Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis should be read in conjunction with our historical consolidated financial statements located in Item 8. Financial Statements and Supplementary Data of this Annual Report. Any reference to Notes in the following management’s discussion and analysis refers to the Notes to Consolidated Financial Statements located in Item 8. Financial Statements and Supplementary Data of this Annual Report. The results of operations reported and summarized below are not necessarily indicative of future operating results. This discussion also contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under Item 1A. Risk Factors and located earlier in this Annual Report.
EXECUTIVE SUMMARY
Our Business
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. The services we offer to the oil and gas market cover the lifecycle of an offshore oil and gas field, and the services we offer to the renewable energy market are currently focused on offshore wind farm projects and cable burial operations. Our well intervention fleet includes seven purpose-built well intervention vessels, six IRSs, three SILs and the ROAM. Our robotics equipment includes 44 work-class ROVs, four trenchers and one ROVDrill. We charter ROV support vessels on both long-term and spot bases to facilitate our ROV and trenching operations. Our well intervention and robotics operations are geographically dispersed throughout the world. Our Production Facilities segment includes the HP I , the HFRS and our ownership of oil and gas properties.
Economic Outlook and Industry Influences
Demand for our services is primarily influenced by the condition of the oil and gas and the renewable energy markets, in particular, the willingness of offshore energy companies to spend on operational activities and capital projects. The performance of our business is also largely affected by 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, global health, and several other factors, including:
• worldwide economic activity and general economic and business conditions, including access to global capital and capital markets;
• the global supply and demand for oil and natural gas;
• political and economic uncertainty and geopolitical unrest, including regional conflicts and economic and political conditions in oil-producing regions;
• actions taken by OPEC and/or OPEC+;
• the availability and discovery rate of new oil and natural gas reserves in offshore areas;
• the exploration and production of onshore shale oil and natural gas;
• the cost of offshore exploration for and production and transportation of oil and natural gas;
• the level of excess production capacity;
• the ability of oil and gas companies to generate funds or otherwise obtain external capital for capital projects and production operations;
• the environmental and social sustainability of the oil and gas sector and the perception thereof, including within the investing community;
• the sale and expiration dates of offshore leases globally;
• governmental restrictions on oil and gas leases, including executive actions taken with respect to permitting in connection with oil and gas leases on federal land announced in January 2021;
• 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 or renewable energy alternatives;
• weather conditions, natural disasters, and epidemic and pandemic diseases, including the ongoing COVID-19 pandemic;
34
Table of Contents
• laws, regulations and policies directly related to the industries in which we provide services, and their interpretation and enforcement;
• environmental and other governmental regulations; and
• domestic and international tax laws, regulations and policies.
Crude oil prices declined significantly in 2014 and have been volatile since then, most recently experiencing a precipitous decline through April 2020 due to the ongoing COVID-19 pandemic as well as the price war among OPEC+ nations during the first quarter 2020. Prices have since begun a modest recovery as OPEC+ nations have cut production, fears of vast oversupply and a lack of storage capacity have subsided, and economic shutdowns resulting from the pandemic have eased in certain regions. However, oil prices remained low through the end of 2020 and their recovery remains uncertain. The decline in oil prices and the volatility and uncertainty in prices have caused oil and gas operators to drastically reduce spending (on both operational activities and capital projects), which has decreased the demand and rates for services provided by offshore oil and gas 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. Rig day rates are also a pricing indicator for our services. Rig overhang, combined with lower volumes of work and lower day rates quoted by 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.
The ongoing COVID-19 pandemic has resulted in a new period of market weakness. While the full impact of the COVID-19 pandemic, including the duration of the decrease in economic activity and the resulting impact on the demand and price of oil, remains unknown, we expect that the industry will be challenged through 2021 and possibly longer. We have seen and expect to continue to see operators reducing spending and deferring work, driving down the rates they are presently willing to pay for services, asserting claims of force majeure and/or cancelling contracts and rig contractors likewise are lowering prices, stacking rigs, furloughing employees, and recognizing losses. We believe the uncertainty and other conditions of the current environment will make it more difficult for us to secure long-term contracts for our vessels and systems, as operators may be less willing to commit to future spending. These developments have also 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 decrease in the price of oil impacted our 2020 operating results. Most if not all of our oil and gas customers have drastically cut their spending, which has reduced the demand and rates for the services offered to our oil and gas customers. We warm-stacked two of our well intervention vessels in April 2020 as a result of decreased demand and government lock-downs: the Seawell in the North Sea and the Q700 0, which completed a project offshore Nigeria in the first quarter 2020. The COVID-19 pandemic continues to pose challenges with, and increase costs related to, our supply chain, logistics and human capital resources, including minimizing the direct impact of COVID-19 on our offshore workforce and challenges with offshore crew changes due to travel restrictions and quarantine measures. The impact of COVID-19 on energy companies’ market values was a key contributor to our recognition of a goodwill impairment charge during the first quarter 2020. 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.
Despite this current period of market weakness and volatility, 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. Our well intervention and robotics operations are intended to service the lifecycle 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. We believe that we have a competitive advantage in performing well intervention services efficiently and 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
35
Table of Contents
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; (2) our services offer commercially viable alternatives for reducing the finding and development costs of reserves as compared to new drilling as well as extending and enhancing the commercial life of subsea wells; 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.
Demand for our services in the renewable energy market is affected by various factors, including the pace of consumer shift towards renewable energy sources, global electricity demand, technological advancements that increase the production and/or reduce the cost of renewable energy, expansion of offshore renewable energy projects to deeper water, and government subsidies for renewable energy projects.
Business Activity Summary
We have been focused on enhancing our financial position and strengthening our balance sheet through various means including securities offerings (the last of which occurred in August 2020), which has allowed us to strategically focus on our core well intervention and robotics businesses.
In January 2020, the Q7000 , a newbuild semi-submersible well intervention vessel built to U.K. North Sea standards, commenced operations.
During 2020, the COVID-19 pandemic and related governmental shut-downs significantly affected oil and gas prices, which negatively affected customer demand for our services. Consequently, we warm-stacked the Seawell and the Q7000 during part of 2020 and focused on maintaining utilization on our other vessels and equipment. We implemented a number of health and safety protocols as a result of the pandemic, including significant measures to protect personnel working in the offshore environment. The vast majority of our onshore personnel are working remotely during the pandemic.
We have continued to expand our services and offerings into the offshore renewable energy sector. During 2020, we completed a site clearance project in the North Sea as well as performed services for renewable energy customers in Asia and the U.S., including the first wind farm installed in U.S. federal waters.
Backlog
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. In addition to serving the oil and gas market, our robotics assets are contracted for the development of offshore renewable energy projects (wind farms). We provide services primarily in deepwater in the Gulf of Mexico, Brazil, North Sea, Asia Pacific and West Africa regions. As of December 31, 2020, our consolidated backlog that is supported by written agreements or contracts totaled $407 million, of which $301 million is expected to be performed in 2021. The substantial majority of our backlog is associated with our Well Intervention segment. As of December 31, 2020, our well intervention backlog was $226 million, all of which is expected to be performed in 2021. 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 69% of our total backlog. As of December 31, 2019, the total backlog associated with our operations was $796 million. Backlog is not necessarily a reliable indicator of revenues derived from these contracts as services may be added or subtracted; contracts may be renegotiated, deferred, canceled and in many cases modified while in progress; and reduced rates, fines and penalties may be imposed by our customers. Furthermore, our contracts are in certain cases cancelable without penalty. 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.
36
Table of Contents
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 consolidated financial statements, including our consolidated results of operations.
Comparison of Years Ended December 31, 2020 and 2019
The following table details various financial and operational highlights for the periods presented (dollars in thousands):
Year Ended December 31, Increase/(Decrease)
2020 2019 Amount Percent
Net revenues —
Well Intervention $ 539,249 $ 593,300 $ (54,051) (9) %
Robotics 178,018 171,672 6,346 4 %
Production Facilities 58,303 61,210 (2,907) (5) %
Intercompany eliminations (42,015) (74,273) 32,258
$ 733,555 $ 751,909 $ (18,354) (2) %
Gross profit (loss) —
Well Intervention $ 41,037 $ 104,376 $ (63,339) (61) %
Robotics 22,716 15,809 6,907 44 %
Production Facilities 17,883 19,222 (1,339) (7) %
Corporate, eliminations and other (1,727) (1,569) (158)
$ 79,909 $ 137,838 $ (57,929) (42) %
Gross margin —
Well Intervention 8 % 18 %
Robotics 13 % 9 %
Production Facilities 31 % 31 %
Total company 11 % 18 %
Number of vessels or robotics assets (1) / Utilization (2)
Well intervention vessels 7/67% 6/89%
Robotics assets (3)
49/34% 50/41%
Chartered robotics vessels 2/94% 3/87%
(1) Represents the number of vessels or robotics assets as of the end of the period, including spot vessels and those under long-term charter, and excluding acquired vessels prior to their in-service dates and vessels or assets disposed of and/or taken out of service.
(2) 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 in 2020 and 2019 included 1,057 and 191 spot vessel days, respectively, at near full utilization.
(3) Consists of ROVs, trenchers and ROVDrill.
37
Table of Contents
Intercompany segment amounts are derived primarily from equipment and services provided to other business segments. Intercompany segment revenues are as follows (in thousands):
Year Ended December 31, Increase/
2020 2019 (Decrease)
Well Intervention $ 15,039 $ 43,484 $ (28,445)
Robotics 26,976 30,789 (3,813)
$ 42,015 $ 74,273 $ (32,258)
Net Revenues. Our consolidated net revenues decreased by 2% in 2020 as compared to 2019, reflecting lower revenues from our Well Intervention and Production Facilities segments, offset in part by higher revenues in our Robotics segment and lower intercompany eliminations.
Our Well Intervention revenues decreased by 9% in 2020 as compared to 2019, primarily reflecting lower vessel utilization in the North Sea and Gulf of Mexico, lower IRS rental utilization and lower foreign currency rates in Brazil. The decrease in revenues was offset in part by revenues on the Q7000 , which commenced operations offshore West Africa in January 2020. Vessel utilization in the North Sea and Gulf of Mexico were negatively impacted by the downturn in the offshore oil and gas market due to the COVID-19 pandemic, which resulted in our warm-stacking the Seawell and the Q7000 during the year, as well as scheduled regulatory certification inspections in the Gulf of Mexico during the first quarter 2020. Additionally, our Well Intervention revenues in the Gulf of Mexico in 2019 included $27.5 million associated with intercompany P&A work for our Production Facilities segment and no such P&A work was performed in 2020. Our Well Intervention revenues in 2019 also included approximately $3.9 million of contractual adjustments related to increases in withholding taxes in Brazil.
Our Robotics revenues increased by 4% in 2020 as compared to 2019, primarily reflecting improvements in chartered vessel utilization, offset in part by lower ROV, trencher and ROVDrill utilization. Chartered vessel days included a significant increase in spot vessel days primarily due to an offshore wind farm site clearance project in the North Sea and a marine salvage project offshore Australia. Our results included 1,690 vessel days and 407 trenching days (including 161 days on third-party vessels) in 2020 as compared to 1,086 vessel days and 729 trenching days (including 245 days on third-party vessels) in 2019.
Our Production Facilities revenues decreased by 5% in 2020 as compared to 2019, primarily reflecting reduced revenues associated with the HFRS and a reduction in oil and gas production revenues.
The decrease in intercompany eliminations was primarily attributable to a $27.5 million elimination of revenues that our Well Intervention segment earned in 2019 associated with its P&A work on the Droshky oil and gas properties on behalf of our Production Facilities segment. There were no such P&A-related intercompany eliminations in 2020.
Gross Profit (Loss). Our consolidated 2020 gross profit decreased by $57.9 million, or 42%, as compared to 2019, primarily reflecting lower gross profit in our Well Intervention and Production Facilities segments, offset in part by higher gross profit in our Robotics segment.
The gross profit related to our Well Intervention segment decreased by $63.3 million, or 61%, in 2020 as compared to 2019, primarily reflecting lower revenues, which included the warm stacking of the Seawell , lower vessel utilization in the Gulf of Mexico and higher costs associated with the Q 7000 , which commenced operations in January 2020 and was warm stacked beginning in April 2020 and until commencing its mobilization to West Africa in mid-November 2020.
38
Table of Contents
The gross profit related to our Robotics segment increased by $6.9 million, or 44%, in 2020 as compared to 2019, primarily reflecting higher revenues as well as a full year of cost reductions relating to certain vessels, including the termination of the Grand Canyon charter in November 2019 and the expiration of the Grand Canyon II hedge in July 2019 and the Grand Canyon III hedge in February 2020 (Note 21).
The gross profit related to our Production Facilities segment decreased by 7% in 2020 as compared to 2019, primarily reflecting decreases in revenues.
Goodwill Impairment. The $6.7 million charge in 2020 reflects the impairment of the entire goodwill balance associated with our acquisition of a controlling interest in Subsea Technologies Group Limited (“STL”) (Note 7).
Selling, General and Administrative Expenses. Our selling, general and administrative expenses in 2020 included a $2.7 million provision for credit losses (Note 19). Excluding this charge, our selling, general and administrative expenses decreased by $11.4 million in 2020 as compared to 2019, primarily reflecting a reduction in employee compensation costs and other cost-saving measures during 2020.
Equity in Earnings of Investment. Equity in earnings of investment was $0.2 million in 2020 and $1.4 million in 2019, primarily reflecting reductions in our remaining obligations to decommission the “Independence Hub” platform (Note 5).
Net Interest Expense. Our net interest expense totaled $28.5 million in 2020 as compared to $8.3 million in 2019, primarily reflecting lower capitalized interest in 2020 and higher yields associated with the 2026 Notes issued in August 2020. Capitalized interest decreased to $1.2 million in 2020 with the completion of the Q7000 in January 2020 as compared to $20.2 million in 2019 (Note 8).
Gain on Extinguishment of Long-term Debt. The $9.2 million gain on extinguishment of long-term debt in 2020 was associated with our repurchase of a portion of the 2022 and 2023 Notes (Note 8).
Other Income, Net. Net other income increased by $3.6 million in 2020 as compared to 2019, primarily reflecting foreign exchange fluctuations in our non-U.S. dollar currencies. Net other income in 2020 and 2019 included foreign currency transaction gains of $4.6 million and $1.5 million, respectively.
Royalty Income and Other. Royalty income and other decreased by $0.6 million in 2020 as compared to 2019. The decrease was primarily attributable to the reduction in our overriding royalty income, which was affected by lower average oil prices and lower production volumes in 2020 as compared to 2019.
Income Tax Provision (Benefit). Income tax benefit was $18.7 million for 2020 as compared to an income tax provision of $7.9 million for 2019. Our income tax benefit in 2020 included discrete benefits related to the restructuring of certain of our foreign subsidiaries and our carrying back certain net operating losses to prior periods with higher income tax rates under tax law changes associated with the CARES Act (Note 9). Excluding these discrete items, we had an income tax benefit of $2.8 million and an effective tax rate of (200.5)% in 2020 as compared to an income tax provision of $7.9 million and an effective tax rate of 12.0% in 2019. The negative effective tax rate was primarily attributable to our near break-even pre-tax income for 2020 as well as the earnings mix between our higher and lower tax rate jurisdictions.
Comparison of Years Ended December 31, 2019 and 2018
Various financial and operational highlights for the years ended December 31, 2019 and 2018 were previously presented in our 2019 Annual Report on Form 10-K.
39
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Overview
The following table presents certain information useful in the analysis of our financial condition and liquidity (in thousands):
December 31,
2020 2019
Net working capital (1)
$ 246,338 $ 153,508
Long-term debt (1)
258,912 306,122
Liquidity (2)
451,532 379,533
(1) Current maturities of our long-term debt of $90.7 million and $99.7 million, respectively, are included in net working capital and excluded from long-term debt. Long-term debt is also net of unamortized debt discounts and debt issuance costs. See Note 8 for information relating to our long-term debt.
(2) Liquidity, as defined by us, is equal to cash and cash equivalents, excluding restricted cash, plus available capacity under the Revolving Credit Facility. Our liquidity at December 31, 2020 included cash and cash equivalents of $291.3 million and $160.2 million of available borrowing capacity under the Revolving Credit Facility (Note 8). 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. Our liquidity at December 31, 2019 excluded $54.1 million of restricted cash (short-term).
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):
December 31,
2020 2019
Term Loan (matures December 2021) $ 29,559 $ 32,869
Nordea Q5000 Loan (matures January 2021) (1)
53,532 89,031
MARAD Debt (matures February 2027) 53,361 60,073
2022 Notes (mature May 2022) (2)
33,477 115,765
2023 Notes (mature September 2023) (2)
26,922 108,115
2026 Notes (mature February 2026) (2)
152,712 —
Total debt $ 349,563 $ 405,853
(1) We repaid the Nordea Q5000 Loan in January 2021.
(2) Convertible Senior Notes Due 2022 (the “2022 Notes”), Convertible Senior Notes Due 2023 (the “2023 Notes”) and Convertible Senior Notes Due 2026 (the “2026 Notes”) will increase to their face amounts through accretion of their debt discounts and amortization of related debt issuance costs through their respective maturity dates (Note 8).
40
Table of Contents
The following table provides summary data from our consolidated statements of cash flows (in thousands):
Year Ended December 31,
2020 2019 2018
Cash provided by (used in):
Operating activities $ 98,800 $ 169,669 $ 196,744
Investing activities (19,281) (142,385) (136,014)
Financing activities (52,578) (45,818) (46,186)
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.
The ongoing COVID-19 pandemic, challenging market conditions and industry-wide spending cuts have impacted our current year revenues and we expect these events to continue to impact our results into the near future. Our operating cash flows are impacted to the extent we cannot reduce costs or replace those revenues. Despite these challenges, we remain focused on maintaining a strong balance sheet and adequate liquidity. Over the near term, we have reduced, deferred and cancelled certain planned capital expenditures and reduced our overall cost structure commensurate with our level of activities. Over the mid-term, we have extended our debt maturity profile through refinancing a portion of our 2022 Notes and 2023 Notes in favor of the 2026 Notes. We have reduced operating costs through various measures including warm stacking two of our vessels during the year. These costs should return with increases in activity. 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.
The ongoing COVID-19 pandemic and its impact on the energy and financial markets have contributed to rising yields on our existing debt as well as volatility in our stock price, both of which increase our cost of capital. The COVID-19 pandemic has also contributed to limited access to certain capital markets. Despite those limitations, in August 2020, we refinanced a portion of our 2022 Notes and 2023 Notes in favor of the 2026 Notes. The yield on the 2026 Notes is significantly higher than that of the 2022 Notes and 2023 Notes.
An ongoing period of weak, or continued decreases in, industry activity may make it difficult to comply with our covenants and the other restrictions in the agreements governing our debt. Current global market conditions have increased the potential for that difficulty. Decreases in our revenues and EBITDA, including as may be attributable to the fallout from the ongoing COVID-19 pandemic, may also limit our ability to fully access the Revolving Credit Facility. At December 31, 2020, our available borrowing capacity under the Revolving Credit Facility, based on the applicable leverage ratio covenant, was $160.2 million, net of $2.8 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, and our failure to comply with these covenants and other restrictions could lead to an event of default.
Operating Cash Flows
Total cash flows from operating activities decreased by $70.9 million in 2020 as compared to 2019, primarily reflecting lower operating income and larger increases in working capital as compared to 2019.
Total cash flows from operating activities decreased by $27.1 million in 2019 as compared to 2018, primarily reflecting changes in our working capital during 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.
41
Table of Contents
Investing Activities
Capital expenditures represent cash paid principally for the acquisition, construction, completion, upgrade, modification and refurbishment of long-lived property and equipment such as dynamically positioned vessels, topside equipment and subsea systems. Capital expenditures also include interest on property and equipment under development. Significant (uses) sources of cash associated with investing activities are as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Capital expenditures:
Well Intervention $ (19,523) $ (139,212) $ (136,164)
Robotics (257) (417) (151)
Production Facilities — (123) (325)
Other (464) (1,102) (443)
STL acquisition, net — (4,081) —
Proceeds from sale of assets (1)
963 2,550 25
Other — — 1,044
Net cash used in investing activities $ (19,281) $ (142,385) $ (136,014)
(1) Amount in 2019 primarily reflects cash received from the sale of certain property acquired from Marathon Oil (Note 16).
Our capital expenditures primarily included payments associated with the construction and completion of the Q7000 , which commenced operations in January 2020, as well as the investment in the 15K IRS and the ROAM.
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 $52.6 million in 2020 primarily reflect the repayment of $46.4 million of scheduled maturities related to our indebtedness (Note 8) as well as the net cash flow from our issuance of the 2026 Notes and the related capped call transactions (the “2026 Capped Calls”) and our repurchase of a portion of the 2022 and 2023 Notes (as described below). Net cash outflows from financing activities of $45.8 million in 2019 primarily reflect the repayment of $42.6 million of our indebtedness and $2.0 million in net cash outflows related to repayments and net refinancing, including fees, of the Term Loan. Net cash outflows from financing activities of $46.2 million in 2018 primarily reflect the repayment of $166.4 million of our indebtedness using cash and the net proceeds from the issuance in March 2018 of $125 million of the 2023 Notes.
In August 2020, we issued the 2026 Notes, which have a principal amount of $200 million and a conversion price of approximately $6.97 per share. We used the proceeds from the issuance to fund our repurchase of $90 million of the 2022 Notes and $95 million of the 2023 Notes, to acquire the 2026 Capped Calls to offset potential dilution of our common stock by increasing the effective conversion price of the 2026 Notes to approximately $8.42 per share, and to fund the related debt issuance costs.
42
Table of Contents
Free Cash Flow
Free cash flow increased to $79.5 million in 2020 from $31.4 million in 2019. The increase was due to the decrease in capital expenditures with the completion of the Q7000 , offset in part by the reduction in operating cash flows.
Free cash flow decreased to $31.4 million in 2019 from $59.7 million in 2018. The decrease was primarily attributable to the decrease in operating cash flows and higher capital expenditures in 2019.
Free cash flow is a non-GAAP financial measure. See Item 6. Selected Financial Data of this Annual Report for the definition and calculation of free cash flow.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual cash obligations as of December 31, 2020 and the scheduled years in which the obligations are contractually due (in thousands):
Total (1)
Less Than
1 Year 1-3 Years 3-5 Years More Than
5 Years
Term Loan $ 29,750 $ 29,750 $ — $ — $ —
Nordea Q5000 Loan 53,572 53,572 — — —
MARAD debt 56,410 7,560 16,270 17,935 14,645
2022 Notes (2)
35,000 — 35,000 — —
2023 Notes (3)
30,000 — 30,000 — —
2026 Notes (4)
200,000 — — — 200,000
Interest related to debt (5)
85,654 20,842 33,499 29,198 2,115
Property and equipment 6,200 6,071 129 — —
Operating leases (6)
260,487 92,239 153,553 10,641 4,054
Total cash obligations $ 757,073 $ 210,034 $ 268,451 $ 57,774 $ 220,814
(1) Excludes unsecured letters of credit outstanding at December 31, 2020 totaling $2.8 million. These letters of credit may be issued to support various obligations, such as contractual obligations, contract bidding and insurance activities.
(2) Notes mature in May 2022. 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 December 31, 2020, the conversion trigger was not met. See Note 8 for additional information.
(3) Notes mature in September 2023. 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 December 31, 2020, the conversion trigger was not met. See Note 8 for additional information.
(4) Notes mature in February 2026. The 2026 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 $9.06 per share, which is 130% of the conversion price. At December 31, 2020, the conversion trigger was not met. See Note 8 for additional information.
(5) Interest payment obligations were calculated using stated coupon rates for fixed rate debt and interest rates applicable at December 31, 2020 for variable rate debt.
(6) Operating leases include vessel charters and facility and equipment leases. At December 31, 2020, our commitment related to long-term vessel charters totaled approximately $233.3 million, of which $89.5 million was related to the non-lease (services) components that are not included in operating lease liabilities in the consolidated balance sheet as of December 31, 2020.
43
Table of Contents
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our discussion and analysis of our financial condition and results of operations, as reflected in the consolidated financial statements and related footnotes included in Item 8 . Financial Statements and Supplementary Data of this Annual Report, 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. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We believe that the most critical accounting policies in this regard are those described below. While these issues require us to make judgments that are somewhat subjective, they are generally based on a significant amount of historical data and current market data. See Note 2 to our consolidated financial statements for a detailed discussion on the application of our accounting policies.
Property and Equipment
We review our property and equipment for impairment indicators at least quarterly or whenever changes in facts and circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. We evaluate impairment indicators considering the nature of the asset or asset group, the future economic benefits of the asset or asset group, historical and estimated future profitability measures, and other external market conditions or factors that may be present. We often estimate future earnings and cash flows of our assets to corroborate our determination of whether impairment indicators exist. If impairment indicators suggest that the carrying amount of an asset may not be recoverable, we determine whether an impairment has occurred by estimating undiscounted cash flows of the asset and comparing those cash flows to the asset’s carrying value. If the undiscounted cash flows are less than the asset’s carrying value (i.e., the asset is unrecoverable), impairment, if any, is recognized for the difference between the asset’s carrying value and its estimated fair value. The expected future cash flows used for the assessment of recoverability are based on judgmental assessments of operating costs, project margins and capital project spending, considering information available at the date of review. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or based on a multiple of operating cash flows validated with historical market transactions of similar assets where possible.
The determination of the appropriate asset groups at which to evaluate impairment, the review of property and equipment for impairment indicators, the projection of future cash flows of property and equipment, and the estimated fair value of any property and equipment that may be deemed unrecoverable involve significant judgment and estimation by our management. Changes to those judgments and estimations could require us to recognize impairment charges in the future.
Income Taxes
We conduct business in numerous countries and earn income in various jurisdictions. Income taxes have been provided based upon the tax laws and rates in those jurisdictions. The provision of our income taxes involves the interpretation of various laws and regulations, and changes in those laws, our operations and/or legal structure could impact our income tax liabilities. Furthermore, our tax filings are subject to regular audits and examination by local taxing authorities. We provide for uncertain tax positions and related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.
44
Table of Contents
We record deferred taxes based on the differences between financial reporting and the tax basis of assets and liabilities. The carrying value of deferred tax assets are based on our estimates, judgments and assumptions regarding future operating results and taxable income. Loss carryforwards and tax credits are assessed for realization, and a valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. If we subsequently determine that we will be able to realize deferred tax assets in the future in excess of our net recorded amount, the resulting adjustment would increase earnings for the period in which such determination was made. We will continue to assess the adequacy of a valuation allowance on a quarterly basis. Any changes to our estimated valuation allowance could be material to our consolidated financial position and results of operations.
The 2017 Tax Act requires the taxable repatriation of foreign earnings that had been reinvested in previous years. Subsequently, repatriation of foreign earnings will generally be free of U.S. federal tax but may be subject to changes in future tax legislation that may result in taxation. As of December 31, 2020, we had accumulated undistributed earnings generated by our non-U.S. subsidiaries without operations in the U.S. of approximately $62.2 million. We intend to indefinitely reinvest these earnings, as well as future earnings from our non-U.S. subsidiaries without operations in the U.S., to fund our international operations. We have not provided deferred income taxes on the accumulated earnings and profits as we consider them permanently reinvested. The computation of the potential deferred tax liability associated with the amount of reinvested earnings and other basis differences is not practicable.