298
)
 
(5,256
)
Net change in hedges, net of tax
4,774

 
9,707

Unrealized loss on note receivable arising during the period
(629
)
 

Income taxes on note receivable
132

 

Unrealized loss on note receivable, net of tax
(497
)
 

Foreign currency translation gain (loss)
(4,277
)
 
14,905

Other comprehensive income, net of tax

 
24,612

Comprehensive income
$
42,345

 
$
4,084

The accompanying notes are an integral part of these condensed consolidated financial statements.

6



HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands) 
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
42,345

 
$
(20,528
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
83,339

 
82,670

Amortization of debt discount
4,238

 
3,487

Amortization of debt issuance costs
2,703

 
5,238

Share-based compensation
7,569

 
7,613

Deferred income taxes
(5,716
)
 
(3,019
)
Equity in losses of investment
378

 
457

(Gain) loss on disposition of assets, net
(146
)
 
39

Loss on extinguishment of long-term debt
1,183

 
397

Unrealized gain on derivative contracts, net
(2,289
)
 
(4,291
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(15,769
)
 
(21,709
)
Other current assets
(5,662
)
 
(12,145
)
Income tax payable
2,963

 
2,742

Accounts payable and accrued liabilities
6,968

 
30,675

Other non-current, net
28,723

 
(40,303
)
Net cash provided by operating activities
150,827

 
31,323

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(55,431
)
 
(131,428
)
Proceeds from sale of assets
25

 
10,000

Net cash used in investing activities
(55,406
)
 
(121,428
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuance of Convertible Senior Notes due 2023
125,000

 

Repurchase of Convertible Senior Notes due 2032
(60,365
)
 

Proceeds from term loan

 
100,000

Repayment of term loan
(62,872
)
 
(193,508
)
Repayment of Nordea Q5000 Loan
(26,786
)
 
(26,786
)
Repayment of MARAD Debt
(6,532
)
 
(6,222
)
Debt issuance costs
(3,867
)
 
(3,694
)
Net proceeds from issuance of common stock

 
219,504

Payments related to tax withholding for share-based compensation
(1,058
)
 
(1,306
)
Proceeds from issuance of ESPP shares
506

 
432

Net cash provided by (used in) financing activities
(35,974
)
 
88,420

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(947
)
 
1,927

Net increase in cash and cash equivalents
58,500

 
242

Cash and cash equivalents:
 
 
 
Balance, beginning of year
266,592

 
356,647

Balance, end of period
$
325,092

 
$
356,889

The accompanying notes are an integral part of these condensed consolidated financial statements.

7



HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 — Basis of Presentation and New Accounting Standards
 
The accompanying condensed consolidated financial statements include the accounts of Helix Energy Solutions Group, Inc. and its subsidiaries (collectively, “Helix” or the “Company”). Unless the context indicates otherwise, the terms “we,” “us” and “our” in this report refer collectively to Helix and its subsidiaries. All material intercompany accounts and transactions have been eliminated. These unaudited condensed consolidated financial statements have been prepared pursuant to instructions for the Quarterly Report on Form 10-Q required to be filed with the Securities and Exchange Commission (the “SEC”) and do not include all information and footnotes normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
 
The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP in U.S. dollars and are consistent in all material respects with those applied in our 2017 Annual Report on Form 10-K (“2017 Form 10-K”). The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements and the related disclosures. Actual results may differ from our estimates. We have made all adjustments (which were normal recurring adjustments) that we believe are necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations, statements of comprehensive income (loss), and statements of cash flows, as applicable. The operating results for the three- and nine-month periods ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. Our balance sheet as of December 31, 2017 included herein has been derived from the audited balance sheet as of December 31, 2017 included in our 2017 Form 10-K. These unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto included in our 2017 Form 10-K.
 
Certain reclassifications were made to previously reported amounts in the consolidated financial statements and notes thereto to make them consistent with the current presentation format.
 
New accounting standards adopted
 
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”). The FASB also issued several subsequent updates to promote more consistent interpretation and application of the principles outlined in the standard. ASC 606 provides a five-step approach to account for revenue arising from contracts with customers in order for an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
 
We adopted ASC 606 effective January 1, 2018 using the modified retrospective method by applying the five-step model to all contracts that were not completed as of the date of adoption. For contracts that were modified before the date of adoption, we have considered the modification guidance within the new standard and determined that the revenues recognized prior to adoption for such modified contracts were not impacted. We did not record any cumulative effect adjustment to the opening balance of our retained earnings as of January 1, 2018 as the adoption of ASC 606 had an insignificant impact on our prior year earnings. On our consolidated balance sheet, contract assets that were previously presented as “Other accounts receivable” are now a component of “Other current assets.” The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. ASC 606 requires additional disclosures with regard to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We do not expect the adoption of this guidance to have a material impact on the measurement or recognition of our revenues on an ongoing basis. The impact of ASC 606 for the three- and nine-month periods ended September 30, 2018, which primarily relates to the acceleration of lump sum demobilization fees (Note 9), was as follows (in thousands): 
 

8



 
September 30, 2018
 
As
Reported
 
Pro Forma Without Adoption of ASC 606
 
Effect of Change
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Unbilled and other
$
66,396

 
$
67,263

 
$
(867
)
Other current assets
47,450

 
46,104

 
1,346

Liabilities
 
 
 
 
 
Accrued liabilities
84,431

 
84,705

 
(274
)
Deferred tax liabilities
102,742

 
102,584

 
158

Equity
 
 
 
 
 
Retained earnings
396,781

 
396,186

 
595

 
 
Three Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2018
 
As
Reported
 
Pro Forma Without Adoption of ASC 606
 
Effect of Change
 
As
Reported
 
Pro Forma Without Adoption of ASC 606
 
Effect of Change
Statement of Operations
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
212,575

 
$
212,965

 
$
(390
)
 
$
581,462

 
$
580,709

 
$
753

Income from operations
31,377

 
31,767

 
(390
)
 
55,033

 
54,280

 
753

Income before income taxes
27,962

 
28,352

 
(390
)
 
43,571

 
42,818

 
753

Income tax provision
841

 
923

 
(82
)
 
1,226

 
1,068

 
158

Net income
27,121

 
27,429

 
(308
)
 
42,345

 
41,750

 
595

 
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows a reclassification from accumulated other comprehensive income (loss) (“OCI”) to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”) that was enacted on December 22, 2017. We adopted this guidance as of January 1, 2018 by making the election to reclassify $1.5 million of net stranded tax benefits from accumulated OCI to retained earnings (Note 8). On an ongoing basis, we release the income tax effects of individual items in accumulated OCI as those items are sold or settled at the applicable statutory rate.
 
New accounting standards issued but not yet effective
 
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASC 842”). The FASB also issued several subsequent updates to provide improvements to the new guidance. ASC 842 amends the existing accounting standards for leases to increase transparency and comparability among organizations. The new guidance requires a lessee to recognize a lease right-of-use asset and related lease liability for most leases, including those classified as operating leases under current GAAP. ASC 842 also changes the definition of a lease and requires expanded quantitative and qualitative disclosures for both lessees and lessors. We are in the process of implementing ASC 842. We have accumulated our lease contracts and are aggregating them into a lease software platform. We are also assessing non-lease contracts for inclusion of embedded leases, updating our policies and controls and establishing appropriate presentation and disclosure changes resulting from the new guidance. While our implementation plan is still ongoing, management’s assessment based on our current portfolio of leases, including vessel charters, is that our assets and liabilities will increase by a significant amount as we recognize right-of-use assets and lease liabilities on our balance sheet upon our adoption of ASC 842. We do not expect the new guidance to have any significant impact on our earnings or cash flows. We will adopt ASC 842 by applying the new guidance in the first quarter of 2019 and recognizing a cumulative-effect adjustment to the opening balance of retained earnings.
 
We do not expect any other recent accounting standards to have a material impact on our financial position, results of operations or cash flows.

9



Note 2 — Company Overview
 
We are an international offshore energy services company that provides specialty services to the offshore energy industry with a focus on well intervention and robotics operations. We seek to provide services and methodologies that we believe are critical to maximizing production economics. We provide services primarily in deepwater in the U.S. Gulf of Mexico, Brazil, North Sea, Asia Pacific and West Africa regions. Our “life of field” services are segregated into three reportable business segments: Well Intervention, Robotics and Production Facilities (Note 12).
 
Our Well Intervention segment includes our vessels and/or equipment used to perform well intervention services in the U.S. Gulf of Mexico, Brazil, the North Sea and West Africa. Our Well Intervention segment also includes intervention riser systems (“IRSs”), some of which we provide on a stand-alone basis, and subsea intervention lubricators (“SILs”). Our well intervention vessels include the Q4000, the Q5000, the Seawell, the Well Enhancer and two chartered monohull vessels, the Siem Helix 1 and the Siem Helix 2. We also have a semi-submersible well intervention vessel under construction, the Q7000.
 
Our Robotics segment includes remotely operated vehicles (“ROVs”), trenchers and ROVDrills, which are designed to complement offshore construction and well intervention services, and three ROV support vessels under long-term charter: the Grand Canyon, the Grand Canyon II and the Grand Canyon III. We also utilize spot vessels as needed.
 
Our Production Facilities segment includes the Helix Producer I (the “HP I”), a ship-shaped dynamically positioned floating production vessel, and the Helix Fast Response System (the “HFRS”), which provides certain operators access to our Q4000 and HP I vessels in the event of a well control incident in the Gulf of Mexico. The HP I has been under contract to the Phoenix field operator since February 2013, currently under a fixed fee agreement through at least June 1, 2023. We are also party to an agreement providing various operators through March 31, 2019 with access to the HFRS for well control purposes. The Production Facilities segment also includes our ownership interest in Independence Hub, LLC (“Independence Hub”) (Note 5).
Note 3 — Details of Certain Accounts
 
Other current assets consist of the following (in thousands): 
 
September 30,
2018
 
December 31,
2017
 
 
 
 
Contract assets (Note 9)
$
1,346

 
$

Prepaids
13,275

 
10,102

Deferred costs (Note 9)
26,248

 
27,204

Other
6,581

 
4,462

Total other current assets
$
47,450

 
$
41,768

 
Other assets, net consist of the following (in thousands): 
 
September 30,
2018
 
December 31,
2017
 
 
 
 
Note receivable (1)
$

 
$
3,758

Prepaids
6,342

 
7,666

Deferred dry dock costs, net
8,854

 
12,368

Deferred costs (Note 9)
44,964

 
63,767

Charter fee deposit (2)
12,544

 
12,544

Other
4,281

 
5,102

Total other assets, net
$
76,985

 
$
105,205


10



(1)
The amount at December 31, 2017 reflects the fair value of a note receivable that was issued to us by a customer as part of a payment forgiveness arrangement. On July 6, 2018, a third party acquired our note receivable for $2.0 million. During the nine-month period ended September 30, 2018, we reversed a $0.6 million unrealized gain previously recorded in Accumulated OCI and recorded a $1.1 million other than temporary loss to account for the reduction in the fair value of our note receivable.
(2)
This amount deposited with the vessel owner is to be used to reduce our final charter payments for the Siem Helix 2.
 
Accrued liabilities consist of the following (in thousands): 
 
September 30,
2018
 
December 31,
2017
 
 
 
 
Accrued payroll and related benefits
$
42,496

 
$
30,685

Deferred revenue (Note 9)
13,597

 
12,609

Derivative liability (Note 15)
9,160

 
10,625

Other
19,178

 
17,761

Total accrued liabilities
$
84,431

 
$
71,680

 
Other non-current liabilities consist of the following (in thousands): 
 
September 30,
2018
 
December 31,
2017
 
 
 
 
Investee losses in excess of investment (Note 5)
$
5,965

 
$
7,567

Deferred gain on sale of property (1)
5,288

 
5,838

Deferred revenue (Note 9)
17,968

 
8,744

Derivative liability (Note 15)
1,822

 
8,150

Other
11,339

 
10,391

Total other non-current liabilities
$
42,382

 
$
40,690

(1)
Relates to the sale and lease-back in January 2016 of our office and warehouse property located in Aberdeen, Scotland. The deferred gain is amortized over the 15-year minimum lease term.
Note 4 — Statement of Cash Flow Information
 
We define cash and cash equivalents as cash and all highly liquid financial instruments with original maturities of three months or less. The following table provides supplemental cash flow information (in thousands): 
 
Nine Months Ended
September 30,
 
2018
 
2017
 
 
 
 
Interest paid, net of interest capitalized
$
6,620

 
$
9,002

Income taxes paid
4,699

 
3,967

 
Our non-cash investing activities include the acquisition of property and equipment for which payment has not been made. These non-cash capital additions totaled $8.5 million as of September 30, 2018 and $16.9 million as of December 31, 2017.

11



Note 5 — Equity Investments
 
We have a 20% ownership interest in Independence Hub that we account for using the equity method of accounting. Independence Hub owns the “Independence Hub” platform located in Mississippi Canyon Block 920 in the U.S. Gulf of Mexico in a water depth of 8,000 feet. Since we are committed to providing our pro-rata portion of the necessary level of financial support for Independence Hub to pay its obligations as they become due, we recorded liabilities of $8.2 million at September 30, 2018 and $9.8 million at December 31, 2017 for our share of the estimated obligations, net of remaining working capital. These liabilities are reflected in “Accrued liabilities” and “Other non-current liabilities” in the accompanying condensed consolidated balance sheets.
Note 6 — Long-Term Debt
 
Scheduled maturities of our long-term debt outstanding as of September 30, 2018 are as follows (in thousands):
 
Term
Loan (1)
 
2022
Notes
 
2023 Notes
 
MARAD
Debt
 
Nordea
Q5000
Loan
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Less than one year
$
4,212

 
$

 
$

 
$
6,858

 
$
35,714

 
$
46,784

One to two years
30,417

 

 

 
7,200

 
98,214

 
135,831

Two to three years

 

 

 
7,560

 

 
7,560

Three to four years

 
125,000

 

 
7,937

 

 
132,937

Four to five years

 

 
125,000

 
8,333

 

 
133,333

Over five years

 

 

 
32,580

 

 
32,580

Total debt
34,629

 
125,000

 
125,000

 
70,468

 
133,928

 
489,025

Current maturities
(4,212
)
 

 

 
(6,858
)
 
(35,714
)
 
(46,784
)
Long-term debt, less current maturities
30,417

 
125,000

 
125,000

 
63,610

 
98,214

 
442,241

Unamortized debt discount (2)

 
(11,772
)
 
(18,528
)
 

 

 
(30,300
)
Unamortized debt issuance costs (3)
(434
)
 
(1,898
)
 
(2,986
)
 
(4,147
)
 
(1,211
)
 
(10,676
)
Long-term debt
$
29,983

 
$
111,330

 
$
103,486

 
$
59,463

 
$
97,003

 
$
401,265

(1)
Term Loan borrowing pursuant to the Credit Agreement (as defined below) matures in June 2020. Scheduled principal repayments of the Term Loan have been adjusted to reflect prepayments made in March 2018.
(2)
Our Convertible Senior Notes due 2022 (the “2022 Notes”) will increase to their face amount through accretion of the debt discount through May 2022. Our Convertible Senior Notes due 2023 (the “2023 Notes”) will increase to their face amount through accretion of the debt discount through September 2023.
(3)
Debt issuance costs are amortized to interest expense over the term of the applicable debt agreement.
 
Below is a summary of certain components of our indebtedness:
 
Credit Agreement
 
On June 30, 2017, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with a group of lenders led by Bank of America, N.A. (“Bank of America”). The amended and restated credit facility is comprised of a $100 million term loan (the “Term Loan”) and a revolving credit facility (the “Revolving Credit Facility”) of up to $150 million (the “Revolving Loans”). The Revolving Credit Facility permits us to obtain letters of credit up to a sublimit of $25 million. Pursuant to the Credit Agreement, subject to existing lender participation and/or the participation of new lenders, and subject to standard conditions precedent, we may request aggregate commitments up to $100 million with respect to an increase in the Revolving Credit Facility, additional term loans, or a combination thereof. As of September 30, 2018, we had no borrowings under the Revolving Credit Facility, and our available borrowing capacity under that facility, based on the applicable leverage ratio covenant, totaled $146.7 million, net of $3.3 million of letters of credit issued under that facility.
 

12



The Term Loan and the Revolving Loans (together, the “Loans”), at our election, bear interest in relation to Bank of America’s base rate, to a LIBOR rate or a combination thereof. The Term Loan bearing interest at the base rate will bear interest at a per annum rate equal to Bank of America’s base rate plus a margin of 3.25%. The Term Loan bearing interest at a LIBOR rate will bear interest per annum at the LIBOR rate selected by us plus a margin of 4.25%. The interest rate on the Term Loan was 6.49% as of September 30, 2018. The Revolving Loans bearing interest at the base rate will bear interest at a per annum rate equal to Bank of America’s base rate plus a margin ranging from 1.75% to 3.25%. The Revolving Loans bearing interest at a LIBOR rate will bear interest per annum at the LIBOR rate selected by us plus a margin ranging from 2.75% to 4.25%. A letter of credit fee is payable by us equal to the applicable margin for LIBOR rate Loans times the daily amount available to be drawn under the applicable letter of credit. Margins on the Revolving Loans will vary in relation to the Consolidated Total Leverage Ratio (as defined below) as provided for in the Credit Agreement. We also pay a fixed commitment fee of 0.50% per annum on the unused portion of our Revolving Credit Facility.
 
The Term Loan principal is required to be repaid in quarterly installments totaling 5% in the first loan year, 10% in the second loan year and 15% in the third loan year, with a balloon payment at maturity. Installment amounts are subject to adjustment for any prepayments on the Term Loan. We may elect to prepay amounts outstanding under the Term Loan without premium or penalty, but may not reborrow any amounts prepaid. We may prepay amounts outstanding under the Revolving Credit Facility without premium or penalty and may reborrow any amounts prepaid up to the amount of the Revolving Credit Facility. The Loans mature on June 30, 2020.
 
The Credit Agreement and the other loan documents entered into in connection with the Credit Agreement include terms and conditions, including covenants, which we consider customary for this type of facility. The covenants include certain restrictions on our and our subsidiaries’ ability to grant liens, incur indebtedness, make investments, merge or consolidate, sell or transfer assets, pay dividends and make capital expenditures. In addition, the Credit Agreement obligates us to meet minimum ratios of EBITDA to interest charges (“Consolidated Interest Coverage Ratio”) and funded debt to EBITDA (“Consolidated Total Leverage Ratio”), and provided that if there are no Loans outstanding, the funded debt ratio requirement permits us to offset a certain amount of cash against the funded debt used in the calculation (“Consolidated Net Leverage Ratio”). After the Term Loan is repaid in full, if there are any Loans outstanding, including unreimbursed draws under letters of credit issued under the Revolving Credit Facility, we also are required to ensure that the ratio of our total secured indebtedness to EBITDA (“Consolidated Secured Leverage Ratio”) does not exceed a maximum permitted ratio. The Credit Agreement also obligates us to maintain certain cash levels depending on the type of indebtedness that is outstanding.
 
We may from time to time designate one or more of our foreign subsidiaries as subsidiaries not generally subject to the covenants in the Credit Agreement (the “Unrestricted Subsidiaries”). The debt and EBITDA of those Unrestricted Subsidiaries are not included in the calculations of our financial covenants, except for the debt and EBITDA of Helix Q5000 Holdings, S.a.r.l., a wholly owned subsidiary incorporated in Luxembourg (“Q5000 Holdings”). Our obligations under the Credit Agreement are guaranteed by our domestic subsidiaries (except Cal Dive I - Title XI, Inc.) and by Canyon Offshore Limited, a wholly owned Scottish subsidiary. Our obligations under the Credit Agreement, and of our subsidiary guarantors under their guarantee, are secured by (i) most of the assets of the parent company, (ii) the shares of our domestic subsidiaries (other than Cal Dive I - Title XI, Inc.) and of Canyon Offshore Limited, and (iii) most of the assets of our domestic subsidiaries (other than Cal Dive I - Title XI, Inc.) and of Canyon Offshore Limited. In addition, these obligations are secured by pledges of up to 66% of the shares of certain foreign subsidiaries.
 
In March 2018, we prepaid $61 million of the Term Loan with a portion of the net proceeds from the 2023 Notes. We recognized a $0.9 million loss to write off the related unamortized debt issuance costs, which loss is presented as “Loss on extinguishment of long-term debt” in the accompanying consolidated statement of operations.
 

13



Convertible Senior Notes Due 2022
 
On November 1, 2016, we completed the public offering and sale of our 2022 Notes in the aggregate principal amount of $125 million. The 2022 Notes bear interest at a rate of 4.25% per annum, and are payable semi-annually in arrears on November 1 and May 1 of each year, beginning on May 1, 2017. The 2022 Notes mature on May 1, 2022 unless earlier converted, redeemed or repurchased. During certain periods and subject to certain conditions, the 2022 Notes are convertible by the holders into shares of our common stock at an initial conversion rate of 71.9748 shares of our common stock per $1,000 principal amount (which represents an initial conversion price of approximately $13.89 per share of common stock), subject to adjustment in certain circumstances. We have the right and the intention to settle the principal amount of any such future conversions in cash.
 
Prior to November 1, 2019, the 2022 Notes are not redeemable. On or after November 1, 2019, if certain conditions are met, we may redeem all or any portion of the 2022 Notes at a redemption price payable in cash equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest, and a “make-whole premium” (as defined in the indenture governing the 2022 Notes). Holders of the 2022 Notes may require us to repurchase the notes following a “fundamental change” (as defined in the indenture governing the 2022 Notes).
 
The indenture governing the 2022 Notes contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee under the indenture or the holders of not less than 25% in aggregate principal amount then outstanding under the 2022 Notes may declare the entire principal amount of all the notes, and the interest accrued on such notes, if any, to be immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization relating to us or a significant subsidiary, the principal amount of the 2022 Notes together with any accrued and unpaid interest thereon will become immediately due and payable.
 
The 2022 Notes are accounted for by separating the net proceeds between long-term debt and shareholders’ equity. In connection with the issuance of the 2022 Notes, we recorded a debt discount of $16.9 million ($11.0 million net of tax) as a result of separating the equity component. The effective interest rate for the 2022 Notes is 7.3% after considering the effect of the accretion of the related debt discount that represented the equity component of the 2022 Notes at their inception. The remaining unamortized amount of the debt discount of the 2022 Notes was $11.8 million at September 30, 2018 and $13.9 million at December 31, 2017.
 
Convertible Senior Notes Due 2023
 
On March 20, 2018, we completed the public offering and sale of our 2023 Notes in the aggregate principal amount of $125 million. The net proceeds from the issuance of the 2023 Notes were approximately $121 million, after deducting the underwriters’ discounts and commissions and estimated offering expenses. We used the net proceeds from the issuance of the 2023 Notes to fund the required repurchase of $59.3 million in principal of the 2032 Notes and to prepay $61 million of our Term Loan.
 
The 2023 Notes bear interest at a rate of 4.125% per annum, and are payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2018. The 2023 Notes mature on September 15, 2023 unless earlier converted, redeemed or repurchased. During certain periods and subject to certain conditions, the 2023 Notes are convertible by the holders into shares of our common stock at an initial conversion rate of 105.6133 shares of our common stock per $1,000 principal amount (which represents an initial conversion price of approximately $9.47 per share of common stock), subject to adjustment in certain circumstances. We have the right and the intention to settle the principal amount of any such future conversions in cash.
 
Prior to March 15, 2021, the 2023 Notes are not redeemable. On or after March 15, 2021, if certain conditions are met, we may redeem all or any portion of the 2023 Notes at a redemption price payable in cash equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest, and a “make-whole premium” (as defined in the indenture governing the 2023 Notes). Holders of the 2023 Notes may require us to repurchase the notes following a “fundamental change” (as defined in the indenture governing the 2023 Notes).
 

14



The indenture governing the 2023 Notes contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee under the indenture or the holders of not less than 25% in aggregate principal amount then outstanding under the 2023 Notes may declare the entire principal amount of all the notes, and the interest accrued on such notes, if any, to be immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization relating to us or a significant subsidiary, the principal amount of the 2023 Notes together with any accrued and unpaid interest thereon will become immediately due and payable.
 
The 2023 Notes are accounted for by separating the net proceeds between long-term debt and shareholders’ equity. In connection with the issuance of the 2023 Notes, we recorded a debt discount of $20.1 million ($15.9 million net of tax) as a result of separating the equity component. The effective interest rate for the 2023 Notes is 7.8% after considering the effect of the accretion of the related debt discount that represented the equity component of the 2023 Notes at their inception. The remaining unamortized amount of the debt discount of the 2023 Notes was $18.5 million at September 30, 2018.
 
MARAD Debt
 
This U.S. government-guaranteed financing (the “MARAD Debt”), pursuant to Title XI of the Merchant Marine Act of 1936 administered by the Maritime Administration, was used to finance the construction of the Q4000. The MARAD Debt is collateralized by the Q4000 and is guaranteed 50% by us. The MARAD Debt is payable in equal semi-annual installments, matures in February 2027 and bears interest at a rate of 4.93%.
 
Nordea Credit Agreement
 
In September 2014, Q5000 Holdings entered into a credit agreement (the “Nordea Credit Agreement”) with a syndicated bank lending group for a term loan (the “Nordea Q5000 Loan”) in an amount of up to $250 million. The Nordea Q5000 Loan was funded in the amount of $250 million in April 2015 at the time the Q5000 vessel was delivered to us. The parent company of Q5000 Holdings, Helix Vessel Finance S.à r.l., also a wholly owned Luxembourg subsidiary, guaranteed the Nordea Q5000 Loan. The loan is secured by the Q5000 and its charter earnings as well as by a pledge of the shares of Q5000 Holdings. This indebtedness is non-recourse to Helix.
 
The Nordea Q5000 Loan bears interest at a LIBOR rate plus a margin of 2.5%. The Nordea Q5000 Loan matures on April 30, 2020 and is repayable in scheduled quarterly principal installments of $8.9 million with a balloon payment of $80.4 million at maturity. Q5000 Holdings may elect to prepay amounts outstanding under the Nordea Q5000 Loan without premium or penalty, but may not reborrow any amounts prepaid. Quarterly principal installments are subject to adjustment for any prepayments on this debt. In June 2015, we entered into various interest rate swap contracts to fix the one-month LIBOR rate on a portion of our borrowings under the Nordea Q5000 Loan (Note 15). The total notional amount of the swaps (initially $187.5 million) decreases in proportion to the reduction in the principal amount outstanding under our Nordea Q5000 Loan. The fixed LIBOR rates are approximately 150 basis points.
 
The Nordea Credit Agreement and related loan documents include terms and conditions, including covenants and prepayment requirements, that we consider customary for this type of transaction. The covenants include restrictions on Q5000 Holdings’s ability to grant liens, incur indebtedness, make investments, merge or consolidate, sell or transfer assets, and pay dividends. In addition, the Nordea Credit Agreement obligates Q5000 Holdings to meet certain minimum financial requirements, including liquidity, consolidated debt service coverage and collateral maintenance.
 

15



Convertible Senior Notes Due 2032 
 
In March 2012, we issued $200 million of 3.25% Convertible Senior Notes which were originally scheduled to mature on March 15, 2032. In March 2018, we made a tender offer for the repurchase of the 2032 Notes outstanding on the first repurchase date as required by the indenture governing the 2032 Notes, and as a result we repurchased $59.3 million in aggregate principal amount of the 2032 Notes on March 20, 2018. The total repurchase price was $59.5 million, including $0.2 million in fees. We recognized a $0.2 million loss in connection with the repurchase of the notes. The loss is presented as “Loss on extinguishment of long-term debt” in the accompanying consolidated statement of operations. On May 4, 2018, we redeemed the remaining $0.8 million in aggregate principal amount of the 2032 Notes.
 
Other 
 
In accordance with our Credit Agreement, the 2022 Notes, the 2023 Notes, the MARAD Debt agreements and the Nordea Credit Agreement, we are required to comply with certain covenants, including certain financial ratios such as a consolidated interest coverage ratio and various leverage ratios, as well as the maintenance of minimum cash balance, net worth, working capital and debt-to-equity requirements. As of September 30, 2018, we were in compliance with these covenants.
 
The following table details the components of our net interest expense (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Interest expense
$
8,171

 
$
8,336

 
$
24,511

 
$
30,183

Interest income
(994
)
 
(792
)
 
(2,263
)
 
(2,056
)
Capitalized interest
(3,928
)
 
(3,929
)
 
(11,504
)
 
(12,647
)
Net interest expense
$
3,249

 
$
3,615

 
$
10,744

 
$
15,480

Note 7 — Income Taxes
 
On December 22, 2017, the 2017 Tax Act was enacted. The 2017 Tax Act is comprehensive tax reform legislation that contains significant changes to corporate taxation, including a permanent reduction of the corporate income tax rate from 35% to 21%, a mandatory one-time tax on un-repatriated accumulated earnings of foreign subsidiaries, a partial limitation on the deductibility of business interest expense, and a shift from U.S. taxation on worldwide income of multinational corporations to a partial territorial system (along with rules that create a new U.S. minimum tax on earnings of foreign subsidiaries).
 
We recognized the income tax effects of the 2017 Tax Act in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”), which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, to the 2017 Tax Act. SAB 118 allows for a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts. We believe the provisional amounts recorded during the fourth quarter of 2017 continue to represent a reasonable estimate of the accounting implications of the 2017 Tax Act. We did not identify any items for which the income tax effects of the 2017 Tax Act could not be reasonably estimated through September 30, 2018.
 
We believe that our recorded deferred tax assets and liabilities are reasonable. However, tax laws and regulations are subject to interpretation, and the outcomes of tax disputes are inherently uncertain; therefore, our assessments can involve a series of complex judgments about future events and rely heavily on estimates and assumptions.
 

16



Our estimated annual effective tax rate, adjusted for discrete tax items, is applied to our pretax loss for the current interim period in 2018 as we previously made the determination that a return to the annualized effective tax rate method is appropriate for 2018. A year-to-date effective tax rate method was used for recording income taxes for the comparative interim period in 2017 based on expectations that a small change in our estimated ordinary income could result in a large change in the estimated annual effective tax rate.
 
The effective tax rates for the three- and nine-month periods ended September 30, 2018 were 3.0% and 2.8%, respectively. The effective tax rates for the three- and nine-month periods ended September 30, 2017 were (204.9)% and 5.2%, respectively. The variance was primarily attributable to the earnings mix between our higher and lower tax rate jurisdictions, the reduction of the U.S. corporate income tax rate from 35% to 21% as a result of the 2017 Tax Act, and a tax charge in 2017 attributable to a change in tax position related to our foreign taxes.
 
Income taxes are provided based on the U.S. statutory rate and at the local statutory rate for each foreign jurisdiction adjusted for items that are allowed as deductions for federal and foreign income tax reporting purposes, but not for book purposes. The primary differences between the U.S. statutory rate and our effective rate are as follows: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
U.S. statutory rate
21.0
 %
 
35.0
 %
 
21.0
 %
 
35.0
 %
Foreign provision
(18.5
)
 
(241.5
)
 
(19.1
)
 
2.8

Change in tax position (1)

 

 

 
(29.3
)
Other
0.5

 
1.6

 
0.9

 
(3.3
)
Effective rate
3.0
 %
 
(204.9
)%
 
2.8
 %
 
5.2
 %
(1)
As a result of a change in tax position related to our foreign taxes, we recorded a tax charge of $6.3 million in June 2017.
Note 8 — Shareholders’ Equity
 
The components of Accumulated OCI are as follows (in thousands): 
 
September 30,
2018
 
December 31,
2017
 
 
 
 
Cumulative foreign currency translation adjustment
$
(66,966
)
 
$
(62,689
)
Net unrealized loss on hedges, net of tax (1)
(4,350
)
 
(7,507
)
Unrealized gain on note receivable, net of tax (2)

 
409

Accumulated other comprehensive loss
$
(71,316
)
 
$
(69,787
)
(1)
Relates to foreign currency hedges for the Grand Canyon II and Grand Canyon III charters as well as interest rate swap contracts for the Nordea Q5000 Loan (Note 15). Balance at September 30, 2018 was net of deferred income taxes totaling $1.1 million. Balance at December 31, 2017 was net of deferred income taxes of $4.0 million, $1.6 million of which was reclassified to retained earnings on January 1, 2018 pursuant to the adoption of ASU No. 2018-02 (Note 1).
(2)
Balance at December 31, 2017 was net of deferred income taxes of $0.2 million, $0.1 million of which was reclassified to retained earnings on January 1, 2018 pursuant to the adoption of ASU No. 2018-02 (Note 1).

17



Note 9 — Revenue from Contracts with Customers
 
We generate revenue in our Well Intervention segment by supplying the vessels, personnel, and equipment to provide well intervention services, which involve providing marine access, serving as a deployment mechanism to the subsea well, connecting to and maintaining a secure connection to the subsea well and maintaining well control through the duration of the intervention services. We also perform down-hole intervention work and provide certain engineering services. We generate revenue in our Robotics segment by operating ROVs, trenchers and ROVDrills to provide subsea construction, inspection, repair and maintenance services to oil and gas companies as well as subsea trenching and burial of pipelines and cables for the oil and gas and the renewable energy industries. We also provide integrated robotic services by supplying vessels that deploy the ROVs and trenchers. Our Production Facilities segment generates revenue by providing the personnel, vessel and equipment for oil and natural gas processing as well as well control response services.
 
Our revenues are derived from short-term and long-term service contracts with customers. Our service contracts generally contain either provisions for specific time, material and equipment charges that are billed in accordance with the terms of such contracts (dayrate contracts) or lump sum payment provisions (lump sum contracts). We record revenues net of taxes collected from customers and remitted to governmental authorities.
 
We generally account for our services under contracts with customers as a single performance obligation satisfied over time. The single performance obligation in our dayrate contracts is comprised of a series of distinct time increments in which we provide services. We do not account for activities that are immaterial or not distinct within the context of our contracts as separate performance obligations. Consideration for these activities as well as contract fulfillment activities is allocated to the single performance obligation on a systematic basis that depicts the pattern of the provision of our services to the customer.
 
The total transaction price for a contract is determined by estimating both fixed and variable consideration expected to be earned over the term of the contract. We do not generally provide significant financing to our customers and do not adjust contract consideration for the time value of money if extended payment terms are granted for less than one year. The estimated amount of variable consideration is constrained and is only included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. At the end of each reporting period, we reassess and update our estimates of variable consideration and amounts of that variable consideration that should be constrained.
 
Dayrate Contracts.  Revenues generated from dayrate contracts generally provide for payment according to the rates per day as stipulated in the contract (e.g. operating rate, standby rate, repair rate). The invoices billed to the customer are typically based on the varying rates applicable to operating status on an hourly basis. Dayrate consideration is allocated to the distinct hourly time increment to which it relates and is therefore recognized in line with the contractual rate billed for the services provided for any given hour. Similarly, revenues from contracts that stipulate a monthly rate are recognized ratably during the month.
 
Dayrate contracts also may contain fees charged to the customer for mobilizing and demobilizing equipment and personnel. Mobilization and demobilization fees are associated with contract fulfillment activities, and related revenue (subject to any constraint on estimates of variable consideration) is allocated to the single performance obligation and recognized ratably over the initial term of the contract. Mobilization fees are generally billable to the customer in the initial phase of a contract and generate contract liabilities until they are recognized as revenue. Demobilization fees are generally received at the end of the contract and generate contract assets when they are recognized as revenue prior to becoming receivables from the customer. See further discussion on contract liabilities under “Contract balances” below.
 
We receive reimbursements from our customers for the purchase of supplies, equipment, personnel services and other services provided at their request. Reimbursable revenues are variable and subject to uncertainty as the amounts received and timing thereof are dependent on factors outside of our influence. Accordingly, these revenues are constrained and not recognized until the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of the customer. We are generally considered a principal in these transactions and record the associated revenues at the gross amounts billed to the customer.
 

18



A dayrate contract modification involving an extension of the contract by adding additional days of services is generally accounted prospectively for as a separate contract, but may be accounted for as a termination of the existing contract and creation of a new contract if the consideration for the extended services does not represent their stand-alone selling prices.
 
Lump Sum Contracts.  Revenues generated from lump sum contracts are recognized over time. Revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost measure of progress for our lump sum contracts because it best depicts the progress toward satisfaction of our performance obligation, which occurs as we incur costs under those contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of cumulative costs incurred to date to the total estimated costs at completion of the performance obligation. Consideration, including lump sum mobilization and demobilization fees billed to the customer, is recorded proportionally as revenue in accordance with the cost-to-cost measure of progress. Consideration for lump sum contracts is generally due from the customer based on the achievement of milestones. As such, contract assets are generated to the extent we recognize revenues in advance of our rights to collect contract consideration and contract liabilities are generated when contract consideration due or received is greater than revenues recognized to date.
 
We review and update our contract-related estimates regularly and recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period in which the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If a current estimate of total contract costs to be incurred exceeds the estimate of total revenues to be earned, we recognize the projected loss in full when it is identified. A modification to a lump sum contract is generally accounted for as part of the existing contract and recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
 
Disaggregation of revenue
 
The following table provides information about disaggregated revenue by contract duration for the three- and nine-month periods ended September 30, 2018 (in thousands): 
 
Well Intervention
 
Robotics
 
Production Facilities
 
Intercompany Elimination (1)
 
Total Revenue
Three months ended September 30, 2018
 
 
 
 
 
 
 
 
Short-term
$
39,548

 
$
29,877

 
$

 
$

 
$
69,425

Long-term (2)
114,893

 
24,463

 
15,877

 
(12,083
)
 
143,150

Total
$
154,441

 
$
54,340

 
$
15,877

 
$
(12,083
)
 
$
212,575

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
 
 
 
 
 
 
 
Short-term
$
143,510

 
$
74,050

 
$

 
$

 
$
217,560

Long-term (2)
302,259

 
46,519

 
48,541

 
(33,417
)
 
363,902

Total
$
445,769

 
$
120,569

 
$
48,541

 
$
(33,417
)
 
$
581,462

(1)
Intercompany revenues between Robotics and Well Intervention are under agreements that are considered long-term.
(2)
Contracts are classified as long-term if all or part of the contract is to be performed over a period extending beyond 12 months from the effective date of the contract. Long-term contracts may include multi-year agreements whereby the commitment for services in any one year may be short in duration.
 

19



Contract balances
 
Accounts receivable are recognized when our right to consideration becomes unconditional. Accounts receivable that have been billed to customers are recorded as trade accounts receivable while accounts receivable that have not been billed to customers are recorded as unbilled accounts receivable.
 
Contract assets are rights to consideration in exchange for services that we have transferred to a customer when that right is conditional on our future performance. Contract assets generally consist of (i) demobilization fees recognized ratably over the contract term but invoiced upon completion of the demobilization activities and (ii) revenue recognized in excess of the amount billed to the customer for lump sum contracts when the cost-to-cost method of revenue recognition is utilized. Contract assets are reflected in “Other current assets” on the accompanying condensed consolidated balance sheet. Contract assets as of January 1, 2018 were immaterial while contract assets as of September 30, 2018 were $1.3 million. Impairment losses recognized on our accounts receivable and contract assets were immaterial for the three- and nine-month periods ended September 30, 2018.
 
Contract liabilities are obligations to provide future services to a customer for which we have already received, or have the unconditional right to receive, the consideration from the customer. Contract liabilities may consist of (i) advance payments received from customers, including upfront mobilization fees allocated to the single performance obligation and recognized ratably over the contract term and (ii) the amount billed to the customer in excess of revenue recognized for lump sum contracts when the cost-to-cost method of revenue recognition is utilized. Contract liabilities are reflected as “Deferred revenue,” a component of “Accrued liabilities” and “Other non-current liabilities” on the accompanying condensed consolidated balance sheet. Contract liabilities as of January 1, 2018 and September 30, 2018 totaled $21.4 million and $31.6 million, respectively. Revenue recognized for the three- and nine-month periods ended September 30, 2018 included $7.4 million and $10.8 million, respectively, that were included in the contract liability balance at the beginning of each period.
 
We report the net contract asset or contract liability position on a contract-by-contract basis at the end of each reporting period.

Performance obligations
 
As of September 30, 2018, $1.2 billion related to unsatisfied performance obligations was expected to be recognized as revenue in the future, with $118.0 million in 2018, $437.2 million in 2019 and $666.5 million in 2020 and thereafter. These amounts included fixed consideration and estimated variable consideration for both wholly and partially unsatisfied performance obligations, including mobilization and demobilization fees. These amounts are derived from the specific terms within our contracts, and the expected timing for revenue recognition is based on the estimated start date and duration of each contract according to the information known at September 30, 2018.
 
For the three- and nine-month periods ended September 30, 2018, revenues recognized from performance obligations satisfied (or partially satisfied) in previous periods were immaterial.
 
Contract costs
 
Contract costs consist of costs incurred in fulfilling a contract with a customer. Our contract costs primarily relate to costs incurred for mobilization of personnel and equipment at the beginning of a contract and costs incurred for demobilization at the end of a contract. Mobilization costs are deferred and amortized ratably over the contract term (including anticipated contract extensions) based on the pattern of the provision of services to which these contract costs relate. Demobilization costs are recognized when incurred at the end of the contract. Deferred contract costs are reflected as “Deferred costs,” a component of “Other current assets” and “Other assets, net” on the accompanying condensed consolidated balance sheet. Our deferred contract costs totaled $71.2 million as of September 30, 2018. For the three- and nine-month periods ended September 30, 2018, we recorded $8.5 million and $25.6 million, respectively, related to amortization of deferred contract costs existing at the beginning of each period and there were no associated impairment losses.

20



Note 10 — Earnings Per Share
 
We have shares of restricted stock issued and outstanding that are currently unvested. Holders of shares of unvested restricted stock are entitled to the same liquidation and dividend rights as the holders of our unrestricted common stock and the shares of restricted stock are thus considered participating securities. Under applicable accounting guidance, the undistributed earnings for each period are allocated based on the participation rights of both common shareholders and the holders of any participating securities as if earnings for the respective periods had been distributed. Because both the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, we are required to compute earnings per share (“EPS”) under the two class method in periods in which we have earnings. For periods in which we have a net loss we do not use the two class method as holders of our restricted shares are not obligated to share in such losses.
 
The presentation of basic EPS amounts on the face of the accompanying condensed consolidated statements of operations is computed by dividing net income or loss by the weighted average shares of our common stock outstanding. The calculation of diluted EPS is similar to that for basic EPS, except that the denominator includes dilutive common stock equivalents and the numerator excludes the effects of dilutive common stock equivalents, if any. The computations of the numerator (income) and denominator (shares) to derive the basic and diluted EPS amounts presented on the face of the accompanying condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2018 are as follows (in thousands): 
 
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
 
Income
 
Shares
 
Income
 
Shares
Basic:
 
 
 
 
 
 
 
Net income
$
27,121

 
 
 
$
2,290

 
 
Less: Undistributed earnings allocated to participating securities
(260
)
 
 
 
(27
)
 
 
Undistributed earnings allocated to common shares
$
26,861

 
146,700

 
$
2,263

 
145,958

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Undistributed earnings allocated to common shares
$
26,861

 
146,700

 
$
2,263

 
145,958

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based awards other than participating securities

 
264

 

 

Undistributed earnings reallocated to participating securities

 

 

 

Net income
$
26,861

 
146,964

 
$
2,263

 
145,958

 

21



 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
 
Income
 
Shares
 
Income
 
Shares
Basic:
 
 
 
 
 
 
 
Net income (loss)
$
42,345

 
 
 
$
(20,528
)
 
 
Less: Undistributed earnings allocated to participating securities
(407
)
 
 
 

 
 
Undistributed earnings allocated to common shares
$
41,938

 
146,679

 
$
(20,528
)
 
145,057

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Undistributed earnings allocated to common shares
$
41,938

 
146,679

 
$
(20,528
)
 
145,057

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based awards other than participating securities

 
82

 

 

Undistributed earnings reallocated to participating securities

 

 

 

Net income (loss)
$
41,938

 
146,761

 
$
(20,528
)
 
145,057

 
We had a net loss for the nine-month period ended September 30, 2017. Accordingly, our diluted EPS calculation for this period was equivalent to our basic EPS calculation since diluted EPS excluded any assumed exercise or conversion of common stock equivalents. These common stock equivalents were excluded because they were deemed to be anti-dilutive, meaning their inclusion would have reduced the reported net loss per share in the applicable period. Shares that otherwise would have been included in the diluted per share calculations assuming we had earnings are as follows (in thousands): 
 
 
Nine Months Ended
 
 
September 30, 2017
 
 
 
Diluted shares (as reported)
 
145,057

Share-based awards
 
364

Total
 
145,421

 
In addition, the following potentially dilutive shares related to the 2022 Notes, the 2023 Notes and the 2032 Notes were excluded from the diluted EPS calculation because we have the right and the intention to settle any such future conversions in cash (Note 6) (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
2022 Notes
8,997

 
8,997

 
8,997

 
8,997

2023 Notes
13,202

 

 
9,381

 

2032 Notes (1)

 
2,403

 
701

 
2,403

(1)
The 2032 Notes were fully redeemed in May 2018.

22



Note 11 — Employee Benefit Plans
 
Long-Term Incentive Plan 
 
As of September 30, 2018, there were 1.8 million shares of our common stock available for issuance under our long-term incentive plan, the 2005 Long-Term Incentive Plan, as amended and restated January 1, 2017 (the “2005 Incentive Plan”). During the nine-month period ended September 30, 2018, the following grants of share-based awards were made under the 2005 Incentive Plan: 
Date of Grant
 
 
Shares / Units
 
 
 
Grant Date
Fair Value
Per Share
 
 
Vesting Period
 
 
 
 
 
 
 
 
 
 
 
January 2, 2018 (1)
 
 
449,271

 
 
 
$
7.54

 
 
33% per year over three years
January 2, 2018 (2)
 
 
449,271

 
 
 
10.44

 
 
100% on January 2, 2021
January 2, 2018 (3)
 
 
8,247

 
 
 
7.54

 
 
100% on January 1, 2020
April 2, 2018 (3)
 
 
11,064

 
 
 
5.79

 
 
100% on January 1, 2020
July 2, 2018 (3)
 
 
6,565

 
 
 
8.33

 
 
100% on January 1, 2020
August 21, 2018 (4)
 
 
6,093

 
 
 
8.97

 
 
100% on August 21, 2019
(1)
Reflects grants of restricted stock to our executive officers.
(2)
Reflects grants of performance share units (“PSUs”) to our executive officers. The PSUs provide for an award based on the performance of our common stock over a three-year period with the maximum amount of the award being 200% of the original awarded PSUs and the minimum amount being zero. These awards when vested can only be settled in shares of our common stock.
(3)
Reflects grants of restricted stock to certain independent members of our Board of Directors (the “Board”) who have made an election to take their quarterly fees in stock in lieu of cash.
(4)
Reflects a grant of restricted stock made to a new independent member of our Board upon his joining our Board.
 
Compensation cost for restricted stock is the product of grant date fair value of each share and the number of shares granted and is recognized over the applicable vesting periods on a straight-line basis. Forfeitures are recognized as they occur. For the three- and nine-month periods ended September 30, 2018, $1.5 million and $4.5 million, respectively, were recognized as share-based compensation related to restricted stock. For the three- and nine-month periods ended September 30, 2017, $1.7 million and $5.4 million, respectively, were recognized as share-based compensation related to restricted stock.
 
The estimated fair value of PSUs is determined using a Monte Carlo simulation model. The PSUs granted in 2017 and 2018 are accounted for as equity awards whereas awards granted prior to 2017 are accounted for as liability awards. Compensation cost for PSUs that are accounted for as equity awards is measured based on the estimated grant date fair value and recognized over the vesting period on a straight-line basis. PSUs that are accounted for as liability awards are measured based on the estimated fair value at the balance sheet date and changes in fair value of the awards are recognized in earnings. Cumulative compensation cost for vested liability PSU awards equals the actual payout value upon vesting. For the three- and nine-month periods ended September 30, 2018, $6.3 million and $11.5 million, respectively, were recognized as share-based compensation related to PSUs. For the three- and nine-month periods ended September 30, 2017, $4.0 million and $5.8 million, respectively, were recognized as share-based compensation related to PSUs. The liability balance for unvested PSUs that are accounted for as liability awards was $18.8 million at September 30, 2018 and $11.1 million at December 31, 2017. We paid $0.9 million in cash to settle the 2015 PSU awards when they vested in January 2018.
 
Additionally in January 2018, we granted $5.0 million of fixed value cash awards to select management employees under the 2005 Incentive Plan. The value of these cash awards is recognized on a straight-line basis over a vesting period of three years. For the three- and nine-month periods ended September 30, 2018, $0.5 million and $1.3 million, respectively, was recognized as compensation cost.
 

23



Employee Stock Purchase Plan 
 
We have an employee stock purchase plan (the “ESPP”). The ESPP has 1.5 million shares authorized for issuance, of which 0.5 million shares were available for issuance as of September 30, 2018. The ESPP currently has a purchase limit of 130 shares per employee per purchase period.
 
For more information regarding our employee benefit plans, including our long-term incentive stock-based and cash plans and our employee stock purchase plan, see Note 11 to our 2017 Form 10-K.
Note 12 — Business Segment Information
 
We have three reportable business segments: Well Intervention, Robotics and Production Facilities. Our U.S., U.K. and Brazil well intervention operating segments are aggregated into the Well Intervention business segment for financial reporting purposes. Our Well Intervention segment includes our vessels and/or equipment used to perform well intervention services in the U.S. Gulf of Mexico, Brazil, the North Sea and West Africa. Our Well Intervention segment also includes IRSs, some of which we provide on a stand-alone basis, and SILs. Our well intervention vessels include the Q4000, the Q5000, the Seawell, the Well Enhancer and the chartered Siem Helix 1 and Siem Helix 2 vessels. Our Robotics segment includes ROVs, trenchers and ROVDrills, which are designed to complement offshore construction and well intervention services, and three ROV support vessels under long-term charter: the Grand Canyon, the Grand Canyon II and the Grand Canyon III. Our Production Facilities segment includes the HP I, the HFRS and our investment in Independence Hub that is accounted for under the equity method. All material intercompany transactions between the segments have been eliminated.
 
We evaluate our performance primarily based on operating income of each reportable segment. Certain financial data by reportable segment are summarized as follows (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net revenues —
 
 
 
 
 
 
 
Well Intervention
$
154,441

 
$
111,522

 
$
445,769

 
$
299,219

Robotics
54,340

 
47,049

 
120,569

 
102,078

Production Facilities
15,877

 
16,380

 
48,541

 
47,965

Intercompany elimination
(12,083
)
 
(11,691
)
 
(33,417
)
 
(31,145
)
Total
$
212,575

 
$
163,260

 
$
581,462

 
$
418,117

 
 
 
 
 
 
 
 
Income (loss) from operations —
 
 
 
 
 
 
 
Well Intervention
$
34,427

 
$
16,906

 
$
82,774

 
$
37,356

Robotics
5,601

 
(9,365
)
 
(12,818
)
 
(37,313
)
Production Facilities
6,694

 
7,660

 
20,919

 
20,724

Corporate and other
(15,567
)
 
(10,633
)
 
(36,507
)
 
(29,296
)
Intercompany elimination
222

 
199

 
665

 
641

Total
$
31,377

 
$
4,767

 
$
55,033

 
$
(7,888
)
 

24



Intercompany segment amounts are derived primarily from equipment and services provided to other business segments at rates consistent with those charged to third parties. Intercompany segment revenues are as follows (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Well Intervention
$
4,379

 
$
3,765

 
$
10,546

 
$
8,033

Robotics
7,704

 
7,926

 
22,871

 
23,112

Total
$
12,083

 
$
11,691

 
$
33,417

 
$
31,145

 
Segment assets are comprised of all assets attributable to each reportable segment. Corporate and other includes all assets not directly identifiable with our business segments, most notably the majority of our cash and cash equivalents. The following table reflects total assets by reportable segment (in thousands): 
 
September 30,
2018
 
December 31,
2017
 
 
 
 
Well Intervention
$
1,912,197

 
$
1,830,733

Robotics
161,079

 
179,853

Production Facilities
123,160

 
138,292

Corporate and other
182,039

 
213,959

Total
$
2,378,475

 
$
2,362,837

Note 13 — Commitments and Contingencies and Other Matters
 
Commitments
 
We have charter agreements with Siem Offshore AS for the Siem Helix 1 and Siem Helix 2 vessels used in connection with our contracts with Petrobras to perform well intervention work offshore Brazil. We have charter agreements for the Grand Canyon, Grand Canyon II and Grand Canyon III vessels for use in our robotics operations. The charter agreements expire in October 2019 for the Grand Canyon, in April 2021 for the Grand Canyon II and in May 2023 for the Grand Canyon III.
 
In September 2013, we executed a contract for the construction of a newbuild semi-submersible well intervention vessel, the Q7000, to be built to North Sea standards. Pursuant to the contract and subsequent amendments, 20% of the contract price was paid upon the signing of the contract in 2013, 20% was paid in 2016, 20% was paid in December 2017, 20% is to be paid on December 31, 2018, and 20% is to be paid upon the delivery of the vessel, which at our option can be deferred until December 31, 2019. We are also contractually committed to reimburse the shipyard for its costs in connection with the deferment of the Q7000’s delivery beyond 2017. At September 30, 2018, our total investment in the Q7000 was $323.5 million, including $207.6 million of installment payments to the shipyard. Currently, equipment is being manufactured and installed for the completion of the vessel.
 
Contingencies and Claims
 
We believe that there are currently no contingencies that would have a material adverse effect on our financial position, results of operations or cash flows.
 
Litigation
 
We are involved in various other legal proceedings, some involving claims for personal injury under the General Maritime Laws of the United States and the Jones Act based on alleged negligence. In addition, from time to time we incur other claims, such as contract and employment-related disputes, in the normal course of business.

25



Note 14 — Fair Value Measurements
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value accounting rules establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: 
 
Level 1 — Observable inputs such as quoted prices in active markets;
Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 — Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
Assets and liabilities measured at fair value are based on one or more of three valuation approaches as follows: 
 
(a)
Market Approach — Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
(b)
Cost Approach — Amount that would be required to replace the service capacity of an asset (replacement cost).
(c)
Income Approach — Techniques to convert expected future cash flows to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models).
 
Our financial instruments include cash and cash equivalents, receivables, accounts payable, long-term debt and derivative instruments. The carrying amount of cash and cash equivalents, trade and other current receivables as well as accounts payable approximates fair value due to the short-term nature of these instruments. The fair value of our derivative instruments (Note 15) and of our note receivable that is accounted for as an investment in available-for-sale debt securities (Note 3) reflects our best estimate and is based upon exchange or over-the-counter quotations whenever they are available. Quoted valuations may not be available due to location differences or terms that extend beyond the period for which quotations are available. Where quotes are not available, we utilize other valuation techniques or models to estimate market values. These modeling techniques require us to make estimations of future prices, price correlation, volatility and liquidity based on market data. Our actual results may differ from our estimates, and these differences could be positive or negative. The following tables provide additional information relating to those financial instruments measured at fair value on a recurring basis (in thousands): 
 
Fair Value Measurements at
September 30, 2018 Using
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Valuation
Approach
Assets:
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
1,535

 
$

 
$
1,535

 
(c)
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts

 
10,982

 

 
10,982

 
(c)
Total net liability
$

 
$
9,447

 
$

 
$
9,447

 
 
 

26



 
Fair Value Measurements at
December 31, 2017 Using
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Valuation
Approach
Assets:
 
 
 
 
 
 
 
 
 
Note receivable
$

 
$
3,758

 
$

 
$
3,758

 
 
Interest rate swaps

 
966

 

 
966

 
(c)
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts

 
12,467

 

 
12,467

 
(c)
Total net liability
$

 
$
7,743

 
$

 
$
7,743

 
 
 
The principal amount and estimated fair value of our long-term debt are as follows (in thousands): 
 
September 30, 2018
 
December 31, 2017
 
Principal Amount (1)
 
Fair
Value (2) (3)
 
Principal Amount (1)
 
Fair
Value (2) (3)
 
 
 
 
 
 
 
 
Term Loan (matures June 2020)
$
34,629

 
$
34,802

 
$
97,500

 
$
98,231

Nordea Q5000 Loan (matures April 2020)
133,928

 
133,510

 
160,714

 
160,111

MARAD Debt (matures February 2027)
70,468

 
74,108

 
77,000

 
82,058

2022 Notes (mature May 2022)
125,000

 
133,281

 
125,000

 
124,219

2023 Notes (mature September 2023)
125,000

 
162,031

 

 

2032 Notes (redeemed May 2018)

 

 
60,115

 
60,040

Total debt
$
489,025

 
$
537,732

 
$
520,329

 
$
524,659

(1)
Principal amount includes current maturities and excludes the related unamortized debt discount and debt issuance costs. See Note 6 for additional disclosures on our long-term debt.
(2)
The estimated fair value of the 2022 Notes, the 2023 Notes and the 2032 Notes was determined using Level 1 inputs under the market approach. The fair value of the Term Loan, the Nordea Q5000 Loan and the MARAD Debt was estimated using Level 2 fair value inputs under the market approach, which was determined using a third party evaluation of the remaining average life and outstanding principal balance of the indebtedness as compared to other obligations in the marketplace with similar terms.
(3)
The principal amount and fair value of the convertible notes are for the entire instrument inclusive of the conversion feature reported in shareholders’ equity.
Note 15 — Derivative Instruments and Hedging Activities
 
Our business is exposed to market risks associated with interest rates and foreign currency exchange rates. Our risk management activities involve the use of derivative financial instruments to hedge the impact of market risk exposure related to variable interest rates and foreign currency exchange rates. To reduce the impact of these risks on earnings and increase the predictability of our cash flows, from time to time we enter into certain derivative contracts, including interest rate swaps and foreign currency exchange contracts. All derivative instruments are reflected in the accompanying condensed consolidated balance sheets at fair value.
 
We engage solely in cash flow hedges. Hedges of cash flow exposure are entered into to hedge a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. Changes in the fair value of derivative instruments that are designated as cash flow hedges are reported in Accumulated OCI to the extent that the hedges are effective. These changes are subsequently reclassified into earnings when the hedged transactions settle. The ineffective portion of changes in the fair value of cash flow hedges is recognized immediately in earnings. In addition, any change in the fair value of a derivative instrument that does not qualify for hedge accounting is recorded in earnings in the period in which the change occurs.
 

27



For additional information regarding our accounting for derivative instruments and hedging activities, see Notes 2 and 17 to our 2017 Form 10-K.
 
Interest Rate Risk
 
From time to time, we enter into interest rate swaps to stabilize cash flows related to our long-term variable interest rate debt. In June 2015 we entered into various interest rate swap contracts to fix the interest rate on $187.5 million of our Nordea Q5000 Loan borrowings (Note 6). These swap contracts, which are settled monthly, began in June 2015 and extend through April 2020. Our interest rate swap contracts qualify for cash flow hedge accounting treatment. Changes in the fair value of interest rate swaps are reported in Accumulated OCI to the extent the swaps are effective. These changes are subsequently reclassified into earnings when the anticipated interest is recognized as interest expense. The ineffective portion of the interest rate swaps, if any, is recognized immediately in earnings within the line titled “Net interest expense.” The amount of ineffectiveness associated with our interest rate swap contracts was immaterial for all periods presented.
 
Foreign Currency Exchange Rate Risk
 
Because we operate in various regions around the world, we conduct a portion of our business in currencies other than the U.S. dollar. We enter into foreign currency exchange contracts from time to time to stabilize expected cash outflows related to our vessel charters that are denominated in foreign currencies.
 
In February 2013, we entered into similar foreign currency exchange contracts to hedge our foreign currency exposure associated with the Grand Canyon II and Grand Canyon III charter payments denominated in Norwegian kroner through July 2019 and February 2020, respectively. Unrealized losses associated with the effective portion of our foreign currency exchange contracts that qualify for hedge accounting treatment are included in our Accumulated OCI (net of tax). Changes in unrealized losses associated with the foreign currency exchange contracts that are not designated as cash flow hedges are reflected in “Other income (expense), net” in the accompanying condensed consolidated statements of operations. Hedge ineffectiveness also is reflected in “Other income (expense), net” in the accompanying condensed consolidated statements of operations. There were no gains or losses associated with hedge ineffectiveness for the three- and nine-month periods ended September 30, 2018 and 2017.
 
Quantitative Disclosures Relating to Derivative Instruments 
 
The following table presents the balance sheet location and fair value of our derivative instruments that were designated as hedging instruments (in thousands): 
 
September 30, 2018
 
December 31, 2017
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Asset Derivative Instruments:
 
 
 
 
 
 
 
Interest rate swaps
Other current assets
 
$
972

 
Other current assets
 
$
311

Interest rate swaps
Other assets, net
 
563

 
Other assets, net
 
655

 
 
 
$
1,535

 
 
 
$
966

 
 
 
 
 
 
 
 
Liability Derivative Instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
Accrued liabilities
 
$
6,235

 
Accrued liabilities
 
$
7,492

Foreign exchange contracts
Other non-current liabilities
 
729

 
Other non-current liabilities
 
4,975

 
 
 
$
6,964

 
 
 
$
12,467

 

28



The following table presents the balance sheet location and fair value of our derivative instruments that were not designated as hedging instruments (in thousands): 
 
September 30, 2018
 
December 31, 2017
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Liability Derivative Instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
Accrued liabilities
 
$
2,925

 
Accrued liabilities
 
$
3,133

Foreign exchange contracts
Other non-current liabilities
 
1,093

 
Other non-current liabilities
 
3,175

 
 
 
$
4,018

 
 
 
$
6,308

 
The following tables present the impact that derivative instruments designated as hedging instruments had on our Accumulated OCI (net of tax) and our condensed consolidated statements of operations (in thousands). We estimate that as of September 30, 2018, $4.2 million of losses in Accumulated OCI associated with our derivative instruments is expected to be reclassified into earnings within the next 12 months.
 
Unrealized Gain (Loss) Recognized in OCI
(Effective Portion)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
(164
)
 
$
2,282

 
$
(35
)
 
$
4,091

Interest rate swaps
76

 
15

 
874

 
50

 
$
(88
)
 
$
2,297

 
$
839

 
$
4,141

 
 
Location of
Gain (Loss) Reclassified from
Accumulated OCI into Earnings
 
Gain (Loss) Reclassified from
Accumulated OCI into Earnings
(Effective Portion)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Cost of sales
 
$
(1,957
)
 
$
(3,288
)
 
$
(5,538
)
 
$
(10,280
)
Interest rate swaps
Net interest expense
 
158

 
(95
)
 
305

 
(542
)
 
 
 
$
(1,799
)
 
$
(3,383
)
 
$
(5,233
)
 
$
(10,822
)
 
The following table presents the impact that derivative instruments not designated as hedging instruments had on our condensed consolidated statements of operations (in thousands): 
 
Location of Gain (Loss)
Recognized in Earnings
 
Gain (Loss) Recognized in Earnings
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other income (expense), net
 
$
(83
)
 
$
1,050

 
$
(26
)
 
$
1,531