SEACOR Marine Holdings Inc. quarterly report, Q3 FY2018

SEACOR Marine Holdings Inc. — Q3 2018 Form 10-Q

Business context and reporting period

Quarter ended September 30, 2018; filed November 13, 2018. SEACOR Marine provides offshore marine transportation and support services worldwide. At quarter-end it operated 176 vessels across five geographic regions. Unless noted, financial amounts below are in U.S. dollars.

Financial results and liquidity

Metric	Q3 2018	Q3 2017	Nine months 2018	Nine months 2017
Operating revenue	$70.3 million	$47.8 million	$182.7 million	$124.4 million
Operating loss	$10.2 million	$29.1 million	$55.6 million	$92.5 million
Net loss attributable to SEACOR Marine	$16.0 million	$20.5 million	$69.8 million	$61.9 million
Basic loss per share and warrants	$0.71	$1.17	$3.42	$3.51

• Operating revenue increased 47% in Q3 and 47% year to date. Fleet utilization rose to 68% from 60% in Q3 and to 61% from 54% year to date; average daily rates also increased. The addition of liftboats through the Falcon Global Holdings joint venture contributed to revenue growth.
• Operating loss narrowed year over year, but the company remained loss-making. Q3 costs included higher operating expenses and depreciation; year-to-date depreciation and amortization was $55.3 million versus $42.8 million.
• Other expense was $3.3 million in Q3 versus $8.3 million of other income in the prior-year quarter. For the nine months, other expense was $30.3 million versus $8.3 million of other income, including $9.8 million of net derivative losses, principally from remeasurement of the convertible-note conversion option.
• Operating cash flow was negative $50.1 million for the nine months, compared with positive $35.1 million a year earlier. The filing cites working-capital demands, including a $29.2 million increase in receivables; the prior period also included $51.9 million of proceeds from marketable securities and $33.8 million of net income-tax refunds.
• Cash and cash equivalents were $102.9 million at September 30, down from $110.2 million at year-end; restricted cash was $1.7 million. Including $35.6 million of construction reserve funds, the company reported $140.1 million in cash, restricted cash and reserves. Current assets were $202.8 million and current liabilities $102.1 million.
• Debt carrying amount, including current portion, was $415.2 million, compared with $314.9 million at December 31, 2017. Contractual debt maturities totaled $454.7 million; these figures differ in part because the carrying amount is net of discounts and issue costs. Current debt was $17.4 million and long-term debt $397.7 million.

Material changes versus the prior comparable period

• Improved revenue and utilization reflected a larger operating fleet and additions or repositioning of vessels. The FGH joint venture brought six MOI liftboats into the consolidated business; the company held a 72% interest and consolidated FGH.
• SEACOR Marine raised capital through an April private placement of common shares and warrants for gross proceeds of approximately $56.9 million. In May, Carlyle exchanged $50 million of convertible notes for warrants; the remaining $125 million of notes had their rate increased from 3.75% to 4.25% and maturity extended to December 2023.
• A new $130 million syndicated facility was signed in September, secured by mortgages on 20 vessels and guaranteed by SEACOR Marine. Proceeds refinanced about $101.3 million of subsidiary obligations, increasing term debt by approximately $30.1 million. Quarterly principal payments begin in December 2018.
• The company recognized $3.0 million of impairment charges on property and equipment, primarily four anchor-handling towing supply vessels removed from service, and $1.2 million of impairment on an equity-method investment in SEACOR Grant DIS.
• Year-to-date capital expenditures were $37.8 million; capital acquisitions were reported at $44.6 million. Unfunded capital commitments were $34.5 million, payable through 2020, and an additional $20.8 million of vessel orders was indefinitely deferred.

Outlook, management commentary, risks and unusual items

• Management described market conditions as difficult despite a recovery in oil prices, citing ongoing low exploration and drilling activity and potential oversupply as vessels reactivate and new vessels enter service. Management believes available cash, reserve funds, operating cash flow, subsidiary borrowing availability and capital-market access will be sufficient for liquidity needs, while noting market conditions could constrain financing access.
• No specific revenue or earnings guidance was provided. The filing says operating results depend chiefly on vessel rates and utilization and cautions that interim results are not necessarily indicative of full-year results.
• Key risks include oil-price and offshore-investment declines, industry vessel oversupply, customer suspensions or cancellations, geographic and currency exposure, variable-rate debt, regulatory and Jones Act requirements, weather and seasonality, customer concentration, and operational and litigation exposures.
• The company reported a $3.4 million tax liability adjustment related to its 2017 federal return, which it deemed immaterial to both periods. It also corrected previously reported weighted-average share counts and loss per share for the first and second quarters of 2018; management concluded the errors were not material and the September-quarter figures were unaffected.
• Adoption of the new lease standard was planned for January 1, 2019. Management preliminarily estimated recognition of $40 million to $75 million in right-of-use assets and corresponding lease liabilities.
• After quarter-end, the company entered interest-rate swaps covering portions of the new syndicated facility and vessel-acquisition debt. It also sold three fast support vessels and two liftboats for gross proceeds of $8.2 million and a net gain of $5.1 million; $7.0 million of proceeds repaid debt.

Important facts for investors to verify

• Whether improved utilization and vessel rates can be sustained, particularly given management’s oversupply and demand concerns.
• Receivable collection, working-capital requirements and the trajectory of operating cash flow after the nine-month cash outflow.
• Debt repayment capacity, floating-rate exposure, collateral and guarantee terms, and required principal payments beginning in December 2018.
• Funding and timing of the $34.5 million committed capital program, the $5.3 million remaining SEACOSCO commitment, and the status of deferred vessel orders.
• Performance and funding needs of joint ventures and equity-method investments, including SEACOR Grant DIS and OSV Partners.
• Potential final balance-sheet effects of the 2019 lease-standard adoption and any future impairment or tax adjustments.