Company Quick10K Filing
Hornbeck Offshore Services
Price0.90 EPS-4
Shares38 P/E-0
MCap34 P/FCF-0
Net Debt1,071 EBIT-95
TEV1,106 TEV/EBIT-12
TTM 2019-09-30, in MM, except price, ratios
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-02-28
10-Q 2018-09-30 Filed 2018-11-09
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-09
10-K 2017-12-31 Filed 2018-02-28
10-Q 2017-09-30 Filed 2017-11-08
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-02-24
10-Q 2016-09-30 Filed 2016-11-09
10-Q 2016-06-30 Filed 2016-08-09
10-Q 2016-03-31 Filed 2016-05-10
10-K 2015-12-31 Filed 2016-02-26
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-08-06
10-Q 2015-03-31 Filed 2015-05-08
10-K 2014-12-31 Filed 2015-02-25
10-Q 2014-09-30 Filed 2014-11-07
10-Q 2014-06-30 Filed 2014-08-08
10-Q 2014-03-31 Filed 2014-05-09
10-K 2013-12-31 Filed 2014-02-28
10-Q 2013-09-30 Filed 2013-11-08
10-Q 2013-06-30 Filed 2013-08-09
10-Q 2013-03-31 Filed 2013-05-10
10-K 2012-12-31 Filed 2013-02-28
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-06
10-Q 2012-03-31 Filed 2012-05-07
10-K 2011-12-31 Filed 2012-02-29
10-Q 2011-09-30 Filed 2011-11-07
10-Q 2011-06-30 Filed 2011-08-09
10-Q 2011-03-31 Filed 2011-05-10
10-K 2010-12-31 Filed 2011-03-16
10-Q 2010-09-30 Filed 2010-11-09
10-Q 2010-06-30 Filed 2010-08-09
10-Q 2010-03-31 Filed 2010-05-10
10-K 2009-12-31 Filed 2010-03-01
8-K 2020-06-19
8-K 2020-05-19
8-K 2020-05-14
8-K 2020-05-13
8-K 2020-05-13
8-K 2020-04-13
8-K 2020-03-31
8-K 2020-03-21
8-K 2020-03-20
8-K 2020-03-02
8-K 2020-02-29
8-K 2020-02-14
8-K 2020-01-17
8-K 2020-01-13
8-K 2019-12-20
8-K 2019-10-30
8-K 2019-09-03
8-K 2019-08-16
8-K 2019-07-31
8-K 2019-06-28
8-K 2019-06-20
8-K 2019-05-01
8-K 2019-03-14
8-K 2019-03-01
8-K 2019-02-13
8-K 2019-02-07
8-K 2019-02-05
8-K 2019-01-22
8-K 2019-01-10
8-K 2018-12-31
8-K 2018-10-31
8-K 2018-10-02
8-K 2018-08-01
8-K 2018-06-21
8-K 2018-05-18
8-K 2018-05-02
8-K 2018-03-29
8-K 2018-02-04

HOS 10Q Quarterly Report

Part I - Financial Information
Item 1 - Financial Statements
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 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Mine Safety Disclosures
Item 5 - Other Information
Item 6 - Exhibits
EX-3.5 ex-35.htm
EX-31.1 ex311q310-q09302019.htm
EX-31.2 ex312q310-q09302019.htm
EX-32.1 ex321q310-q09302019.htm
EX-32.2 ex322q310-q09302019.htm

Hornbeck Offshore Services Earnings 2019-09-30

Balance SheetIncome StatementCash Flow
3.52.82.11.40.70.02012201420172020
Assets, Equity
0.20.10.10.0-0.0-0.12012201420172020
Rev, G Profit, Net Income
0.20.10.0-0.1-0.2-0.32012201420172020
Ops, Inv, Fin

10-Q 1 q10-q09302019.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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 001-32108
 
  Hornbeck Offshore Services, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
72-1375844
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
103 NORTHPARK BOULEVARD, SUITE 300
COVINGTON, LA 70433
(Address of Principal Executive Offices) (Zip Code)
(985) 727-2000
(Registrant’s Telephone Number, Including Area Code)
 
     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.    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).    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  
 
Accelerated filer ☐
 
 
 
Non-accelerated filer  
 
Smaller reporting company 
 
 
 
 
 
Emerging growth 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      No  
Class
 
Trading Symbol
 
Name of exchange on which registered
 
Outstanding at October 31, 2019
Common Stock, $0.01 par value
 
HOS
 
New York Stock Exchange
 
37,993,329
 



HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
 
 


i


PART I—FINANCIAL INFORMATION
Item 1—Financial Statements
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
September 30,
2019
 
December 31,
2018
 
(Unaudited)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
136,401

 
$
224,936

Restricted cash
227

 

Accounts receivable, net of allowance for doubtful accounts of $2,528 and $1,123, respectively
57,387

 
54,924

Other current assets
18,203

 
19,768

Total current assets
212,218

 
299,628

Property, plant and equipment, net
2,360,254

 
2,434,829

Restricted cash
56,223

 

Deferred charges, net
33,241

 
22,525

Right of use assets
23,237

 

Other assets
6,633

 
7,655

Total assets
$
2,691,806

 
$
2,764,637

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
32,621

 
$
26,826

Accrued interest
14,425

 
15,910

Accrued payroll and benefits
8,391

 
12,445

Current portion of long-term debt, net of original issue discount of $0 and $2,725 and deferred financing costs of $487 and $611, respectively
223,826

 
96,311

Lease liabilities
2,972

 

Other accrued liabilities
9,429

 
9,750

Total current liabilities
291,664

 
161,242

Long-term debt, including deferred net gain of $33,373 and $15,845, and net of original issue discount of $3,310 and $3,013 and deferred financing costs of $10,906 and $6,149, respectively
1,040,392

 
1,123,625

Deferred tax liabilities, net
136,454

 
169,122

Lease liabilities
23,563

 

Other liabilities
1,839

 
2,722

Total liabilities
1,493,912

 
1,456,711

Stockholders’ equity:
 
 
 
Preferred stock: $0.01 par value; 5,000 shares authorized; no shares issued and outstanding

 

Common stock: $0.01 par value; 100,000 shares authorized; 37,993 and 37,701 shares issued and outstanding, respectively
380

 
377

Additional paid-in-capital
765,661

 
761,834

Retained earnings
437,636

 
549,475

Accumulated other comprehensive loss
(5,783
)
 
(3,760
)
Total stockholders’ equity
1,197,894

 
1,307,926

Total liabilities and stockholders’ equity
$
2,691,806

 
$
2,764,637



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

1


HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Vessel revenues
$
43,683

 
$
49,401

 
$
136,192

 
$
132,016

Non-vessel revenues
9,147

 
9,067

 
27,519

 
26,470

 
52,830

 
58,468

 
163,711

 
158,486

Costs and expenses:
 
 
 
 
 
 
 
Operating expenses
41,131

 
38,203

 
121,742

 
109,030

Depreciation
24,559

 
24,843

 
73,987

 
74,121

Amortization
4,033

 
2,725

 
11,373

 
6,973

General and administrative expenses
13,362

 
15,134

 
38,378

 
40,255

 
83,085


80,905


245,480


230,379

Gain on sale of assets
7

 
25

 
62

 
55

Operating loss
(30,248
)
 
(22,412
)
 
(81,707
)
 
(71,838
)
Other income (expense):
 
 
 
 
 
 
 
Loss on early extinguishment of debt, net

 

 
(71
)
 

Interest income
1,314

 
531

 
3,349

 
1,693

Interest expense
(22,249
)
 
(16,548
)
 
(61,970
)
 
(46,894
)
Other income (expense), net
(268
)
 
23

 
(351
)
 
(41
)
 
(21,203
)
 
(15,994
)
 
(59,043
)
 
(45,242
)
Loss before income taxes
(51,451
)
 
(38,406
)
 
(140,750
)
 
(117,080
)
Income tax benefit
(10,047
)
 
(7,223
)
 
(30,783
)
 
(22,152
)
Net loss
$
(41,404
)
 
$
(31,183
)
 
$
(109,967
)
 
$
(94,928
)
Loss per share:
 
 
 
 
 
 
 
Basic loss per common share
$
(1.09
)
 
$
(0.83
)
 
$
(2.90
)
 
$
(2.53
)
Diluted loss per common share
$
(1.09
)
 
$
(0.83
)
 
$
(2.90
)
 
$
(2.53
)
Weighted average basic shares outstanding
37,993

 
37,595

 
37,886

 
37,479

Weighted average diluted shares outstanding
37,993

 
37,595

 
37,886

 
37,479



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

2


HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
 
(Unaudited)
 
(Unaudited)
Net loss
$
(41,404
)
 
$
(31,183
)
 
$
(109,967
)
 
$
(94,928
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation loss
(5,647
)
 
(2,994
)
 
(3,895
)
 
(14,209
)
Total comprehensive loss
$
(47,051
)
 
$
(34,177
)
 
$
(113,862
)
 
$
(109,137
)


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

3


HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)

(In thousands)
 
Three Months Ended September 30, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (loss)
 
Total
Stockholders
Equity
 
Shares
 
Amount
 
Balance at July 1, 2019
37,993

 
$
380

 
$
764,625

 
$
479,040

 
$
(136
)
 
$
1,243,909

Shares issued under employee benefit programs

 

 

 

 

 

Stock-based compensation expense

 

 
1,036

 

 

 
1,036

Net loss

 

 

 
(41,404
)
 

 
(41,404
)
Foreign currency translation loss

 

 

 

 
(5,647
)
 
(5,647
)
Balance at September 30, 2019
37,993

 
$
380

 
$
765,661

 
$
437,636

 
$
(5,783
)
 
$
1,197,894


 
Nine Months Ended September 30, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (loss)
 
Total
Stockholders
Equity
 
Shares
 
Amount
 
Balance at January 1, 2019
37,700

 
$
377

 
$
761,834

 
$
549,475

 
$
(3,760
)
 
$
1,307,926

Shares issued under employee benefit programs
293

 
3

 
1

 

 

 
4

Adoption of ASU 2018-02

 

 

 
(1,872
)
 
1,872

 

Stock-based compensation expense

 

 
3,826

 

 

 
3,826

Net loss

 

 

 
(109,967
)
 

 
(109,967
)
Foreign currency translation loss

 

 

 

 
(3,895
)
 
(3,895
)
Balance at September 30, 2019
37,993

 
$
380

 
$
765,661

 
$
437,636

 
$
(5,783
)
 
$
1,197,894


 
Three Months Ended September 30, 2018
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (loss)
 
Total
Stockholders
Equity
 
Shares
 
Amount
 
Balance at July 1, 2018
37,595

 
$
376

 
$
760,942

 
$
604,853

 
$
(2,538
)
 
$
1,363,633

Shares issued under employee benefit programs

 

 

 

 

 

Stock-based compensation expense

 

 
443

 

 

 
443

Net loss

 

 

 
(31,183
)
 

 
(31,183
)
Foreign currency translation loss

 

 

 

 
(2,994
)
 
(2,994
)
Balance at September 30, 2018
37,595

 
$
376

 
$
761,385

 
$
573,670

 
$
(5,532
)
 
$
1,329,899


 
Nine Months Ended September 30, 2018
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (loss)
 
Total
Stockholders
Equity
 
Shares
 
Amount
 
Balance at January 1, 2018
37,144

 
$
371

 
$
760,278

 
$
668,598

 
$
8,677

 
$
1,437,924

Shares issued under employee benefit programs
451

 
5

 
(277
)
 

 

 
(272
)
Stock-based compensation expense

 

 
1,384

 

 

 
1,384

Net loss

 

 

 
(94,928
)
 

 
(94,928
)
Foreign currency translation loss

 

 

 

 
(14,209
)
 
(14,209
)
Balance at September 30, 2018
37,595

 
$
376

 
$
761,385

 
$
573,670

 
$
(5,532
)
 
$
1,329,899



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

4



HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(109,967
)
 
$
(94,928
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation
73,987

 
74,121

Amortization
11,373

 
6,973

Stock-based compensation expense
2,535

 
8,922

Loss on early extinguishment of debt
71

 

Provision for bad debts
1,405

 
88

Deferred tax benefit
(31,637
)
 
(22,866
)
Amortization of deferred financing costs
99

 
3,298

Gain on sale of assets
(62
)
 
(55
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(4,677
)
 
(30,347
)
Other current and long-term assets
(655
)
 
3,060

Deferred drydocking charges
(23,000
)
 
(7,233
)
Accounts payable
6,539

 
29,833

Accrued liabilities and other liabilities
3,196

 
2,487

Accrued interest
(1,484
)
 
871

Net cash used in operating activities
(72,277
)
 
(25,776
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Costs incurred for acquisition of offshore supply vessels

 
(40,868
)
Costs incurred for OSV newbuild program
(2,165
)
 
(3,670
)
Net proceeds from sale of assets
68

 
82

Vessel capital expenditures
(1,436
)
 
(7,295
)
Non-vessel capital expenditures
(355
)
 
(107
)
Net cash used in investing activities
(3,888
)
 
(51,858
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from first-lien term loans
29,159

 

Repurchase of convertible notes
(73,076
)
 

Proceeds from senior credit facility
100,000

 

Payment of deferred financing costs
(11,891
)
 

Shares withheld for payment of employee withholding taxes

 
(536
)
Net cash proceeds from other shares issued
126

 
260

Net cash provided by (used in) financing activities
44,318

 
(276
)
Effects of exchange rate changes on cash
(238
)
 
(873
)
Net decrease in cash, cash equivalents and restricted cash
(32,085
)
 
(78,783
)
Cash, cash equivalents and restricted cash at beginning of period
224,936

 
186,849

Cash, cash equivalents and restricted cash at end of period
$
192,851

 
$
108,066

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
 
 
 
Cash paid for interest
$
63,318

 
$
44,936

Cash paid for income taxes
$
369

 
$
933

SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
 
 
 
Exchange of convertible notes for first-lien term loans
$
20,951

 
$

Exchange of senior notes for second-lien term loans
$
142,629

 
$



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

5

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1. Basis of Presentation
The accompanying unaudited consolidated financial statements do not include certain information and footnote disclosures required by United States generally accepted accounting principles, or GAAP. The interim financial statements and notes are presented as permitted by instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements have been included and consist only of normal recurring items. The unaudited quarterly financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Annual Report on Form 10-K of Hornbeck Offshore Services, Inc. (together with its subsidiaries, the “Company”) for the year ended December 31, 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
The consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
2. Going Concern
Since the second half of 2014, the offshore oil service sector has experienced difficult operating conditions due to the reduced price of oil. This low oil price environment caused many of the Company's customers to reduce their budgets for the worldwide exploration or production of oil. This reduced spending has negatively impacted the Company's financial results. As discussed in Note 8, the Company's 2020 senior notes and 2021 senior notes mature in April 2020 and March 2021, respectively. The maturity of the Company’s 2020 senior notes now falls within the twelve-month period following the issuance of these financial statements for which the Company is required to evaluate as part of its assessment of its ability to continue as a going concern. Management of the Company continues to believe it has adequate liquidity to fund its operations up until the maturity of the 2020 senior notes. However, absent the combination of a significant recovery of market conditions such that cash flow from operations were to increase materially from currently projected levels, coupled with the refinancing and/or further management of its funded debt obligations, the Company does not currently expect to have sufficient liquidity to repay the full amount of the 2020 senior notes and the 2021 senior notes as they mature in 2020 and 2021, respectively. Management continues to implement its on-going plan to address its maturities as they become due, including efforts in connection with the refinancing of its 2020 senior notes. The closing of the $100 million senior credit facility in June 2019 was the latest step in that iterative process. Based on continuing discussions with existing and potential lenders, management is cautiously optimistic that it will be able to successfully implement this plan. However, management recognizes that its plan depends on the actions of these third parties, including reaching an agreement with existing senior note holders and/or obtaining new sources of liquidity, and, therefore, the Company is unable at this time to conclude that such plan is reasonably certain of being achieved. Accordingly, given the uncertainty with respect to the Company’s ability to pay its 2020 senior notes in full as they become due, the Company acknowledges that substantial doubt exists regarding its ability to continue as a going concern. There can be no assurance that cash flows from operations will increase materially or that the Company will succeed in reaching agreements with its senior note holders or accessing new capital to pay the 2020 senior notes in full as they become due in April 2020.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these consolidated financial statements. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.

6

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




3. Recent Accounting Pronouncements
Standard
 
Description
 
Required Date of Adoption
 
Effect on the financial statements and other significant matters
Standards that have been adopted
 
 
ASU No. 2016-02, "Leases" (Topic 842)

 
This standard requires lessees to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. ASU 2016-02 requires a modified retrospective application. Early adoption is permitted.
 
January 1, 2019

 
The Company adopted this ASU effective January 1, 2019. See further discussion below and in footnote 12.
 
 
 
 
 
 
 
ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income"

 
This standard allows companies to reclassify items in accumulated other comprehensive income to retained earnings for stranded tax effects resulting from The Tax Cuts and Jobs Act.
 
January 1, 2019

 
The Company adopted ASU No. 2018-02 on January 1, 2019. This adoption had no material impact on its consolidated financial statements.

 
 
 
 
 
 
 
ASU No. 2018-09, "Codification Improvements"

 
This standard provides clarification, corrects errors in and makes minor improvements to various ASC topics. Many of the amendments in this update have transition guidance with effective dates for annual periods beginning after December 15, 2018, and some amendments do not require transition guidance and are effective upon issuance of this update.

 
January 1, 2019

 
The Company adopted ASU No. 2018-09 on January 1, 2019. This adoption had no material impact on its consolidated financial statements.

 
 
 
 
 
 
 
ASU No. 2018-11, "Leases" (Topic 842): Targeted Improvements

 
This standard provides for the election of transition methods between the modified retrospective method and the optional transition relief method. The modified retrospective method is applied to all prior reporting periods presented with a cumulative-effect adjustment recorded in the earliest comparative period while the optional transition relief method is applied beginning in the period of adoption with a cumulative-effect adjustment recorded in such period. Also, this standard allows lessors to elect to not separate non-lease components from the associated lease components if certain criteria are met.

 
January 1, 2019

 
The Company adopted ASU No. 2018-11 on January 1, 2019. See further discussion below.



Standards that have not been adopted
 
 
ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"
 
This standard requires measurement and recognition of expected credit losses for financial assets held. ASU No. 2016-13 requires modified retrospective application. Early adoption is permitted.
 
January 1, 2023
 
The Company believes that the implementation of this new guidance will not have a material impact on its consolidated financial statements.
 
 
 
 
 
 
 

ASC 842, Leases 

Lessee Accounting

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-02, Leases, which requires lessees to recognize a right-of-use, or ROU, asset and a lease obligation for all leases. This ASU became effective for the Company for its annual reporting period beginning January 1, 2019, including interim periods within that reporting period. The Company adopted the standard using a modified retrospective approach with the effective date of the standard as the date of initial application.

The Company elected the package of practical expedients permitted under the transition guidance within the standard, which eliminates the reassessment of past leases, classification and initial direct costs. For leases with a term of twelve months or less, the Company has made a policy election in which the ROU asset and lease liability will not be recognized on its balance sheet.
 
As a result of the Company's adoption of this new standard, it recorded ROU assets of $24.7 million and lease liabilities of $27.7 million. The adoption of the standard did not have an impact on the Company's equity and will not have a material impact on the Company's results of operations and cash flows.

Lessor Accounting

Under ASU 2018-11, a lessor may elect to combine lease and non-lease components provided that the non-lease component(s) otherwise would be accounted for under the new revenue guidance in ASC 606 and both of the following conditions are met:
The timing and pattern of transfer for the lease component are the same as those for the non-lease components associated with that lease component.
The lease component, if accounted for separately, would be classified as an operating lease.
When the above conditions are met, the entity will need to assess predominance. If the non-lease components are predominant, the entity accounts for the combined component under ASC 606; otherwise, the entity accounts for the combined component under ASC 842.
After review of its revenue streams, the Company has concluded that the non-lease component of its revenue is predominant, and that both of the criteria above are met. Therefore, the Company has adopted the new transition options and combines lease and non-lease revenues. The Company recognizes revenue based on the non-lease component under ASC 606, as it has concluded that the non-lease component is the predominant component. The adoption of ASU 2018-11 on January 1, 2019 did not change the timing or amounts of revenues recognized by the Company.

7

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




4. Revenues from Contracts with Customers

Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective method. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. Accordingly, the Company did not make an adjustment to the opening balance of retained earnings in order to account for the implementation of the new requirements of this standard, and it did not restate prior period information for the effects of the new standard.     
The services that are provided by the Company represent a single performance obligation under our contracts that are satisfied at a point in time or over time. Revenues are earned primarily by (1) chartering the Company's vessels, including the operation of such vessels, (2) providing vessel management services to third party vessel owners, and (3) providing shore-based port facility services, including the rental of land. The services generating these revenue streams are provided to customers based upon contracts that include fixed or determinable prices and do not generally include right of return or other significant post-delivery obligations. The Company's vessel revenues, vessel management revenues and port facility revenues are recognized either at a point in time or over the passage of time when the customer has received or is receiving the benefit from the applicable service. Revenues are recognized when the performance obligations are satisfied in accordance with contractual terms and in an amount that reflects the consideration that the Company expects to be entitled to in exchange for the services rendered or rentals provided. Revenues are recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. Invoices are typically billed to our customers on a monthly basis and payment terms on customer invoices typically range 30 to 60 days.
A performance obligation under contracts with the Company's customers to render services is the unit of account under Topic 606. The Company accounts for services rendered separately if they are distinct and the service is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered provided on its own or with other resources that are readily available to the customer. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.
As of September 30, 2019, the Company has certain remaining performance obligations representing contracted vessel revenues for which work has not been performed and such contracts have an original expected duration of more than one year. As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations for such contracts was $5.9 million, of which $1.5 million and $4.4 million are expected to be recognized in 2019 and 2020, respectively. The Company has elected to apply the optional exemption for the disclosure of the remaining performance obligations for any of its revenue streams that are expected to have a duration of one year or less and, therefore, such amounts have not been disclosed.


8

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Disaggregation of Revenues

For the three and nine months ended September 30, 2019 and 2018, the Company recognized revenues as follows (in thousands):
 
Three Months Ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Vessel revenues
$
43,683

 
$
49,401

 
$
136,192

 
$
132,016

Vessel management revenues
8,673

 
8,039

 
26,291

 
23,772

Shore-based facility revenues
474

 
1,028

 
1,228

 
2,698

 
$
52,830

 
$
58,468

 
$
163,711

 
$
158,486

5. Loss per share
Basic and Diluted loss per common share was calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Weighted average number of common shares outstanding was calculated by using the sum of the shares determined on a daily basis divided by the number of days in the period.
The table below reconciles the Company’s loss per share (in thousands, except for per share data): 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(41,404
)
 
$
(31,183
)
 
$
(109,967
)
 
$
(94,928
)
Weighted average number of shares of common stock outstanding
37,993

 
37,595

 
37,886

 
37,479

Add: Net effect of dilutive stock options and unvested restricted stock (1)(2)(3)

 

 

 

Weighted average number of dilutive shares of common stock outstanding
37,993

 
37,595

 
37,886

 
37,479

Loss per common share:
 
 
 
 
 
 
 
Basic loss per common share
$
(1.09
)
 
$
(0.83
)
 
$
(2.90
)
 
$
(2.53
)
Diluted loss per common share
$
(1.09
)
 
$
(0.83
)
 
$
(2.90
)
 
$
(2.53
)
 
(1)
Due to a net loss, the Company excluded from the calculation of loss per share the effect of equity awards representing the rights to acquire 4,683 and 3,659 shares of common stock for the three and nine months ended September 30, 2019, respectively and 529 shares and 602 shares of common stock for the three and nine months ended September 30, 2018, respectively.
(2)
For the nine months ended September 30, 2019 and 2018 and for the three months ended September 2018, the 2019 convertible senior notes were not dilutive, as the average price of the Company’s stock was less than the effective conversion price of such notes. In September 2019, the Company repaid the remaining balance of the 2019 convertible senior notes in full upon their maturity. See Note 8 for further discussion. It was the Company's stated intention to redeem the principal amount of its 2019 convertible senior notes in cash and the Company used the treasury method for determining potential dilution in the diluted earnings per share computation.
(3)
Dilutive unvested restricted stock units are expected to fluctuate from quarter to quarter depending on the Company’s performance compared to a predetermined set of performance criteria. See Note 9 to these financial statements for further information regarding certain of the Company’s restricted stock grants.


9

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




6. Property, Plant and Equipment
Asset Impairment Assessment
In accordance with ASC 360, the Company periodically reviews long-lived asset valuations when events or changes in circumstances indicate that an asset’s carrying value may not be recoverable. If indicators of impairment exist, the Company assesses the recoverability of its long-lived assets by comparing the projected future undiscounted cash flows associated with the related long-lived asset group over their remaining estimated useful lives. If the sum of the estimated undiscounted cash flows are less than the carrying amounts of the asset group, the assets are written down to their estimated fair values based on the expected discounted future cash flows or appraised values attributable to the assets. The future cash flows are subjective and are based on the Company’s current assumptions regarding future dayrates, utilization, operating expense, direct overhead, including G&A expense, and recertification costs that could differ from actual results.
During the second quarter of 2016, the Company determined that it observed indicators of impairment related to its vessels. This resulted from the rapid deterioration of its second quarter 2016 operating results, as well as the uncertainty regarding future market conditions and the related impact on the Company's projected operating results. For the purpose of calculating the undiscounted cash flows, the Company grouped its vessels into two groups, OSVs and MPSVs, and used a probability-weighted undiscounted cash flow projection to test for recoverability. Included in the cash flow projections were assumptions related to the current mix of active and stacked vessels, the timing of stacked vessels returning to active status along with projected dayrates, operating expenses and overhead expenses related to each of the groupings.
While the Company has not observed any new impairment indicators since 2016, it has reviewed and updated, as necessary, the assumptions used in determining its undiscounted cash flow projections for each asset group to reflect current market conditions. After reviewing the results of these projections, which were last updated in 2019, the Company determined that each of its asset groups continue to have sufficient projected undiscounted cash flows to recover the remaining book value of the Company's long-lived assets within such group.
7. Acquisition of Vessels
On May 18, 2018, the Company completed the acquisition of four high-spec Jones Act-qualified OSVs and related equipment from Aries Marine Corporation and certain of its affiliates for $40.9 million in cash, inclusive of $4.0 million related to a non-compete intangible asset that is being amortized over the life of such asset, or two years. Also included in this transaction was the cost of fuel and lube inventory and transactions fees. The acquired vessels were all U.S.-flagged and are comprised of two 300 class OSVs and two 280 class OSVs. Subsequent to the acquisition, these four vessels have been foreign-flagged. The Company determined that substantially all of the fair value of the assets acquired are concentrated in a group of similar identifiable assets and, therefore, has accounted for such transaction as an asset acquisition under ASU 2017-01.


10

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




8. Debt
As of the dates indicated, the Company had the following outstanding debt (in thousands):
 
September 30,
2019
 
December 31,
2018
5.875% senior notes due 2020, net of deferred financing costs of $487 and $1,162
$
223,826

 
$
365,780

5.000% senior notes due 2021, net of deferred financing costs of $1,446 and $2,173
448,554

 
447,827

1.500% convertible senior notes due 2019, net of original issue discount of $0 and $2,725 and deferred financing costs of $0 and $611

 
96,311

First-lien term loans due 2023, including deferred gain of $13,913 and $15,845, and net of original issue discount of $3,310 and $3,013, and deferred financing costs of $3,491 and $2,814
357,112

 
310,018

Second-lien term loans due 2025, including deferred gain of $19,460
140,695

 

Senior credit facility, net of deferred financing costs of $5,969
94,031

 

 
1,264,218

 
1,219,936

Less current maturities
(223,826
)
 
(96,311
)
 
$
1,040,392

 
$
1,123,625

The table below summarizes the Company's cash interest payments (in thousands):
 
Cash Interest Payments
 
Payment Dates
5.875% senior notes due 2020
$
6,589

 
April 1 and October 1
5.000% senior notes due 2021
11,250

 
March 1 and September 1
First-lien term loans due 2023
2,728

 
Variable (1)
Second-lien term loans due 2025
2,879

 
January 31, April 30, July 31, and October 31
Senior credit facility
611

 
Monthly (2)
 
(1)
The interest rate on the first-lien term loans is variable based on the Company's election. The amount reflected in this table is the monthly amount payable based on the 30-day LIBOR interest rate that was elected and in effect on September 30, 2019 plus an applicable margin, which is currently 7.00%. Please see further discussion of the variable interest rate below.
(2)
The interest rate on the senior credit facility is variable based on 30-day LIBOR plus a 5.00% margin. The amount reflected in this table is the monthly amount payable based on the 30-day LIBOR interest rate that was in effect on September 30, 2019. Please see further discussion of the variable interest rate below.

Senior Credit Facility
On June 28, 2019, the Company entered into a $100.0 million senior secured asset-based revolving credit facility, or the senior credit facility. The senior credit facility is guaranteed by certain of the Company's domestic and foreign subsidiaries and contains customary representations and warranties, covenants and events of default. The fully-funded senior credit facility is secured by first-priority liens on receivables, certain restricted and unrestricted cash accounts and related assets. The senior credit facility is comprised of two tranches that will rebalance each month based on the variable receivable-backed borrowing base. The unrestricted receivables-backed tranche will mature in 2022, whereas the restricted cash-backed tranche will mature in 2025. The receivables-backed tranche may be used, subject to the completion of applicable eligibility review procedures, for working capital and general corporate purposes, including the refinancing or repayment of existing debt, subject to, among other things, compliance with certain requirements. The cash-backed tranche may, over time, rebalance to the receivables-backed tranche as eligible receivables increase and may be refinanced over time.

11

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Borrowings under the senior credit facility accrue interest at a floating-rate LIBOR plus a fixed spread of 5.00% for the life of the facility. The Company may, at its option from time to time, prepay loans under either tranche of the senior credit facility. Fifty percent of such loans available under the senior credit facility is subject to a prepayment premium (i) at 103% of the principal amount repaid if such repayment occurs on or prior to June 28, 2020; (ii) at 102% of the principal amount repaid if such repayment occurs on or prior to June 28, 2021; (iii) at 101% of the principal amount repaid if such repayment occurs on or prior to December 28, 2021 and (iv) at 100% of the principal amount repaid if such repayment occurs after December 28, 2021, with such premiums subject to adjustments downward under certain circumstances. The other fifty percent of such loans may be repaid at any time without prepayment penalty.
On September 30, 2019, the Company's restricted cash balance under the senior credit facility was $56.2 million. The Company classifies cash as restricted when there are legal or contractual restrictions on its withdrawal or usage.
First-Lien Term Loans
On June 15, 2017, the Company entered into the first lien term loan agreement (as amended, amended and restated, supplemented or otherwise modified from time to time, the First Lien Term Loan Agreement), by and among the Company, as Parent Borrower, Hornbeck Offshore Services, LLC, or HOS, as Co-Borrower, certain holders of the Company’s then outstanding notes, or the First-Lien Initial Lenders, and Wilmington Trust, National Association, as Administrative Agent and Collateral Agent for the lenders that initially provided for $300 million of first-lien delayed-draw term loans, or the first-lien term loans. On March 1, 2019, the Company entered into Incremental First Lien Term Loan Joinder Agreements with such parties, including certain existing as well as additional lenders, to borrow an additional $50.0 million of first-lien term loans, or the incremental first-lien term loans, under the First Lien Term Loan Agreement, including approximately $30.1 million in cash of new financing. On March 1, 2019, the Company exchanged approximately $21.0 million in face value of its 2019 convertible senior notes in a privately negotiated debt-for-debt exchange for the remaining approximately $19.9 million of incremental first-lien term loans. In accordance with applicable accounting guidance, this debt-for-debt exchange was accounted for as a debt modification. As a result, the Company recorded a loss on early extinguishment of debt of $1.3 million ($1.1 million or $0.03 per diluted share after-tax) due to deal costs associated with the exchange. The incremental first-lien term loans have the same terms applicable to the first-lien term loans originally issued under the existing First Lien Term Loan Agreement.
The Company can use the amounts under the first-lien term loans for working capital and general corporate purposes, including acquisitions and/or the refinancing of existing debt, subject to, among other things, compliance with certain covenants requiring the Company to maintain access to liquidity (cash and credit availability) of $25.0 million at all times. The minimum liquidity level required for prepayment of the Company’s existing indebtedness and/or certain other restricted payments is $65.0 million.
The first-lien term loans are guaranteed by certain of the Company's domestic and foreign subsidiaries and are collateralized on a first-lien basis by certain deposit and securities accounts, 46 domestic high-spec OSVs and MPSVs and nine foreign high-spec OSVs, including a security interest in two pending MPSV newbuilds, and associated personalty, as well as by second-priority liens on receivables, certain unrestricted cash accounts and related assets that secure the senior credit facility on a first-lien basis.
Borrowings accrue interest, at the Company’s option, at either:
an adjusted London Interbank Offered Rate (subject to a 1.00% floor) plus (a) 6.00% during the first year of the first-lien term loans, (b) 6.50% during the second year of the first-lien term loans, (c) 7.00% during the third year of the first-lien term loans, (d) 7.25% during the fourth year of the first-lien term loans, and (e) 7.50% thereafter; or

12

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




the greatest of (a) the prime rate announced by The Wall Street Journal, (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%, and (c) the London Interbank Offered Rate plus, 1%, plus, for either (a), (b), or (c), a margin of (i) 5.00% during the first year of the first-lien term loans, (ii) 5.50% during the second year of the first-lien term loans, (iii) 6.00% during the third year of the first-lien term loans, (iv) 6.25% during the fourth year of the first-lien term loans, and (v) 6.50% thereafter.
Second-Lien Term Loans
In February and March 2019, the Company completed two private offers and exchanged an aggregate of $142.6 million in face value of its 2020 senior notes for $121.2 million of second-lien term loans due 2025, or second-lien term loans, of the Company and the Co-Borrower. In accordance with applicable accounting guidance, this debt-for-debt exchange was accounted for as a debt modification. As a result, the Company recorded a loss on early extinguishment of debt of $2.4 million ($1.9 million or $0.05 per diluted share after-tax) primarily related to deal costs associated with the exchange. As contemplated by and provided for under the agreement governing the first-lien term loans, the second-lien term loans were made pursuant to a Second Lien Term Loan Agreement entered into by the Company, the Co-Borrower, the lenders party thereto and the Administrative Agent and Collateral Agent. The second-lien term loans have a maturity date of February 7, 2025 and bear interest at a fixed rate per annum of 9.50%. The second-lien term loans are guaranteed by certain of the Company’s domestic and foreign subsidiaries and are collateralized on a second-lien basis, subject to certain permitted liens, by a second-priority interest in the same collateral securing the Company’s first-lien term loans on a first-lien basis and third priority liens on receivables, certain unrestricted cash accounts and related assets that secure the senior credit facility on a first-lien basis.
Convertible Note Repurchases and Repayment
During the nine months ended September 30, 2019, the Company completed a series of private transactions for the repurchase of $52.9 million in face value of its outstanding 2019 convertible senior notes for an aggregate total of $47.6 million of cash. The Company recorded a gain on early extinguishment of debt of $3.6 million ($2.9 million or $0.08 per diluted share after-tax), which was comprised of a $5.6 million gain on the repurchase, offset in part by the write-off of $2.0 million of original issue discount, deal costs and unamortized financing costs related to the notes repurchased.
On September 3, 2019, the Company repaid the remaining balance of $25.8 million in face value of its 2019 convertible senior notes in full upon their maturity, plus accrued and unpaid interest thereon, in accordance with the terms of the indenture governing such notes. The retirement of this debt was funded with cash on hand.
The agreements governing the first-lien term loans and the second-lien term loans, the senior credit facility and the indentures governing the Company's 2020 senior notes and 2021 senior notes impose certain restrictions on the Company. Such restrictions affect, and in many cases limit or prohibit, among other things, the Company's ability to incur additional indebtedness, make capital expenditures, redeem equity, create liens, sell assets and make dividend or other restricted payments.
The Company estimates the fair value of its 2020 senior notes, 2021 senior notes, the first-lien term loans and the second-lien term loans by primarily using quoted market prices. Given the observability of the inputs to these estimates, the Company has assigned a Level 2 of the three-level valuation hierarchy. The interest rate on the senior credit facility is variable and the Company has concluded that face value approximates fair value of such facility as of September 30, 2019.

13

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




As of the dates indicated below, the Company had the following face values, carrying values and fair values (in thousands):
 
September 30, 2019
 
December 31, 2018
 
Face Value
 
Carrying Value
 
Fair Value
 
Face Value
 
Carrying Value
 
Fair Value
5.875% senior notes due 2020
$
224,313

 
$
223,826

 
$
126,131

 
$
366,942

 
$
365,780

 
$
191,727

5.000% senior notes due 2021
450,000

 
448,554

 
205,875

 
450,000

 
447,827

 
220,500

1.500% convertible senior notes due 2019

 

 

 
99,647

 
96,311

 
88,125

First-lien term loans due 2023 (1)
350,000

 
357,112

 
343,875

 
300,000

 
310,018

 
295,875

Second-lien term loans due 2025 (2)
121,235

 
140,695

 
90,320

 

 

 

Senior credit facility (3)
100,000

 
94,031

 
100,000

 

 

 

 
$
1,245,548

 
$
1,264,218

 
$
866,201

 
$
1,216,589

 
$
1,219,936

 
$
796,227

 
(1)
The carrying value of the first-lien term loans due 2023 includes a deferred gain of $13,913 less original issue discount and deferred financing costs of $6,801.
(2)
The carrying value of the second-lien term loans due 2025 includes a deferred gain of $19,460.
(3)
A portion of the senior credit facility matures in 2022 with the balance maturing in 2025.
Capitalized Interest
During the first quarter of 2018, the Company notified the shipyard that was constructing the remaining two vessels in the Company's fifth OSV newbuild program that it was terminating the construction contracts for such vessels. The Company did not capitalize any of its interest costs during the nine months ended September 30, 2019. Upon recommencement of construction of such vessels, the Company intends to resume capitalization of related interest costs. During the nine months ended September 30, 2018, the Company capitalized approximately $2.3 million of interest costs related to the construction of vessels.
9. Incentive Compensation
Stock-Based Incentive Compensation Plan
On June 20, 2019, the Company received stockholder approval to increase the maximum number of shares available under its long-term compensation plan by 7.0 million. The Company’s stock-based incentive compensation plan now covers a maximum of 11.95 million shares of common stock that allows the Company to grant restricted stock awards, restricted stock unit awards, or collectively restricted stock, stock options, stock appreciation rights and fully-vested common stock to employees and directors. As a result of the approval to increase the number of shares available under this plan, the Company, which has the sole discretion in determining the method of settlement for awards granted under the plan, now has the ability and intent to settle these awards using available shares. Accordingly, the classification of and accounting for 5.1 million outstanding phantom stock units, or PSUs, and 1.6 million stock appreciation rights, or SARs, were modified from cash-settled to stock-settled during the second quarter of 2019. These outstanding awards were granted to Company executives in 2017, 2018 and 2019 and to non-executive employees in 2019. After these settlement modifications were completed, the Company has only 0.2 million awards outstanding that will settle in cash on their respective vesting dates. The remaining vesting provisions of the modified awards were not impacted and, therefore, the Company determined the fair value of the awards on the date of the modification was the same as the date prior to the modification. There was no additional compensation expense recognized at the time of modification. As of September 30, 2019, taking into account the outstanding awards now anticipated to be stock-settled, the Company has 0.7 million shares of common stock available to be granted under such plan.

14

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Restricted Stock
During the nine months ended September 30, 2019, the Company granted 2.4 million time-based PSUs. The compensation expense related to time-based PSUs is amortized over a vesting period of up to three years and is determined based on the market price of the Company’s stock on the date of grant applied to the total shares that are expected to fully vest. All PSUs that remain cash-settled are re-measured quarterly and classified as a liability, due to the originally intended settlement of these awards in cash. As a result of the stockholder approval to increase the number of shares available under its long-term incentive compensation plan, the Company now has the ability to settle certain previously granted PSUs in shares. As such, the value of these awards was determined on the modification date and such expense will not vary in future periods.
In addition to the PSUs granted in 2019, the Company granted performance-based and time-based restricted stock units and phantom restricted stock units in prior years. The PSUs granted in prior years to non-executive employees were not impacted by the June 2019 modification. During the nine months ended September 30, 2019, the Company issued 292,715 shares of common stock due to vestings of restricted stock units and employee purchases under the Company's Employee Stock Purchase Plan.
Stock Appreciation Rights
During the nine months ended September 30, 2019, the Company granted 1.6 million SARs. The SARs vest and become exercisable in three equal annual installments on each of the 1st, 2nd and 3rd anniversaries of the grant date and have a ten-year life. The SARs represent the right to receive, upon exercise, a number of shares of Company common stock, cash, or a combination thereof, at the election of the Company, equal to the product of the aggregate number of shares of Company common stock with respect to which the SAR is exercised and the excess of the fair market value of a share of Company common stock as of the date of exercise over the grant price of $1.38.
On June 20, 2019, the Company determined that it would settle its outstanding SARs in equity rather than cash and such awards are now accounted for as stock-settled SARs. All of the remaining vesting provisions of the SARs are unchanged. The Company estimated the fair value of each SAR on the modification date using the Black-Scholes option-pricing model. As of the modification date, the fair value for the outstanding SARs was $1.02 per share granted.
The following assumptions were used to value SARs on the modification date:
Expected volatility
89.1
%
Expected life
6.0
years
Risk-free interest rate
1.9
%
Expected dividend yield
%
The risk-free interest rate used to value SARs is based on the U.S. Treasury yield curve in effect at the time of grant with maturity dates that coincide with the expected life of the SARs. The Company used the simplified method under GAAP to determine the expected life, since this is the first time the Company issued SARs. The Company's assumption for volatility is based on its historical volatility calculated on the grant date.

15

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




The impact of stock-based compensation expense charges on the Company’s operating results are reflected in the table below (in thousands, except for per share data):
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Loss before income taxes
$
876

 
$
4,169

 
$
2,535

 
$
8,922

Net loss
$
705

 
$
3,385

 
$
1,980

 
$
7,236

Loss per common share:
 
 
 
 
 
 
 
Basic loss per common share
$
0.02

 
$
0.09

 
$
0.05

 
$
0.19

Diluted loss per common share
$
0.02

 
$
0.09

 
$
0.05

 
$
0.19

10. Commitments and Contingencies
Vessel Construction
During the first quarter of 2018, the Company notified the shipyard that was constructing the remaining two vessels in the Company's fifth OSV newbuild program that it was terminating the construction contracts for such vessels based on the shipyard's statements that it would be more than one year late in the delivery of the vessels, among other reasons. On October 2, 2018, the shipyard filed suit against the Company in the 22nd Judicial District Court for the Parish of St. Tammany in the State of Louisiana, or the Gulf Island Litigation. The shipyard claims that the Company's termination was improper and that the shipyard should be permitted to complete construction of the vessels. Alternatively, the shipyard asserts that if the termination was proper, the Company would owe the shipyard compensation for unpaid work. The Company has responded to the suit and has alleged counter-claims. The Company intends to vigorously defend against the shipyard’s claims and considers them to be without merit. The shipyard has frustrated the Company's ability to complete the vessels at a replacement shipyard by asserting that it has possessory rights over the vessels. The Company disputes these asserted possessory rights and believes that the detention of the vessels, over which the Company has title, is wrongful. On November 5, 2019, the district court denied a preliminary motion for summary judgment to require the shipyard to release its possession of the vessels, which may delay further the ability to complete the vessels at a completion shipyard. Because of the shipyard's detention of the vessels, the timeframe in which the vessels can be completed at a replacement shipyard is also uncertain. The Company received performance bonds from sureties. The sureties have denied the Company's claim under the bonds, but did authorize the Company to select a completion yard and, subject to a reservation of rights, offered to fund the cost to complete the vessels in excess of their contract price of up to the full amount of the performance bond. The Company rejected the sureties' conditional and non-conforming offer.

As of the date of termination of the construction contracts, these two remaining vessels, both of which are domestic 400 class MPSVs, were projected to be delivered in the second and third quarters of 2019, respectively. These projected delivery dates were subsequently amended, for guidance purposes, to be the second and third quarters of 2020. Due to the continued uncertainty of the timing and location of future construction activities, the Company is now updating its forward guidance for the delivery dates related to these vessels to be the second and third quarters of 2021, respectively. However, the timing of the remaining construction draws remains subject to change commensurate with any potential further delays in the delivery dates of such vessels. The cost of this nearly completed 24-vessel newbuild program, before construction period interest, is expected to be approximately $1,335.0 million, of which $22.9 million and $35.8 million are currently expected to be incurred in fiscal 2020 and fiscal 2021, respectively. The foregoing amounts do not reflect any potential additional payments to the shipyard in respect of the aforementioned claim. From the inception of this program through September 30, 2019, the Company had incurred $1,276.3 million, or 95.6%, of total expected project costs.

16

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Contingencies
In the normal course of its business, the Company becomes involved in various claims and legal proceedings in which monetary damages are sought. It is management's opinion that the Company's liability, if any, under such claims or proceedings would not materially affect the Company's financial position or results of operations. The Company insures against losses relating to its vessels, pollution and third party liabilities, including claims by employees under Section 33 of the Merchant Marine Act of 1920, or the Jones Act. Third party liabilities and pollution claims that relate to vessel operations are covered by the Company’s entry in a mutual protection and indemnity association, or P&I Club, as well as by marine liability policies in excess of the P&I Club’s coverage. The Company provides reserves for any individual claim deductibles for which the Company remains responsible by using an estimation process that considers Company-specific and industry data, as well as management’s experience, assumptions and consultation with outside counsel. As additional information becomes available, the Company will assess the potential liability related to its pending claims and revise its estimates. Although historically revisions to such estimates have not been material, changes in estimates of the potential liability could materially impact the Company’s results of operations, financial position or cash flows.
11. Income Taxes
The effective tax benefit rate for the nine months ended September 30, 2019 and 2018 was 21.9% and 18.9%, respectively. The Company's effective tax rate differs from the federal statutory rate due to the establishment of valuation allowances in 2019 and 2018 for state net operating loss, foreign tax credit carryforwards, and nondeductible interest based upon management's conclusion that it is more likely than not such losses and credits will not be realized by their expiration dates. The Company's income tax benefit rate for the nine months ended September 30, 2019 was higher than the benefit rate from the nine months ended September 30, 2018, because of the reversal of a portion of valuation allowances on state net operating loss carryforwards that the Company now believes will be utilized, due to state law changes in June 2019.
During the nine months ended September 30, 2019, the Company adopted ASU 2018-02 and has elected to reclassify the stranded income tax effects of the Tax Cuts and Jobs Act from accumulated comprehensive income to retained earnings. As a result, a reduction in retained earnings and an increase in accumulated other comprehensive income of $1.9 million was recorded in the nine months ended September 30, 2019.
12. Leases
The Company determines if an agreement is a lease or contains a lease at inception. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. ROU assets and the corresponding lease liabilities are recorded at the commencement date based on the present value of lease payments over the expected lease term. The Company uses its incremental borrowing rate, which would be the rate incurred to borrow on a collateralized basis over a similar term in a similar economic environment, to calculate the present value of lease payments.
The Company is obligated under certain operating leases for shore-based facilities, office space and temporary housing. Such leases will often include options to extend the lease and the Company will include option periods that, on commencement date, it is reasonably likely that it will exercise. Some leases may require variable lease payments such as real estate taxes and maintenance expenses. These costs are expensed in the period in which they are incurred. None of the Company's leases contain any residual value guarantees. The Company recorded $3.0 million of expense related to leases in general and administrative and operating expenses during the nine months ended September 30, 2019. The expense recorded for short-term leases was $0.4 million during the nine months ended September 30, 2019.

17

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




During the nine months ended September 30, 2019, the Company recorded operating cash outflows from operating leases of $2.7 million.
Annual maturities of operating lease liabilities under non-cancelable leases with terms in excess of one year, as of September 30, 2019, are as follows (in thousands):
 
Nine Months Ended 
 September 30, 2019
Remainder of 2019
$
746

2020
3,073

2021
3,003

2022
3,065

2023
3,122

Thereafter
43,873

Total lease payments
56,882

Less: imputed interest
30,347

Total operating lease liabilities
$
26,535

 
 
Weighted-average remaining lease term (in years)
17.3

Weighted-average discount rate
9.0
%



18


Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our unaudited consolidated financial statements and notes to unaudited consolidated financial statements in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto included in our Annual Report on Form 10-K as of and for the year ended December 31, 2018. 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. See “Forward Looking Statements” for additional discussion regarding risks associated with forward-looking statements. In this Quarterly Report on Form 10-Q, “company,” “we,” “us,” “our” or like terms refer to Hornbeck Offshore Services, Inc. and its subsidiaries, except as otherwise indicated. Please refer to Item 5—Other Information for a glossary of terms used throughout this Quarterly Report on Form 10-Q.
In this Quarterly Report on Form 10-Q, we rely on and refer to information regarding our industry from the BOEM, EIA and IHS-Petrodata, Inc. These organizations are not affiliated with us and are not aware of and have not consented to being named in this Quarterly Report on Form 10-Q. We believe this information is reliable. In addition, in many cases we have made statements in this Quarterly Report on Form 10-Q regarding our industry and our position in the industry based on our experience in the industry and our own evaluation of market conditions.
General
During the third quarter of 2019, oil prices remained in a range of $50 to $60 per barrel for WTI and Brent. Crude prices still remain below the average prevailing prices between 2005 and late 2014. The sustained decrease in oil prices since 2014 caused major, international and independent oil companies with deepwater operations to significantly reduce their offshore capital spending budgets for the worldwide exploration or production of oil since 2015. Less spending by our customers combined with a global oversupply of OSVs for current market conditions, including high-spec OSVs in our core markets, have resulted in significant reductions in our dayrates and utilization.
The principal question facing the offshore oilfield-related industry is the duration of the current downturn in offshore activities. Our current view is that market conditions in the Greater GoM Operating Region have begun to rebound, however conditions in the third quarter of 2019 reflected little improvement and have not yet resulted in better utilization or pricing for our active fleet of OSVs. In fact during the third quarter of 2019, utilization and effective dayrates for our OSVs worsened over the sequential and prior year quarters. Oil price improvement appears unlikely in the near-term due to continued slower global demand and sustained over supply. Additionally, global economic uncertainty, driven by events such as a trade-war involving the United States and major trading partners, could negatively impact global economic conditions or oil markets.
Against this backdrop, the primary challenge confronting us has been, and continues to be, the ability to repay our senior notes maturing in 2020 and 2021. The maturity of our 2020 senior notes falls within the twelve-month period following the issuance of our financial statements, which we are required to evaluate as part of our assessment of the Company's ability to continue as a going concern. We continue to believe that we have adequate liquidity to fund our operations through at least March 2020. However, absent the combination of a significant recovery of market conditions such that cash flow from operations were to increase materially from currently projected levels, coupled with the refinancing and/or further management of our funded debt obligations, we do not currently expect to have sufficient liquidity to repay the full amount of the 2020 senior notes and the 2021 senior notes as they mature in 2020 and 2021, respectively. Recently, we have engaged in discussions with advisors to and members of an ad hoc group of holders of our 2020 and 2021 notes. These discussions, while positive, are preliminary and we cannot provide assurance that these discussions will result in an acceptable arrangement. As part of our efforts to negotiate an arrangement with

19


holders of our 2020 and 2021 senior notes, we have established a Special Committee of our Board of Directors.
While third quarter 2019 market conditions remained soft and affected our utilization and pricing for OSVs, we continue to observe leading indicators that signal the potential for improved conditions - including larger offshore capital budget announcements by our customers, a growth in the number of final investment decisions, or FIDs, made public by our customers for offshore projects, recently announced deepwater discoveries, a growing contract backlog announced by several drilling contractors and increased customer inquiries for our services, principally in the Greater GoM Operating Region. During the third quarter of 2019, we did not observe any noticeable change in the anticipated supply of high-spec U.S.-flagged OSVs. In the U.S. GoM, two high-spec OSVs have been delivered into the domestic market so far this year. We expect one additional high-spec OSV to be delivered into domestic service in 2019 and one high-spec OSV to be delivered into domestic service in the first quarter of 2020. We do not anticipate significant growth in the supply of high-spec U.S.-flagged OSVs beyond the currently anticipated level of 179 of such vessels by the first quarter of 2020. We continue to monitor the overhang of the dormant supply of stacked U.S.-flagged high-spec OSVs. There are approximately 75 stacked domestic vessels and all of these vessels will require intermediate or special surveys in order to return to service. We believe that the cost to industry participants to reactivate high-spec OSVs, including survey costs, crewing costs, training costs and unanticipated events, will range between $2 million and $5 million per vessel, on average.
During the third quarter of 2019, there was an average of 26.3 floating rigs working in the Greater GoM Operating Region. We see an additional one to two incremental floaters that will begin working in the Greater GoM Operating Region through the end of 2019. While we do not expect that all of these units will work at the same time or that all units currently working will continue to work; overall we view these developments as favorable for market conditions going forward. We believe that these improved regional demand drivers will create increased opportunities for our fleet of new generation OSVs. Once the current supply and demand fundamentals return to more normal conditions, our results from operations should improve.
Unlike our OSVs, whose utilization is tied principally to drilling activities, demand for our MPSVs is also driven by other offshore activities. These vessels are used for a wide variety of oilfield applications that are not necessarily related to drilling. Because of the need to continuously inspect, repair and maintain offshore infrastructure, our MPSVs have, at times, partially counter-acted weakness in overall drilling activities. However, we have not yet seen a significant pick up in the expansion of offshore infrastructure, such as the installation of new floating and subsea infrastructure and field development that more meaningfully drive MPSV utilization. Consequently, utilization of our MPSVs has been volatile. We expect to continue experiencing seasonal fluctuations, with peak activity occurring in late spring through early fall followed by softer demand during the winter months of each year.
Since October 1, 2014, we stacked OSVs and MPSVs on various dates. As of September 30, 2019, as well as October 30, 2019, we had 35 OSVs and two MPSVs stacked and such stacked vessels represent 50% of our fleetwide vessel headcount, and 37% of our total OSV and MPSV deadweight tonnage. The Company plans to reactivate one 265 class OSV during the fourth quarter of 2019 and one MPSV during the first quarter of 2020. We may consider stacking additional vessels or reactivating vessels as market conditions warrant. By stacking vessels, we have significantly reduced our on-going cash outlays and lowered our risk profile; however, we also have fewer revenue-producing units in service that can contribute to our results and produce cash flows to cover our fixed costs and commitments. While we may choose to stack additional vessels should market conditions warrant, our current expectation is to retain our active fleet in the market to accept contracts at the best available terms even if such contracts are below our breakeven cash cost of operations.
In order to support customer requirements in Mexico, and based on our long-term view that Mexico will continue to invest directly or allow foreign investment in its offshore energy sector, and increasingly in deepwater prospects, we elected to Mexican-flag four HOSMAX 300 class OSVs, two 280 class OSVs, two

20


240 class OSVs and one MPSV since January 1, 2018. At present, our Mexican-flagged fleet is comprised of eight high-spec OSVs, five low-spec OSVs and one MPSV, which is the second largest concentration of vessels we have committed to any single national market. Mexico has undergone significant transformation as a market for offshore energy over the last several years. More recently, Mexico's newly elected president has announced an intention to roll-back some of the energy reforms that have created more opportunities for international oil companies, or IOCs, to operate in Mexico. The current administration appears to favor allowing Pemex, as opposed to IOCs, to unlock Mexico's offshore energy resources. We are monitoring the manner in which these policies develop. We have a long-standing relationship with Pemex as well as with the IOCs that have recently entered Mexico. We expect Mexico to continue to refine energy policies that are appropriate to its national objectives.
In Brazil, we presently own and operate one Brazilian-flagged high-spec OSV. We have flexibility under Brazilian law to import and flag into Brazilian registry an additional vessel of similar DWT. We also own and operate one Vanuatu-flagged MPSV currently working in Brazil as a flotel. Brazil is the single largest deepwater market in the world. Recent measures to expand the role of IOCs in its “pre-salt” prospects are taking hold and we believe Brazilian activity in the offshore energy space will be a significant contributor to the overall recovery in global offshore E&P activities.
Our Vessels
All of our current vessels are qualified under the Jones Act to engage in U.S. coastwise trade, except for 18 foreign-flagged new generation OSVs and two foreign-flagged MPSVs. As of September 30, 2019, our 31 active new generation OSVs, six active MPSVs and four managed OSVs were operating in domestic and international areas as noted in the following table:
Operating Areas
Domestic
 
GoM (1)
20

Other U.S. coastlines (2)
5

 
25

Foreign
 
Other Latin America
2

Caribbean
2

Brazil
2

Mexico
10

 
16

Total Vessels (3)
41

 
(1) Includes two owned vessels supporting the military.
(2) Includes one owned and four managed vessels supporting the military
(3) Excluded from this table are 35 new generation OSVs and two MPSVs that were stacked as of September 30, 2019.

Critical Accounting Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. In other circumstances, we are required to make estimates, judgments and assumptions that we believe are reasonable based on available information. We base our estimates and judgments on historical experience and various other factors that we believe are reasonable based upon the information available. Actual results may differ from these estimates under different assumptions and conditions. We continually assess the carrying value of our vessels as discussed below.

21


Carrying Value of Vessels. We depreciate our OSVs and MPSVs over estimated useful lives of 25 years each. Salvage value for our new generation marine equipment is estimated to be 25% of the originally recorded cost for these asset types. In assigning depreciable lives to these assets, we have considered the effects of both physical deterioration largely caused by wear and tear due to operating use and other economic and regulatory factors that could impact commercial viability. To date, our experience confirms that these policies are reasonable, although there may be events or changes in circumstances in the future that indicate that recovery of the carrying amount of our vessels might not be possible.
We presently review the carrying values of our vessels for impairment using the following asset groups: OSVs and MPSVs. We believe that these two vessel groups are appropriate because our vessels are highly mobile among disparate geographies and are directed centrally from our headquarters. Our OSVs share multiple forms of direct and indirect common costs and are marketed on a portfolio basis as an integrated (multi-vessel) marine solution to our customers primarily supporting drilling and exploration activities in various deepwater and ultra-deepwater markets worldwide to our customers. We manage, market, operate and maintain our vessels in a unified manner because we are performing the same services to the same client group across the same geographic regions - i.e., primarily the transportation of the same fungible types of cargo. We believe that our unified approach to operating the vessels within each group is among the most important factors and strategic advantages that drive our customers to utilize our vessels, irrespective of the type or size of vessel that the customer requires on a given engagement. Therefore, management has concluded that the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities is at the OSV and MPSV groupings.
When analyzing asset groups for impairment, we consider both historical and projected operating cash flows, operating income, and EBITDA based on current operating environment and future conditions that we can reasonably anticipate, such as inflation or prospective wage costs. These projections are based on, but not limited to, job location, current and historical market dayrates included in recent sales proposals, utilization and contract coverage; along with anticipated market drivers, such as drilling rig movements, results of offshore lease sales and discussions with our customers regarding their ongoing drilling plans.
If events or changes in circumstances as set forth above were to indicate that the asset group’s carrying amount may not be recoverable over the vessels' useful lives for such groups, we would then be required to estimate the future undiscounted cash flows expected to result from the use of the asset group and its eventual disposition. If the sum of the expected future undiscounted cash flows was determined to be less than the carrying amount of the vessels, we would be required to reduce the carrying amount to fair value. Examples of events or changes in circumstances that could indicate that the recoverability of the carrying amount of our asset groups should be assessed might include a significant change in regulations such as OPA 90, a significant decrease in the market value of the asset group and current period operating or cash flow losses combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the asset group.
During the second quarter of 2016, we identified indicators of impairment relating to our vessels as a result of operating losses occurring for the first time in the our history due to the rapid decline in market conditions. In accordance with GAAP, we calculated the undiscounted cash flows using a probability weighted forecast for each of our asset groups over their respective remaining useful lives. Included in the cash flow projections were assumptions related to the current mix of active and stacked vessels, the estimated timing of stacked vessels returning to active status along with projected dayrates, operating expenses and overhead expenses related to each of the groupings. We view vessel stackings as a temporary status and a prudent business strategy. Stacking vessels does not imply that we have ceased marketing such vessels or intend to never reactivate such vessels when market conditions improve. In fact, we have unstacked vessels in recent quarters and will continue to do so as warranted. The total of the undiscounted cash flows was greater than the net book values of our asset groups and, therefore, we concluded that we did not have an impairment of

22


our long-lived assets as of June 30, 2016, and in such analysis, noted a significant cushion for each of our asset groups as a result of the long remaining useful lives of our vessels.
While we have not observed any new impairment indicators since the second quarter of 2016, each quarterly period, we assess whether there are any new indicators present and whether there have been any events or developments that would indicate that our most recent undiscounted cash flow analysis warrants being updated to reflect a change in inputs or assumptions. We have reviewed and updated, as necessary, the assumptions used in determining our undiscounted cash flow projections for each asset group to reflect current and projected market conditions, and also prepared and updated our sensitivity analysis relating to such assumptions. After reviewing the result of our most recent undiscounted cash flow projections, which were prepared in mid-2019, we have determined that each of our asset groups continues to have sufficient projected undiscounted cash flows to recover the remaining book value of our long-lived assets within such group. In the development of the undiscounted cash flows, in addition to the previously discussed considerations above and in light of current market conditions, we estimate the length of time it will take for the market to absorb our stacked vessels such that we can return those vessels to active status. Any significant revisions to this estimate would have the greatest impact in the development of the undiscounted cash flows. However, as part of our most recent analysis, we determined that if we extended the downturn (and, thus, the unstacking of vessels) by two years from the most recent estimate, this would reduce our undiscounted cash flows by less than 15%, still providing us with substantial excess undiscounted cash flow coverage of the assets’ net book values given the length of remaining useful lives for the assets. Further, we also perform a look-back analysis each quarter to compare our actual performance to that of our most recently prepared undiscounted cash flow analysis. In each case since June 2016, we have noted that our actual quarterly performance has outperformed the applicable estimated undiscounted cash flow calculations used in completing the latest impairment analysis for such comparable period. See Note 6 of our consolidated financial statements included herein for further discussion. We will continue to closely monitor market conditions and potential impairment indicators as long as this market downturn persists.
Our other significant accounting policies and estimates are discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Results of Operations
The tables below set forth the average dayrates, utilization rates and effective dayrates for our owned new generation OSVs and the average number and size of vessels owned during the periods indicated. These vessels generate a substantial portion of our revenues and operating profit. Excluded from the OSV information below are the results of operations for our MPSVs, our shore-based port facility and vessel management services, including the four non-owned vessels managed for the U.S. Navy. The Company does not provide average or effective dayrates for its MPSVs. MPSV dayrates are impacted by highly variable customer-required cost-of-sales associated with ancillary equipment and services, such as ROVs, accommodation units and cranes, which are typically recovered through higher dayrates charged to the customer. Due to the fact that each of our MPSVs have a workload capacity and significantly higher income generating potential than each of the Company’s new generation OSVs, the utilization and dayrate levels of our MPSVs can have a very large impact on our results of operations. For this reason, our consolidated operating results, on a period-to-period basis, are disproportionately impacted by the level of dayrates and utilization achieved by our six active MPSVs.

23


 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Offshore Supply Vessels:
 
 
 
 
 
 
 
Average number of new generation OSVs (1)
66.0

 
66.0

 
66.0

 
64.0

Average number of active new generation OSVs (2)
31.0

 
26.3

 
30.3

 
22.4

Average new generation OSV fleet capacity (DWT)
238,845

 
238,783

 
238,845

 
229,260

Average new generation OSV capacity (DWT)
3,619

 
3,618

 
3,619

 
3,584

Average new generation OSV utilization rate (3)
23.4
%
 
26.1
%
 
29.4
%
 
24.7
%
Effective new generation OSV utilization rate (4)
49.9
%
 
65.4
%
 
63.9
%
 
70.5
%
Average new generation OSV dayrate (5)
$
19,750

 
$
19,446

 
$
18,600

 
$
19,097

Effective dayrate (6)
$
4,622

 
$
5,075

 
$
5,468

 
$
4,717

 
(1)
We owned 66 new generation OSVs as of September 30, 2019. Excluded from this data are eight MPSVs owned and operated by the Company, four non-owned vessels managed for the U.S. Navy. and two MPSV newbuilds currently under construction.
(2)
In response to weak market conditions, we elected to stack certain new generation OSVs on various dates since October 1, 2014. Active new generation OSVs represent vessels that are immediately available for service during each respective period.
(3)
Utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenues.
(4)
Effective utilization rate is based on a denominator comprised only of vessel-days available for service by the active fleet, which excludes the impact of stacked vessel days.
(5)
Average new generation OSV dayrates represent average revenue per day, which includes charter hire, crewing services, and net brokerage revenues, based on the number of days during the period that the OSVs generated revenues.
(6)
Effective dayrate represents the average dayrate multiplied by the average utilization rate.
Non-GAAP Financial Measures
We disclose and discuss EBITDA as a non-GAAP financial measure in our public releases, including quarterly earnings releases, investor conference calls and other filings with the Securities and Exchange Commission. We define EBITDA as earnings (net income) before interest, income taxes, depreciation and amortization. Our measure of EBITDA may not be comparable to similarly titled measures presented by other companies. Other companies may calculate EBITDA differently than we do, which may limit its usefulness as a comparative measure.
We view EBITDA primarily as a liquidity measure and, as such, we believe that the GAAP financial measure most directly comparable to this measure is cash flows provided by operating activities. Because EBITDA is not a measure of financial performance calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.
EBITDA is widely used by investors and other users of our financial statements as a supplemental financial measure that, when viewed with our GAAP results and the accompanying reconciliations, we believe EBITDA provides additional information that is useful to gain an understanding of the factors and trends affecting our ability to service debt, pay deferred taxes and fund drydocking charges and other maintenance capital expenditures. We also believe the disclosure of EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity from quarter to quarter and year to year.
EBITDA is also a financial metric used by management as a supplemental internal measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; to compare to the EBITDA of other companies when evaluating potential acquisitions; and to assess our ability to service existing fixed charges and incur additional indebtedness.

24


The following table reconciles cash flows used in operating activities to EBITDA for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
EBITDA Reconciliation to GAAP:
 
 
 
 
 
 
 
Net cash flows used in operating activities
$
(23,617
)
 
$
1,878

 
$
(72,277
)
 
$
(25,776
)
Cash paid for deferred drydocking charges
7,395

 
3,882

 
23,000

 
7,233

Cash paid for interest
24,131

 
10,724

 
63,318

 
40,028

Cash paid for (refunds of) taxes
391

 
283

 
369

 
933

Changes in working capital
(8,027
)
 
(7,405
)
 
(7,230
)
 
(4,248
)
Stock-based compensation expense
(876
)
 
(4,169
)
 
(2,535
)
 
(8,922
)
Loss on early extinguishment of debt, net

 

 
(71
)
 

Gain (loss) on sale of assets
7

 
25

 
62

 
55

Changes in other, net
(1,328
)
 
(39
)
 
(1,405
)
 
(88
)
EBITDA
$
(1,924
)
 
$
5,179

 
$
3,231

 
$
9,215

The following table provides the detailed components of EBITDA as we define that term for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Components of EBITDA:
 
 
 
 
 
 
 
Net loss
$
(41,404
)
 
$
(31,183
)
 
$
(109,967
)
 
$
(94,928
)
Interest, net
 
 
 
 
 
 
 
Debt obligations
22,249

 
16,548

 
61,970

 
46,894

Interest income
(1,314
)
 
(531
)
 
(3,349
)
 
(1,693
)
Total interest, net
20,935

 
16,017

 
58,621

 
45,201

Income tax benefit
(10,047
)
 
(7,223
)
 
(30,783
)
 
(22,152
)
Depreciation
24,559

 
24,843

 
73,987

 
74,121

Amortization
4,033

 
2,725

 
11,373

 
6,973

EBITDA
$
(1,924
)
 
$
5,179

 
$
3,231

 
$
9,215

In addition, we have also historically made certain adjustments, as applicable, to EBITDA for losses on early extinguishment of debt, stock-based compensation expense and interest income, to internally evaluate our performance based on the computation of ratios used in certain financial covenants of our credit agreements with various lenders, whenever applicable. We believe that such ratios can, at times, be material components of financial covenants and, when applicable, failure to comply with such covenants could result in the acceleration of indebtedness or the imposition of restrictions on our financial flexibility.
The following table provides certain detailed adjustments to EBITDA, as we define that term, for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Loss on early extinguishment of debt, net
$

 
$

 
$
71

 
$

Stock-based compensation expense
876

 
4,169

 
2,535

 
8,922

Interest income
1,314

 
531

 
3,349

 
1,693


25


Set forth below are the material limitations associated with using EBITDA as a non-GAAP financial measure compared to cash flows provided by operating activities.
EBITDA does not reflect the future capital expenditure requirements that may be necessary to replace our existing vessels as a result of normal wear and tear,
EBITDA does not reflect the interest, future principal payments and other financing-related charges necessary to service the debt that we have incurred in acquiring and constructing our vessels,
EBITDA does not reflect the deferred income taxes that we will eventually have to pay once we are no longer in an overall tax net operating loss carryforward position, as applicable, and
EBITDA does not reflect changes in our net working capital position.
Management compensates for the above-described limitations in using EBITDA as a non-GAAP financial measure by only using EBITDA to supplement our GAAP results.


26


Summarized financial information for the three months ended September 30, 2019 and 2018, respectively, is shown below in the following table (in thousands, except percentage changes):
 
Three Months Ended  
 September 30,
 
Increase (Decrease)
 
 
2019
 
2018
 
$
Change
 
%
Change
 
Revenues:
 
 
 
 
 
 
 
 
    Vessel revenues
 
 
 
 
 
 
 
 
Domestic
$
24,965

 
$
36,238

 
$
(11,273
)
 
(31.1
)
%
Foreign
18,718

 
13,163

 
5,555

 
42.2

%
 
43,683

 
49,401

 
(5,718
)
 
(11.6
)
%
    Non-vessel revenues
9,147

 
9,067

 
80

 
0.9

%
 
52,830

 
58,468

 
(5,638
)
 
(9.6
)
%
Operating expenses
41,131

 
38,203

 
2,928

 
7.7

%
Depreciation and amortization
28,592

 
27,568

 
1,024

 
3.7

%
General and administrative expenses
13,362

 
15,134

 
(1,772
)
 
(11.7
)
%
 
83,085


80,905


2,180

 
2.7

%
Gain on sale of assets
7

 
25

 
(18
)
 
(72.0
)
%
Operating loss
(30,248
)
 
(22,412
)
 
(7,836
)
 
35.0

%
Interest expense
22,249

 
16,548

 
5,701

 
34.5

%
Interest income
1,314

 
531

 
783

 
>100.0

%
Income tax benefit
(10,047
)
 
(7,223
)
 
(2,824
)
 
39.1

%
Net loss
$
(41,404
)
 
$
(31,183
)
 
$
(10,221
)
 
32.8

%
Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018
Revenues. Revenues for the three months ended September 30, 2019 decreased by $5.6 million, or 9.6%, to $52.8 million compared to the same period in 2018. Our weighted-average active operating fleet for the three months ended September 30, 2019 and 2018 was 37.0 and 33.3 vessels, respectively.
Vessel revenues decreased $5.7 million, or 11.6%, to $43.7 million for the three months ended September 30, 2019 compared to $49.4 million for the same period in 2018. The decrease in vessel revenues was primarily due to soft market conditions for our vessels. Revenues from our MPSV fleet decreased $3.0 million, or 16.3%, for the three months ended September 30, 2019 compared to the prior-year period. For the three months ended September 30, 2019, we had an average of 37.0 vessels stacked compared to 40.7 vessels stacked in the prior-year quarter. Average new generation OSV dayrates were $19,750 for the third quarter of 2019 compared to $19,446 for the same period in 2018. Our new generation OSV utilization was 23.4% for the third quarter of 2019 compared to 26.1% for the same period in 2018. Our new generation OSVs were stacked for an aggregate of 3,220 days during the third quarter of 2019 compared to 3,650 days for the same period in 2018. Excluding stacked vessel days, our new generation OSV effective utilization was 49.9% and 65.4% for the same periods, respectively. Domestic vessel revenues decreased $11.3 million from the year-ago quarter primarily due to soft market conditions for our vessels during the three months ended September 30, 2019. Foreign vessel revenues increased $5.6 million due to an additional MPSV operating in a foreign market during the three months ended September 30, 2019. Foreign vessel revenues for the third quarter of 2019 comprised 42.8% of our total vessel revenues compared to 26.6% for the year-ago period.
Non-vessel revenues increased $0.1 million, or 0.9%, to $9.2 million for the three months ended September 30, 2019 compared to $9.1 million for the same period in 2018. This increase is primarily attributable to higher revenues earned from vessel management services during 2019 compared to the year-ago period.

27


Operating Expenses. Operating expenses were $41.1 million, an increase of $2.9 million, or 7.7%, for the three months ended September 30, 2019 compared to $38.2 million for the same period in 2018. Operating expenses increased primarily due to a higher number of active vessels in our fleet during the three months ended September 30, 2019. Aggregate cash operating expenses are projected to be in the approximate annual range of $161.7 million to $166.7 million for the year ending December 31, 2019. Such cash operating expense estimate is exclusive of any additional repositioning expenses we may incur in connection with the potential relo