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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 June 30, 2017

 

GULFMARK OFFSHORE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation)

 

001-33607

(Commission file number)

 

76-0526032

(I.R.S. Employer Identification No.)

 

 

842 West Sam Houston Parkway North, Suite 400, Houston, Texas

 

77024

 
 

(Address of principal executive offices)

 

(Zip Code)

 

 

(713) 963-9522

(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 ☐ (Do not check if a smaller reporting company)

 

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 ☒

 

Number of shares of Class A Common Stock, $0.01 par value, outstanding as of August 8, 2017: 27,999,661.

 

 
 

 

  

GulfMark Offshore, Inc.

Index

 

   

Page

Number

Part I.

Financial Information

 
 

Item 1

Financial Statements

7

   

Unaudited Condensed Consolidated Balance Sheets

7

   

Unaudited Condensed Consolidated Statements of Operations

8

   

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

9

   

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

10

   

Unaudited Condensed Consolidated Statements of Cash Flows

11

   

Notes to the Unaudited Condensed Consolidated Financial Statements

12

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

46

 

Item 4

Controls and Procedures

47

     

Part II.

Other Information

 

 

Item 1

Legal Proceedings

47

 

Item 1A

Risk Factors

47

 

Item 6

Exhibits

55

 

Signatures

56

 

Exhibit Index

57

 

 
2

 

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain or be identified by the words “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “believe,” “should,” “could,” “may,” “might,” “will,” “project,” “forecast,” “budget” and similar expressions. In addition, any statement concerning future financial performance (including, without limitation, future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by or against us, which may be provided by management, are also forward-looking statements as so defined. Statements made by us in this report that contain forward-looking statements may include, but are not limited to, information concerning our possible or assumed future results of operations and statements about the following subjects:

 

 

our ability to obtain Bankruptcy Court (as defined below) approval with respect to motions or other requests made to the Bankruptcy Court in our Bankruptcy Case (as defined below), including maintaining strategic control as debtor-in-possession;

 

our ability to negotiate, develop, confirm and consummate a plan of reorganization (including the Plan, as defined below);

 

the effects of our Bankruptcy Case on our operations, including our relationships with employees, regulatory authorities, customers, suppliers, banks, insurance companies and other third parties, and agreements;

 

the effects of our Bankruptcy Case on our company and on the interests of various constituents, including holders of our common stock and debt instruments;

 

Bankruptcy Court rulings in our Bankruptcy Case as well as the outcome of all other pending litigation and the outcome of the Bankruptcy Case in general;

 

the length of time that we will operate under chapter 11 protection and the continued availability of operating capital during the pendency of the proceedings;

 

risks associated with third-party motions in the Bankruptcy Case, which may interfere with our ability to confirm and consummate a plan of reorganization and restructuring generally;

 

increased advisory costs to execute a plan of reorganization;

 

the impact of the delisting of our common stock by the New York Stock Exchange on the liquidity and market price of our common stock and on our ability to access the public capital markets;

 

our ability to continue as a going concern in the long term, including our ability to confirm a plan of reorganization that restructures our debt obligations to address our liquidity issues and allows emergence from our Bankruptcy Case;

 

our ability to access adequate debtor-in-possession financing or use cash collateral;

 

the potential adverse effects of our Bankruptcy Case on our liquidity, results of operations, or business prospects;

 

our ability to execute our business and restructuring plan;

 

increased administrative and legal costs related to our Bankruptcy Case and other litigation and the inherent risks involved in a bankruptcy process;

 

 
3

 

 

 

the cost, availability and access to capital and financial markets, including the ability to secure new financing after emerging from our Bankruptcy Case;

 

tax planning;

 

market conditions and the effect of such conditions on our future results of operations;

 

demand for marine supply and transportation services;

 

supply of vessels and companies providing services;

 

future capital expenditures and budgets for capital and other expenditures;

 

sources and uses of and requirements for financial resources;

 

market outlook;

 

operations outside the United States;

 

contractual obligations;

 

cash flows and contract backlog;

 

timing and cost of completion of vessel upgrades, construction projects and other capital projects;

 

asset impairments and impairment evaluations;

 

assets held for sale;

 

business strategy;

 

growth opportunities;

 

competitive position;

 

expected financial position;

 

interest rate and foreign exchange risk;

 

debt levels and the impact of changes in the credit markets and credit ratings for our debt;

 

timing and duration of required regulatory inspections for our vessels;

 

plans and objectives of management;

 

effective date and performance of contracts;

 

outcomes of legal proceedings;

 

compliance with applicable laws;

 

declaration and payment of dividends; and

 

availability, limits and adequacy of insurance or indemnification.

 

These types of statements are based on current expectations about future events and inherently are subject to certain risks, uncertainties and assumptions, many of which are beyond our control, which could cause actual results to differ materially from those expected, projected or expressed in forward-looking statements. It should be understood that it is not possible to predict or identify all risks, uncertainties and assumptions. These risks, uncertainties and assumptions include, among others, the following:

 

 

the risk factors discussed in Part I, Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016 and in Part II, Item 1A of this report;

 

operational risk;

 

significant and sustained or additional declines in oil and natural gas prices;

 

sustained weakening of demand for our services;

 

general economic and business conditions;

 

the business opportunities that may be presented to and pursued or rejected by us;

 

insufficient access to sources of liquidity;

 

 
4

 

 

 

changes in law or regulations including, without limitation, changes in tax laws;

 

fewer than anticipated deepwater and ultra-deepwater drilling units operating in the Gulf of Mexico, the North Sea, offshore Southeast Asia or in other regions in which we operate;

 

unanticipated difficulty in effectively competing in or operating in international markets;

 

the level of fleet additions by us and our competitors that could result in overcapacity in the markets in which we compete;

 

advances in exploration and development technology;

 

dependence on the oil and natural gas industry;

 

drydocking delays or cost overruns on construction projects or insolvency of shipbuilders;

 

inability to accurately predict vessel utilization levels and day rates;

 

lack of shipyard or equipment availability;

 

unanticipated customer suspensions, cancellations, rate reductions or non-renewals;

 

uncertainty caused by the ability of customers to cancel some long-term contracts for convenience;

 

further reductions in capital expenditure budgets by customers;

 

ongoing capital expenditure requirements;

 

uncertainties surrounding deepwater permitting and exploration and development activities;

 

risks relating to compliance with the Jones Act, including the repeal or administrative weakening of the Jones Act or changes in the interpretation of the Jones Act related to the U.S. citizenship qualification;

 

uncertainties surrounding environmental and government regulations that could result in reduced exploration and production activities or that could increase our operations costs and operating requirements;

 

catastrophic or adverse sea or weather conditions;

 

risks of foreign operations, risk of war, sabotage, piracy, cyber-attack or terrorism;

 

public health threats;

 

disagreements with our joint venture partners;

 

assumptions concerning competition;

 

risks relating to leverage, including potential difficulty in maintaining compliance with covenants in our material debt or other obligations or in obtaining covenant relief from lenders or other contract parties;

 

risks of currency fluctuations; and

 

the shortage of or the inability to attract and retain qualified personnel.

 

These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. There can be no assurance that we have accurately identified and properly weighed all of the factors that affect market conditions and demand for our vessels, that the information upon which we have relied is accurate or complete, that our analysis of the market and demand for our vessels is correct or that the strategy based on such analysis will be successful.

 

 
5

 

 

The risks and uncertainties included here are not exhaustive. Other sections of this report and our other filings with the Securities and Exchange Commission, or SEC, include additional factors that could adversely affect our business, results of operations and financial performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements included in this report are based only on information currently available to us and speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations or beliefs with regard to the statement or any change in events, conditions or circumstances on which any forward-looking statement is based. In addition, in certain places in this report, we may refer to reports published by third parties that purport to describe trends or developments in energy production and drilling and exploration activity. We do so for the convenience of our investors and potential investors and in an effort to provide information available in the market intended to lead to a better understanding of the market environment in which we operate. We specifically disclaim any responsibility for the accuracy and completeness of such information and undertake no obligation to update such information.

 

 
6

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(In thousands, except par value amounts)

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 14,117     $ 8,822  

Trade accounts receivable, net of allowance for doubtful accounts of $3,347 and $2,482, respectively

    20,954       22,043  

Other accounts receivable

    7,557       7,650  

Inventory

    7,506       7,465  

Prepaid expenses

    6,290       3,799  

Restricted cash

    3,460       -  

Other current assets

    2,271       3,110  

Total current assets

    62,155       52,889  
                 

Vessels, equipment, and other fixed assets at cost, net of accumulated depreciation of $498,847 and $468,817, respectively

    1,004,972       970,522  

Construction in progress

    1,605       24,698  

Deferred costs and other assets

    2,761       5,794  

Total assets

  $ 1,071,493     $ 1,053,903  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Current maturities of long term debt

  $ 117,156     $ 483,326  

Debtor in possession financing

    17,000       -  

Accounts payable

    8,729       11,666  

Income and other taxes payable

    3,788       3,678  

Accrued personnel costs

    9,514       9,109  

Accrued interest expense

    755       8,163  

Other accrued liabilities

    4,882       9,305  

Total current liabilities

    161,824       525,247  
                 

Long-term income taxes:

               

Deferred income tax liabilities

    124,581       58,094  

Other income taxes payable

    17,763       17,768  

Other liabilities

    3,235       3,173  

Total liabilities not subject to compromise

    307,403       604,282  

Liabilities subject to compromise

    448,124       -  

Stockholders' equity:

               

Preferred stock, $0.01 par value; 2,000 shares authorized; no shares issued

    -       -  

Class A Common Stock, $0.01 par value; 60,000 shares authorized; 29,629 and 29,104 shares issued and 27,957 and 27,122 outstanding, respectively; Class B Common Stock $0.01 per value; 60,000 shares authorized; no shares issued

    289       278  

Additional paid-in capital

    400,397       411,983  

Retained earnings

    81,775       241,207  

Accumulated other comprehensive income (loss)

    (125,611 )     (148,402 )

Treasury stock, at cost

    (50,148 )     (64,580 )

Deferred compensation expense

    9,264       9,135  

Total stockholders' equity

    315,966       449,621  

Total liabilities and stockholders' equity

  $ 1,071,493     $ 1,053,903  

 

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

 

 
7

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
    (In thousands, except per share amounts)  
                                 

Revenue

  $ 24,641     $ 30,487     $ 49,000     $ 69,281  

Costs and expenses:

                               

Direct operating expenses

    19,384       20,932       38,559       44,667  

Drydock expense

    1,654       63       4,556       890  

General and administrative expenses

    8,804       8,854       18,381       18,642  

Pre-petition restructuring charges

    11,933       -       17,787       -  

Depreciation and amortization

    13,578       14,911       27,148       30,950  

Impairment charges

    -       46,151       -       162,808  

(Gain) loss on sale of assets and other

    (32 )     5,914       5,241       5,918  

Total costs and expenses

    55,321       96,825       111,672       263,875  

Operating loss

    (30,680 )     (66,338 )     (62,672 )     (194,594 )

Other income (expense):

                               

Interest expense

    (5,716 )     (8,991 )     (24,152 )     (17,388 )

Interest income

    9       35       16       75  

Gain on extinguishment of debt

    -       25,792       -       35,912  

Reorganization items

    (5,094 )     -       (5,094 )     -  

Foreign currency transaction loss and other

    (204 )     (1,083 )     (391 )     (1,127 )

Total other income (expense)

    (11,005 )     15,753       (29,621 )     17,472  

Loss before income taxes

    (41,685 )     (50,585 )     (92,293 )     (177,122 )

Income tax benefit

    1,138       3,005       (73,069 )     38,360  

Net loss

  $ (40,547 )   $ (47,580 )   $ (165,362 )   $ (138,762 )

Loss per share:

                               

Basic

  $ (1.58 )   $ (1.90 )   $ (6.50 )   $ (5.55 )

Diluted

  $ (1.58 )   $ (1.90 )   $ (6.50 )   $ (5.55 )

Weighted average shares outstanding:

                               

Basic

    25,583       25,077       25,442       24,985  

Diluted

    25,583       25,077       25,442       24,985  

 

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

 

 
8

 

  

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(In thousands)

   

(In thousands)

 

Net loss

  $ (40,547 )   $ (47,580 )   $ (165,362 )   $ (138,762 )

Comprehensive income (loss):

                               

Foreign currency translation gain (loss)

    16,225       (25,457 )     22,791       (22,199 )

Total comprehensive income (loss)

  $ (24,322 )   $ (73,037 )   $ (142,571 )   $ (160,961 )

 

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

 

 
9

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2017

(In thousands)

 

   

Common

Stock

   

Additional Paid-

In Capital

   

Retained

Earnings

   

Accumulated Other

Comprehensive

Income

   

Treasury Stock

   

Deferred

Compen-

sation

Expense

   

Total

Stockholders'

Equity

 
                                   

Shares

   

Share Value

                 
                                                                 

Balance at December 31, 2016

  $ 278     $ 411,983     $ 241,207     $ (148,402 )     (2,586 )   $ (64,580 )   $ 9,135     $ 449,621  

Net loss

    -       -       (165,362 )     -       -       -       -       (165,362 )

Issuance of common stock and other

    11       2,883       -       -       -       -       -       2,894  

Treasury stock

    -       -       -       -       310       14,561       -       14,561  

Deferred compensation plan

    -       (14,469 )     -       -       (415 )     (129 )     129       (14,469 )

Stock compensation tax adjustment

    -       -       5,930       -       -       -       -       5,930  

Translation adjustment

    -       -       -       22,791       -       -       -       22,791  

Balance at June 30, 2017

  $ 289     $ 400,397     $ 81,775     $ (125,611 )     (2,691 )   $ (50,148 )   $ 9,264     $ 315,966  

 

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

 

 
10

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

Six Months Ended

 
   

June 30,

 
   

2017

   

2016

 
   

(In thousands)

 

Cash flows from operating activities:

               

Net loss

  $ (165,362 )   $ (138,762 )

Adjustments to reconcile net loss to net cash provided by operations:

               

Depreciation and amortization

    27,148       30,950  

Amortization of stock-based compensation

    1,896       2,731  

Amortization of deferred financing costs

    10,279       2,127  

Provision for doubtful accounts receivable, net of write-offs

    801       23  

Impairment charges

    -       162,808  

Loss on sale of assets

    5,241       5,918  

Gain on extinguishment of debt

    -       (35,912 )

Deferred income tax expense (benefit)

    73,107       (38,600 )

Foreign currency transaction (gain) loss

    380       1,066  

Change in operating assets and liabilities:

               

Accounts receivable

    1,072       11,306  

Prepaids and other

    (4,891 )     406  

Accounts payable

    (3,202 )     294  

Other accrued liabilities and other

    11,076       (8,638 )

Net cash used in operating activities

    (42,455 )     (4,283 )

Cash flows from investing activities:

               

Purchases of vessels, equipment and other fixed assets

    (24,663 )     (13,638 )

Proceeds from disposition of vessels and equipment

    3,032       1,429  

Net cash used in investing activities

    (21,631 )     (12,209 )

Cash flows from financing activities:

               

Proceeds from borrowings under revolving loan facilities

    58,443       39,194  

Proceeds from borrowings under DIP financing facility

    17,000          

Repayment of secured credit facilities

    (2,000 )     (33,448 )

Debt issuance costs

    -       (831 )

Other financing costs

    (4,299 )     -  

Proceeds from issuance of stock

    -       227  

Net cash provided by financing activities

    69,144       5,142  

Effect of exchange rate changes on cash

    237       58  

Net (decrease) increase in cash and cash equivalents

    5,295       (11,292 )

Cash and cash equivalents at beginning of period

    8,822       21,939  

Cash and cash equivalents at end of period

  $ 14,117     $ 10,647  

Supplemental cash flow information:

               

Interest paid, net of interest capitalized

  $ 2,590     $ 16,073  

Income taxes paid, net

    1,129       1,691  

Restructuring costs paid

    5,094       -  

 

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

 

 
11

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION) AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

(1)

GENERAL INFORMATION

 

Organization and Nature of Operations

 

The condensed consolidated financial statements of GulfMark Offshore, Inc. and its subsidiaries included herein have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Unless otherwise indicated, references to “we”, “us”, “our” and the “Company” refer collectively to GulfMark Offshore, Inc. and its subsidiaries. Certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, has been condensed or omitted in this Quarterly Report on Form 10-Q pursuant to such rules and regulations. However, we believe that the disclosures herein are adequate to make the information presented not misleading. The consolidated balance sheet as of December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. It is recommended that these financial statements be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

In the opinion of management, all adjustments, which include reclassification and normal recurring adjustments necessary to present fairly the unaudited condensed consolidated financial statements for the periods indicated, have been made. All significant intercompany accounts have been eliminated. Certain reclassifications of previously reported information may be made to conform to current year presentation.

 

We provide offshore marine support and transportation services primarily to companies involved in the offshore exploration and production of oil and natural gas. Our vessels transport materials, supplies and personnel to offshore facilities, as well as move and position drilling structures. The majority of our operations are conducted in the North Sea, offshore Southeast Asia and the Americas. We also operate our vessels in other regions to meet our customers’ requirements.

 

Bankruptcy Filing

 

On May 17, 2017, GulfMark Offshore, Inc., or the Debtor, filed a voluntary petition for relief, or the Petition, and commenced a case, or the Bankruptcy Case, under chapter 11, or Chapter 11, of title 11 of the United States Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware, or the Bankruptcy Court, to pursue a proposed plan of reorganization which, as amended, we refer to as the Plan. The Bankruptcy Case is being administered under the caption In re GulfMark Offshore, Inc. No trustee has been appointed and we will continue to operate as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. To assure ordinary course operations, we have obtained approval from the Bankruptcy Court for a variety of “first day” motions, including authority to maintain bank accounts and other customary relief. A summary of the key features of the Plan is included below in Note 2.

 

 
12

 

 

The Plan is subject to acceptance by the Debtor’s creditors (as and to the extent required under the Bankruptcy Code) and confirmation by the Bankruptcy Court. Information contained in the Plan and the disclosure statement dated June 26, 2017 relating to the Plan is subject to change, whether as a result of amendments to the Plan, third-party actions, or otherwise.

 

Bankruptcy Accounting

 

The unaudited condensed consolidated financial statements included herein have been prepared as if we were a going concern and reflect the application of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 852 “Reorganizations,” or ASC 852. ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in “reorganization items, net” on our consolidated statements of operations. In addition, prepetition unsecured and under-secured obligations that may be impacted by the bankruptcy reorganization process have been classified as “liabilities subject to compromise” on our consolidated balance sheet at June 30, 2017. These liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court, although they may be settled for less.

 

The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of our Chapter 11 proceedings. In particular, the consolidated financial statements do not purport to show: (i) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities; (ii) the amount of prepetition liabilities that may be allowed for claims or contingencies, or the status and priority thereof; (iii) the effect on stockholders’ equity accounts of any changes that may be made to our capitalization; or (iv) the effect on operations of any changes that may be made to our business.

 

Restricted cash

 

As a result of the bankruptcy, certain customers and financial institutions have required us to cash collateralize certain performance and transaction obligations. The accounts that hold this cash are under our control but use of the cash is restricted until we have completed the obligations. These amounts are separated from cash and included in restricted cash in our balance sheet.

 

Earnings Per Share

 

Basic Earnings Per Share, or EPS, is computed by dividing net income (loss) by the weighted average number of shares of Class A Common Stock outstanding during the period. Diluted EPS is computed using the treasury stock method for Class A Common Stock equivalents.

 

(2) Bankruptcy and Related Matters

 

As described in Note 1, on May 17, 2017, the Debtor filed for protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court to pursue the Plan. The commencement of the Bankruptcy Case constituted an event of default that accelerated the Debtor’s obligations under the Indenture, dated as of March 12, 2012, by and between the Debtor, as issuer, and U.S. Bank National Association, as trustee, with respect to the Senior Notes referred to below. In addition, the commencement of the Bankruptcy Case constituted an event of default under the Multicurrency Facility Agreement and the Norwegian Facility Agreement referred to below.

 

 
13

 

 

Restructuring Support Agreement

 

On May 15, 2017, the Debtor entered into a restructuring support agreement, or the RSA, with holders, or the Noteholders, of approximately 50% of the aggregate outstanding principal amount of the Debtor’s unsecured 6.375% senior notes due 2022, or the Senior Notes, to support a restructuring on the terms of the Plan. The RSA provides that, among other things, we will commence a $125 million rights offering, or the Rights Offering, and that:

 

 

The Debtor will commence the $125 million Rights Offering, pursuant to which (subject to limitations regarding the Jones Act described below), eligible Noteholders will have the right to purchase on the effective date of the Plan, or the Effective Date, their pro rata share of 60% of the Debtor’s common stock, or as applicable, the Jones Act Warrants (as defined below), or the Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issued or issuable under the proposed management incentive plan, or the MIP, and upon exercise of the Reorganization Warrants (as defined below). The Rights Offering will be backstopped by certain of the Noteholders for a 6.0% commitment premium paid in the form of 3.6% of the Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issued or issuable under the MIP and upon exercise of the Reorganization Warrants.

 

 

Each holder of the Senior Notes will receive (subject to limitations regarding the Jones Act described below) its pro rata share of the Reorganized GulfMark Equity representing in the aggregate 35.65% of Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP and the exercise of the Reorganization Warrants.

 

 

The Jones Act, which applies to companies that engage in coastwise trade, requires that, among other things, with respect to a publicly traded company, the aggregate ownership of common stock by non-U.S. citizens be not more than 25% of its outstanding common stock. Accordingly, the creditors who are recipients of common stock pursuant to the Plan or the Rights Offering who are non-U.S. holders may receive warrants to acquire common stock at an exercise price in a minimal amount in lieu of common stock, or the Jones Act Warrants.

 

 

All outstanding common stock of the Debtor will be cancelled and each holder of outstanding common stock of the Debtor will receive its pro rata share of (a) common stock representing in the aggregate 0.75% of the Reorganized GulfMark Equity, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP and the exercise of the Reorganization Warrants, and (b) warrants for 7.5% of the equity in the reorganized Debtor, subject to dilution by the Reorganized GulfMark Equity issuable under the MIP, with a 7-year term and with an exercise price based on an equity value of $1 billion, or the Reorganization Warrants.

 

 

The Debtor will seek to obtain debtor-in-possession financing pursuant to terms and conditions that are reasonably acceptable to the Debtor and Requisite Noteholders (as defined in the RSA).

 

 
14

 

 

 

Holders of allowed claims arising under the Debtor’s proposed debtor-in-possession financing facility, administrative expense claims, priority tax claims, other priority claims, and other secured claims of the Debtor will receive in exchange for their claims payment in full in cash or otherwise have their rights unimpaired under title 11 of the Bankruptcy Code. The Debtor will continue to pay any general unsecured claims in the ordinary course of business.

 

The RSA includes covenants on the part of the Debtor and the Noteholders, including that the Noteholders vote in favor of the Plan and otherwise facilitate the restructuring contemplated by the RSA. The RSA also includes rights of termination by each party upon the occurrence of certain events, including without limitation our failure to achieve certain milestones.

 

The Plan provides that the guaranty claims of the lender under our Secured Revolving Credit Facility Agreement, dated December 27, 2012, in the original aggregate principal amount of NOK 600,000,000, as amended, supplemented and/or restated from time to time, or the Norwegian Facility Agreement, among the Debtor, as guarantor, one of our indirect wholly-owned subsidiaries, GulfMark Rederi AS, or Rederi, as the borrower, our other subsidiaries party thereto and DNB Bank ASA, or the Norwegian Lender, will receive, on the Effective Date of the Plan, payment in cash in an amount equal to the allowed amount of guaranty claims, except to the extent that the lender agrees to a less favorable treatment. See “DNB Second Amendment and Restatement Agreement” below.

 

In addition, the Plan provides that, on the Effective Date of the Plan, or as soon as reasonably practicable thereafter, the Debtor (or its designee) or the reorganized Debtor (or its designee), as applicable, will pay in full in cash the allowed guaranty claims of the lenders under our secured Multicurrency Facility Agreement, dated as of September 26, 2014, as amended, supplemented and/or restated from time to time, or the Multicurrency Facility Agreement, among the Debtor, as guarantor, one of our indirect wholly-owned subsidiaries, GulfMark Americas, Inc., or GulfMark Americas, as the borrower, a group of financial institutions as the lenders and The Royal Bank of Scotland plc, as agent for the lenders, or the Agent, less any amounts that may have been paid to satisfy obligations under the Multicurrency Facility Agreement by any of the obligors under the Multicurrency Facility Agreement prior to the Effective Date, except as otherwise agreed by the Agent and the Debtor (with consent of the Required Consenting Noteholders (as defined in the Plan)).

 

Backstop Commitment Agreement

 

On May 15, 2017, the Debtor entered into a backstop commitment agreement, or the Backstop Commitment Agreement, pursuant to which certain of the Noteholders agreed to backstop the Rights Offering contemplated in the RSA, or the Backstop Commitments. Pursuant to the Backstop Commitment Agreement, each of the holders of a Backstop Commitment party to the Backstop Commitment Agreement, or the Commitment Parties, severally and not jointly, agree to fully participate in the Rights Offering and purchase the Reorganized GulfMark Equity in accordance with the percentages set forth in the Backstop Commitment Agreement to the extent unsubscribed under the Rights Offering. In addition, to compensate the Commitment Parties for the risk of their undertakings and as consideration for the Backstop Commitments, the Debtor will pay the Commitment Parties, subject to approval by the Bankruptcy Court, in the aggregate, on the Effective Date, a backstop commitment premium in an amount equal to $7,500,000 in the form of Reorganized GulfMark Equity.

 

 
15

 

 

The Backstop Commitment Agreement is terminable by the Debtor and/or the Requisite Commitment Parties (as defined in the Backstop Commitment Agreement) under several conditions, including failure to achieve certain milestones or the termination of the RSA. The Debtor is also required to pay a termination fee in the amount of $7,500,000 in cash to the Commitment Parties if the Backstop Commitment Agreement is terminated for certain events.

 

Intercompany DIP Credit Agreement

 

On May 18, 2017, the Debtor entered into the Senior Secured Super-Priority Debtor In Possession Credit Agreement, or the Intercompany DIP Agreement, among the Debtor, as the borrower, Rederi, a wholly-owned subsidiary of the Debtor, as the lender, and the Norwegian Lender, as issuing bank.  Pursuant to the Intercompany DIP Agreement, Rederi has made available to the Debtor a senior secured super-priority term loan facility of up to $35 million to allow the Debtor to continue to operate its business and manage its properties as a debtor and a debtor-in-possession pursuant to the Debtor’s filing of the Petition.  The Debtor has requested that the Norwegian Lender issue letters of credit from time to time, to be cash collateralized using the proceeds of the term loans under the Intercompany DIP Agreement. As security for the loans under the Intercompany DIP Agreement, the Debtor has pledged 65% of its equity interests in GulfMark Capital, LLC, GulfMark Foreign Investments LLC and GM Offshore, Inc., each a wholly-owned domestic subsidiary of the Debtor.

 

DNB Second Amendment and Restatement Agreement

 

In order to provide funds to Rederi for purposes of making loans to the Debtor under the Intercompany DIP Agreement, on May 18, 2017, Rederi entered into the Second Amendment and Restatement Agreement, or the DNB Second Amendment and Restatement Agreement, among Rederi, as borrower, the other loan parties party thereto, the financial institutions listed therein as lenders, and the Norwegian Lender, as arranger and agent. Pursuant to the DNB Second Amendment and Restatement Agreement, the parties amended and restated the Norwegian Facility Agreement. We refer to the Norwegian Facility Agreement, as amended and restated by the DNB Second Amendment and Restatement Agreement, as the Amended and Restated Norwegian Facility. Pursuant to the Amended and Restated Norwegian Facility, the Norwegian Lender agreed to make available to Rederi an additional $35 million senior secured term loan facility, or the Term Loan Facility.  To secure the Term Loan Facility, Rederi, a wholly-owned subsidiary of GulfMark Norge AS, or the Norwegian Parent, and GulfMark UK Ltd., or the UK Guarantor, a wholly-owned subsidiary of GulfMark North Sea Limited, or the UK Parent, agreed to place mortgages in favor of the Norwegian Lender on certain additional previously unencumbered vessels owned by Rederi and certain other subsidiaries of the Debtor. In addition, the UK Parent and the Norwegian Parent pledged their shares in the UK Guarantor and Rederi, respectively, to the Norwegian Lender.

 

Multicurrency Facility Agreement Forbearance Agreement

 

On June 26, 2017, GulfMark Americas and GulfMark Management, Inc., or GulfMark Management, each a subsidiary of the Debtor, entered into a forbearance agreement, or the RBS Forbearance Agreement, with The Royal Bank of Scotland plc, as Agent, relating to the Multicurrency Facility Agreement. Pursuant to the RBS Forbearance Agreement, the Agent agreed to waive the defaults and events of default specified in the RBS Forbearance Agreement and to forbear from exercising any rights or remedies under the Multicurrency Facility Agreement as a result of any such defaults and events of default specified in the RBS Forbearance Agreement until the earlier of (x) the occurrence of any of the early termination events specified in the RBS Forbearance Agreement, (y) the effectiveness of the Plan (including all exhibits and schedules thereto, and as amended, modified or supplemented solely in accordance with the RBS Forbearance Agreement) and (z) September 4, 2017. In addition, the Agent agreed in the RBS Forbearance Agreement that during such period the provision in the Multicurrency Facility Agreement that would result in an automatic acceleration of the outstanding obligations, termination of the lending commitments and a requirement to cash-collateralize letters of credit as specified in the RBS Forbearance Agreement shall not apply.

 

 
16

 

 

 Liabilities Subject to Compromise

 

As a result of the filing of the Petition, the payment of pre-petition indebtedness is subject to compromise or other treatment under the Plan. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims is generally not permitted, the Bankruptcy Court granted the Debtor authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtor’s businesses and assets. Among other things, the Bankruptcy Court authorized the Debtor to pay certain pre-petition claims relating to employee wages and benefits, customers, vendors, and suppliers in the ordinary course of business.

 

The Debtor has been paying and intends to continue to pay undisputed post-petition claims in the ordinary course of business. With respect to pre-petition claims, the Debtor has notified all known claimants of the deadline to file a proof of claim with the Bankruptcy Court, which deadline has passed. The Debtor’s liabilities subject to compromise represent the Debtor’s current estimate of claims expected to be allowed under the Plan. Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. 

 

Liabilities subject to compromise are included in our unaudited condensed consolidated balance sheet in the amount of $448.1 million, consisting of the Senior Notes in the aggregate principal amount of $429.6 million and accrued interest through the date of the Petition on the Senior Notes in the amount of $18.5 million. See Note 5 for a description of the Senior Notes.

 

Reorganization Items

 

Reorganization items represent amounts incurred subsequent to the Bankruptcy Case filing directly resulting from such filing and consist primarily of professional fees for bankers, attorneys and accountants totaling $5.1 million during the three months ended June 30, 2017.

 

 
17

 

 

Financial Statements of the Debtor

 

In accordance with the requirements of ASC 852, the following are condensed financial statements of the Debtor:

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION)

UNAUDITED CONDENSED BALANCE SHEET

 

   

June 30,

 
   

2017

 
   

(In thousands)

 

ASSETS

       

Current assets:

       

Cash and cash equivalents

  $ 4,007  

Prepaid expenses

    1,641  

Total current assets

    5,648  
         

Intercompany notes and other receivables

    418,665  

Investments in subsidiaries

    286,164  
         

Total assets

  $ 710,477  

LIABILITIES AND STOCKHOLDERS' EQUITY

       

Current liabilities:

       

Debtor in possession financing

  $ 10,000  

Accounts payable

    369  

Accrued personnel costs

    5,004  

Other accrued liabilities

    588  

Total current liabilities

    15,961  

Deferred income tax liabilities

    111,330  

Liabilities subject to compromise

    448,124  

Stockholders' equity

    135,062  

Total liabilities and stockholders' equity

  $ 710,477  

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION)

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS 

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2017

 
    (In thousands)  

Revenue

  $ -     $ -  

Costs and expenses:

               

General and administrative expenses

    1,486       3,389  

Pre-petition restructuring charges

    11,716       17,569  

Total costs and expenses

    13,202       20,958  

Operating loss

    (13,202 )     (20,958 )

Other income (expense):

               

Interest expense

    (3,910 )     (17,219 )

Interest income

    2,507       5,183  

Reorganization items

    (1,902 )     (1,902 )

Foreign currency transaction loss and other

    (8 )     (9 )

Total other income (expense)

    (3,313 )     (13,947 )

Loss before income taxes

    (16,515 )     (34,905 )

Income tax expense

    (6,319 )     (84,091 )

Net loss

  $ (22,834 )   $ (118,996 )

 

 
18

 

 

GULFMARK OFFSHORE, INC. (DEBTOR IN POSSESSION)

UNAUDITED CONDENSED STATEMENT OF CASH FLOWS

 

   

Six Months Ended

 
   

June 30,

 
   

2017

 
   

(In thousands)

 

Cash flows from operating activities:

       

Net loss

  $ (118,996 )

Adjustments to reconcile net loss to net cash provided by operations:

       

Amortization of stock-based compensation

    1,464  

Amortization of deferred financing costs

    6,471  

Deferred income tax expense

    84,091  
         

Change in operating assets and liabilities:

       

Accounts receivable

    25  

Prepaids and other

    (1,144 )

Accounts payable

    (26 )

Other accrued liabilities and other, including intercompany activity

    22,120  

Net cash used in operating activities

    (5,995 )

Cash flows from financing activities:

       

Proceeds from intercompany DIP financing

    10,000  

Net cash provided by financing activities

    10,000  
         

Net increase in cash and cash equivalents

    4,005  

Cash and cash equivalents at beginning of period

    2  

Cash and cash equivalents at end of period

  $ 4,007  

 

 

(3) IMPAIRMENT CHARGES

 

Long-Lived Asset Impairment

 

Our tangible long-lived assets consist primarily of vessels and construction-in-progress. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We assess potential impairment by comparing the carrying values of the long-lived assets to the undiscounted cash flows expected to be received from those assets. If impairment is indicated, we determine the amount of impairment expense by comparing the carrying value of the long-lived assets with their fair market value. We base our undiscounted cash flow estimates on, among other things, historical results adjusted to reflect the best estimate of future operating performance. We obtain estimates of fair value of our vessels from independent appraisal firms. Management’s assumptions are an inherent part of our asset impairment evaluation, and the use of different assumptions could produce results that differ from those reported.

 

Beginning in late 2014, oil prices declined significantly. Prices continued to decline throughout 2015 and into 2016, reaching a low of less than $30 per barrel in the first quarter of 2016. Prices recovered over the remainder of 2016, stabilizing at over $40 per barrel for much of the second and third quarters of 2016 and further increasing to over $50 per barrel in the fourth quarter of 2016. However, prices have since declined and continue to be volatile and are subject to significant uncertainty. The lower price environment impacted the operational plans for oil companies beginning in late 2014 and consequently adversely affected the drilling and support service sector. The decrease in day rates and utilization for offshore vessels has been significant. In addition, the independent appraisal firms have lowered the fair value estimates related to our vessels in each quarter since the fourth quarter of 2014. As a result of these factors, we have performed a number of reviews for impairment since the fourth quarter of 2014.

 

 
19

 

 

Based on the triggering events discussed above, we performed an evaluation for impairment for the quarter ended March 31, 2016 and determined that the carrying values of certain of our long-lived asset groups in the Americas and in Southeast Asia were greater than the related undiscounted expected future cash flows. We compared the carrying values of the long-lived asset groups to the fair value provided by the independent appraisal firms and recorded $114.1 million of impairment charges in the first quarter of 2016. The impairment charge consisted of $94.5 million in connection with our long-lived assets in the U.S. Gulf of Mexico, which is part of our Americas segment and included vessels under construction, and $19.6 million in connection with our Southeast Asia segment. We also performed an evaluation for impairment for each of our asset groups in the first and second quarters of 2017, but determined that the undiscounted expected future cash flows were greater than the carrying value in each group and concluded that no further impairment was indicated.

 

We will continue to monitor the industry for triggering events that could indicate additional impairment.

 

Vessel Component Impairment

 

We have vessel components in our North Sea and Southeast Asia segments that we intend to sell. Based on third party valuations, in the first quarter of 2016 we recorded impairment expense related to these assets totaling $2.6 million, consisting of $2.0 million in the North Sea and $0.6 million in Southeast Asia.

 

(4)

VESSEL ACQUISITIONS AND DISPOSITIONS

 

Interest is capitalized in connection with the construction of vessels. During the six months ended June 30, 2017, we capitalized $0.1 million of interest, all in the first quarter. Since we took delivery of the last of the new build vessels we had under construction during the first quarter of 2017, no further interest was capitalized during the second quarter of 2017. During the three and six months ended June 30, 2016, we capitalized $0.7 million and $1.7 million of interest, respectively.

 

In the first quarter of 2016, we had two vessels under construction in the U.S. that were significantly delayed. In March 2016, we resolved certain matters under dispute with the shipbuilder and reset the contract schedules so that we would take delivery of the first vessel in mid-2016 and the second vessel in mid-2017, at which time a final payment of $26.0 million would be due.  We took delivery of the first of these vessels during the second quarter of 2016. Under the settlement, we had the right to elect not to take delivery of the second vessel and forego the final payment, in which case the shipbuilder would retain the vessel. On May 8, 2017, we advised the shipbuilder that we had elected not to take delivery. We have no other vessels under construction as of June 30, 2017.

 

During the first quarter of 2017 we took delivery of a vessel built in Norway and paid a final installment on delivery of 195.0 million NOK (approximately $23.3 million).

 

 
20

 

 

The following tables illustrate the details of vessels sold and vessels added:

 

Vessel Additions Since December 31, 2016

     

Year

 

Length

             

Month

Vessel Region Type(1)

Built

 

(feet)

    BHP(3)     DWT(4)  

Delivered

                                 

North Barents

N. Sea

LgPSV

2017

    304       11,935       4,700  

Jan-17

 

Vessels Disposed of Since December 31, 2016

     

Year

 

Length

             

Month

Vessel Region Type(2)

Built

 

(feet)

    BHP(3)     DWT(4)  

Disposed

                                 

Mako

Americas

FSV

2008

    181       7,200       552  

Mar-17

Tiger

Americas

FSV

2009

    181       7,200       552  

Mar-17

 

(1) LgPSV - Large Platform Supply Vessel

(2) FSV - Fast Supply Vessel

(3) BHP - Brake Horsepower

(4) DWT - Deadweight Tons

 

 

(5)

DEBT

 

Our debt at June 30, 2017 and December 31, 2016 consisted of the following:

 

   

June 30, 2017

   

December 31, 2016

 
   

(In thousands)

 

Senior Notes Due 2022

  $ -     $ 429,640  

Multicurrency Facility Agreement

    72,000       49,000  

Norwegian Facility Agreement

    45,156       11,157  

Debtor in possession financing component of Amended and Restated Norwegian Facility

    17,000       -  
      134,156       489,797  

Debt Premium

    -       423  

Debt Issuance Costs Associated with the Senior Notes

    -       (6,894 )

Total

  $ 134,156     $ 483,326  

 

As described further in this Note 5, the Senior Notes in the aggregate principal amount of $429.6 million have been reclassified as liabilities subject to compromise.

 

The following is a summary of scheduled debt maturities by year:

 

Year

 

Debt Maturity

 
     

(In thousands)

 
 

2017

    -  
 

2018

    -  
 

2019

    134,156  
 

2020

    -  
 

2021

    -  
 

Thereafter

    -  
 

Total

  $ 134,156  

 

 
21

 

  

Our consolidated financial statements as of and for the three and six months ended June 30, 2017 have been prepared assuming we 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 the consolidated financial statements. However, for the reasons described in Note 2, indebtedness with the stated maturities as summarized above is classified as a current liability at June 30, 2017 and at December 31, 2016.

 

Senior Notes Due 2022

 

In March and December 2012, we issued $500.0 million aggregate principal amount of 6.375% Senior Notes due 2022. Interest on the Senior Notes is payable semi-annually on March 15 and September 15. On and after March 15, 2017, we may redeem some or all of the Senior Notes at the redemption prices (expressed as percentages of principal amount) equal to 103.188% for the twelve-month period beginning March 15, 2017, 102.125% for the twelve-month period beginning March 15, 2018, 101.063% for the twelve-month period beginning March 15, 2019 and 100.000% beginning March 15, 2020 and thereafter, plus accrued and unpaid interest to the redemption date.

 

In conjunction with the Senior Notes offering, we incurred a total of $12.7 million in debt issuance costs, of which $6.7 million remained unamortized at March 31, 2017. We also sold the Senior Notes at a premium, of which $0.4 million remained unamortized at March 31, 2017. As of March 31, 2017, based on negotiations that were underway with holders of our Senior Notes, it became evident that the restructuring of our capital structure would not include a restructuring of the Senior Notes, and that the Senior Notes, as demand obligations, would not be repaid under the terms of the Senior Note indentures in the ordinary course of business. As a result, on March 31, 2017, we accelerated the amortization of the debt premium and debt issuance costs, fully amortizing such amounts as of March 31, 2017.

 

In December 2015, we repurchased in the open market $1.0 million face value of the Senior Notes leaving $499.0 million aggregate principal amount of the Senior Notes outstanding at December 31, 2015. In the first quarter of 2016, we repurchased in the open market $20.0 million face value of Senior Notes leaving $479.0 million aggregate principal amount outstanding at March 31, 2016. We recorded a gain totaling approximately $10.1 million upon the repurchase of Senior Notes in the first quarter of 2016, which gain is included in other income and expense in our consolidated statements of operations. In the year ended December 31, 2016, we repurchased in the open market a total of $69.4 million face value of the Senior Notes and recorded gains totaling approximately $35.9 million. The open market repurchases reduced the aggregate principal amount of Senior Notes outstanding to $429.6 million.

 

We did not pay the $13.7 million interest payment due March 15, 2017 on our Senior Notes. Our failure to pay this amount on April 14, 2017 within the 30-day grace period to make such payment resulted in an event of default under the indenture governing the Senior Notes, resulting in a cross-default under the Multicurrency Facility Agreement and the Norwegian Facility Agreement. On April 14, 2017, we entered into a forbearance agreement with certain beneficial owners and/or investment advisors or managers of discretionary accounts for the holders or beneficial owners, or the Holders, of in excess of 50% of the aggregate principal amount of Senior Notes outstanding, pursuant to which each Holder agreed during the “Forbearance Period,” subject to certain conditions, not to enforce any of the rights and remedies available to the Holders or the trustee under the indenture or the Senior Notes, solely with respect to our failure to make the interest payment due on March 15, 2017 on the Senior Notes. The “Forbearance Period” was subsequently extended until the earlier of May 12, 2017 and the occurrence of any of the specified early termination events described therein.

 

 
22

 

 

Subsequently, on May 17, 2017, as described in more detail in Notes 1 and 2, we filed for protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court to pursue the Plan. The commencement of the Bankruptcy Case constitutes an event of default that accelerated the Debtor’s obligations under the Indenture, dated as of March 12, 2012, by and between the Debtor, as issuer, and U.S. Bank National Association, as trustee, with respect to the Senior Notes. Any efforts to enforce such payment obligations under the Senior Notes were automatically stayed as a result of the filing of the Petition and the holders’ rights of enforcement in respect of the Senior Notes are subject to the applicable provisions of the Bankruptcy Code. In conjunction with the filing of the Petition, we entered into the RSA with the Noteholders holding approximately 50% of the aggregate outstanding principal amount of the Senior Notes. The RSA contemplates that, among other things, we will commence the Rights Offering. We have also entered into the Backstop Commitment Agreement with the Noteholders, pursuant to which the Commitment Parties agree to backstop the Rights Offering. The RSA and the Backstop Commitment Agreement are more fully described in Note 2.

 

As a result of filing the Petition and entering into the RSA, we have reclassified the amounts outstanding under the Senior Notes, including all interest accrued through the date of the Petition, to liabilities subject to compromise. Liabilities subject to compromise are included in our unaudited condensed consolidated balance sheet in the amount of $448.1 million, consisting of the Senior Notes in the amount of $429.6 million and accrued interest through the date of the Bankruptcy Case filing in the amount of $18.5 million.

 

Multicurrency Facility Agreement

 

We are party to the Multicurrency Facility Agreement, which has a scheduled maturity date of September 26, 2019 and commits the lenders to provide revolving loans of up to $100.0 million at any one time outstanding, subject to certain terms and conditions set forth in the Multicurrency Facility Agreement, and contains a sublimit of $25.0 million for swingline loans and a sublimit of $5.0 million for the issuance of letters of credit. Revolving loans drawn under the Multicurrency Facility Agreement and denominated in U.S. Dollars accrue interest at the London Interbank Offered Rate, or LIBOR, plus an applicable margin which may range from 2.75% to 4.00%, while swingline loans drawn under the Multicurrency Facility Agreement accrue interest at the alternate base rate. The applicable margin is determined by reference to the capitalization ratio calculated as of the last day of the most recent fiscal quarter. The applicable interest rate for overdue amounts increases by an additional 2.00%. The fee for unused commitments is 1.25% per annum. We are subject to certain financial and other covenants and other obligations under the Multicurrency Facility Agreement. Please see Note 6 to our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016 for additional information regarding the obligations under our Multicurrency Facility Agreement. On March 8, 2017, we entered into an agreement with the Agent under our Multicurrency Facility Agreement pursuant to which the lenders extended additional revolving loans in the aggregate principal amount of $10.0 million on March 8, 2017. The agreement prohibits us from requesting any additional loans under the Multicurrency Facility Agreement without the prior written consent of the Agent (acting upon the instruction of all the lenders following unanimous consent).

 

 
23

 

 

The report from our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2016 included an uncertainty paragraph arising from the substantial doubt about our ability to continue as a going concern. Our failure to deliver an unqualified audit opinion from our auditors that is not subject to a going concern or like qualification or exception constituted an event of default under the Multicurrency Facility Agreement, allowing the lenders thereunder to cancel their commitments, accelerate the indebtedness thereunder and exercise remedies with respect to the collateral securing the Multicurrency Facility Agreement, likewise causing a cross-default under the Norwegian Facility Agreement absent a waiver or forbearance from the lenders under the Multicurrency Facility Agreement. In addition, the commencement of the Bankruptcy Case constituted an event of default under the Multicurrency Facility Agreement.

 

On March 14, 2017, we entered into a support agreement with the Agent in which the lenders agreed to waive certain existing or anticipated defaults or events of default under the Multicurrency Facility Agreement and forbear from exercising rights or remedies under the related finance documents as a result therefrom for a limited support period. We subsequently entered into agreements with the Agent extending such support period as of April 14, 2017, April 28, 2017 and May 12, 2017. On May 19, 2017, GulfMark Americas and GulfMark Management entered into a forbearance agreement with the Agent pursuant to which the Agent agreed to waive the defaults and events of default specified therein and to forbear from exercising any rights or remedies under the Multicurrency Facility Agreement as a result of any such defaults and events of default for a limited period and to rescind, on a retrospective basis, during such period the provision in the Multicurrency Facility Agreement that results in an automatic acceleration of the outstanding obligations, termination of the lending commitments and a requirement to cash-collateralize letters of credit in connection with the event of default arising as a result of the Debtor’s filing of the Petition. Such forbearance agreement was subsequently extended as of May 31, 2017 and June 16, 2017.

 

On June 26, 2017, GulfMark Americas and GulfMark Management entered into the RBS Forbearance Agreement with the Agent relating to the Multicurrency Facility Agreement. Pursuant to the RBS Forbearance Agreement, the Agent agreed to waive the defaults and events of default specified in the RBS Forbearance Agreement and to forbear from exercising any rights or remedies under the Multicurrency Facility Agreement as a result of any such defaults and events of default specified in the RBS Forbearance Agreement until the earlier of (x) the occurrence of any of the early termination events specified in the RBS Forbearance Agreement, (y) the effectiveness of the Plan (including all exhibits and schedules thereto, and as amended, modified or supplemented solely in accordance with the RBS Forbearance Agreement) and (z) September 4, 2017. In addition, the Agent agreed in the RBS Forbearance Agreement that during such period the provision in the Multicurrency Facility Agreement that would result in an automatic acceleration of the outstanding obligations, termination of the lending commitments and a requirement to cash-collateralize letters of credit as specified in the RBS Forbearance Agreement shall not apply.

 

We had unamortized fees paid to the arrangers, the Agent and the security trustee totaling $2.3 million at March 31, 2017, which fees were amortized into interest cost on a straight-line basis over the life of the Multicurrency Facility Agreement. As of March 31, 2017, based on negotiations that were underway with the lenders, it became evident that the restructuring of our capital structure would not include a restructuring of the Multicurrency Facility Agreement, and that the Multicurrency Facility Agreement, as a demand obligation, would not be repaid under the terms of the Multicurrency Facility Agreement in the ordinary course of business. As a result, on March 31, 2017, we accelerated the amortization of debt issuance costs, fully amortizing such amounts as of March 31, 2017.

 

 
24

 

 

The Multicurrency Facility Agreement is secured by 24 vessels owned by GulfMark Americas. The collateral that secures the loans under the Multicurrency Facility Agreement may also secure all of GulfMark Americas’ obligations under any hedging agreements between GulfMark Americas and any lender or other hedge counterparty to the Multicurrency Facility Agreement.

 

The Debtor unconditionally guaranteed all existing and future indebtedness and liabilities of GulfMark Americas arising under the Multicurrency Facility Agreement and other related loan documents. Such guarantee may also cover obligations of GulfMark Americas arising under any hedging arrangements. At June 30, 2017, we had $72.0 million borrowed and outstanding under the Multicurrency Facility Agreement and the weighted average interest rate on our outstanding borrowings under the Multicurrency Facility Agreement was 5.13%.

 

Norwegian Facility Agreement

 

Under the Amended and Restated Norwegian Facility, the Norwegian Lender has agreed to provide certain loans up to an aggregate principal amount equal to the sum of $55.0 million and NOK 210.0 million (or approximately $25.6 million at June 30, 2017) at any one time outstanding, subject to certain terms and conditions. The Amended and Restated Norwegian Facility has a scheduled maturity date on the earlier of August 18, 2017 (subject to extension in accordance with certain conditions specified therein) and the occurrence of any of the specified early maturity events, including the Effective Date of the Plan. Loans under the Amended and Restated Norwegian Facility accrue interest at the Norwegian Interbank Offered Rate, or NIBOR, or, if the loan is denominated in U.S. Dollars, LIBOR plus 8.00%. During the continuance of an event of default, upon notice by the agent under the Amended and Restated Norwegian Facility, the applicable interest rate increases by an additional 2.00%. The fee for unused commitments is 5.00% per annum. We are subject to certain financial and other covenants and other obligations under the Amended and Restated Norwegian Facility.

 

The Amended and Restated Norwegian Facility is secured by 16 vessels owned by the UK Guarantor and by six vessels owned by Rederi. The collateral that secures the loans under the Amended and Restated Norwegian Facility may also secure all of Rederi’s obligations under any hedging agreements between Rederi and the Norwegian Lender or other hedge counterparty to the Amended and Restated Norwegian Facility.

 

We unconditionally guaranteed all existing and future indebtedness and liabilities of Rederi arising under the Amended and Restated Norwegian Facility and other related loan documents. Such guarantee may also cover obligations of Rederi arising under any hedging arrangements described above. At June 30, 2017, we had $62.2 million borrowed and outstanding under the Amended and Restated Norwegian Facility and the weighted average interest rate on our outstanding borrowings was 5.86%.

 

We had unamortized fees paid to the arrangers, the agent and the security trustee totaling $1.1 million at March 31, 2017, which fees were being amortized into interest cost on a straight-line basis over the life of the Norwegian Facility Agreement. As of March 31, 2017, based on negotiations that were underway with the lenders, it became evident that the restructuring of our capital structure would not include a restructuring of the Norwegian Facility Agreement, and that the Norwegian Facility Agreement, as a demand obligation, would not be repaid under the terms of the Norwegian Facility Agreement in the ordinary course of business. As a result, on March 31, 2017, we accelerated the amortization of debt issuance costs, fully amortizing such amounts as of March 31, 2017.

 

 
25

 

 

On April 14, 2017, we entered into a support agreement with the Norwegian Lender relating to the Norwegian Facility Agreement pursuant to which the Norwegian Lender agreed to abstain from exercising any rights or remedies under the Norwegian Facility Agreement as a result of certain specified defaults or events of default for a limited support period. We subsequently entered into agreements with the Norwegian Lender extending such support period as of April 28, 2017 and May 12, 2017. The commencement of the Bankruptcy Case constituted an event of default under the Norwegian Facility Agreement.

 

In order to provide funds to Rederi for purposes of making loans to the Debtor under the Intercompany DIP Agreement, on May 18, 2017, Rederi entered into the DNB Second Amendment and Restatement Agreement. Pursuant to the DNB Second Amendment and Restatement Agreement, the parties amended and restated the Norwegian Facility Agreement. Pursuant to the Amended and Restated Norwegian Facility, the Norwegian Lender agreed to make the $35 million Term Loan Facility available to Rederi.  To secure the Term Loan Facility, the Norwegian Lender, the UK Guarantor and the UK Parent agreed to place mortgages in favor of the Norwegian Lender on certain additional, previously unencumbered vessels owned by Rederi and certain other subsidiaries of the Debtor. In addition, the UK Parent and the Norwegian Parent pledged their shares in the UK Guarantor and Rederi, respectively, to the Norwegian Lender.

 

(6)

INCOME TAXES

 

Our estimated annual effective tax rate, adjusted for discrete tax items, is applied to interim periods’ pretax income (loss). Our estimated annual effective tax rate includes the recognition of a valuation allowance on our deferred tax assets. The tax effect of this recognition is a discrete item for the second quarter of 2017 of $3.9 million.

 

In previous years, we determined to repatriate all future foreign earnings and $240.0 million of prior earnings of certain of our non-U.S. subsidiaries, thereby reducing our total permanently reinvested earnings. The change in our foreign repatriation strategy resulted in a non-cash tax charge of approximately $84.0 million. We have not provided for U.S. deferred taxes on the permanently reinvested earnings of approximately $553.0 million at June 30, 2017. The projected cash flows of our foreign operations is not sufficient to cover the permanently reinvested earnings without selling assets. We do not intend to liquidate any foreign assets to generate cash to remit to the U.S. parent.

 

If remaining permanently reinvested earnings were repatriated, the incremental U.S. tax would be approximately 35% based on current tax law. In addition, as of June 30, 2017, we had approximately $8.6 million of cash held by our foreign subsidiaries which would be subject to U.S. tax upon repatriation.  

 

(7)

COMMITMENTS AND CONTINGENCIES

 

We execute letters of credit, performance bonds and other guarantees in the normal course of business that ensure our performance or payments to third parties. The aggregate notional value of these instruments was $1.5 million at June 30, 2017 and $1.2 million at December 31, 2016. In the past, no significant claims have been made against these financial instruments. We believe the likelihood of demand for payment under these instruments is remote and expect no material cash outlays to occur from these instruments.

 

 
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We have contingent liabilities and future claims for which we have made estimates of the amount of the eventual cost to liquidate these liabilities or claims. These liabilities and claims may involve threatened or actual litigation where damages have not been specifically quantified but we have made an assessment of our exposure and recorded a provision in our accounts for the expected loss. We intend to defend these matters vigorously; however, litigation is inherently unpredictable, and the ultimate outcome or effect of such lawsuits and actions cannot be predicted with certainty. As a result, there can be no assurance as to the ultimate outcome of these lawsuits. Any claims against us, whether meritorious or not, could cause us to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operations resources. Other claims or liabilities, including those related to taxes in foreign jurisdictions, may be estimated based on our experience in these matters and, where appropriate, the advice of outside counsel or other outside experts. Upon the ultimate resolution of the uncertainties surrounding our estimates of contingent liabilities and future claims, our future reported financial results will be impacted by the difference, if any, between our estimates and the actual amounts paid to settle the liabilities. In addition to estimates related to litigation and tax liabilities, other examples of liabilities requiring estimates of future exposure include contingencies arising out of acquisitions and divestitures. Our contingent liabilities are based on the most recent information available to us regarding the nature of the exposure. Such exposures may change from period to period based upon updated relevant facts and circumstances, which can cause the estimates to change. In the recent past, our estimates for contingent liabilities have been sufficient to cover the actual amount of our exposure. We do not believe that the outcome of these matters will have a material adverse effect on our business, financial condition, or results of operations.

 

(8)

NEW ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued Accounting Standards Update, or ASU, 2014-09, “Revenue from Contracts with Customers.” The ASU will replace most existing revenue recognition guidance in U.S. GAAP. The FASB subsequently issued ASU 2015-14 which delayed the effective date from January 1, 2017 until January 1, 2018. Early application is permitted only to the original effective date. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating this standard in conjunction with the new lease standard (ASU 2016-02) discussed in the next paragraph.

 

In February 2016, the FASB issued ASU 2016-02, “Leases” to increase transparency and comparability among organizations by recognizing all leases on the balance sheet and disclosing key information about leasing arrangements. The main difference between current accounting standards and ASU 2016-02 is the recognition of assets and liabilities by lessees for those leases classified as operating leases under current accounting standards. The new standard is effective for fiscal years beginning after December 15, 2018. We are evaluating this standard in conjunction with the new revenue standard discussed in the previous paragraph.

 

We intend to adopt the new revenue and lease standards on January 1, 2018. While we continue to assess all potential impacts of these standards, we expect our overall revenues to remain substantially unchanged. However, the actual revenue recognition treatment required under the new standards may depend on contract-specific terms and may vary in some instances. In addition, we anticipate that our revenues will be classified into two general categories – lease revenue and service revenue. The lease revenue will reflect the consideration earned while our vessels are being chartered to our customers while the service revenue component will be primarily composed of the services rendered by our crews that operate the vessels.

 

 
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In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments.” The objective of the new standard is to eliminate diversity in practice related to the classification of certain cash receipts and payments by adding or clarifying guidance on eight cash flow classification issues: debt prepayment or extinguishment costs; settlement of zero-coupon bonds; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted. The standard should be applied retrospectively to all periods presented. We do not expect the adoption of this standard to have a material effect on our financial condition or results of operations.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory.” This standard requires recognition of tax consequences in the period in which a transfer takes place, with the exception of inventory transfers. There will be an immediate effect on earnings if the tax rates in the tax jurisdictions of the selling entity and buying entity are different. The new standard is effective for fiscal years beginning after December 15, 2017. We do not expect the adoption of this standard to have a material effect on our financial condition or results of operations.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations - Clarifying the Definition of a Business” to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective in annual periods beginning after December 15, 2017. We do not expect the adoption of this standard to have a material effect on our financial condition or results of operations.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (ASC 718) - Scope of Modification Accounting.” The objective of this standard is to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in ASC 718 to a change to the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for many different reasons, and the nature and effect of the change can vary significantly. The new standard is effective for fiscal years beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the potential effect this standard will have on our financial condition and results of operations.

 

 
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(9)

OPERATING SEGMENT INFORMATION

 

We operate three segments: the North Sea, Southeast Asia and the Americas, each of which is considered a reportable segment under FASB ASC 280, “Segment Reporting”. Our management evaluates segment performance primarily based on operating income. Cash and debt are managed centrally. Because the regions do not manage those items, the gains and losses on foreign currency remeasurements associated with these items are excluded from operating income. Our management considers segment operating income to be a good indicator of each segment’s operating performance from its continuing operations, as it represents the results of the ownership interest in operations without regard to financing methods or capital structures. Each operating segment’s operating loss is summarized in the following table.

 

Operating Income (Loss) by Operating Segment

                                       
                                         
   

North Sea

   

Southeast

Asia

   

Americas

   

Other

   

Total

 
   

(In thousands)

 

Quarter Ended June 30, 2017

                                       

Revenue

  $ 14,939     $ 2,141     $ 7,561     $ -     $ 24,641  

Direct operating expenses

    10,212       2,224       6,948       -       19,384  

Drydock expense

    1,534       (8 )     128       -       1,654  

General and administrative expenses

    1,883       1,015       1,428       4,478       8,804  

Pre-petition restructuring charges

    167       6       45       11,715       11,933  

Depreciation and amortization expense

    5,707       1,783       5,488       600       13,578  

(Gain) loss on sale of assets

    -       (32 )     -       -       (32 )

Operating income (loss)

  $ (4,564 )   $ (2,847 )   $ (6,476 )   $ (16,793 )   $ (30,680 )
                                         

Quarter Ended June 30, 2016

                                       

Revenue

  $ 21,077     $ 4,382     $ 5,028     $ -     $ 30,487  

Direct operating expenses

    12,328       3,295       5,309       -       20,932  

Drydock expense

    36       27       -       -       63  

General and administrative expenses

    1,832       834       1,667       4,521       8,854  

Depreciation and amortization expense

    6,532       2,346       5,150       883       14,911  

Impairment charges

    -       30,268       15,883       -       46,151  

(Gain) loss on sale of assets

    5,923       -       (9 )     -       5,914  

Operating income (loss)

  $ (5,574 )   $ (32,388 )   $ (22,972 )   $ (5,404 )   $ (66,338 )

 

   

North Sea

   

Southeast

Asia

   

Americas

   

Other

   

Total

 
   

(In thousands)

 

Six Months Ended June 30, 2017

                                       

Revenue

  $ 28,934     $ 5,309     $ 14,757     $ -     $ 49,000  

Direct operating expenses

    20,286       4,468       13,805       -       38,559  

Drydock expense

    4,414       (8 )     150       -       4,556  

General and administrative expenses

    3,672       1,775       3,626       9,308       18,381  

Pre-petition restructuring charges

    167       6       45       17,569       17,787  

Depreciation and amortization expense

    11,325       3,565       11,053       1,205       27,148  

(Gain) loss on sale of assets

    -       (32 )     5,273       -       5,241  

Operating income (loss)

  $ (10,930 )   $ (4,465 )   $ (19,195 )   $ (28,082 )   $ (62,672 )
                                         

Six Months Ended June 30, 2016

                                       

Revenue

  $ 44,009     $ 6,869     $ 18,403     $ -     $ 69,281  

Direct operating expenses

    26,019       6,252       12,396       -       44,667  

Drydock expense

    873       17       -       -       890  

General and administrative expenses

    3,961       1,707       3,698       9,276       18,642  

Depreciation and amortization expense

    13,089       4,947       11,118       1,796       30,950  

Impairment charges

    1,986       50,437       110,385       -       162,808  

(Gain) loss on sale of assets

    5,923       -       (5 )     -       5,918  

Operating income (loss)

  $ (7,842 )   $ (56,491 )   $ (119,189 )   $ (11,072 )   $ (194,594 )
                                         
                                         

Total Assets

                                       

June 30, 2017

  $ 501,587     $ 152,374     $ 407,560     $ 9,972     $ 1,071,493  

December 31, 2016

    465,908       158,671       424,398       4,926       1,053,903  

 

At December 31, 2016, we had $371.6 million and at June 30, 2017, we had $354.8 million in long-lived assets attributable to the United States, our country of domicile.

 

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

 

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements (including the notes thereto) included elsewhere in this report, Part II, Item 1A, “Risk Factors” in this report and our audited consolidated financial statements and the notes thereto, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A, “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016. Unless otherwise indicated, references to “we”, “us”, “our” and the “Company” refer collectively to GulfMark Offshore, Inc., a Delaware corporation, and its subsidiaries.

 

Overview

 

We provide marine support and transportation services to companies involved in the offshore exploration and production of oil and natural gas. Our vessels transport drilling materials, supplies and personnel to offshore facilities, and also move and position drilling structures. A substantial portion of our operations is international. Our fleet has grown in both size and capability, from 11 vessels in 1990 to our present number of 69 vessels, through strategic acquisitions and the new construction of technologically advanced vessels, partially offset by dispositions of certain older, less profitable vessels. As of August 9, 2017, our fleet included 66 owned vessels, 32 of which are stacked, and three managed vessels.

 

 Our results of operations are affected primarily by day rates, fleet utilization and the number and type of vessels in our fleet. Utilization and day rates, in turn, are influenced principally by the demand for vessel services from the offshore exploration and production sectors of the oil and natural gas industry. The supply of vessels to meet this fluctuating demand is related directly to the perception of future activity in both the drilling and production phases of the oil and natural gas industry as well as the availability of capital to build new vessels to meet the changing market requirements. As discussed below, the recent and sustained decline in the price of oil has materially and negatively impacted our results of operations.

 

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

 

The operations of our fleet may be subject to seasonal factors. Operations in the North Sea are often at their highest levels from April to August and at their lowest levels from December through February. Operations in our other areas, although involving some seasonal factors, tend to remain more consistent throughout the year. Activity in the U.S. Gulf of Mexico may be slower during the hurricane season from June through November, although following a hurricane, activity may increase as there may be a greater demand for vessel services as repair and remediation activities take place.

 

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

 

 
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In addition to direct operating costs, we incur fixed charges related to (i) the depreciation of our fleet, (ii) costs for routine drydock inspections, (iii) modifications designed to ensure compliance with applicable regulations and (iv) maintaining certifications for our vessels with various international classification societies. The number of drydockings and other repairs undertaken in a given period generally determines our repair and maintenance expenses. The demands of the market, the expiration of existing contracts, the commencement of new contracts, seasonal factors and customer preferences influence the timing of drydocks. As a result of the current market downturn, we have taken some vessels out of service (also referred to as stacking) and deferred a number of drydocks as part of our cost cutting initiatives. The deferred drydocks will eventually be required to be performed prior to returning the vessels to active service.

 

Oil Price Impact

 

Our business is directly impacted by the level of activity in worldwide offshore oil and natural gas exploration, development and production, which in turn is influenced by trends in oil and natural gas prices. In addition, oil and natural gas prices are affected by a host of geopolitical and economic forces, including the fundamental principles of supply and demand. In particular, the oil price is significantly influenced by actions of the Organization of Petroleum Exporting Countries, or OPEC. Beginning in late 2014, the oil and gas industry experienced a significant decline in the price of oil causing an industry-wide downturn that continued into 2017. The decline was in part a result of an OPEC decision to increase production. The price of oil declined significantly from over $100 per barrel in July 2014 to below $30 per barrel in February 2016. The downturn of the last few years has significantly impacted the operational plans for oil companies, resulting in reduced expenditures for exploration and production activities, and consequently has adversely affected the drilling and support service sector. These changes in industry dynamics decreased demand for offshore supply vessel, or OSV, services and led to an excess number of vessels in all of our operating regions. Although OPEC met in November 2016 and agreed to limit production going forward, day rates have not recovered. In many regions, day rates for OSV services have fallen below the levels needed to sustain our business. Assuming the industry cost structure remains at current levels, many industry observers believe that sustained oil price levels in excess of $60 per barrel are required to return the OSV business to profitability.

 

Bankruptcy Filing

 

On May 17, 2017, GulfMark Offshore, Inc., or the Debtor, filed a voluntary petition for relief, or the Petition, and commenced a case, or the Bankruptcy Case, under chapter 11, or Chapter 11, of title 11 of the United States Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware, or the Bankruptcy Court, to pursue a proposed plan of reorganization which, as amended, we refer to as the Plan. The Bankruptcy Case is being administered under the caption In re GulfMark Offshore, Inc. No trustee has been appointed and we will continue to operate as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. To assure ordinary course operations, we have obtained approval from the Bankruptcy Court for a variety of “first day” motions, including authority to maintain bank accounts and other customary relief. A summary of the key features of the Plan is included below under “– Liquidity, Capital Resources and Financial Condition.”

 

 
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The Plan is subject to acceptance by the Debtor’s creditors (as and to the extent required under the Bankruptcy Code) and confirmation by the Bankruptcy Court. Information contained in the Plan and the disclosure statement dated June 26, 2017 relating to the Plan is subject to change, whether as a result of amendments to the Plan, third-party actions, or otherwise.

 

Critical Accounting Policies

 

There have been no changes to the critical accounting policies used in our reporting of results of operations and financial position. For a discussion of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Long-Lived Asset Impairment

 

Our tangible long-lived assets consist primarily of vessels and construction-in-progress. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We assess potential impairment by comparing the carrying values of the long-lived assets to the undiscounted cash flows expected to be received from those assets. If impairment is indicated, we determine the amount of impairment expense by comparing the carrying value of the long-lived assets with their fair market value. We base our undiscounted cash flow estimates on, among other things, historical results adjusted to reflect the best estimate of future operating performance. We obtain estimates of fair value of our vessels from independent appraisal firms. Management’s assumptions are an inherent part of our asset impairment evaluation, and the use of different assumptions could produce results that differ from those reported.

 

Beginning in late 2014, oil prices declined significantly. Prices continued to decline throughout 2015 and into 2016, reaching a low of less than $30 per barrel in the first quarter of 2016. Prices recovered over the remainder of 2016, stabilizing at over $40 per barrel for much of the second and third quarters of 2016 and further increasing to over $50 per barrel in the fourth quarter of 2016. However, prices have since declined and continue to be volatile and are subject to significant uncertainty. The lower price environment impacted the operational plans for oil companies beginning in late 2014 and consequently adversely affected the drilling and support service sector. The decrease in day rates and utilization for offshore vessels has been significant. In addition, the independent appraisal firms have lowered the fair value estimates related to our vessels in each quarter since the fourth quarter of 2014. As a result of these factors, we have performed a number of reviews for impairment since the fourth quarter of 2014.

 

Based on the triggering events discussed above, we performed an evaluation for impairment for the quarter ended March 31, 2016 and determined that the carrying values of certain of our long-lived asset groups in the Americas and in Southeast Asia were greater than the related undiscounted expected future cash flows. We compared the carrying values of the long-lived asset groups to the fair value provided by the independent appraisal firms and recorded $114.1 million of impairment charges in the first quarter of 2016. The impairment charge consisted of $94.5 million in connection with our long-lived assets in the U.S. Gulf of Mexico, which is part of our Americas segment and included vessels under construction, and $19.6 million in connection with our Southeast Asia segment. We also performed an evaluation for impairment for each of our asset groups in the first and second quarters of 2017, but determined that the undiscounted expected future cash flows were greater than the carrying value in each group and concluded that no further impairment was indicated.

 

 
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We will continue to monitor the industry for triggering events that could indicate additional impairment.

 

Vessel Component Impairment

 

We have vessel components in our North Sea and Southeast Asia segments that we intend to sell. Based on third party valuations, in the first quarter of 2016 we recorded impairment expense related to these assets totaling $2.6 million, consisting of $2.0 million in the North Sea and $0.6 million in Southeast Asia.

 

Bankruptcy Accounting

 

The unaudited condensed consolidated financial statements included herein have been prepared as if we were a going concern and reflect the application of Financial Accounting Standards Board Accounting Standards Codification 852 “Reorganizations,” or ASC 852. ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in “reorganization items, net” on our consolidated statements of operations. In addition, prepetition unsecured and under-secured obligations that may be impacted by the bankruptcy reorganization process have been classified as “liabilities subject to compromise” on our consolidated balance sheet at June 30, 2017. These liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court, although they may be settled for less.

 

The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of our Chapter 11 proceedings. In particular, the consolidated financial statements do not purport to show: (i) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities; (ii) the amount of prepetition liabilities that may be allowed for claims or contingencies, or the status and priority thereof; (iii) the effect on stockholders’ equity accounts of any changes that may be made to our capitalization; or (iv) the effect on operations of any changes that may be made to our business.

 

 
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Results of Operations

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Revenues by Region (000's) (a):

                               

North Sea Based Fleet (c)

  $ 14,939     $ 21,077     $ 28,934     $ 44,009  

Southeast Asia Based Fleet

    2,141       4,382       5,309       6,869  

Americas Based Fleet

    7,561       5,028       14,757       18,403  
                                 

Rates Per Day Worked (b):

                               

North Sea Based Fleet (c)

  $ 10,052     $ 12,055     $ 10,234     $ 13,442  

Southeast Asia Based Fleet

    5,456       8,246       5,442       7,753  

Americas Based Fleet

    7,868       9,797       8,308       10,653  
                                 

Overall Utilization (b):

                               

North Sea Based Fleet

    64.3 %     69.0 %     61.8 %     65.5 %

Southeast Asia Based Fleet

    41.8 %     41.4 %     49.9 %     35.6 %

Americas Based Fleet

    32.1 %     17.1 %     30.2 %     18.9 %
                                 

Average Owned Vessels (d):

                               

North Sea Based Fleet

    25.0       26.5       24.9       26.7  

Southeast Asia Based Fleet

    10.0       13.0       10.0       13.0  

Americas Based Fleet

    31.0       30.3       31.8       30.2  

Total

    66.0       69.8       66.6       69.9  

 

 

(a)

Includes owned and managed vessels.

(b)

Average rate per day worked is defined as total charter revenues divided by number of days worked. Overall utilization rate is defined as the total number of days worked divided by total number of days of availability in the period.

(c)

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

(d)

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

 

 
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Comparison of the Three Months Ended June 30, 2017 with the Three Months Ended June 30, 2016

 

For the three months ended June 30, 2017, we had a net loss of $40.5 million, or $1.58 per diluted share, on revenues of $24.6 million. During the three months ended June 30, 2016, our net loss was $47.6 million, or $1.90 per diluted share, on revenues of $30.5 million.

 

Our revenues for the quarter ended June 30, 2017 decreased $5.8 million, or 19.2%, compared to the quarter ended June 30, 2016. Average day rates decreased from $10,939 during the second quarter of 2016 to $8,697 during the second quarter of 2017 resulting in a $5.9 million decline in revenue. The continued strength of the U.S. Dollar was responsible for a further revenue decrease of $1.6 million. Offsetting these decreases was an increase in utilization of 4.5 percentage points increasing revenue by $0.7 million between the periods. In addition, revenue increased $1.0 million as a result of the delivery of one new build vessel during the first quarter of 2017 and the full quarter effect of a vessel delivered mid-2016. Our average fleet size decreased due to the sale of four vessels during the second half of 2016 and the sale of two additional vessels during the first quarter of 2017. The sold vessels had been stacked in the second quarter of 2016, resulting in no revenue effect related to the sale.

 

We had an operating loss of $30.7 million for the three months ended June 30, 2017, compared to a $66.3 million operating loss during the same period of 2016. During the quarter ended June 30, 2016 we recognized impairment charges of $46.2 million. Excluding these charges, the operating loss in the second quarter of 2017 increased $10.5 million compared to the second quarter of 2016. The decrease in revenue was the main reason for the lower operating results. In addition, during the second quarter of 2017 drydock expense increased $1.6 million. Pre-petition restructuring charges were $11.9 million and are largely related to legal and professional fees from our restructuring and bankruptcy advisors, prior to the bankruptcy filing on May 17, 2017. Partially offsetting these increases was a decrease in direct operating expenses of $1.5 million, general and administrative expenses of $0.1 million, and depreciation and amortization expense of $1.3 million. The decrease in depreciation expense was due to the asset impairments recognized during 2016 and the decrease in the size of the fleet in 2017 due to vessel sales. In addition, during the second quarter of 2016 we recognized a loss on sale of asset of $5.9 million.

 

North Sea

 

North Sea revenue decreased $6.1 million, or 29.1%, for the quarter ended June 30, 2017, compared to the same period in 2016. Utilization decreased from 65.5% in the 2016 period to 61.8% in the 2017 period, reducing revenue by $3.0 million. Day rates decreased from $12,055 in the second quarter of 2016 to $10,052 in the current quarter, reducing revenue by $2.0 million. The strength of the U.S. Dollar caused a decrease in revenue of $1.6 million. Partially offsetting these decreases was an increase in capacity of $0.5 million mainly related to the addition of one new build vessel in early 2017. Operating loss decreased from $5.6 million during the quarter ended June 30, 2016 to $4.6 million for the same period in 2017 primarily due to decreases in direct operating expenses of $2.1 million and depreciation and amortization expense of $0.8 million, related to the sale of a vessel in 2016. In addition, during the 2016 period we recognized a loss on sale of asset of $5.9 million. Partially offsetting these decreases were an increase in drydock expense of $1.5 million and pre-petition restructuring charges of $0.2 million. General and administrative expenses also increased slightly, in addition to the decrease in revenue for the second quarter of 2017.

 

 
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 Southeast Asia

 

Revenue in Southeast Asia decreased $2.2 million, or 51.1%, for the quarter ended June 30, 2017 compared to the quarter ended June 30, 2016. The main factor for the decrease was the decrease in day rates, which decreased from $8,246 in the second quarter of 2016 to $5,456 in the second quarter of 2017. Utilization remained virtually unchanged. Operating loss decreased by $29.6 million, from $32.4 million in the second quarter of 2016 to $2.8 million in the same period of 2017. During the second quarter of 2016, we recognized an impairment charge of $30.3 million. Excluding this charge, operating loss increased by $0.7 million. The main factor for the increase in operating loss was decreased revenue. In addition, for the second quarter of 2017, general and administrative expenses increased $0.2 million. Offsetting this increase was a decrease in direct operating expenses of $1.1 million, and a decrease in depreciation and amortization expense of $0.6 million.

 

Americas

 

Revenue in the Americas increased $2.5 million, or 50.4%, in the second quarter of 2017 compared to the second quarter of 2016. Utilization increased 15%, increasing revenue by $4.8 million. In addition, capacity increased by $0.5 million due to the delivery of a new vessel during 2016. This was offset by lower day rates which decreased from $9,797 during the second quarter of 2016 to $7,868 during the second quarter of 2017, causing a decrease in revenue of $2.8 million. We recorded an operating loss of $23.0 million during the second quarter of 2016 compared to an operating loss of $6.5 million during the second quarter of 2017. During the 2016 period we recognized impairment charges of $15.9 million. Excluding these charges, the decrease in operating loss period over period was $0.6 million. The decrease in operating loss was primarily due to the increase in revenue and the decrease of $0.2 million in general and administrative expenses. Offsetting these were increases in operating expenses of $1.6 million and depreciation and amortization expense of $0.3 million, and a small increase in drydock expense.

 

Other

 

Other income decreased by $26.8 million, from income of $15.8 million in the second quarter of 2016 to a loss of $11.0 million during the second quarter of 2017. The change is due mainly to a $25.8 million gain related to the purchase in the open market of $49.3 million in face value of our Senior Notes during the second quarter of 2016. In addition, interest expense decreased $3.3 million during the 2017 period due to the discontinuance of interest accruals on the Senior Notes subsequent to the filing of the Petition. During the second quarter of 2017, we recognized $5.1 million of reorganization items related to our Bankruptcy Case.

 

Tax Rate

 

Our effective tax rate for the second quarter of 2017 was a benefit of 2.7%. This compares to a benefit of 5.9% for the same period in 2016. The change in the effective tax rate from the prior year was primarily attributable to a change in the taxable mix of earnings between our higher and lower tax jurisdictions. In addition, in 2017 we have recognized a valuation allowance on certain of our deferred tax assets.

 

 
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Comparison of the Six Months Ended June 30, 2017 with the Six Months Ended June 30, 2016

 

For the six months ended June 30, 2017, we had a net loss of $165.4 million, or $6.50 per diluted share, on revenues of $49.0 million. During the six months ended June 30, 2016, our net loss was $138.7 million, or $5.55 per diluted share, on revenues of $69.3 million.

 

Our revenues for the six months ended June 30, 2017 decreased $20.3 million, or 29.3%, compared to the six months ended June 30, 2016. Average day rates decreased from $11,925 during the six months ended June 30, 2016 to $8,819 during the six months ended June 30, 2017, resulting in a $16.9 million decline in revenue, while the strong U.S. Dollar was responsible for a further revenue decrease of $3.2 million. In addition, during the first quarter of 2016 we received a $6.6 million payment from a customer to cancel a contract. Offsetting these decreases was an increase in utilization of 5.1 percentage points causing an increase in revenue of $4.4 million. Capacity increased by $2.0 million mainly due to the delivery of one new build vessel during the first quarter of 2017 and the full year-to-date effect of a vessel delivered mid-2016. Our average fleet size decreased by 3.3 vessels due to the sale of four vessels during the second half of 2016 and two vessels sold during the first quarter of 2017, partially offset by the vessel deliveries.

 

We had an operating loss of $62.7 million for the six months ended June 30, 2017, compared to a $194.6 million operating loss during the same period of 2016. During the six months ended June 30, 2016 we recognized impairment charges of $162.8 million. Excluding these charges, the operating loss in the first six months of 2017 increased $30.9 million compared to the first six months of 2016. The decrease in revenue was the main reason for the lower operating results. During the first six months of 2017, drydock expense increased $3.7 million. In addition, during the 2017 period we recognized $17.8 million of pre-petition restructuring charges largely due to higher legal and professional fees related to payments to our restructuring and bankruptcy advisors, prior to the bankruptcy filing on May 17, 2017. Partially offsetting these increases were decreases in direct operating expenses of $6.1 million, general and administrative expenses of $0.3 million and depreciation and amortization expense of $3.8 million. These decreases were due to the asset impairments recognized during 2016 and the decrease in the size of the fleet in 2017 due to vessel sales. During the first six months of 2017 we recognized a lower loss on sale of asset of $0.7 million.

 

North Sea

 

North Sea revenue decreased $15.1 million, or 34.3%, for the six months ended June 30, 2017, compared to the same period in 2016. Utilization decreased from 65.5% in the 2016 period to 61.8% in the 2017 period, reducing revenue by $8.5 million. Day rates decreased from $13,442 in the first six months of 2016 to $10,234 in the current year, reducing revenue by $4.4 million. The strength of the U.S. Dollar caused a decrease in revenue of $3.2 million. Partially offsetting these decreases was an increase in capacity of $1.0 million mainly related to the addition of one new build vessel in early 2017. Operating loss increased $3.1 million, from $7.8 million during the six months June 30, 2016 to $10.9 million for the same period in 2017. During the 2016 period we recognized an impairment charge of $2.0 million. Excluding this charge, the increase in operating loss was $5.1 million. This increase was primarily due to the decrease in revenue. In addition, for the six months ended June 30, 2017, drydock expense increased $3.5 million and pre-petition restructuring charges increased $0.2 million. Offsetting these increases were decreases in direct operating expenses of $5.7 million, general and administrative expenses of $0.3 million and depreciation and amortization expense of $1.8 million. During the 2016 period we recognized a loss on sale of asset of $5.9 million.

 

 
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 Southeast Asia

 

Revenue in Southeast Asia decreased $1.6 million, or 22.7%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Day rates declined from $7,753 in the first six months of 2016 to $5,442 in the same 2017 period, causing a decrease in revenue of $2.8 million. Offsetting this decrease was an increase in utilization, from 35.6% for the first six months of 2016 to 49.9% for the first six months of 2017. This increase amounted to $1.2 million higher revenue. Operating loss decreased by $52.0 million, from $56.5 million in the first six months of 2016 to $4.5 million in the same period of 2017. During the first six months of 2016, we recognized an impairment charge of $50.4 million. Excluding this charge, the operating loss decreased by $1.6 million. A decrease in direct operating expenses of $1.8 million and a decrease in depreciation and amortization of $1.4 million were the main factors in the decrease in operating loss. General and administrative expenses had a small increase.

 

Americas

 

Revenue in the Americas decreased $3.6 million, or 19.8%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Day rates decreased from $10,653 during the first six months of 2016 to $8,308 during the first six months of 2017, causing a decrease in revenue of $9.7 million. In addition, during the first quarter of 2016 we received a $6.6 million payment from a customer cancelling a long term contract. Utilization increased 11.3% between the periods, increasing revenue by $11.7 million. In addition, capacity increased by $1.0 million due to the delivery of a new vessel during 2016. We recorded an operating loss of $119.2 million during the first six months of 2016 compared to an operating loss of $19.2 million during the first six months of 2017. During the 2016 period we recognized impairment charges of $110.4 million. Excluding these charges, the increase in operating loss period over period was $10.4 million. The main factor in the higher operating loss was the decrease in revenue. In addition, direct operating expenses increased $1.4 million and drydock expense increased $0.2 million. During the 2017 period we recognized a loss on sale of asset of $5.3 million. Partially offsetting these increases were small decreases in general and administrative expenses and depreciation and amortization expense of $0.1 million combined.