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Item 2. Management’s Discussion and Analysis

2020-04-24 compared with 2019-10-23 · 140 added, 236 removed, 168 unchanged (69% of the section changed)

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FORWARD-LOOKING STATEMENTS AND ASSUMPTIONS

This Quarterly Report on Form 10-Q contains or incorporates by reference various statements that contain forward-looking information regarding Helix and represent our expectations and beliefs concerning future events.

This Quarterly Report on Form 10-Q contains or incorporates by reference various statements that contain forward-looking information regarding Helix and represent our current expectations or forecasts of future events.

This forward-looking information is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995 as set forth in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

All statements included herein or incorporated herein by reference that are predictive in nature, that depend upon or refer to future events or conditions, or that use terms and phrases such as “achieve,” “anticipate,” “believe,” “estimate,” “budget,” “expect,” “forecast,” “plan,” “project,” “propose,” “strategy,” “predict,” “envision,” “hope,” “intend,” “will,” “continue,” “may,” “potential,” “should,” “could” and similar terms and phrases are forward-looking statements although not all forward-looking statements contain such identifying words.

All statements included herein or incorporated by reference herein that are predictive in nature, that depend upon or refer to future events or conditions, or that use terms and phrases such as “achieve,” “anticipate,” “believe,” “estimate,” “budget,” “expect,” “forecast,” “plan,” “project,” “propose,” “strategy,” “predict,” “envision,” “hope,” “intend,” “will,” “continue,” “may,” “potential,” “should,” “could” and similar terms and phrases are forward-looking statements although not all forward-looking statements contain such identifying words.

Included in forward-looking statements are, among other things:

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statements regarding our ability to enter into and/or perform commercial contracts, including the scope, timing and outcome of those contracts;

statements regarding the acquisition, construction, completion, upgrades to or maintenance of vessels, systems or equipment and any anticipated costs or downtime related thereto, including the construction, completion and mobilization of the Q7000 ;

statements regarding the ongoing COVID-19 pandemic and the recent oil price decline, and their respective effects and results, our protocols and plans, the continuation of our current backlog, the spot market, our cost reduction plans and our ability to manage current changes;

statements regarding the acquisition, construction, completion, upgrades to or maintenance of vessels, systems or equipment and any anticipated costs or downtime related thereto;

statements regarding any financing transactions or arrangements, or our ability to enter into such transactions or arrangements;

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These factors include:

the results and effects of the ongoing COVID-19 pandemic and the recent oil price decline and actions by customers, suppliers and partners with respect thereto;

the impact of domestic and global economic conditions and the future impact of such conditions on the oil and gas industry and the demand for our services;

the impact of oil and gas price fluctuations and the cyclical nature of the oil and gas industry;

the general impact of oil and gas price fluctuations and the cyclical nature of the oil and gas industry;

the impact of any potential cancellation, deferral or modification of our work or contracts by our customers;

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unexpected delays in the delivery, chartering or customer acceptance, and terms of acceptance, of our assets;

the effects of our indebtedness and our ability to reduce capital commitments;

the effects of our indebtedness, our ability to comply with debt covenants and our ability to reduce capital commitments;

the results of our continuing efforts to control costs and improve performance;

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the availability of capital (including any financing) to fund our business strategy and/or operations;

the impact of current and future laws and governmental regulations, including tax and accounting developments, such as the 2017 Tax Act;

the impact of the U.K.

to potentially exit the European Union, known as Brexit, on our business, operations and financial condition, which is unknown at this time;

the impact of current and future laws and governmental regulations, including tax and accounting developments, such as the U.S.

Tax Cuts and Jobs Act and the CARES Act and regulations thereunder;

the impact of U.K.’s exit from the European Union, known as Brexit, on our business, operations and financial condition, which is unknown at this time;

the effect of adverse weather conditions and/or other risks associated with marine operations;

the impact of foreign currency exchange controls and exchange rate fluctuations;

the impact of foreign currency exchange controls, potential illiquidity of those currencies and exchange rate fluctuations;

the effectiveness of our current and future hedging activities;

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Our actual results could also differ materially from those anticipated in any forward-looking statements as a result of a variety of factors, including those described under Item 1A.

“Risk Factors” in this Quarterly Report, and Item 1A.

“Risk Factors” and Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Form 10-K.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors.

Forward-looking statements are only as of the date they are made, and other than as required under the securities laws, we assume no obligation to update or revise these forward-looking statements or provide reasons why actual results may differ.

Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

We caution you not to place undue reliance on the forward-looking statements.

All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement.

This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

We urge you to carefully review and consider the disclosures made in this Quarterly Report and our reports filed with the SEC and incorporated by reference in our 2019 Form 10-K that attempt to advise interested parties of the risks and factors that may affect our business.

EXECUTIVE SUMMARY

Business Strategy

We are an international offshore energy services company that provides specialty services to the offshore energy industry, with a focus on well intervention and robotics operations.

We believe that focusing on these services should deliver favorable long-term financial returns.

From time to time, we may make strategic investments that expand our service capabilities and/or the regions in which we operate, or add capacity to existing services in our key operating regions.

We expect our well intervention fleet to expand with the completion and delivery in 2019 of the Q7000 , a newbuild semi-submersible vessel.

Chartering newer vessels with additional capabilities, such as the three Grand Canyon vessels, should enable our robotics business to better serve the needs of our customers.

From a longer-term perspective we also expect to benefit from our fixed fee agreement for the HP I , a dynamically positioned floating production vessel that processes production from the Phoenix field for the field operator, until at least June 1, 2023.

With the acquisition of certain oil and gas properties from Marathon Oil in January 2019, we expect improved utilization of our well intervention fleet in the Gulf of Mexico as we perform the P&A of the acquired assets as our schedule permits, subject to regulatory timelines.

In January 2015, Helix, OneSubsea LLC, OneSubsea B.V., Schlumberger Technology Corporation, Schlumberger B.V.

and Schlumberger Oilfield Holdings Ltd.

entered into a Strategic Alliance Agreement and related agreements for the parties to design, develop, manufacture, promote, market and sell on a global basis integrated equipment and services for subsea well intervention.

The alliance leverages the parties’ capabilities to provide a unique, fully integrated offering to clients, combining marine support with well access and control technologies.

We and OneSubsea jointly developed a 15,000 working p.s.i.

intervention riser system (“15K IRS”), each owning a 50% interest.

The 15K IRS was completed and placed into service in January 2018.

In October 2016, we and OneSubsea launched the development of our first Riserless Open-water Abandonment Module (“ROAM”), each owning a 50% interest.

Final acceptance testing on the ROAM has been completed and the system is currently expected to be available to customers in 2020.

With the delivery in November 2019 and the commencement of operations in January 2020 of the Q7000 , our well intervention fleet currently includes seven purpose-built well intervention vessels, six IRSs, three SILs and one Riserless Open-water Abandonment Module (“ROAM”).

Our robotics equipment currently includes 44 work-class ROVs, four trenchers and one ROVDrill.

We also charter ROV support vessels on both long-term and spot bases to facilitate our ROV and trenching operations.

Our well intervention and robotic operations are geographically dispersed throughout the world.

Our Production Facilities segment includes the HP I , the HFRS and several wells and related infrastructure associated with the Droshky Prospect.

Our alliance with Schlumberger leverages the parties’ capabilities to provide a unique, fully integrated offering to clients, combining marine support with well access and control technologies.

We and Schlumberger jointly developed a 15,000 working p.s.i.

IRS, which was completed and placed into service in January 2018, and our first ROAM, which is currently available to customers.

Economic Outlook and Industry Influences

Demand for our services is primarily influenced by the condition of the oil and gas industry, and in particular, the willingness of oil and gas companies to spend on operational activities and capital projects.

The performance of our business is also largely dependent on the prevailing market prices for oil and natural gas, which are impacted by domestic and global economic conditions, hydrocarbon production and capacity, geopolitical issues, weather, and several other factors, including:

worldwide economic activity and general economic and business conditions, including available access to global capital and capital markets;

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political and economic uncertainty and geopolitical unrest, including regional conflicts and economic and political conditions in the Middle East and other oil-producing regions;

actions taken by the Organization of Petroleum Exporting Countries;

actions taken by OPEC and/or OPEC+, including actions such as the oil price war during the first quarter 2020;

the availability and discovery rate of new oil and natural gas reserves in offshore areas;

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the ability of oil and gas companies to generate funds or otherwise obtain external capital for capital projects and production operations;

the sale and expiration dates of offshore leases in the U.S.

and overseas;

the sale and expiration dates of offshore leases globally;

technological advances affecting energy exploration, production, transportation and consumption;

potential acceleration of the development of alternative fuels;

shifts in end-customer preferences toward fuel efficiency and the use of natural gas;

weather conditions and natural disasters;

shifts in end-customer preferences toward fuel efficiency and the use of natural gas or renewable energy alternatives;

weather conditions, natural disasters, and epidemic and pandemic diseases, including the ongoing COVID-19 pandemic;

environmental and other governmental regulations;

domestic and international tax laws, regulations and policies.

West Texas Intermediate oil prices have been volatile, fluctuating between $50 and $60 per barrel throughout most of the first nine months of 2019.

Volatility in oil prices and imbalance in the supply and demand for oil create uncertainty in oil and gas exploration and production activities.

For instance, an increase in oil and gas exploration and production activities (shale oil production in particular) is expected when major oil producing countries including the U.S.

increase output as a result of rising oil prices.

Increased supply without adequate levels of increase in demand, however, may weaken oil prices and industry prospects.

The resulting industry environment may discourage oil and gas companies from making longer-term investments in offshore exploration and production as well as other offshore operational activities.

Increased competition for limited offshore oil and gas projects has driven down rates that drilling rig contractors are charging for their services, which affects us, as drilling rigs historically have been the asset class used for offshore well intervention work.

This rig overhang combined with lower volumes of work continues to affect the utilization and/or rates we can achieve for our assets.

Volatile and uncertain macroeconomic conditions in some regions and countries around the world, such as West Africa, Brazil, China and the U.K.

following Brexit, may have a direct and/or indirect impact on our existing contracts and contracting opportunities and may introduce further currency volatility into our operations and/or financial results.

Many oil and gas companies are increasingly focusing on optimizing production of their existing subsea wells.

We believe that we have a competitive advantage in terms of performing well intervention services efficiently.

Furthermore, we believe that as oil and gas companies begin to increase overall spending levels, it likely will be weighted towards production enhancement activities rather than exploration projects.

Crude oil prices declined significantly in 2014 and have been volatile since then.

Brent crude oil prices fluctuated between $53 and $75 per barrel during 2019 before declining precipitously in the first quarter 2020 to lows below $20 per barrel due to the ongoing COVID-19 pandemic as well as the price war among OPEC+ nations during the first quarter 2020.

Low oil prices and the volatility and uncertainty in prices have caused oil and gas operators recently to drastically reduce spending (both operational activities and capital spending), which has decreased the demand and rates for services provided by all offshore services providers.

Historically, drilling rigs have been the asset class used for offshore well intervention work, and our customers have used drilling rigs on existing long-term contracts to perform well intervention work instead of new drilling activities.

This rig overhang, combined with lower volumes of work for drilling rig contractors, affects the utilization and/or rates we can achieve for our assets and services.

Furthermore, additional volatile and uncertain macroeconomic conditions in some regions and countries around the world, such as West Africa, Brazil, China and the U.K.

following Brexit, may have a direct and/or indirect impact on our existing contracts and contracting opportunities and may introduce further volatility into our operations and/or financial results.

We saw improvements in 2019 as compared to 2018 and expected to see a continued recovery as we entered 2020.

Rig overhang had reduced, and customer activity and oil prices had recovered to some extent.

However, that recovery has now been halted with the ongoing COVID-19 pandemic as well as the OPEC+ price war during the first quarter 2020.

While the full impact of these recent events, including the duration of the decrease in economic activity due to COVID-19 and the resulting impact on the demand and price of oil, is unknown, we expect that the industry may be depressed through 2021.

We are seeing and expect to continue to see operators reducing spending and deferring work, asserting claims of force majeure and/or cancelling contracts and rig contractors lowering prices, stacking rigs, furloughing employees, and recognizing losses.

These developments also have impacted, and are expected to continue to impact, many other aspects of our industry and the global economy, including limiting access to and use of capital across various sources and markets, disrupting supply chains and increasing costs, and negatively affecting human capital resources including complicating offshore crew changes due to health and travel restrictions as well as the overall health of the global workforce.

The COVID-19 pandemic and the OPEC+ price war have resulted in a significant decrease in the price of oil and caused significant disruption and uncertainty in the oil and gas market.

While these events did not materially impact our operating results or financial condition during the first quarter 2020, we did incur related impairment losses and our customers have begun to reduce their spending, which we anticipate will reduce the demand for our services at least in the near term and perhaps longer.

Additionally, these events have created challenges with our supply chain and human capital resources, including challenges with offshore crew changes due to travel restrictions and quarantine measures.

While these market disruptions may be temporary, we cannot reliably estimate the duration of the COVID-19 pandemic or current market conditions, or the ultimate impact they will have on our financial position, results of operations and cash flows.

Although this sustained period of market weakness and volatility has been exacerbated by the ongoing COVID-19 pandemic and the OPEC+ price war, over the longer term we expect oil and gas companies to increasingly focus on optimizing production of their existing subsea wells.

As oil and gas companies re-assess and focus their budgetary spend allocations, we expect that it may be weighted towards production enhancement activities rather than exploration projects as enhancement is less expensive per incremental barrel of oil than new exploration.

Moreover, as the subsea tree base expands and ages, the demand for P&A services should persist.

We believe that we have a competitive advantage in performing well intervention services efficiently.

Our well intervention and robotics operations are intended to service the life span of an oil and gas field as well as to provide P&A services at the end of the life of a field as required by governmental regulations.

Thus, we believe that fundamentals for our business remain favorable over the longer term as the need to prolong well life in oil and gas production is a primary driver of demand for our services.

Our current strategy is to be positioned for future market recovery while managing through a sustained period of weak activity.

This strategy is based on multiple factors, including:

We believe that fundamentals for our business remain favorable over the longer term as the need to prolong well life in oil and gas production and safely decommission end of life wells are primary drivers of demand for our services.

This belief is based on multiple factors, including:

(1) the need to extend the life of subsea wells is significant to the commercial viability of the wells as P&A costs are considered;

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and (3) in past cycles, well intervention and workover have been some of the first activities to recover, and in a prolonged market downturn are important to the commercial viability of deepwater wells.

We could see the beginnings of an upturn in the demand for our services in the Gulf of Mexico, which are primarily driven by three factors:

(1) long-term rig contracts are not being renewed thus removing some of the rig overhang that was considered by our customers to be a sunk cost;

(2) previously deferred work on aging wells is less likely to be further deferred as well performance declines;

and (3) North America customer spending shifts from unconventional onshore oil and gas to conventional offshore development and enhancement as returns from onshore investment opportunities diminish.

Business Activity Summary

On January 16, 2019, we renewed the agreements that provide various operators with access to the HFRS for well control purposes through March 31, 2020 on newly agreed-upon rates and terms.

These agreements automatically renew on an annual basis absent proper notice of termination.

On January 18, 2019, we acquired from Marathon Oil several wells and related infrastructure associated with the Droshky Prospect located in offshore Gulf of Mexico Green Canyon Block 244.

As part of the transaction, Marathon Oil will pay us agreed-upon amounts for the required P&A of the acquired assets, which we can perform as our schedule permits, subject to regulatory timelines.

There is limited production associated with two wells that were acquired as part of the transaction.

On May 29, 2019, we acquired a 70% controlling interest in STL, an Aberdeen-based subsea engineering company that specializes in the design and manufacture of subsea pressure control equipment, including well intervention, well control and subsea control systems.

RESULTS OF OPERATIONS

We have three reportable business segments:

Well Intervention, Robotics and Production Facilities.

All material intercompany transactions between the segments have been eliminated in our condensed consolidated financial statements, including our consolidated results of operations.

We seek to provide services and methodologies that we believe are critical to maximizing production economics.

We provide services and methodologies that we believe are critical to maximizing production economics.

Our services cover the lifecycle of an offshore oil or gas field.

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In addition to serving the oil and gas market, our Robotics assets are contracted for the development of renewable energy projects (wind farms).

As of September 30, 2019 , our consolidated backlog that is supported by written agreements or contracts totaled $834 million , of which $115 million is expected to be performed over the remainder of 2019.

As of March 31, 2020 , our consolidated backlog that is supported by written agreements or contracts totaled $678 million , of which $392 million is expected to be performed over the remainder of 2020.

The substantial majority of our backlog is associated with our Well Intervention business segment.

As of September 30, 2019 , our well intervention backlog was $627 million , including $92 million expected to be performed over the remainder of 2019.

Our contract with BP to provide well intervention services with our Q5000 semi-submersible vessel, our agreements with Petrobras to provide well intervention services offshore Brazil with the Siem Helix 1 and Siem Helix 2 chartered vessels, and our fixed fee agreement for the HP I represent approximately 86% of our total backlog as of September 30, 2019 .

As of March 31, 2020 , our well intervention backlog was $471 million , including $306 million expected to be performed over the remainder of 2020.

Backlog is not necessarily a reliable indicator of revenues derived from these contracts as services may be added or subtracted;

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If there are cancellation fees, the amount of those fees can be substantially less than the rates we would have generated had we performed the contract.

RESULTS OF OPERATIONS

We have three reportable business segments:

Well Intervention, Robotics and Production Facilities.

All material intercompany transactions between the segments have been eliminated in our condensed consolidated financial statements, including our consolidated results of operations.

Non-GAAP Financial Measures

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We believe that our measures of EBITDA and free cash flow provide useful information to the public regarding our operating performance and ability to service debt and fund capital expenditures and may help our investors understand and compare our results to other companies that have different financing, capital and tax structures.

Other companies may calculate their measures of EBITDA, Adjusted EBITDA and free cash flow differently from the way we do, which may limit their usefulness as comparative measures.

EBITDA, Adjusted EBITDA and free cash flow should not be considered in isolation or as a substitute for, but instead are supplemental to, income from operations, net income, cash flows from operating activities, or other income or cash flow data prepared in accordance with GAAP.

We define EBITDA as earnings before income taxes, net interest expense, gain or loss on extinguishment of long-term debt, net other income or expense, and depreciation and amortization expense.

To arrive at our measure of Adjusted EBITDA, we exclude the gain or loss on disposition of assets, if any.

Non-cash impairment losses on goodwill and other long-lived assets and gains and losses on equity investments are also added back if applicable.

To arrive at our measure of Adjusted EBITDA, we exclude the gain or loss on disposition of assets and the provision for current expected credit losses, if any.

In addition, we include realized losses from foreign currency exchange contracts not designated as hedging instruments and other than temporary loss on note receivable, which are excluded from EBITDA as a component of net other income or expense.

We define free cash flow as cash flows from operating activities less capital expenditures, net of proceeds from sale of assets.

In the following reconciliation, we provide amounts as reflected in our accompanying condensed consolidated financial statements unless otherwise footnoted.

Other companies may calculate their measures of EBITDA, Adjusted EBITDA and free cash flow differently from the way we do, which may limit their usefulness as comparative measures.

In the following reconciliation, we provide amounts as reflected in our accompanying condensed consolidated financial statements unless otherwise noted.

The reconciliation of our net income to EBITDA and Adjusted EBITDA is as follows (in thousands):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Income tax provision

Net income (loss)

Income tax provision (benefit)

Net interest expense

Loss on extinguishment of long-term debt

Other expense, net

Other (income) expense, net

Depreciation and amortization

Gain on disposition of assets, net

Goodwill impairment

Provision for current expected credit losses

Realized losses from foreign exchange contracts not designated as hedging instruments

Other than temporary loss on note receivable

Adjusted EBITDA

The reconciliation of our cash flows from operating activities to free cash flow is as follows (in thousands):

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities

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Free cash flow

Comparison of Three Months Ended September 30, 2019 and 2018

Comparison of Three Months Ended March 31, 2020 and 2019

The following table details various financial and operational highlights for the periods presented (dollars in thousands):

Three Months Ended

September 30,

Net revenues —

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Chartered robotics vessels

Represents the number of vessels or robotics assets as of the end of the period, including vessels under both short-term and long-term charters, and excluding acquired vessels prior to their in-service dates and vessels disposed of and/or taken out of service.

Represents the average utilization rate, which is calculated by dividing the total number of days the vessels or robotics assets generated revenues by the total number of available calendar days in the applicable period.

The average utilization rates of chartered robotics vessels during the three -month periods ended September 30, 2019 and 2018 included 28 and 113 spot vessel days, respectively, at near full utilization.

The average utilization rates of chartered robotics vessels during the three -month periods ended March 31, 2020 and 2019 included 272 and 84 spot vessel days, respectively, at near full utilization.

Consists of ROVs, trenchers and ROVDrill.

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Three Months Ended

September 30,

Well Intervention

Net Revenues.

Our total net revenues for the three -month period ended September 30, 2019 were consistent with those for the same period in 2018 reflecting a mix of higher revenues from our Well Intervention business segment, lower revenues from our Robotics and Production Facilities business segments, and higher intercompany eliminations.

Our Well Intervention revenues increased by 10% for the three -month period ended September 30, 2019 as compared to the same period in 2018 reflecting increases in revenues in the Gulf of Mexico and Brazil, partially offset by lower revenues in the North Sea.

In the Gulf of Mexico, the Q4000 generated higher revenues due to higher utilization and a higher number of integrated service projects.

IRS rental revenues were also higher in the third quarter of 2019.

Revenue increases from the Q4000 and IRS rental were partially offset by lower revenues from the Q5000 due to lower utilization.

Our Well Intervention revenues in the Gulf of Mexico during the third quarter of 2019 also included $10.6 million associated with P&A work on the Droshky wells for our Production Facilities segment, for which Marathon Oil remitted payment to us in September 2019.

The increase in revenues in Brazil was primarily a result of the Siem Helix 2 achieving 99% utilization during the third quarter of 2019 as compared to 90% during the same period in 2018.

The decrease in revenues in the North Sea was primarily attributable to lower rates and a weaker British pound as compared to the third quarter of 2018.

Robotics revenues decreased by 4% for the three -month period ended September 30, 2019 as compared to the same period in 2018 .

The decrease primarily reflected lower trenching activity and spot vessel utilization, offset in part by higher rates on our Grand Canyon II chartered vessel and higher ROV utilization in the three -month period ended September 30, 2019 as compared to the same period in 2018 .

Our Production Facilities revenues decreased by 13% for the three -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting lower revenues from the HFRS during the third quarter of 2019, offset in part by production revenues from the oil and gas properties that we acquired from Marathon Oil in January 2019 (Note 2).

The increase in intercompany eliminations was primarily the result of $10.6 million in revenue that our Well Intervention business segment earned associated with its completion of P&A work on behalf of our Production Facilities segment.

Gross Profit (Loss).

Our total gross profit increased by 6% for the three -month period ended September 30, 2019 as compared to the same period in 2018 reflecting higher gross profit generated by our Well Intervention and Robotics business segments, offset in part by lower gross profit in our Production Facilities business segment.

The gross profit related to our Well Intervention segment increased by 8% for the three -month period ended September 30, 2019 as compared to the same period in 2018 primarily as a result of higher revenues in the Gulf of Mexico and Brazil, partially offset by lower revenues in the North Sea.

The gross profit related to our Robotics segment increased by 36% for the three -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting higher revenues generated by our Grand Canyon II chartered vessel and lower costs due to the expiration in July 2019 of foreign currency exchange contracts to hedge the vessel’s charter payments (Note 17), offset in part by lower spot vessel activity.

The gross profit related to our Production Facilities segment decreased by 49% for the three -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting revenue decreases for the HFRS.

Selling, General and Administrative Expenses.

Our selling, general and administrative expenses decreased by $4.7 million for the three -month period ended September 30, 2019 as compared to the same period in 2018.

The decrease was primarily attributable to compensation costs in the third quarter of 2018 that were related to liability PSU awards, which settled in January 2019 (Note 11).

Net Interest Expense.

Our net interest expense decreased by $1.3 million for the three -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting higher capitalized interest.

Interest on debt used to finance capital projects is capitalized and thus reduces overall interest expense.

Capitalized interest totaled $5.1 million for the three -month period ended September 30, 2019 as compared to $3.9 million for the same period in 2018 as a result of the construction and completion of the Q7000 .

Other Expense, Net.

Net other expense increased by $1.6 million for the three -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting a $1.3 million increase in foreign currency transaction losses.

Income Tax Provision.

Income tax provision was $3.5 million for the three -month period ended September 30, 2019 as compared to $0.8 million for the same period in 2018 .

The effective tax rate was 10.1% for the three -month period ended September 30, 2019 as compared to 3.0% for the same period in 2018 .

The increase was primarily attributable to improvements in profitability in the U.S.

year over year (Note 7).

Comparison of Nine Months Ended September 30, 2019 and 2018

The following table details various financial and operational highlights for the periods presented (dollars in thousands):

Nine Months Ended

September 30,

Net revenues —

Well Intervention

Production Facilities

Intercompany eliminations

Gross profit (loss) —

Well Intervention

Production Facilities

Corporate, eliminations and other

Gross margin —

Well Intervention

Production Facilities

Total company

Number of vessels or robotics assets (1) / Utilization (2)

Well Intervention vessels

Robotics assets (3)

Chartered robotics vessels

The average utilization rates of chartered robotics vessels during the nine -month periods ended September 30, 2019 and 2018 included 137 and 208 spot vessel days, respectively, at near full utilization.

Consists of ROVs, trenchers and ROVDrill.

Intercompany segment amounts are derived primarily from equipment and services provided to other business segments at rates consistent with those charged to third parties.

Intercompany segment revenues are as follows (in thousands):

Nine Months Ended

September 30,

Well Intervention

Net Revenues.

Our total net revenues for the nine -month period ended September 30, 2019 were consistent with those for the same period in 2018 reflecting a mix of higher revenues from our Well Intervention and Robotics business segments, lower revenues from our Production Facilities business segment, and higher intercompany eliminations.

Our Well Intervention revenues increased by 1% for the nine -month period ended September 30, 2019 as compared to the same period in 2018 , primarily reflecting higher revenues in the Gulf of Mexico and Brazil, partially offset by lower revenues in the North Sea.

The increase in revenues in the Gulf of Mexico was primarily attributable to higher utilization of the Q4000 during the first nine months of 2019 as compared to the same period in 2018.

This revenue increase was offset by a reduction in IRS rental revenues during the comparative year-over-year periods.

Our Well Intervention revenues in the Gulf of Mexico during the first nine months of 2019 also included $15.9 million associated with P&A work on the Droshky wells for our Production Facilities segment, for which Marathon Oil remitted payment to us in September 2019.

The increase in revenues in Brazil was primarily a result of both the Siem Helix 1 and the Siem Helix 2 improving their utilization during the first nine months of 2019.

The decrease in revenues in the North Sea primarily reflected a weaker British pound and lower rates as compared to the same period in 2018.

Robotics revenues increased by 13% for the nine -month period ended September 30, 2019 as compared to the same period in 2018 .

The increase primarily reflected higher trenching activities that contributed to increased utilization of our chartered vessels (from 76% during the first nine months of 2018 to 92% during the same period in 2019).

Our robotics assets also achieved higher utilization in the first nine months of 2019 as compared to the same period in 2018.

Our Production Facilities revenues decreased by 8% for the nine -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting lower revenues from the HFRS during the nine-month period ended September 30, 2019, offset in part by production revenues from the oil and gas properties that we acquired from Marathon Oil in January 2019 (Note 2).

The increase in intercompany eliminations was primarily the result of $15.9 million in revenue that our Well Intervention business segment earned associated with its completion of P&A work on behalf of our Production Facilities segment.

Our total net revenues increased by 9% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting higher revenues from our Well Intervention business segment with the addition of the Q7000 , offset in part by lower revenues from our Robotics business segment.

Our Well Intervention revenues increased by 15% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting higher revenues with the commencement of operations of the Q7000 in Nigeria in January 2020 and higher utilization on our North Sea vessels.

This revenue increase was partially offset by a reduction in vessel utilization in the Gulf of Mexico, with both the Q4000 and the Q5000 completing scheduled regulatory certification inspections during the period.

Robotics revenues decreased by 10% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting the decrease in trenching activity and a reduction in ROV, trencher and ROVDrill utilization as compared to the same period in 2019.

Our results included 42 vessel trenching days during the three months ended March 31, 2020 compared to 133 days during the same period in 2019.

These reductions were partially offset by higher spot vessel utilization, which increased to 272 days from 84 days in the prior year period.

Our Production Facilities revenues increased by 2% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting higher production revenues from the oil and gas properties that we acquired from Marathon Oil in January 2019 (Note 2).

Gross Profit (Loss).

Our total gross profit increased by 3% for the nine -month period ended September 30, 2019 as compared to the same period in 2018 reflecting improvements in our Robotics business segment, offset in part by lower gross profit in our Well Intervention and Production Facilities business segments.

The gross profit related to our Well Intervention business segment decreased by 9% for the nine -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting lower IRS rental unit utilization in the Gulf of Mexico as well as reduced operating results in the North Sea, offset in part by improved operating results in Brazil.

Our Robotics segment achieved a gross profit of $14.5 million for the nine -month period ended September 30, 2019 as compared to a gross loss of $5.3 million for the same period in 2018 primarily reflecting higher trenching revenues, with increased utilization for our chartered vessels and our robotics assets, and a reduction in vessel charter costs.

The gross profit related to our Production Facilities segment decreased by 38% for the nine -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting revenue decreases for the HFRS.

Our total gross profit decreased by 88% for the three -month period ended March 31, 2020 as compared to the same period in 2019 reflecting lower gross profit in our Well Intervention business segment.

The gross profit related to our Well Intervention business segment decreased by 109% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting a reduction in vessel utilization in the Gulf of Mexico, with both the Q4000 and the Q5000 completing scheduled regulatory certification inspections during the period, offset in part by the contribution from the Q7000 and higher profits in the North Sea.

The gross loss related to our Robotics segment decreased by 71% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting a reduction in costs related to the termination of the Grand Canyon vessel charter in November 2019 and the expiration of the Grand Canyon II hedge in July 2019, offset in part by lower revenues.

The gross profit related to our Production Facilities segment decreased by 12% for the three -month period ended March 31, 2020 as compared to the same period in 2019 primarily reflecting significantly lower direct costs as the HP I vessel went into regulatory dry dock for recertification during three -month period ended March 31, 2020 .

The recertification costs are typically deferred and amortized.

Goodwill Impairment.

The $6.7 million impairment charge for the three -month period ended March 31, 2020 reflects the write-off of the entire goodwill balance associated with STL (Note 6).

Selling, General and Administrative Expenses.

Our selling, general and administrative expenses decreased by $4.1 million for the nine -month period ended September 30, 2019 as compared to the same period in 2018 .

The decrease was primarily attributable to compensation costs in the first nine months of 2018 that were related to liability PSU awards, which settled in January 2019 (Note 11).

Our selling, general and administrative expenses increased by $0.4 million for the three -month period ended March 31, 2020 as compared to the same period in 2019 .

The increase was primarily attributable to the $0.6 million provision for current expected credit losses as a result of the adoption of ASU No.

2016-13 in 2020 (Note 17).

Net Interest Expense.

Our net interest expense decreased by $4.5 million for the nine -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting higher capitalized interest and a decrease in interest expense due to a reduction in our overall debt levels.

Capitalized interest totaled $15.3 million for the nine -month period ended September 30, 2019 as compared to $11.5 million for the same period in 2018 as a result of the construction and completion of the Q7000 .

Loss on Extinguishment of Long-Term Debt.

The $1.2 million loss for the nine -month period ended September 30, 2018 was attributable to the write-off of the unamortized debt issuance costs related to the prepayment of $61 million of the then-existing term loan in March 2018 and costs associated with our repurchase of $59.3 million in aggregate principal amount of the 2032 Notes (Note 6).

Other Expense, Net.

Net other expense decreased by $0.8 million for the nine -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting a $1.1 million other than temporary loss on a note receivable during the nine-month period ended September 30, 2018.

Income Tax Provision.

Income tax provision was $6.7 million for the nine -month period ended September 30, 2019 as compared to $1.2 million for the same period in 2018 .

The effective tax rate was 11.9% for the nine -month period ended September 30, 2019 as compared to 2.8% for the same period in 2018 .

The increase was primarily attributable to improvements in profitability in the U.S.

year over year (Note 7).

Our net interest expense increased by $3.6 million for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting lower capitalized interest.

Capitalized interest totaled $1.2 million for the three -month period ended March 31, 2020 as compared to $5.0 million for the same period in 2019 as a result of the completion of the Q7000 .

Other Income (Expense), Net.

We reported net other expense of $10.4 million for the three -month period ended March 31, 2020 as compared to net other income of $1.2 million for the same period in 2019 , primarily reflecting foreign currency transaction losses in the three -month period ended March 31, 2020 as compared to foreign currency transaction gains in the same period in 2019 due to the weakening of the British pound.

Income Tax Provision (Benefit).

Income tax benefit was $21.1 million for the three -month period ended March 31, 2020 as compared to an income tax provision of $0.3 million for the same period in 2019 .

The effective tax rates for the three -month periods ended March 31, 2020 and 2019 were 60.2% benefit and 19.7% expense, respectively.

The variance in the effective tax rate was primarily attributable to our carrying back certain net operating losses to prior periods with higher income tax rates as well as the result of the consolidation of certain U.S.

branch operations with the Helix U.S.

consolidated tax group (Note 8).

LIQUIDITY AND CAPITAL RESOURCES

The following table presents certain information useful in the analysis of our financial condition and liquidity (in thousands):

September 30,

Net working capital

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Liquidity, as defined by us, is equal to cash and cash equivalents plus available capacity under the Revolving Credit Facility, which capacity is reduced by letters of credit drawn against that facility.

Our liquidity at September 30, 2019 included cash and cash equivalents of $286.3 million and $172.6 million of available borrowing capacity under the Revolving Credit Facility (Note 6).

Our liquidity at December 31, 2018 included cash and cash equivalents of $279.5 million and $147.4 million of available borrowing capacity under our then-existing revolving credit facility.

Our liquidity at March 31, 2020 included cash and cash equivalents of $159.4 million and $172.6 million of available borrowing capacity under the Revolving Credit Facility (Note 7).

Our liquidity at December 31, 2019 included cash and cash equivalents of $208.4 million and $171.1 million of available borrowing capacity under the Revolving Credit Facility.

The carrying amount of our long-term debt, including current maturities, net of unamortized debt discounts and debt issuance costs, is as follows (in thousands):

September 30,

Term Loan (previously scheduled to mature June 2020)

Term Loan (matures December 2021)

Nordea Q5000 Loan (matures April 2020)

Nordea Q5000 Loan (matures January 2021)

MARAD Debt (matures February 2027)

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2023 Notes (mature September 2023) (1)

The 2022 Notes and the 2023 Notes will increase to their face amounts through accretion of their debt discounts through May 1, 2022 and September 15, 2023, respectively.

The 2022 Notes and the 2023 Notes will increase to their face amounts through accretion of the debt discounts through May 1, 2022 and September 15, 2023, respectively.

The following table provides summary data from our condensed consolidated statements of cash flows (in thousands):

Nine Months Ended

September 30,

Three Months Ended

Cash provided by (used in):

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Financing activities

Our current requirements for cash primarily reflect the need to fund capital spending for our current lines of business and to service our debt.

Historically, we have funded our capital program with cash flows from operations, borrowings under credit facilities, and project financing, along with other debt and equity alternatives.

As of September 30, 2019 , the remaining principal balance of the Nordea Q5000 Loan was classified to current as its maturity date is April 30, 2020 .

Although we currently have no plans to do so, we have the ability to fund the repayment of the Nordea Q5000 Loan when due with available borrowing capacity under the Revolving Credit Facility.

As a further response to industry-wide spending reductions, we continue to remain focused on maintaining a strong balance sheet and adequate liquidity.

Over the near term, we may seek to reduce, defer or cancel certain planned capital expenditures.

We believe that our cash on hand, internally generated cash flows and availability under the Revolving Credit Facility will be sufficient to fund our operations over at least the next 12 months.

In accordance with the Credit Agreement, the 2022 Notes, the 2023 Notes, the MARAD Debt agreements and the Nordea Credit Agreement, we are required to comply with certain covenants, including with respect to the Credit Agreement, certain financial ratios such as a consolidated interest coverage ratio and various leverage ratios, as well as the maintenance of a minimum cash balance, net worth, working capital and debt-to-equity requirements.

The Credit Agreement also contains provisions that limit our ability to incur certain types of additional indebtedness.

These provisions effectively prohibit us from incurring additional secured indebtedness or indebtedness guaranteed by us.

The Credit Agreement does permit us to incur certain unsecured indebtedness and also provides for our subsidiaries to incur project financing indebtedness (such as the MARAD Debt and the Nordea Q5000 Loan) secured by the underlying asset, provided that such indebtedness is not guaranteed by us.

The Credit Agreement also permits Unrestricted Subsidiaries to incur indebtedness provided that it is not guaranteed by us or any of our Restricted Subsidiaries (as defined in the Credit Agreement).

As of September 30, 2019 and December 31, 2018 , we were in compliance with all of the covenants in our long-term debt agreements.

A prolonged period of weak industry activity may make it difficult to comply with our covenants and the other restrictions in the agreements governing our debt.

Our current requirements for cash primarily reflect the need to fund our operations and capital spending for our current lines of business and to service our debt.

Given the ongoing COVID-19 pandemic, challenging market conditions and recent market events resulting in industry-wide spending cuts, we continue to remain focused on maintaining a strong balance sheet and adequate liquidity.

Over the near term, we plan to reduce, defer or cancel certain planned capital expenditures and reduce our overall cost structures commensurate with our expected level of activities.

We believe that our cash on hand, internally generated cash flows and availability under the Revolving Credit Facility will be sufficient to fund our operations and service our debt over at least the next 12 months.

A prolonged period of weak, or a significant decrease in, industry activity may make it difficult to comply with our covenants and the other restrictions in the agreements governing our debt.

Current global and market conditions have increased the potential for that difficulty.

Furthermore, during any period of sustained weak economic activity and reduced EBITDA, our ability to fully access the Revolving Credit Facility may be impacted.

At September 30, 2019 , our available borrowing capacity under the Revolving Credit Facility, based on the applicable leverage ratio covenant, was $172.6 million , net of $2.4 million of letters of credit issued under that facility.

We currently have no plans or forecasted requirements to borrow under the Revolving Credit Facility other than for the issuance of letters of credit.

At March 31, 2020 , our available borrowing capacity under the Revolving Credit Facility, based on the applicable leverage ratio covenant, was $172.6 million , net of $2.4 million of letters of credit issued under that facility.

We currently do not anticipate borrowing under the Revolving Credit Facility other than for the issuance of letters of credit.

Our ability to comply with loan agreement covenants and other restrictions is affected by economic conditions and other events beyond our control.

Our failure to comply with these covenants and other restrictions could lead to an event of default, the possible acceleration of our outstanding debt and the exercise of certain remedies by our lenders, including foreclosure against our collateral.

Subject to the terms of the Credit Agreement, we may borrow and/or obtain letters of credit of up to $25 million under the Revolving Credit Facility.

See Note 6 for additional information relating to our long-term debt, including more information regarding the Credit Agreement and related covenants and collateral.

The 2022 Notes and the 2023 Notes can be converted into our common stock by the holders or redeemed by us prior to their stated maturity under certain circumstances specified in the applicable indenture governing the notes.

We can settle any conversion in cash, shares of our common stock or a combination thereof.

We repurchased $59.3 million in aggregate principal amount of the 2032 Notes on March 20, 2018 and redeemed the remaining $0.8 million outstanding on May 4, 2018.

Operating Cash Flows

Total cash flows from operating activities decreased by $61.0 million for the nine -month period ended September 30, 2019 as compared to the same period in 2018 primarily reflecting the timing of cash receipts from our customers and other increases in net working capital during the first nine months of 2019 as well as higher regulatory certification costs for our vessels and systems, which included costs related to planned dry docks for three of our vessels.

Total cash flows used in operating activities decreased by $17.0 million for the three -month period ended March 31, 2020 as compared to the same period in 2019 primarily reflecting changes in our working capital.

Investing Activities

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Capital expenditures also include interest on property and equipment under development.

Significant sources (uses) of cash associated with investing activities are as follows (in thousands):

Nine Months Ended

September 30,

Significant (uses) sources of cash associated with investing activities are as follows (in thousands):

Three Months Ended

Capital expenditures:

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Production Facilities

STL acquisition, net

Proceeds from sale of assets

Net cash used in investing activities

Our capital expenditures above primarily included payments associated with the construction and completion of the Q7000 (see below).

In September 2013, we entered into a contract for the construction of a newbuild semi-submersible well intervention vessel, the Q7000 , to be built to North Sea standards.

Pursuant to the contract and subsequent amendments, 20% of the contract price was paid upon the signing of the contract, 20% was paid in each of 2016, 2017 and 2018, and the remaining 20% is due upon the delivery of the vessel.

We have informed the shipyard of our intent to take delivery of the vessel in November 2019.

At September 30, 2019 , our total investment in the Q7000 was $446.4 million , including $276.8 million of installment payments to the shipyard.

We plan to incur approximately $80 million related to the Q7000 over the remainder of 2019, including the final shipyard payment of $69.2 million.

The vessel is currently in the final preparation phase for work expected to commence in early 2020.

Our capital expenditures primarily included payments associated with the construction and completion of the Q7000 (see below).

In September 2013, we entered into a contract for the construction of the Q7000 , a newbuild semi-submersible well intervention vessel built to U.K.

North Sea standards.

At March 31, 2020 , our total investment in the Q7000 was $539.3 million , including $346.0 million of installment payments to the shipyard.

The vessel commenced operations in Nigeria in January 2020.

Financing Activities

Cash flows from financing activities consist primarily of proceeds from debt and equity transactions and repayments of our long-term debt.

Net cash outflows from financing activities of $35.6 million for the nine -month period ended September 30, 2019 primarily reflected the repayment of $68.2 million of our indebtedness and $35.0 million in proceeds from the Term Loan (Note 6).

Net cash outflows from financing activities of $36.0 million for the nine -month period ended September 30, 2018 primarily reflected the repayment of $156.6 million of our indebtedness using cash and the net proceeds from the issuance in March 2018 of $125 million of the 2023 Notes (Note 6).

Net cash outflows from financing activities of $18.4 million for the three -month period ended March 31, 2020 primarily reflect the repayment of $13.4 million of our indebtedness (Note 7).

Net cash outflows from financing activities of $14.1 million for the three -month period ended March 31, 2019 primarily reflect the repayment of $13.3 million of our indebtedness.

Free Cash Flow

Free cash flow decreased by $48.6 million for the nine -month period ended September 30, 2019 as compared to the same period in 2018 primarily attributable to the decrease in operating cash flows, slightly offset by reduced capital expenditures in the first nine months of 2019.

Free cash flow increased by $16.3 million for the three -month period ended March 31, 2020 as compared to the same period in 2019 primarily attributable to the increase in operating cash flows.

Free cash flow is a non-GAAP financial measure.

See “RESULTS OF OPERATIONS” above for the definition and calculation of free cash flow.

We anticipate that our capital expenditures, including capitalized interest and regulatory certification costs for our vessels and systems, will approximate $38 million for 2020 .

We believe that cash on hand, internally generated cash flows and availability under the Revolving Credit Facility will provide the capital necessary to continue funding our 2019 capital obligations and to meet our debt obligations due in 2019.

Our estimate of future capital expenditures may change based on various factors.

We may seek to reduce the level of our planned capital expenditures given a prolonged industry downturn.

We believe that cash on hand, internally generated cash flows and availability under the Revolving Credit Facility will provide the capital necessary to continue funding our 2020 operating needs and to meet our debt obligations due in 2020 .

Contractual Obligations and Commercial Commitments

The following table summarizes our contractual cash obligations as of September 30, 2019 and the scheduled years in which the obligations are contractually due (in thousands):

The following table summarizes our contractual cash obligations as of March 31, 2020 and the scheduled years in which the obligations are contractually due (in thousands):

Nordea Q5000 Loan

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Total cash obligations

Excludes unsecured letters of credit outstanding at September 30, 2019 totaling $2.4 million .

Excludes unsecured letters of credit outstanding at March 31, 2020 totaling $2.4 million .

These letters of credit may be issued to support various obligations, such as contractual obligations, contract bidding and insurance activities.

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The 2022 Notes can be converted prior to their stated maturity if the closing price of our common stock for at least 20 days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter exceeds $18.06 per share, which is 130% of the conversion price.

At September 30, 2019 , the conversion trigger was not met.

At March 31, 2020 , the conversion trigger was not met.

See Note 7 for additional information.

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The 2023 Notes can be converted prior to their stated maturity if the closing price of our common stock for at least 20 days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter exceeds $12.31 per share, which is 130% of the conversion price.

At September 30, 2019 , the conversion trigger was not met.

At March 31, 2020 , the conversion trigger was not met.

See Note 7 for additional information.

Interest payment obligations were calculated using stated coupon rates for fixed rate debt and interest rates applicable at September 30, 2019 for variable rate debt.

Primarily reflects costs associated with the Q7000 , which is currently under completion (Note 14).

Interest payment obligations were calculated using stated coupon rates for fixed rate debt and interest rates applicable at March 31, 2020 for variable rate debt.

Operating leases include vessel charters and facility and equipment leases.

At September 30, 2019 , our commitment related to long-term vessel charters totaled approximately $366.2 million, of which $147.2 million is related to the non-lease (services) components that are not included in operating lease liabilities on our balance sheet.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements.

We prepare these financial statements and related footnotes in conformity with GAAP.

At March 31, 2020 , our commitment related to long-term vessel charters totaled approximately $299.2 million, of which $111.5 million was related to the non-lease (services) components that are not included in operating lease liabilities in the condensed consolidated balance sheet as of March 31, 2020 .

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Our discussion and analysis of our financial condition and results of operations, as reflected in the accompanying condensed consolidated financial statements and related footnotes, are prepared in conformity with GAAP.

As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.

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These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes.

For information regarding our critical accounting policies and estimates, please read our “Critical Accounting Policies and Estimates” as disclosed in our 2018 Form 10-K.

For information regarding our critical accounting estimates and policies, please read our “Critical Accounting Estimates and Policies” as disclosed in our 2019 Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis