ITEM 1. BUSINESS
General
Unless the context indicates otherwise, the terms “we,” “our,” “ours,” “us” and the “Company” refer to SEACOR Holdings Inc. and its consolidated subsidiaries. “SEACOR” refers to SEACOR Holdings Inc., incorporated in 1989 in Delaware, without its subsidiaries. “Common Stock” refers to the common stock, par value $.01 per share, of SEACOR. The Company’s fiscal year ended on December 31, 2018.
SEACOR’s principal executive office is located at 2200 Eller Drive, P.O. Box 13038, Fort Lauderdale, Florida 33316, and its telephone number is (954) 523-2200. SEACOR’s website address is www.seacorholdings.com. Any reference to SEACOR’s website is not intended to incorporate the information on the website into this Annual Report on Form 10-K.
The Company’s corporate governance documents, including the Board of Directors’ Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee charters are available, free of charge, on SEACOR’s website or in print for stockholders.
All of the Company’s periodic reports filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on SEACOR’s website, including its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and any amendments to those reports. These reports and amendments are available on SEACOR’s website as soon as reasonably practicable after the Company electronically files the reports or amendments with the SEC. The SEC maintains a website (www.sec.gov) that contains these reports, proxy and information statements and other information.
Segment Information
SEACOR is a diversified holding company with interests in domestic and international transportation and logistics, risk management consultancy and other businesses. The Company conducts its activities in the following reporting segments:
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Ocean Transportation & Logistics Services
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Inland Transportation & Logistics Services
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Witt O’Brien’s
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Other
Discontinued Operations
On June 1, 2017, the Company completed the spin-off of SEACOR Marine Holdings Inc. (“SEACOR Marine”), the company that operated SEACOR’s Offshore Marine Services business segment, by means of a dividend of all the issued and outstanding common stock of SEACOR Marine to SEACOR’s shareholders (the “Spin-off”). Prior to the Spin-off, SEACOR and SEACOR Marine entered into a Distribution Agreement and other agreements that govern the post-Spin-off relationship between SEACOR and SEACOR Marine. For all periods presented herein, the Company has reported the historical financial position, results of operations and cash flows of SEACOR Marine as discontinued operations.
On July 3, 2017, the Company completed the sale of its 70% interest in Illinois Corn Processing LLC (“ICP”), the company that operated SEACOR’s Illinois Corn Processing business segment. For all periods presented herein, the Company has reported the historical financial position, results of operations and cash flows of ICP as discontinued operations.
Ocean Transportation & Logistics Services
Business
Ocean Transportation & Logistics Services (“Ocean Services”) owns and operates a diversified fleet of bulk transportation, port and infrastructure, and logistics assets, including U.S. coastwise eligible vessels and vessels trading internationally. Ocean Services has a 51% controlling interest in certain subsidiaries (collectively “SEA-Vista”) that operate U.S.-flag petroleum and chemical carriers servicing the U.S. coastwise crude oil, petroleum products and chemical trades. Ocean Services’ dry bulk vessels also operate in the U.S. coastwise trade. Ocean Services’ port and infrastructure services includes assisting deep-sea vessels docking in U.S. Gulf and East Coast ports, providing ocean towing services between U.S. ports and providing oil terminal support and bunkering operations in St. Eustatius and the Bahamas. Ocean Services’ logistics services include U.S.-flag Pure Car/Truck Carriers (“PCTCs”) operating globally under the U.S. Maritime Security Program (“MSP”) and liner, short-sea, rail car and project cargo transportation and logistics solutions to and from ports in the Southeastern United States, the Caribbean (including Puerto Rico), the Bahamas and Mexico as well as ‘door-to-door’ solutions for certain customers. Ocean Services also provides technical ship management services for third-party vessel owners. Ocean Services contributed 50%, 54% and 44% of consolidated operating revenues during the years ended December 31, 2018, 2017 and 2016, respectively.
For a discussion of risk and economic factors that may impact Ocean Services’ financial position and its results of operations, see “Item 1A.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
Petroleum and chemical carriers, bulk carriers, PCTCs, harbor and offshore towboats and barges, RORO vessels and barges, inland river towboats and barges, terminals and servicing facilities are the principal physical properties owned by the Company and are more fully described in “Ocean Transportation & Logistics Services” and “Inland Transportation & Logistics Services” in “Item 1. Business.”
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
During 2012, the Company sold National Response Corporation (“NRC”), NRC Environmental Services Inc., SEACOR Response Ltd., and certain other subsidiaries to J.F. Lehman & Company, a private equity firm (the “SES Business Transaction”).
On December 15, 2010, O’Brien’s Response Management L.L.C. (“ORM”) and NRC were named as defendants in one of the several “master complaints” filed in the overall multi-district litigation relating to the Deepwater Horizon oil spill response and clean-up in the Gulf of Mexico, which is currently pending in the U.S. District Court for the Eastern District of Louisiana (the “MDL”). The “B3” master complaint naming ORM and NRC asserted various claims on behalf of a putative class against multiple defendants concerning the clean-up activities generally and the use of dispersants specifically. Both prior to and following the filing of the aforementioned “B3” master complaint, individual civil actions naming the Company, ORM, and/or NRC alleging B3 exposure-based injuries and/or damages were consolidated with the MDL and stayed pursuant to court order. On February 16, 2016, all but eleven “B3” claims against ORM and NRC were dismissed with prejudice (the “B3 Dismissal Order”). On August 2, 2016, the Court granted an omnibus motion for summary judgment as it concerns ORM and NRC in its entirety, dismissing the remaining eleven plaintiffs’ claims against ORM and NRC with prejudice (the “Remaining Eleven Plaintiffs’ Dismissal Order”). The deadline to appeal both of these orders has expired. At present, there is only one remaining claim. On April 8, 2013, the Company, ORM, and NRC were named as defendants in William and Dianna Fitzgerald v. BP Exploration et al., No. 2:13-CV-00650 (E.D. La.) (the “Fitzgerald Action”), which is a suit by a husband and wife whose son allegedly participated in the clean-up effort and became ill as a result of his exposure to oil and dispersants. While the decedent in the Fitzgerald Action’s claims against ORM and NRC were dismissed by virtue of the Remaining Eleven Plaintiffs’ Dismissal Order, the claim as against the Company remains stayed.
Following a status conference with the Court on February 17, 2017, the Court issued several new pretrial orders in connection with the remaining claims in the MDL. Various submissions followed, and on July 18, 2017, the Court issued an order dismissing all remaining “B3” claims in the MDL with prejudice, with the exception of certain claims specifically listed on an exhibit annexed to the order (the “Master MDL B3 Dismissal Order”). Nathan Fitzgerald, the decedent in the Fitzgerald Action, was listed on the exhibit annexed to the Master MDL B3 Dismissal Order. The Court has since issued a list of those plaintiffs compliant with its previous orders and thus whose “B3” claims remain pending; the last version of this compliance list was issued on April 6, 2018 and the claim for the decedent in the Fitzgerald Action remains listed as a pending claim. On April 9, 2018, the Court issued an order requiring remaining “B3” plaintiffs to submit particularized statements of claim, and such a statement was submitted on behalf of the decedent in the Fitzgerald Action on July 9, 2018. On September 20, 2018, the Court issued an order indicating which statements of claim were sufficient and which were not, requiring the latter plaintiffs to show cause; the statement submitted on behalf of the decedent in the Fitzgerald Action was deemed sufficient, requiring nothing further at the time of the order. The Company is unable to estimate the potential exposure, if any, resulting from this matter, to the extent it remains viable, but believes it is without merit and does not expect that it will have a material effect on its consolidated financial position, results of operations or cash flows.
On February 18, 2011, Triton Asset Leasing GmbH, Transocean Holdings LLC, Transocean Offshore Deepwater Drilling Inc., and Transocean Deepwater Inc. (collectively “Transocean”) named ORM and NRC as third-party defendants in a Rule 14(c) Third-Party Complaint in Transocean’s own Limitation of Liability Act action, which is part of the overall MDL, tendering to ORM and NRC the claims in the “B3” master complaint that have already been asserted against ORM and NRC. Various contribution and indemnity cross-claims and counterclaims involving ORM and NRC were subsequently filed. The Company believes that the potential exposure, if any, resulting therefrom has been reduced as a result of the various developments in the MDL, including the B3 Dismissal Order and Remaining Eleven Plaintiffs’ Dismissal Order, and does not expect that these matters will have a material effect on its consolidated financial position, results of operations or cash flows.
Separately, on March 2, 2012, the Court announced that BP Exploration and BP America Production Company (“BP America”) and (collectively “BP”) and the Plaintiffs had reached an agreement on the terms of two proposed class action settlements that will resolve, among other things, Plaintiffs’ economic loss and property damage claims and clean-up related claims against BP. The Company, ORM, and NRC had no involvement in negotiating or agreeing to the terms of either settlement, nor are they parties or signatories thereto. The BP settlement pertaining to personal injury claims (the “Medical Settlement”) purported to resolve the “B3” claims asserted against BP and also established a right for class members to pursue individual claims against BP (but not ORM or NRC) for later-manifested physical conditions. The back-end litigation-option (“BELO”) provision of the Medical Settlement has specifically-delineated procedures and limitations, should any “B3” class member seek to invoke their BELO right. For example, there are limitations on the claims and defenses that can be asserted, as well as on the issues, elements, and proofs that may be litigated at any trial and the potential recovery for any Plaintiff. Notwithstanding that the Company, ORM, and NRC are listed on the Medical Settlement’s release as to claims asserted by Plaintiffs, the Medical Settlement still permits BP to seek indemnity from any party, to the extent BP has a valid indemnity right. The Medical Settlement was approved by the Court on January 11, 2013 and made effective on February 12, 2014. As of early February 2019, BP has tendered approximately 700 claims invoking BELO rights for indemnity pursuant to service contracts to ORM and approximately 70 such claims to NRC. ORM and NRC have rejected BP’s contention that BP is entitled to defense and indemnity coverage from ORM and/or NRC for any of the “B3” claims referenced in BP’s indemnity demands. Moreover, the Company believes that (1) ORM has contractual indemnity coverage for the above-referenced BELO claims through its separate agreements with sub-contractors that worked for ORM during the Deepwater Horizon oil spill response and (2) NRC’s services contract with BP does not provide for broad contractual indemnity as BP contends. The Company, ORM, and NRC are of the belief that BP’s indemnity demands with respect to any “B3” claims, including those involving Medical Settlement class members invoking BELO rights, are untimely and improper and vigorously defend its interest. Overall, however, the Company believes that both settlements have reduced the potential exposure in connection with the various cases relating to the Deepwater Horizon oil spill response and clean-up. The Company is unable to estimate the potential exposure, if any, resulting from these claims, but does not expect that they will have a material effect on its consolidated financial position, results of operations or cash flows.
In the ordinary course of the Company’s business, it may agree to indemnify its counterparty to an agreement. If the indemnified party makes a successful claim for indemnification, the Company would be required to reimburse that party in accordance with the terms of the indemnification agreement. Indemnification agreements generally, but not always, are subject to threshold amounts, specified claim periods and other restrictions and limitations.
In connection with the SES Business Transaction, the Company remains contingently liable for work performed in connection with the Deepwater Horizon oil spill response. Pursuant to the agreement governing the sale, the Company’s potential liability to the purchaser may not exceed the consideration received by the Company for the SES Business Transaction. The Company is currently indemnified under contractual agreements with BP for the potential “B3” liabilities relating to cleanup work performed in connection with the Deepwater Horizon oil spill response; this indemnification is unrelated to, and thus not impacted by, the indemnification BP has demanded for the BELO cases referenced above.
In the ordinary course of its business, the Company becomes involved in various other litigation matters including, among other things, claims by third parties for alleged property damages and personal injuries. Management has used estimates in determining the Company’s potential exposure to these matters and has recorded reserves in its financial statements related thereto where appropriate. It is possible that a change in the Company’s estimates of that exposure could occur, but the Company does not expect such changes in estimated costs would have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers of SEACOR serve at the pleasure of the Board of Directors. The name, age and offices held by each of the executive officers of SEACOR as of December 31, 2018 were as follows:
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for the Company’s Common Stock
SEACOR’s Common Stock trades on the New York Stock Exchange (“NYSE”) under the trading symbol “CKH.” The closing share price on the NYSE on February 22, 2019 was $47.87. As of February 22, 2019, there were 153 holders of record of Common Stock.
The Company currently does not intend on paying any dividends for the foreseeable future. Any payment of future dividends will be at the discretion of SEACOR’s Board of Directors and will depend upon, among other factors, the Company’s earnings, financial condition, current and anticipated capital requirements, plans for expansion, level of indebtedness and contractual restrictions, including the provisions of the Company’s other then-existing indebtedness. The payment of future cash dividends, if any, would be made only from assets legally available.
On June 1, 2017, the Company completed the Spin-off of SEACOR Marine by means of a dividend of all of the issued and outstanding common stock of SEACOR Marine to SEACOR’s shareholders. In the Spin-off, holders of SEACOR Common Stock received approximately 1.005 shares of SEACOR Marine common stock for each share of SEACOR Common Stock held as of the record date for the Spin-off. On December 20, 2017, the Company distributed 3,977,135 shares of Dorian LPG Ltd. (“Dorian”) to its stockholders with each holder of Common Stock receiving approximately 0.2215 shares of Dorian common stock for each share of SEACOR Common Stock held as of the record date for such distribution.
Performance Graph
Set forth in the graph below is a comparison of the cumulative total return that a hypothetical investor would have earned assuming the investment of $100 over the five-year period commencing on December 31, 2013 in (i) the Common Stock of the Company, (ii) the Standard & Poor’s 500 Stock Index (“S&P 500”) and (iii) peer issuers. The information set forth in the graph below shall be considered “furnished” but not “filed” for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934.
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(1)
Assumes the reinvestment of dividends.
(2)
The Peer Issuers group is comprised of publicly-traded firms participating in the U.S. Jones Act Marine Transportation and Project Markets. Such firms were selected on an industry and line-of-business basis. The Peer Issuers data is calculated as a simple average percentage in share prices and includes the following companies: SEACOR Holdings Inc., Kirby Corporation, Overseas Shipholding Group, Inc., Matson Inc. and Great Lakes Dredge & Dock Corporation.
Issuer Repurchases of Equity Securities
SEACOR’s Board of Directors previously approved a securities repurchase plan that authorizes the Company to acquire its Common Stock, 7.375% Senior Notes, 3.0% Convertible Senior Notes, 3.25% Convertible Senior Notes and 2.5% Convertible Senior Notes (collectively the "Securities"), which may be acquired through open market purchases, privately negotiated transactions or otherwise, depending on market conditions.
During the years ended December 31, 2018, 2017 and 2016, the Company acquired no shares of Common Stock for treasury under the Securities repurchase plan. As of December 31, 2018, SEACOR had remaining authorization for Securities repurchases of $66.7 million.
During the years ended December 31, 2017 and 2016, the Company acquired for treasury 212,659 and 47,455 shares of Common Stock, respectively, for aggregate purchase prices of $12.3 million and $2.4 million, respectively, from its employees to cover their tax withholding obligations related to share award transactions. These shares were purchased in accordance with the terms of the Company’s Share Incentive Plans and not pursuant to the repurchase authorizations granted by SEACOR’s Board of Directors.
This following table provides information with respect to purchases by the Company of shares of its Common Stock during the three months ended December 31, 2018:
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(1)
During the three months ended December 31, 2018, the Company purchased $4.6 million in principal amount of its 3.0% Convertible Senior Notes thereby reducing the purchase authority under the plan.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL INFORMATION.
The following table sets forth, for the periods indicated, selected historical consolidated financial data for the Company (in thousands, except per share data). Such financial data should be read in conjunction with “Item 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations below presents the Company’s operating results for each of the three years in the period ended December 31, 2018, and its financial condition as of December 31, 2018. Certain statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations constitute forward looking statements. See “Forward Looking Statements” and “Risk Factors” included elsewhere in this Annual Report on Form 10-K.
Overview
The Company’s operations are divided into three main business segments - Ocean Transportation & Logistics Services (“Ocean Services”), Inland Transportation & Logistics Services (“Inland Services”) and Witt O’Brien’s. The Company also has activities that are referred to and described under Other that primarily includes CLEANCOR Energy Solutions LLC (“Cleancor”), lending and leasing activities and noncontrolling investments in various other businesses.
Discontinued Operations. On June 1, 2017, the Company completed the spin-off of SEACOR Marine Holdings Inc. (“SEACOR Marine”), the company that operated SEACOR’s Offshore Marine Services business segment, by means of a dividend of all the issued and outstanding common stock of SEACOR Marine to SEACOR’s shareholders (the “Spin-off”). Prior to the Spin-off, SEACOR and SEACOR Marine entered into a Distribution Agreement and other agreements that govern the post-Spin-off relationship between SEACOR and SEACOR Marine. For all periods presented herein, the Company has reported the historical financial position, results of operations and cash flows of SEACOR Marine as discontinued operations.
On July 3, 2017, the Company completed the sale of its 70% interest in ICP, the company that operated SEACOR’s Illinois Corn Processing business segment. For all periods presented herein, the Company has reported the historical financial position, results of operations and cash flows of ICP as discontinued operations.
Consolidated Results of Operations
Consolidating segment tables for each period presented below is included in Part IV “Note 17. Segment Information” of this Annual Report on Form 10-K.
Ocean Transportation & Logistics Services
Bulk Transportation Services.
Demand for U.S.-flag bulk transportation services and margins are dependent on several factors including the following:
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the volumes and location of domestic crude oil and petroleum production and associated refining activity levels in the United States;
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the volume and location of domestic retail consumption of petroleum products and commercial demand for crude oil, petroleum products and chemicals;
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the impact of competition from domestic pipelines and railroads;
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the delivered cost and competitiveness of foreign sourced crude oil, oil products and chemicals;
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the number of U.S.-flag oceangoing vessels eligible to participate in the U.S. domestic trade and capable of transporting crude, petroleum or chemical products;
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domestically sourced coal and petroleum coke volumes required for regional power utilities particularly in Florida; and
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demand for phosphate rock and finished fertilizers produced in Florida requiring waterborne transportation to the Mississippi River system.
The available supply of U.S.-flag vessels fluctuates when newly built vessels are placed into service or older vessels are removed from service. Older vessels are typically removed from service when margins are poor and the vessels face regulatory dockings, or when users insist on contracting for newer or more modern vessels. In some cases, loading installations may not accept vessels in excess of certain age requirements, typically 25 years. As of December 31, 2018, Ocean Services believes that third parties have contracted to build two U.S.-flag tank vessels with delivery dates in 2020 that could compete with Ocean Services’ U.S.-flag petroleum and chemical carriers currently in service. Additionally, Ocean Services believes that there are in excess of 13 U.S.-flag petroleum and chemical carriers capable of carrying 155,000 barrels or more still operating that are in excess of 20 years old, including two owned by Ocean Services. The supply of U.S.-flag bulk carriers which are eligible to operate in the Jones
Act trade is currently 14 vessels which range from 14,000 short tons to 40,000 short tons of cargo carrying capacity, of which Ocean Services owns the two largest assets. As of December 31, 2018, no additional U.S.-flag bulk carriers were under construction.
Port & Infrastructure Services.
The demand for harbor towing services is affected by the frequency, size and type of vessels calling within the U.S. ports where Ocean Services’ tugs are deployed. The total number of U.S.-flag harbor tugs in service is hard to ascertain. Operators continue to upgrade their fleets with newly built, larger horsepower azimuth drive tugs to service changing customer requirements. Bunkering equipment is deployed under long-term, fixed price contracts serving the Caribbean and the Bahamas.
Logistics Services.
The demand for logistics services is dependent on several factors. Demand for U.S.-flag PCTCs is generally dependent on global demand for automobiles, the operational policies and budgets of the U.S. armed services and demand for U.S. Government cargo transportation. The U.S. Government dictates the number and types of vessels enrolled in MSP, which provides a stipend to offset the higher cost of U.S. crews and operating standards required for U.S.-flag vessels. The U.S.-flag vessels, including Ocean Services’ PCTCs participating in the MSP program are granted priority for U.S. Government cargo over non-U.S.-flag vessels. Demand for liner and short-sea transportation is generally dependent on the volume of development and construction projects, demand for consumer and durable goods, manufacturing activity, and tourism trends within the Caribbean (including Puerto Rico), the Bahamas and Mexico.
Managed Services.
The demand for managed services is primarily dependent on the number of vessels owned by third parties who are unable to operate their own vessels and require the services of a third-party ship manager, such as financial institutions or owners without enough scale to manage in-house efficiently.
Results of Operations
The number and types of equipment operated, their contracted rates and utilization, and availability for service, taking into account dry-dock requirements and maintenance days, are the key determinants of Ocean Services’ operating results and cash flows. Unless a vessel is removed from operational service, there is little reduction in daily running costs and, consequently, operating margins are most sensitive to changes in contractual rates and utilization.
Ocean Services’ operating costs and expenses are grouped into the following categories:
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personnel (primarily wages, benefits, payroll taxes, savings plans and travel for marine personnel);
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repairs and maintenance (primarily routine repairs and maintenance and overhauls which are performed in accordance with planned maintenance programs);
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dry-docking (primarily the cost of regulatory dry-dockings performed in accordance with applicable regulations);
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insurance and loss reserves (primarily the cost of Hull and Machinery and Protection and Indemnity insurance premiums and loss deductibles);
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fuel, lubes and supplies;
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leased-in equipment (includes the cost of leasing equipment from lessors under bareboat charter arrangements); and
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other (port charges, freight, vessel inspection costs and other).
Vessel dry-dockings are performed in accordance with applicable regulations, or when necessary. Costs are expensed when incurred. If a disproportionate number of dry-dockings are undertaken (or not required) in a particular fiscal year or quarter, operating expenses can vary significantly in comparison with a prior year or prior quarter.
For the years ended December 31, the results of operations for Ocean Services were as follows:
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(1)
Includes amounts attributable to both SEACOR and noncontrolling interests. See Part IV “Note 12. Noncontrolling Interests in Subsidiaries” included in this Annual Report on Form 10-K.
Operating Revenues by Line of Service. The table below sets forth, for the years indicated, the types of operating revenues earned by line of service.
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(1)
Includes MSP revenues of $19.3 million and $9.9 million for the year ended December 31, 2018 and 2017, respectively.
International Shipholding Corporation Acquisition. On July 3, 2017, SEACOR acquired International Shipholding Corporation (“ISH”). Its subsidiaries include: United Ocean Services, which operates Jones Act U.S.-flag bulk carriers supporting the cross-U.S. Gulf trade of fertilizer, phosphate rock, coal, and petroleum coke (the results of which are included in bulk transportation services in the table above); Central Gulf Lines, Inc. (“CGL”); and Waterman Steamship Company. The latter two entities are long-established U.S. based shipping lines that charter and operate vessels enrolled in the MSP. CGL time charters four U.S.-flag PCTCs, to a third party when not moving U.S. military, commercial and U.S. government-impelled cargoes (the results of which are included in logistics services in the table above). See Part IV “Note 2. Business Acquisitions” of this Annual Report on Form 10-K.
2018 compared with 2017
Operating Revenues. Operating revenues were $62.0 million higher in 2018 compared with 2017.
Operating revenues from bulk transportation were $3.7 million higher in 2018 compared with 2017.
Operating revenues from petroleum and chemical transportation were $7.9 million lower primarily due to the sale of one U.S.-flag petroleum and chemical carrier during 2018, higher out-of-service time for the regulatory dry-dockings of U.S.-flag petroleum and chemical carriers and lower charter rates for U.S.-flag petroleum and chemical carriers. These decreases were partially offset by operating revenues resulting from a full year of activity for newly built U.S.-flag petroleum and chemical carriers placed into service during March and August of 2017.
Operating revenues from dry bulk transportation were $11.7 million higher primarily due a full year of operations for two U.S.-flag bulk carriers acquired in the ISH acquisition, partially offset by out-of-service time associated with the regulatory dry-docking of these two U.S.-flag bulk carriers during 2018.
Operating revenues from port and infrastructure services were $8.9 million higher primarily due to an increase in harbor towing tariff activities resulting from higher port traffic, a full year of operations for a U.S.-flag harbor tug under a time charter contract and the commencement of a bareboat charter contract for a U.S.-flag harbor tug.
Operating revenues from logistics services were $48.0 million higher primarily due to a full year of operations for four PCTCs associated with the ISH acquisition and an increase in unit freight shipping demand.
Operating revenues from managed services were $1.4 million higher primarily due to providing management services for two additional third-party vessels.
Operating Expenses. Operating expenses were $74.0 million higher in 2018 compared with 2017 primarily due to:
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the addition of the PCTCs and U.S.-flag bulk carriers acquired in the ISH acquisition;
•
a full year of operations for newly built U.S.-flag petroleum and chemical carriers placed into service during March and August of 2017;
•
placing two foreign-flag short-sea container/RORO vessels into service in January of 2018; and
•
higher regulatory dry-docking costs for U.S.-flag petroleum and chemical carriers.
These increases were partially offset by the sale of one U.S.-flag petroleum and chemical carrier in March of 2018.
Administrative and General. Administrative and general expenses were $3.6 million higher in 2018 compared with 2017 primarily due to higher compensation costs associated with the ISH acquisition and higher legal fees. These increases were partially offset by the accelerated vesting of certain share awards in 2017 in advance of changes to the U.S. federal income tax code.
Depreciation and Amortization. Depreciation and amortization expenses were $0.2 million higher in 2018 compared with 2017 primarily due to placing into service newly built U.S.-flag petroleum and chemical carriers during March and August of 2017 and two short-sea container/RORO vessels in January of 2018 and the acquisition of three U.S.-flag harbor tugs that were previously leased-in. These increases were partially offset by one U.S.-flag petroleum and chemical carrier being fully depreciated during 2018 and the impact of the sale-leaseback of another U.S.-flag petroleum and chemical carrier during 2017.
Gains (Losses) on Asset Dispositions and Impairments, Net. During 2018, Ocean Services sold one U.S.-flag petroleum and chemical carrier, one U.S.-flag harbor tug and other equipment for net proceeds of $5.1 million and gains of $1.9 million, all of which were recognized currently. Additionally, Ocean Services recognized previously deferred gains of $11.0 million due to a change in the lease duration for one U.S.-flag petroleum and chemical carrier. During 2017, Ocean Services recognized an impairment charge of $0.4 million due to the cancellation of an upgrade project for one U.S.-flag harbor tug, partially offset by gains of $0.1 million related to the sale of other equipment.
Operating Income. Excluding the impact of gains (losses) on asset dispositions and impairments, net operating income as a percentage of operating revenues was 14% in 2018 compared with 21% in 2017. The decrease was primarily due to the sale of one U.S.-flag petroleum and chemical carrier, drydocking costs for two U.S.-flag bulk carriers and the associated out-of-service time in 2018 and higher operating costs for two foreign-flag short-sea container/RORO vessels placed into service in January of 2018, partially offset by the increase in harbor towing activities.
Equity in Earnings (Losses) of 50% or Less Owned Companies, Net of Tax. Ocean Services recognized equity in earnings of 50% or less owned companies, net of tax, of $3.7 million in 2018 compared with $7.7 million in 2017. The reduction was primarily due to losses from Ocean Services’ 50% or less owned companies that own and operate rail ferries as a consequence of out-of-service time and associated dry-docking costs and repair expenses, and the sale of a U.S.-flag dry-bulk articulated tug-barge by SeaJon LLC (“SeaJon”) during 2017. These decreases were partially offset by improved results from Trailer Bridge, Inc. (“Trailer Bridge”) and Kotug Seabulk Maritime LLC (“KSM”).
2017 compared with 2016
Operating Revenues. Operating revenues were $123.2 million higher in 2017 compared with 2016.
Operating revenues from bulk transportation were $68.4 million higher in 2017 compared with 2016.
Operating revenues from petroleum and chemical transportation were $47.8 million higher primarily due to a $40.5 million increase in time charter revenues and a $7.7 million increase in voyage charter revenues as a result of placing two newly built U.S.-flag petroleum and chemical carriers into service and a full year of activity for two other newly built U.S.-flag petroleum and chemical carriers placed into service during 2016. These increases were partially offset by a decrease in bareboat revenues of $0.4 million due to out-of-service time associated with dry-docking one U.S.-flag petroleum and chemical carrier.
Operating revenues from dry bulk transportation were $20.6 million higher due to the addition of two bulk carriers acquired in the ISH acquisition.
Operating revenues for port and infrastructure services were $8.7 million higher primarily due to an increase in harbor towing tariff activities resulting from higher port traffic, the commencement of a time charter contract for one U.S.-flag offshore tug and a bareboat charter contract for two foreign-flag harbor tugs during 2017.
Operating revenues from logistics services were $45.7 million higher primarily due to the addition of four U.S.-flag PCTCs associated with the ISH acquisition and an increase in cargo shipping demand for unit freight activities.
Operating Expenses. Operating expenses were $72.7 million higher in 2017 compared with 2016 primarily due to:
•
placing two newly built U.S.-flag petroleum and chemical carriers into service and a full year of activity for two other newly built U.S.-flag petroleum and chemical carriers placed into service during 2016;
•
the dry-docking of one U.S.-flag petroleum and chemical carrier; and
•
the addition of the four U.S.-flag PCTCs and two U.S.-flag bulk carriers acquired in the ISH acquisition.
Administrative and General. Administrative and general expenses were $8.7 million higher in 2017 compared with 2016 primarily due to higher compensation costs associated with the ISH acquisition and the accelerated vesting of certain share awards in advance of changes to the U.S. federal income tax code.
Depreciation and Amortization. Depreciation and amortization expenses were $14.9 million higher in 2017 compared with 2016 primarily due to placing two newly built U.S.-flag petroleum and chemical carriers into service and a full year of activity for two other newly built U.S.-flag petroleum and chemical carriers placed into service during 2016 and the addition of the U.S.-flag bulk carriers acquired in the ISH acquisition.
Operating Income. Operating income as a percentage of operating revenues was 21% in 2017 compared with 21% in 2016, primarily due to placing two newly built U.S.-flag petroleum and chemical carriers into service and a full year of activity for two other newly built U.S.-flag petroleum and chemical carriers placed into service during 2016, offset by out-of-service time associated with dry-docking one U.S.-flag petroleum and chemical carrier and additional costs following the ISH acquisition.
Other, Net. During 2016, Ocean Services recognized a $6.5 million impairment charge related to its cost investment in a foreign container shipping company.
Equity in Earnings (Losses) of 50% or Less Owned Companies, Net of Tax. Ocean Services recognized equity in earnings of 50% or less owned companies, net of tax, of $7.7 million in 2017 compared with equity in losses of 50% or less owned companies, net of tax, of $4.7 million in 2016 primarily due to improved results from Trailer Bridge, following its recapitalization during December 2016, the sale of a U.S.-flag dry bulk articulated tug-barge at a gain by SeaJon during 2017 and earnings from ISH’s 50% or less owned companies that own and operate two foreign-flag rail ferries and a full service railcar facility. These earnings were partially offset by start-up costs incurred by KSM that was formed during 2017. In addition, Ocean Services recognized interest income (not a component of segment profit) of $0.6 million on notes due from Trailer Bridge in 2017 compared with $7.8 million in 2016.
Inland Transportation & Logistics Services
Bulk Transportation.
The results of Inland Services are primarily driven by demand for inland river bulk transportation equipment. The balance between supply of equipment and demand determines prices, utilization and margins achieved. Factors that influence demand for equipment include:
•
the level of domestic and international demand for agricultural commodities, iron ore, steel, steel by-products, coal, ethanol, petroleum and other bulk commodities;
•
the level of domestic production of corn, soybeans and carryover stocks and the price of these commodities;
•
the level of domestic and international consumption of agricultural products and the effect of these levels on the volumes of products that are physically moved into the export markets;
•
the relative cost of transporting products on the inland waterways from the U.S. Midwest to the U.S. Gulf of Mexico for export compared with the cost via rail to the Pacific Northwest;
•
the relative cost of ocean freight from other producing origins; and
•
the strength or weakness of the U.S. dollar and its impact on the import and export markets.
Within the United States and international markets, utilization and margins are also significantly impacted by the following factors:
•
the supply of barges available to move products;
•
operating conditions on the inland waterways including operating status of locks and dams;
•
the effect of river levels on the loading capacities of barges in terms of draft restrictions;
•
the ability to position the barges to maximize efficiencies and utility in moving cargoes both northbound and southbound; and
•
the availability of qualified wheelhouse personnel.
Trade tensions, the resurgence of U.S. oil/gas exploration, which increased the use of covered hopper barges for frac sand, and the gain in U.S. market share in corn exports were the main drivers for barge demand in 2018. Operating conditions were challenging during 2018, and included two high water events in the early spring and early winter that adversely affected operations. The U.S. corn and soybean yields have surpassed trend line averages for the past three years, while crops in the Southern Hemisphere have been challenged with adverse weather over the past two years. Drought negatively affected Brazil’s corn crop in 2018 allowing the U.S. to regain market share increasing corn exports through the U.S. Gulf of Mexico by 18% (5.0 million metric tons “mmt”). Argentina’s soybean crop was severely impaired by early drought and late season flooding. The U.S. was able to maintain steady soybean exports during the first three quarters of the year at just over 18 mmt through the U.S. Gulf of Mexico despite the Chinese import tariffs that went into effect in July. Those tariffs affected U.S.soybean exports in the fourth quarter, with exports through the U.S. Gulf of Mexico plummeting by 31%, (4.3 mmt). Slower U.S. soybean exports combined with a wet, prolonged harvest did not produce the typical seasonal rally in grain freight rates. U.S. corn and soybean producers have record high inventories to begin 2019, and Inland Services expects there will be favorable conditions for exports through July 2019.
Demand from other commodity sectors helped support barge rates. Center Gulf coal exports were up 6.7 mmt through October. Domestic barge delivered coal continues to trend lower with the closure of additional coal fired utilities, down 9.2 mmt through the first three quarters of the year. Domestic steel mill utilization is running at the highest rate since before the 2008 recession spurred by import tariffs and demand from the oil/gas market. This demand continues to support imports of steel inputs and the domestic movement of scrap and finished steel. Salt imports are also increasing as frequent winter storms have increased demand for deicing. High plate steel prices and adequate barge supply have limited new construction allowing the fleet to modestly shrink in 2018.
The covered hopper barge fleet continued to be rationalized. Barge scrapping outpaced new construction again this year by an estimated 150 to 200 barges. Current new build orders for 2019 would indicate an overall fleet reduction in 2019 as retirements should once again exceed new barge construction.
At the end of 2018, the average age of Inland Services’ covered dry-cargo barge fleet was ten years, which Inland Services believes is among the youngest fleets operating on the U.S. Inland Waterways. Inland Services believes that approximately 22% of the dry-cargo barge fleet operating on the U.S. Inland Waterways is over 20 years old. Inland Services believes the relatively young age of its dry-cargo barge fleet enhances its availability and reliability, reduces downtime for repairs and obviates, for the immediate future, the necessity of replacement capital expenditures to maintain its fleet size and revenue generating capacity.
Internationally, the increased demand for barge services continued in 2018 driven by the ongoing expansion of new commodity origins and the U.S. trade war with China. These factors caused higher utilization of the barge and towboat fleet with an extended period of improved operating conditions. No new barge construction occurred in 2018 and an organized barge scrapping program started during the year.
Port & Infrastructure Services.
Inland Services’ terminal operations benefited from high water on the Illinois, Mid-Mississippi and Ohio Rivers during 2018 which caused cargo to be diverted to Inland Services’ St. Louis terminals for transshipment. Tonnage handled at Inland Services’ facilities increased 14.6% compared with 2017.
Inland Services’ fleeting operations benefited from increased barge and boat activities in the St. Louis area, primarily attributable to demand for refinery products.
Logistics Services.
During 2018, SEACOR America’s Marine Highway (“AMH”) transported 48.7% more twenty-foot equivalent container units compared with the prior year, thus eliminating approximately 50,000 truck shipments off the interstate highway system. This growth in volume was driven by plant expansion by customers that support the container on barge operating model. Logistics Services also provides local drayage services to its customers.
Managed Services.
During 2018, Inland Services provided management services related to barge and towboat operations.
Results of Operations
Fleet size, equipment utilization levels from volumes of product moved and margins earned are the key determinants of Inland Services’ operating results and cash flows. Increased demand for inland river transportation equipment generally leads to higher barge freight rates earned and higher activity levels generally leads to higher barge logistics costs. Adverse river conditions caused by severe weather can reduce volumes of product moved and increase barge logistics costs. Margins earned are also impacted by the success, or lack thereof, of coordinating cargo movements to minimize the repositioning costs of empty barges.
The aggregate cost of Inland Services’ operations depends primarily on the size and mix of its fleet and the level of barge activity. Inland Services’ operating costs and expenses are grouped into the following categories:
•
barge logistics (primarily towing, switching, fleeting and cleaning costs);
•
personnel (primarily wages, benefits, payroll taxes, savings plans and travel for marine personnel);
•
repairs and maintenance (primarily repairs and maintenance on towboats and barges, which are performed in accordance with planned maintenance programs);
•
insurance and loss reserves (primarily the cost of Hull and Machinery, Protection and Indemnity and Cargo insurance premiums and loss deductibles);
•
fuel, lubes and supplies;
•
leased-in equipment (includes the cost of leasing equipment, including bought-in freight and towboats); and
•
other (rail car logistics, property taxes, project costs and other).
Adoption of Revenue Recognition Accounting Standard. On January 1, 2018, the Company adopted Financial Accounting Standard Board (“FASB”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). As a consequence of adopting Topic 606, Inland Services now recognizes all of the operating revenues and expenses associated with the dry-cargo barge pools it manages along with additional operating expenses reflective of barge pool earnings attributable to third-party barge owners and not Inland Services in its capacity as manager. Under Topic 606, Inland Services determined it was a principal with respect to the third-party barge owners. Previously, Inland Services recognized operating revenues and expenses only for its proportionate share of the barge pools in which it participated as it acted as an agent. All prior period results have been adjusted to reflect the retrospective adoption of Topic 606. The adoption of Topic 606 had no impact on previously reported operating income, net income or earnings per share. See “Item 1. Financial Statements-Note 1. Basis of Presentation and Accounting Policies” included in Part I of this Annual Report on Form 10-K.
For the years ended December 31, the results of operations for Inland Services were as follows:
______________________
(1)
Includes amounts attributable to both SEACOR and noncontrolling interests. See Part IV “Note 12. Noncontrolling Interests in Subsidiaries” included in this Annual Report on Form 10-K.
Operating Revenues by Service Line. The following table presents, for the years indicated, operating revenues by service line.
2018 compared with 2017
Operating Revenues. Operating revenues were $37.2 million higher in 2018 compared with 2017.
Operating revenues from bulk transportation services were $29.1 million higher in 2018 compared with 2017. Operating revenues from the dry-cargo barge pools were $29.4 million higher primarily due to increased loadings and higher freight rates. Operating revenues from the charter-out of dry-cargo barges were $2.2 million lower primarily due to barges coming off charter and being placed in the dry-cargo barge pools or being sold. Operating revenues from international liquid tank barge operations were $0.9 million higher primarily due to an increase in volumes moved. Operating revenues from boat, specialty barge and other operations were $1.0 million higher primarily due to a full year of operation of one newly built towboat placed into service during the fourth quarter of 2017.
Operating revenues from port and infrastructure services were $2.7 million higher in 2018 compared with 2017. Operating revenues from fleeting operations were $2.5 million higher primarily due to higher activity levels in the St. Louis harbor.
Operating revenues from logistics services were $5.4 million higher primarily due to increased container movements.
Operating Expenses. Operating expenses were $30.2 million higher in 2018 compared with 2017. Barge logistics expenses were $21.3 million higher, primarily due to higher towing and switching costs as a consequence of higher activity levels and increased towing rates. Personnel costs were $0.5 million higher primarily due to higher activity levels at Inland Services’ terminal and fleeting locations in the St. Louis harbor. Repairs and maintenance costs were $1.3 million higher primarily due to scheduled maintenance for certain of Inland Services’ barges and harbor boats. Fuel, lubes and supplies were $1.2 million higher primarily due to increased activity in Inland Services’ fleeting locations and higher fuel prices. Leased-in equipment expense was $2.0 million higher primarily due to bought in barges needed to fill freight commitments in Inland Services’ dry-cargo barge operations. Other operating expenses were $3.8 million higher primarily due to the increase in container movements and higher terminal trucking expenses.
Administrative and General. Administrative and general expenses were $3.4 million lower in 2018 compared with 2017 primarily due to the acceleration of vesting of certain share awards in advance of changes to the U.S. federal income tax code in 2017.
Depreciation and Amortization. Depreciation and amortization expenses were $1.7 million lower in 2018 compared with 2017 primarily due to the sale of 32 inland river dry-cargo barges in the first quarter of 2018.
Gains on Asset Dispositions and Impairments, Net. During 2018, Inland Services sold 32 inland river dry-cargo barges, two specialty barges and other equipment for net proceeds of $10.9 million and gains of $4.7 million, all of which were recognized currently. In addition, Inland Services recognized previously deferred gains of $2.0 million. During 2017, Inland Services sold two inland river towboats, 50 inland river dry-cargo barges, one specialty barge and other equipment for net proceeds of $27.6 million and gains of $17.7 million, of which $10.0 million were recognized currently and $7.7 million were deferred. Equipment dispositions included the sale-leaseback of 50 inland river dry-cargo barges for $12.5 million with leaseback terms of 84 months. In addition, Inland Services recognized losses of $0.3 million related to the total loss of an inland river liquid tank barge while being transported to Colombia and recognized previously deferred gains of $2.3 million.
Operating Income. Excluding the impact of gains on asset dispositions and impairments, net, operating income as a percentage of operating revenues was 4% in 2018 compared with 0% in 2017. The increase was primarily due to higher earnings from the dry-cargo barge pools.
Foreign Currency Gains (Losses), Net. During 2018, Inland Services recognized $2.0 million in foreign currency losses primarily due to the weakening of the Colombian peso versus the U.S. dollar underlying certain intercompany lease obligations.
Equity in Losses of 50% or Less Owned Companies, Net of Tax. During 2018 and 2017, Inland Services recognized $5.7 million and $5.2 million, respectively, of equity losses in 50% or less owned companies, net of tax. During 2018, equity in losses of 50% or less owned companies, net of tax, increased by $0.5 million. Operating results for Bunge-SCF Grain LLC (“Bunge-SCF Grain”), Inland Services’ joint venture that operates grain elevators in Illinois, were $3.5 million lower. Operating results for SCFCo Holdings LLC (“SCFCo”), Inland Services’ 50% or less owned company operating on the Parana-Paraguay River in South America, were $2.4 million higher primarily due to higher demand for barge transportation and favorable operating conditions. Operating results for SCF Bunge Marine LLC, Inland Services’ 50% or less owned company that operates towboats on the U.S. Inland Waterways, improved primarily due to favorable operating conditions, operating an additional towboat and higher towing rates.
2017 compared with 2016
Operating Revenues. Operating revenues were $2.8 million lower in 2017 compared with 2016.
Operating revenues from bulk transportation services were $11.6 million lower in 2017 compared with 2016. Operating revenues from the dry-cargo barge pools were $8.7 million lower primarily due to increased idle barges as a consequence of an
oversupply of equipment and lower freight rates. Operating revenues from the charter-out of dry-cargo barges were $1.5 million lower due to barges coming off charter and returning to the dry-cargo barge pools. Operating revenues from liquid unit tow operations were $7.3 million lower due to the sale of the equipment in the second quarter of 2016. International liquid tank barge operating revenues were $5.2 million higher primarily due to increased demand to move petroleum.
Operating revenues from port and infrastructure services were $4.4 million higher in 2017 compared with 2016. Operating revenues from fleeting operations were $4.9 million higher primarily due to higher activity levels and the acquisition of fleeting assets during the fourth quarter of 2016. Operating revenues from terminal operations were $1.0 million higher primarily due to the acquisition of terminal assets during the fourth quarter of 2016. Operating revenues from machine shop and shipyard operations were $1.5 million lower primarily due to the completion of machine and repair services provided to third parties in the prior year.
Operating revenues from logistics services were $4.4 million higher primarily due to increased container movements.
Operating Expenses. Operating expenses were $1.3 million lower in 2017 compared with 2016. Barge logistics expenses were $8.3 million higher primarily due to higher towing costs as a consequence of higher rates, partially offset by lower switching costs due to barges being idled throughout the year. Personnel costs were $1.3 million lower primarily due to the sale of the liquid unit tow operations equipment during the second quarter of 2016, partially offset by increased personnel costs as a consequence of the acquisition of terminal and fleeting assets during the fourth quarter of 2016. Repairs and maintenance costs were $1.3 million lower primarily due to lower barge painting expenses, terminal maintenance expenses and the impact of the sale of the liquid unit tow equipment in the second quarter of 2016. These decreases were partially offset by higher expenses in international liquid tank barge operations. Insurance and loss reserves expenses were $0.4 million lower primarily due to the sale of the liquid unit tow business in the second quarter of 2016. Fuel, lubes and supplies were $1.5 million higher primarily due to the acquisition of fleeting assets in the fourth quarter of 2016, an increase in container movements and higher activity levels in international liquid tank barge operations. Leased-in equipment costs were $6.8 million lower primarily due to lower bought-in barges to handle freight requirements. Other operating expenses were $2.4 million higher primarily due to increased container movements and higher terminal trucking expenses.
Administrative and General. Administrative and general expenses were $1.9 million higher in 2017 compared with 2016 primarily due to the accelerated vesting of certain share awards in advance of changes to the U.S. federal income tax code.
Depreciation and Amortization. Depreciation and amortization expenses were $0.5 million lower in 2017 compared with 2016 primarily due to the sale of the liquid unit tow operations and the sale leaseback of 50 inland river dry-cargo barges, partially offset by placing three new towboats in service and the acquisition of terminal and fleeting assets during the fourth quarter of 2016.
Gains on Asset Dispositions and Impairments, Net. During 2017, Inland Services sold two inland river towboats, 50 inland river dry-cargo barges, one specialty barge and other equipment for net proceeds of $27.6 million and gains of $17.7 million, of which $10.0 million were recognized currently and $7.7 million were deferred. Equipment dispositions included the sale-leaseback of 50 inland river dry-cargo barges for $12.5 million with leaseback terms of 84 months. In addition, Inland Services recognized losses of $0.3 million related to the total loss of an inland river liquid tank barge while being transported to Colombia and recognized previously deferred gains of $2.3 million. During 2016, Inland Services sold 19 inland river liquid tank barges, one inland river liquid tank barge currently under construction, the rights to eight leased-in inland river liquid tank barges, 14 inland river towboats and other equipment for net proceeds of $90.0 million and gains of $1.9 million, all of which were recognized currently. In addition, Inland Services recognized an impairment charge of $1.1 million related to equipment under construction and previously deferred gains of $2.4 million.
Operating Income. Excluding the impact of gains on asset dispositions and impairments, net, operating income as a percentage of operating revenues was 0% in 2017 compared with 1% in 2016. The decrease was primarily due to lower earnings from the dry-cargo barge pools.
Foreign Currency Gains (Losses), Net. During 2017, Inland Services recognized $0.3 million in foreign currency gains primarily due to the strengthening of the Colombian peso versus the U.S. dollar underlying certain intercompany lease obligations.
Equity in Losses of 50% or Less Owned Companies, Net of Tax. During 2017 and 2016, Inland Services recognized $5.2 million and $15.9 million, respectively, of equity losses in 50% or less owned companies, net of tax, primarily due to losses from SCFCo. During the year ended December 31, 2016, Inland Services identified indicators of impairment in its investment in SCFCo as a result of continuing losses and recognized impairment charges of $7.7 million, for an other-than-temporary decline in the fair value of its investment. Inland Services recognized interest income (not a component of segment profit) of $3.3 million and $3.2 million during the years ended December 31, 2017 and 2016, respectively, on notes due from SCFCo. The losses from SCFCo were partially offset by improved earnings from Bunge-SCF Grain primarily due to the adjustment of U.S. corporate income tax rates and the acquisition of three grain elevators in Illinois during the fourth quarter of 2017.
Witt O’Brien’s.
Witt O’Brien’s results reflect strong growth in 2018. The majority of this growth was driven by response and recovery projects following major natural disasters, such as the hurricanes and wildfires of 2017-2018. Witt O’Brien’s served over 90 communities in 2018, including territory, state and local governments in the U.S. Virgin Islands, Texas, North Carolina, Florida, California and Puerto Rico. Witt O’Brien’s private sector business also grew in 2018, assisted by the acquisition and integration of Strategic Crisis Advisors, a consultancy business specializing in corporate crisis management and business continuity. Many of Witt O’Brien’s public and private sector projects will continue into 2019. These services, together with a strong pipeline of new business opportunities, provide momentum for 2019.
Results of Operations
The number of retainer customers, private and public sector consulting engagements and the number, severity and location of natural and man-made disasters are the key determinants of Witt O’Brien’s operating results and cash flows.
For the years ended December 31, the results of operations for Witt O’Brien’s were as follows:
2018 compared with 2017
Operating Revenues. Operating revenues were $82.6 million higher primarily due to post-disaster response and recovery services provided to territory, state and local governments across the U.S. Virgin Islands, Texas, North Carolina, Florida, California and Puerto Rico.
Operating Expenses. Operating expenses were $51.2 million higher primarily due to increased subcontracted labor costs consistent with the higher operating revenues discussed above.
Administrative and General. Administrative and general expenses were $11.3 million higher primarily due to expanded back-office functions required to support the increased operating activities discussed above.
Depreciation and Amortization. Depreciation and amortization expenses were $1.1 million higher primarily due to additional intangible assets resulting from the acquisition of Strategic Crisis Advisors.
Operating Income (Loss). Operating income was 17% of operating revenues in 2018 compared with 6% in 2017. The improvement was primarily due to post-disaster response and recovery services provided to territory, state and local governments across the U.S. Virgin Islands, Texas, North Carolina, Florida, California and Puerto Rico.
2017 compared with 2016
Operating Revenues. Operating revenues were $6.2 million higher primarily due to post-storm response services provided in Texas and Florida and recovery program consulting in Texas and U.S. Virgin Islands.
Operating Expenses. Operating expenses were $3.5 million higher primarily due to increased subcontracted labor costs consistent with the higher operating revenues discussed above.
Administrative and General. Administrative and general expenses were $2.8 million lower primarily due to a reduction in the allowance for doubtful accounts.
Depreciation and Amortization. Depreciation and amortization expenses were $0.7 million lower due to the impairments of intangible assets during 2016.
Losses on Asset Dispositions and Impairments, Net. During 2016, Witt O’Brien’s identified indicators of impairment for certain of its intangible assets and goodwill resulting in impairment charges of $29.6 million.
Operating Income (Loss). Operating income was 6% of operating revenues in 2017 compared with an operating loss of 8% of operating revenues in 2016, excluding the impairment charges discussed above. The improvement was primarily due to post-storm response services provided in Texas and Florida and recovery program consulting in Texas and U.S. Virgin Islands.
Other
For the years ended December 31, segment loss for the Company’s Other activities was as follows:
______________________
(1)
The balance as a percentage of operating revenues is not meaningful (“n/m”).
(2)
Includes amounts attributable to both SEACOR and noncontrolling interests. See Part IV “Note 12. Noncontrolling Interests in Subsidiaries” included in this Annual Report on Form 10-K.
(3)
The components of segment profit (loss) do not include interest income, which is a significant component of the Company’s lending and leasing activities. Other activities recognized interest income of $0.1 million, $1.4 million and $2.3 million during the years ended December 31, 2018, 2017 and 2016, respectively, primarily related to its lending and leasing portfolio.
Operating Activities. Operating activities in 2018 primarily consist of the business activities of Cleancor, which the Company acquired on June 1, 2018.
Other, Net. Other, net in 2018 primarily includes a gain of $53.9 million on the sale of the Company’s 34.2% interest in Hawker Pacific Airservices, Limited (“Hawker Pacific”) on April 30, 2018. Other, net in 2016 primarily included a $6.7 million reserve for one of the Company’s notes receivable from third parties following non-performance and a decline in the underlying collateral value, and a $5.1 million impairment charge related to a cost method investment in a foreign industrial aircraft company.
Equity in Earnings (Losses) of 50% or Less Owned Companies, Net of Tax. The Company’s 50% or less owned companies primarily consist of general aviation services businesses in Asia, including Hawker Pacific prior to its sale, and an agricultural commodity trading and logistics business.
Corporate and Eliminations
Corporate Expenses. Corporate expenses were $13.2 million lower in 2018 compared with 2017. In addition to the higher share award expense in 2017 discussed below, the reduction was also a consequence of lower legal and professional fees. Corporate expenses were $7.9 million higher in 2017 compared with 2016. Corporate expenses in 2017 included $5.3 million and $6.4 million of share award expense as a consequence of the accelerated vesting of certain share awards in advance of changes to the U.S. federal income tax code and the Spin-off, respectively, partially offset by lower legal and professional fees.
Derivative Gains (Losses), Net. Derivative gains (losses), net in 2017 and 2016 were primarily due to the mark-to-market of the Company’s exchange option liability on subsidiary convertible senior notes. The exchange option liability on these notes terminated on June 1, 2017 as a consequence of the Spin-off.
Other Income (Expense) not included in Segment Profit
Interest Income. Interest income in 2017 was $7.1 million lower compared with 2016 primarily due to lower interest income from loans and advances to 50% or less owned companies.
Interest Expense. Interest expense was $9.8 million lower in 2018 compared with 2017 primarily due to lower debt balances on the 2.5% Convertible Senior Notes due 2027 (the “2.5% Convertible Senior Notes”) and 3.0% Convertible Senior Notes due 2028 (the “3.0% Convertible Senior Notes”), lower balances on the Sea-Vista Credit facility and the redemption of the 7.375% Senior Notes due 2019 (the “7.375% Senior Notes”) in October 2018, partially offset by interest on the 3.25% Convertible Senior Notes due 2030 (the “3.25% Convertible Senior Notes”) issued in May 2018 and lower capitalized interest. Interest expense was $1.7 million higher in 2017 compared with 2016 primarily due to additional borrowings under the Sea-Vista Credit facility and lower capitalized interest partially offset by lower debt balances on the 2.5% Convertible Senior Notes and 7.375% Senior Notes due to repurchases during 2017 and 2016.
Debt Extinguishment Gains (Losses), Net. During 2018, the Company exchanged $117.8 million aggregate principal amount of the Company’s outstanding 3.0% Convertible Senior Notes for a like principal amount of new 3.25% Convertible Senior Notes and purchased $4.9 million in principal amount of its 3.0% Convertible Senior Notes for total consideration of $4.7 million. In addition, prior to the redemption, the Company purchased $5.7 million in principal amount of its 7.375% Senior Notes for $5.9 million. On October 31, 2018, the Company redeemed the remaining $147.4 million in principal amount of its 7.375% Senior Notes for $153.0 million including a make-whole premium of $5.6 million calculated in accordance with the terms of the indenture.
During 2017, the Company purchased $7.6 million in principal amount of its 7.375% Senior Notes for $7.7 million resulting in losses on debt extinguishment of $0.2 million and purchased $61.7 million in principal amount of its 2.5% Convertible Senior Notes for $61.9 million resulting in gains on debt extinguishment of $0.1 million. In addition, SEA-Vista made unscheduled payments of $133.6 million on the Sea-Vista Credit Facility following a sale-leaseback transaction for one of its vessels, which resulted in losses on debt extinguishment of $0.7 million.
During 2016, the Company purchased $35.2 million in principal amount of its 7.375% Senior Notes for $33.1 million resulting in gains on debt extinguishment of $1.9 million and purchased $127.4 million in principal amount of its 2.5% Convertible Senior Notes for $124.7 million resulting in gains on debt extinguishment of $3.3 million.
Marketable Security Losses, Net. As of December 31, 2018, the Company’s most significant marketable security position was its remaining investment in 5,200,000 shares of common stock of Dorian, a publicly traded company listed on the New York Stock Exchange under the symbol “LPG.” Dorian’s closing share price was $5.83, $8.22 and $8.21 as of December 31, 2018, 2017 and 2016, respectively. The Company’s cost basis in Dorian is $13.66 per share. During 2018, marketable security losses, net, were primarily due to losses on the Company’s long marketable security position in Dorian common stock. During 2017, marketable security losses, net, were primarily due to losses on the Company’s long marketable security position in Dorian common stock, upon the mark-to-market of 3,977,135 shares of such stock on December 20, 2017, immediately preceding the distribution of such shares to SEACOR shareholders as a dividend. During 2016, marketable security losses, net, of $34.9 million were primarily due to losses on the Company’s long marketable security position in Dorian, partially offset by gains on short marketable security positions of $2.7 million.
Debt Facilities
For a description of the Company’s debt facilities, see Part IV “Note 7. Long-Term Debt” included in this Annual Report on Form 10-K.
Income Taxes
The Company’s effective income tax rate in 2018, 2017, and 2016 was 9.2%, (190.9)% and 39.8%, respectively. See Part IV “Note 8. Income Taxes” included in this Annual Report on Form 10-K.
Liquidity and Capital Resources
General
The Company’s ongoing liquidity requirements arise primarily from working capital needs, capital commitments and its obligations to repay debt. The Company may use its liquidity to fund acquisitions, repurchase shares of SEACOR common stock, par value $0.01 per share (“Common Stock”) for treasury, repurchase its outstanding notes or make other investments. Sources of liquidity are cash balances, marketable securities, construction reserve funds and cash flows from operations. From time to time, the Company may secure additional liquidity through asset sales or the issuance of debt, shares of Common Stock or common stock of its subsidiaries, preferred stock or a combination thereof.
The Company's capital commitments as of December 31, 2018 by year of expected payment were as follows (in thousands):
Subsequent to December 31, 2018, the Company committed to purchase additional property and equipment for $3.9 million.
As of December 31, 2018, the Company had outstanding debt of $354.6 million, net of discounts and issue costs, and letters of credit totaling $9.5 million with various expiration dates through 2027. In addition, as of December 31, 2018, the Company guaranteed payments on behalf of SEACOR Marine totaling $41.9 million, under certain sale-leaseback transactions, equipment financing and multi-employer pension obligations. These guarantees continue to be contingent obligations of the Company because the beneficiary of the guarantees did not release the Company from its obligations in connection with the Spin-off and decline as payments are made by SEACOR Marine on the underlying obligations. The Company earns a fee from SEACOR Marine of 0.5% per annum on the amount of the obligations under these guarantees.
As of December 31, 2018, the holders of the Company’s 3.0% Convertible Senior Notes ($107.3 million outstanding), 2.5% Convertible Senior Notes ($64.5 million outstanding) and 3.25% Convertible Senior Notes ($117.8 million) may require the Company to repurchase the notes on November 19, 2020, December 19, 2022 and May 15, 2025, respectively. The Company’s long-term debt maturities, assuming the holders of the aforementioned convertible senior notes require the Company to repurchase the notes on those dates, are as follows (in thousands):
SEACOR’s Board of Directors previously approved a securities repurchase plan that authorizes the Company to acquire its Common Stock, 7.375% Senior Notes, 3.0% Convertible Senior Notes, 3.25% Convertible Senior Notes and 2.5% Convertible Senior Notes (collectively the "Securities"), through open market purchases, privately negotiated transactions or otherwise, depending on market conditions. As of December 31, 2018, the Company’s repurchase authority for the Securities was $66.7 million.
As of December 31, 2018, the Company held balances of cash, cash equivalents, restricted cash, restricted cash equivalents, marketable securities and construction reserve funds totaling $181.4 million. As of December 31, 2018, construction reserve funds of $3.9 million were classified as non-current assets in the accompanying consolidated balance sheets as the Company has the intent and ability to use the funds to acquire equipment. Additionally, the Company had $94.0 million available under subsidiary credit facilities. These facilities limit the payments of dividends and distributions to SEACOR and its other subsidiaries as defined in the agreements.
Summary of Cash Flows
Operating Activities
Cash flows provided by continuing and discontinued operating activities decreased $71.0 million during 2018 compared with 2017 and increased $39.4 million during 2017 compared with 2016. The components of cash flows provided by (used in) operating activities during the years ended December 31 were as follows:
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(1)
During 2018, 2017 and 2016, capitalized interest paid and included in purchases of property and equipment for continuing and discontinued operations was $0.2 million, $4.7 million and $18.5 million, respectively.
Operating income from continuing operations before depreciation, amortization and gains (losses) on asset dispositions and impairments, net increased $27.1 million during 2018 compared with 2017 and increased $35.1 million during 2017 compared with 2016. See “Consolidated Results of Operations” included above for a discussion of the results for each of the Company’s business segments.
During 2017, cash provided by operating activities of continuing and discontinued operations included $1.7 million of cash used to cover marketable security short positions. During 2017, cash provided by operating activities of continuing and discontinued operations included $52.6 million received from the sale of marketable security long positions.
During 2016, cash provided by operating activities of continuing and discontinued operations included $21.9 million of cash used to purchase marketable security long positions and $1.1 million to cover marketable security short positions. During 2016, cash provided by operating activities of continuing and discontinued operations included $8.9 million received from the sale of marketable security long positions and $0.3 million received upon entering into marketable security short positions.
During 2018, 2017 and 2016 other includes $4.0 million, $32.6 million and $14.1 million, respectively, for the amortization of stock expense. Additionally, during 2017 other includes an $18.2 million gain on the sale of ICP.
Investing Activities
During 2018, net cash provided by investing activities of continuing operations was $80.5 million primarily as follows:
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Capital expenditures were $50.3 million. Equipment deliveries included five U.S.-flag harbor tugs and two foreign-flag short-sea container/RORO vessels.
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The Company sold one U.S.-flag petroleum and chemical carrier, one U.S.-flag harbor tug, 32 inland river dry-cargo barges, two inland river specialty barges and other property and equipment for net proceeds of $16.1 million.
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The Company made investments in, and advances to, 50% or less owned companies of $20.6 million including $9.1 million to Rail-Ferry Vessel Holdings LLC (“RF Vessel Holdings”), $4.6 million to Golfo de Mexico Rail-Ferry Holdings LLC (“Golfo de Mexico”), $5.4 million to VA&E Trading USA LLP and VA&E Trading LLP (collectively “VA&E”), $1.0 million to KSM and $0.5 million to SCF Bunge Marine LLC (“SCF Bunge Marine”).
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The Company received $9.0 million from its 50% or less owned companies, including $5.4 million from VA&E, $2.6 million from SCFCo Holdings LLC (“SCFCo”) and $0.6 million from an industrial aviation business.
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On April 30, 2018, the Company sold its interest in Hawker Pacific for $78.0 million.
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The Company received payments on third-party leases and notes receivables of $0.5 million.
During 2017, net cash provided by investing activities of continuing operations was $115.9 million primarily as follows:
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Capital expenditures were $114.6 million. Equipment deliveries included three U.S.-flag petroleum and chemical carriers, one U.S.-flag harbor tug, two foreign-flag harbor tugs, two inland river liquid tank barges and three inland river towboats.
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The Company sold one U.S.-flag petroleum and chemical carrier, two inland river towboats, 50 inland river dry-cargo barges, two inland river specialty barges and other property and equipment for net proceeds of $164.8 million. Equipment dispositions included the sale-leaseback of one U.S.-flag petroleum and chemical carrier for $134.9 million with a leaseback term of 104 months and 50 inland river dry-cargo barges for $12.5 million with leaseback terms of 84 months.
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The Company made investments in, and advances to, 50% or less owned companies of $9.7 million including $2.0 million to Trailer Bridge, $2.9 million to SCFCo, $3.5 million to VA&E and $1.0 million to Avion Pacific Limited (“Avion”).
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The Company received $12.1 million from its 50% or less owned companies, including $6.0 million from Trailer Bridge, $1.7 million from SCFCo and $4.0 million from Avion.
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The Company received capital distributions of $3.5 million from SeaJon.
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The Company received $5.0 million from the sale of a controlling interest in a subsidiary.
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The Company received payments on third-party leases and notes receivables of $24.5 million.
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On July 3, 2017, the Company acquired all of the equity of ISH for a net purchase price of ($5.9) million, net of cash acquired of $16.4 million.
During 2017, net cash provided by investing activities of discontinued operations was $2.7 million primarily as follows:
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Offshore Marine Services used net cash of $17.3 million related to the purchase and sale of equipment.
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Illinois Corn Processing used net cash of $1.2 million for the purchase of equipment.
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Offshore Marine Services received net cash of $4.1 million from construction reserve funds and restricted cash.
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Offshore Marine Services received net distributions of $5.0 million from its 50% or less owned companies.
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Offshore Marine Services used $7.8 million for business consolidations and acquisitions.
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The Company received $19.9 million from the sale of its controlling interest in Illinois Corn Processing.
During 2016, net cash used in investing activities of continuing operations was $88.2 million primarily as follows:
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Capital expenditures were $252.8 million. Equipment deliveries included three U.S.-flag petroleum and chemical carriers, 46 inland river dry-cargo barges and two inland river towboats. In addition, the Company received one U.S.-flag harbor tug as partial consideration for the sale of certain Inland Services equipment as described below.
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The Company sold one U.S.-flag petroleum and chemical carrier, two U.S.-flag harbor tugs, 19 inland river liquid tank barges, the rights to eight leased-in inland river liquid tank barges, 14 inland river towboats and other property and equipment for net proceeds of $153.0 million ($143.0 million in cash, $8.0 million in seller financing and one U.S.-flag harbor tug valued at $2.0 million). Equipment dispositions included the sale-leaseback of one U.S.-flag petroleum and chemical carrier, for $61.0 million with a leaseback term of 76 months.
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The Company made investments in, and advances to, 50% or less owned companies of $8.1 million including $1.7 million to Trailer Bridge, $2.6 million to SCFCo and $3.0 million to Avion.
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The Company received $9.5 million from its 50% or less owned companies, including $8.4 million from SEA-Access LLC (“SEA-Access”) and $1.1 million from VA&E.
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The Company made net investments of $2.7 million in third-party leases and notes receivable.
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On October 31, 2016, the Company acquired certain assets from Central Contracting & Marine, Inc. consisting primarily of terminal and fleeting assets including five harbor boats, for $18.1 million in cash.
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On December 2, 2016, the Company acquired a controlling interest in SeaJon II LLC, which owns a U.S.-flag offshore tug, through the acquisition of its partners 50% equity interest for $2.4 million in cash, net of cash acquired of $0.9 million.
During 2016, net cash used in investing activities of discontinued operations was $21.6 million primarily as follows:
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Offshore Marine Services used net cash of $59.4 million related to the purchase and sale of equipment.
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Illinois Corn Processing used net cash of $4.7 million for the purchase of equipment.
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Offshore Marine Services received net cash of $59.2 million from construction reserve funds and restricted cash.
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Offshore Marine Services made net advances of $16.9 million to its 50% or less owned companies.
Financing Activities
During 2018, net cash used in financing activities of continuing operations was $224.8 million. The Company:
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purchased $5.7 million in principal amount of its 7.375% Senior Notes for $5.9 million. On October 31, 2018, the Company redeemed the remaining $147.4 million in principal amount of its 7.375% Senior Notes for $153.0 million including a make-whole premium of $5.6 million;
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purchased $4.9 million in principal amount of its 3.0% Convertible Senior Notes for total consideration of $4.7 million;
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repaid $47.7 million under the SEA-Vista Credit Facility;
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repaid the outstanding balance of $12.2 million under the ISH Term Loan;
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repaid the outstanding balance of $1.4 million of other debt assumed in the ISH acquisition;
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made other scheduled payments on long-term debt of $0.6 million;
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incurred costs of $2.5 million related to the exchange of $117.8 million aggregate principal amount of the Company’s outstanding 3.0% Convertible Senior Notes for a like principal amount of new 3.25% Convertible Senior Notes;
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paid dividends to noncontrolling interests of $5.1 million; and
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received $8.4 million from share award plans.
During 2017, net cash used in financing activities of continuing operations was $249.6 million. The Company:
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purchased $7.6 million in principal amount of its 7.375% Senior Notes for $7.7 million;
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purchased $61.7 million in principal amount of its 2.5% Convertible Senior Notes for total consideration of $61.9 million. Consideration of $60.5 million was allocated to the settlement of the long-term debt and $1.4 million was allocated to the purchase of the conversion option embedded in the 2.5% Convertible Senior Notes. In addition, the Company repurchased $31.0 million in principal amount of its 2.5% Convertible Senior Notes that were validly surrendered in the Company’s offer to purchase such notes for total consideration of $31.0 million;
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borrowed $44.9 million and repaid $188.4 million under the SEA-Vista Credit Facility;
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repaid $12.8 million under the ISH Credit Facility;
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made other scheduled payments on long-term debt and capital lease obligations of $3.0 million;
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acquired 212,659 shares of Common Stock for treasury for an aggregate purchase price of $12.3 million from its employees to cover their tax withholding obligations related to share award transactions. These shares were purchased in accordance with the terms of the Company’s Share Incentive Plans and not pursuant to the repurchase authorizations granted by SEACOR’s Board of Directors; and
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received $22.6 million from share award plans.
During 2017, net cash used in financing activities of discontinued operations was $7.1 million primarily due to a $7.4 million dividend payment to noncontrolling interests made by ICP.
During 2016, net cash used in financing activities of continuing operations was $79.3 million. The Company:
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purchased $35.2 million in principal amount of its 7.375% Senior Notes for $33.1 million;
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purchased $127.4 million in principal amount of its 2.5% Convertible Senior Notes for total consideration of $124.7 million. Consideration of $117.3 million was allocated to the settlement of the long-term debt and $7.4 million was allocated to the purchase of the conversion option embedded in the 2.5% Convertible Senior Notes.
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borrowed $87.0 million and repaid $17.8 million under the SEA-Vista Credit Facility;
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issued other long-term debt of $7.5 million and made other scheduled payments on long-term debt and capital lease obligations of $0.4 million;
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incurred $0.1 million in issuance costs on debt facilities;
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acquired 47,455 shares of Common Stock for treasury for an aggregate purchase price of $2.4 million from its employees to cover their tax withholding obligations related to share award transactions. These shares were purchased in accordance with the terms of the Company’s Share Incentive Plans and not pursuant to the repurchase authorizations granted by SEACOR’s Board of Directors; and
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received $4.9 million from share award plans.
During 2016, net cash provided by financing activities of discontinued operations was $12.3 million as follows:
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Offshore Marine Services borrowed $42.9 million, net of issue costs and repaid $27.2 million.
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Illinois Corn Processing paid $3.3 million in dividends to a noncontrolling interest.
Short and Long-Term Liquidity Requirements
The Company anticipates it will continue to generate positive cash flows from operations and that these cash flows will be adequate to meet the Company’s working capital requirements. In support of the Company’s capital expenditure program and debt service requirements, the Company believes that a combination of cash balances on hand, cash generated from operating activities, funding under existing subsidiary financing arrangements and access to the credit and capital markets will provide sufficient liquidity to meet its obligations. The Company continually evaluates possible acquisitions and dispositions of certain businesses and assets. The Company’s sources of liquidity may be impacted by the general condition of the markets in which it operates and the broader economy as a whole, which may limit its access to the credit and capital markets on acceptable terms. Management will continue to closely monitor the Company’s liquidity and the credit and capital markets.
Off-Balance Sheet Arrangements
On occasion, the Company and its partners will guarantee certain obligations on behalf of their 50% or less owned companies. As of December 31, 2018, the Company guaranteed payments on behalf of SEACOR Marine totaling $41.9 million, under certain sale-leaseback transactions, equipment financing and multi-employer pension obligations. These guarantees continue to be contingent obligations of the Company because the beneficiary of the guarantees did not release the Company from its obligations in connection with the Spin-off and decline as payments are made by SEACOR Marine on the underlying obligations. The Company earns a fee from SEACOR Marine of 0.5% per annum on the amount of the obligations under these guarantees.
Contractual Obligations and Commercial Commitments
The following table summarizes the Company’s contractual obligations and other commercial commitments and their aggregate maturities as of December 31, 2018 (in thousands):
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(1)
Estimated interest payments of the Company’s borrowings are based on contractual terms and maturities. As of December 31, 2018, the holders of the Company’s 3.0% Convertible Senior Notes ($107.3 million outstanding), 2.5% Convertible Senior Notes ($64.5 million outstanding) and 3.25% Convertible Senior Notes ($117.8 million outstanding) may require the Company to repurchase the notes on November 19, 2020, December 19, 2022 and May 15, 2025, respectively. See table in “General” above for the Company’s long-term debt principal maturities assuming the holders of the aforementioned convertible notes require the Company to repurchase the notes on those dates.
(2)
Capital purchase obligations represent commitments for the purchase of property and equipment. These commitments are not recorded as liabilities on the Company’s consolidated balance sheet as of December 31, 2018 as the Company has not yet received the goods or taken title to the property.
(3)
Operating leases include leases of petroleum and chemical carriers, inland river towboats, harbor tugs, barges, and other property that have a remaining term in excess of one year.
(4)
These commitments are for goods and services to be acquired in the ordinary course of business and are fulfilled by the Company’s vendors within a short period of time.
(5)
Other primarily includes deferred compensation arrangements.
Debt Securities and Credit Agreements
For a discussion of the Company’s debt securities and credit agreements see “Note 7. Long-Term Debt” in the Company’s “Notes to Consolidated Financial Statements.”
Effects of Inflation
The Company’s operations expose it to the effects of inflation. In the event that inflation becomes a significant factor in the world economy, inflationary pressures could result in increased operating and financing costs.
Contingencies
During 2012, the Company sold National Response Corporation (“NRC”), NRC Environmental Services Inc., SEACOR Response Ltd., and certain other subsidiaries to J.F. Lehman & Company, a private equity firm (the “SES Business Transaction”).
On December 15, 2010, O’Brien’s Response Management L.L.C. (“ORM”) and NRC were named as defendants in one of the several “master complaints” filed in the overall multi-district litigation relating to the Deepwater Horizon oil spill response and clean-up in the Gulf of Mexico, which is currently pending in the U.S. District Court for the Eastern District of Louisiana (the “MDL”). The “B3” master complaint naming ORM and NRC asserted various claims on behalf of a putative class against multiple defendants concerning the clean-up activities generally and the use of dispersants specifically. Both prior to and following the filing of the aforementioned “B3” master complaint, individual civil actions naming the Company, ORM, and/or NRC alleging B3 exposure-based injuries and/or damages were consolidated with the MDL and stayed pursuant to court order. On February 16, 2016, all but eleven “B3” claims against ORM and NRC were dismissed with prejudice (the “B3 Dismissal Order”). On August 2, 2016, the Court granted an omnibus motion for summary judgment as it concerns ORM and NRC in its entirety, dismissing the remaining eleven plaintiffs’ claims against ORM and NRC with prejudice (the “Remaining Eleven Plaintiffs’ Dismissal Order”). The deadline to appeal both of these orders has expired. At present, there is only one remaining claim. On April 8, 2013, the Company, ORM, and NRC were named as defendants in William and Dianna Fitzgerald v. BP Exploration et al., No. 2:13-CV-00650 (E.D. La.) (the “Fitzgerald Action”), which is a suit by a husband and wife whose son allegedly participated in the clean-up effort and became ill as a result of his exposure to oil and dispersants. While the decedent in the Fitzgerald Action’s
claims against ORM and NRC were dismissed by virtue of the Remaining Eleven Plaintiffs’ Dismissal Order, the claim as against the Company remains stayed.
Following a status conference with the Court on February 17, 2017, the Court issued several new pretrial orders in connection with the remaining claims in the MDL. Various submissions followed, and on July 18, 2017, the Court issued an order dismissing all remaining “B3” claims in the MDL with prejudice, with the exception of certain claims specifically listed on an exhibit annexed to the order (the “Master MDL B3 Dismissal Order”). Nathan Fitzgerald, the decedent in the Fitzgerald Action, was listed on the exhibit annexed to the Master MDL B3 Dismissal Order. The Court has since issued a list of those plaintiffs compliant with its previous orders and thus whose “B3” claims remain pending; the last version of this compliance list was issued on April 6, 2018 and the claim for the decedent in the Fitzgerald Action remains listed as a pending claim. On April 9, 2018, the Court issued an order requiring remaining “B3” plaintiffs to submit particularized statements of claim, and such a statement was submitted on behalf of the decedent in the Fitzgerald Action on July 9, 2018. On September 20, 2018, the Court issued an order indicating which statements of claim were sufficient and which were not, requiring the latter plaintiffs to show cause; the statement submitted on behalf of the decedent in the Fitzgerald Action was deemed sufficient, requiring nothing further at the time of the order. The Company is unable to estimate the potential exposure, if any, resulting from this matter, to the extent it remains viable, but believes it is without merit and does not expect that it will have a material effect on its consolidated financial position, results of operations or cash flows.
On February 18, 2011, Triton Asset Leasing GmbH, Transocean Holdings LLC, Transocean Offshore Deepwater Drilling Inc., and Transocean Deepwater Inc. (collectively “Transocean”) named ORM and NRC as third-party defendants in a Rule 14(c) Third-Party Complaint in Transocean’s own Limitation of Liability Act action, which is part of the overall MDL, tendering to ORM and NRC the claims in the “B3” master complaint that have already been asserted against ORM and NRC. Various contribution and indemnity cross-claims and counterclaims involving ORM and NRC were subsequently filed. The Company believes that the potential exposure, if any, resulting therefrom has been reduced as a result of the various developments in the MDL, including the B3 Dismissal Order and Remaining Eleven Plaintiffs’ Dismissal Order, and does not expect that these matters will have a material effect on its consolidated financial position, results of operations or cash flows.
Separately, on March 2, 2012, the Court announced that BP Exploration and BP America Production Company (“BP America”) and (collectively “BP”) and the Plaintiffs had reached an agreement on the terms of two proposed class action settlements that will resolve, among other things, Plaintiffs’ economic loss and property damage claims and clean-up related claims against BP. The Company, ORM, and NRC had no involvement in negotiating or agreeing to the terms of either settlement, nor are they parties or signatories thereto. The BP settlement pertaining to personal injury claims (the “Medical Settlement”) purported to resolve the “B3” claims asserted against BP and also established a right for class members to pursue individual claims against BP (but not ORM or NRC) for later-manifested physical conditions. The back-end litigation-option (“BELO”) provision of the Medical Settlement has specifically-delineated procedures and limitations, should any “B3” class member seek to invoke their BELO right. For example, there are limitations on the claims and defenses that can be asserted, as well as on the issues, elements, and proofs that may be litigated at any trial and the potential recovery for any Plaintiff. Notwithstanding that the Company, ORM, and NRC are listed on the Medical Settlement’s release as to claims asserted by Plaintiffs, the Medical Settlement still permits BP to seek indemnity from any party, to the extent BP has a valid indemnity right. The Medical Settlement was approved by the Court on January 11, 2013 and made effective on February 12, 2014. As of early February 2019, BP has tendered approximately 700 claims invoking BELO rights for indemnity pursuant to service contracts to ORM and approximately 70 such claims to NRC. ORM and NRC have rejected BP’s contention that BP is entitled to defense and indemnity coverage from ORM and/or NRC for any of the “B3” claims referenced in BP’s indemnity demands. Moreover, the Company believes that (1) ORM has contractual indemnity coverage for the above-referenced BELO claims through its separate agreements with sub-contractors that worked for ORM during the Deepwater Horizon oil spill response and (2) NRC’s services contract with BP does not provide for broad contractual indemnity as BP contends. The Company, ORM, and NRC are of the belief that BP’s indemnity demands with respect to any “B3” claims, including those involving Medical Settlement class members invoking BELO rights, are untimely and improper and vigorously defend its interest. Overall, however, the Company believes that both settlements have reduced the potential exposure in connection with the various cases relating to the Deepwater Horizon oil spill response and clean-up. The Company is unable to estimate the potential exposure, if any, resulting from these claims, but does not expect that they will have a material effect on its consolidated financial position, results of operations or cash flows.
In the ordinary course of the Company’s business, it may agree to indemnify its counterparty to an agreement. If the indemnified party makes a successful claim for indemnification, the Company would be required to reimburse that party in accordance with the terms of the indemnification agreement. Indemnification agreements generally, but not always, are subject to threshold amounts, specified claim periods and other restrictions and limitations.
In connection with the SES Business Transaction, the Company remains contingently liable for work performed in connection with the Deepwater Horizon oil spill response. Pursuant to the agreement governing the sale, the Company’s potential liability to the purchaser may not exceed the consideration received by the Company for the SES Business Transaction. The Company is currently indemnified under contractual agreements with BP for the potential “B3” liabilities relating to cleanup work
performed in connection with the Deepwater Horizon oil spill response; this indemnification is unrelated to, and thus not impacted by, the indemnification BP has demanded for the BELO cases referenced above.
In the ordinary course of its business, the Company becomes involved in various other litigation matters including, among other things, claims by third parties for alleged property damages and personal injuries. Management has used estimates in determining the Company’s potential exposure to these matters and has recorded reserves in its financial statements related thereto where appropriate. It is possible that a change in the Company’s estimates of that exposure could occur, but the Company does not expect such changes in estimated costs would have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
Certain subsidiaries of the Company are participating employers in two industry-wide, multi-employer defined benefit pension plans,AMOPP and the SPP. The Company’s participation in these plans relates to certain employees of the Company’s Ocean Services business segment. Under federal pension law, the AMOPP was deemed in critical status for the 2009 and 2010 plan years. The AMOPP was frozen in January 2010 and a ten year rehabilitation plan was adopted by the AMOPP trustees in February 2010 whereby benefit changes and increased contributions by participating employers were expected to improve the funded status of the AMOPP. On December 28, 2012, the AMOPP was elevated to endangered status primarily as a result of favorable investment performance and the rehabilitation plan adopted by the AMOPP trustees. Based on an actuarial valuation performed as of September 30, 2017, the latest period for which an actuarial valuation is available, if the Company chose to fully withdraw from the AMOPP at that time, its withdrawal liability would have been $34.4 million. That liability may change in future years based on various factors, primarily employee census. As of December 31, 2018, the Company has no intention to withdraw from the AMOPP and no deficit amounts have been invoiced. Depending upon the results of the future actuarial valuations and the ten year rehabilitation plan, it is possible that the AMOPP will experience further funding deficits, requiring the Company to recognize additional payroll related operating expenses in the periods invoices are received or contribution levels are increased.
Related Party Transactions
The Company manages barge pools as part of its Inland Services segment. Pursuant to the pooling agreements, operating revenues and expenses of participating barges are combined and the net results are allocated on a pro-rata basis based on the number of barge days contributed by each participant. Companies controlled by Mr. Fabrikant, the Executive Chairman and Chief Executive Officer of SEACOR, and trusts established for the benefit of Mr. Fabrikant’s children, own barges that participate in the barge pools managed by the Company. Mr. Fabrikant and his affiliates were participants in the barge pools prior to the acquisition of SCF Marine Inc. by SEACOR in 2000. During the years ended December 31, 2018, 2017 and 2016, Mr. Fabrikant and his affiliates earned $0.8 million, $0.5 million and $0.8 million, respectively, of net barge pool results (after payment of $0.1 million, $0.1 million and $0.1 million, respectively, in management fees to the Company). As of December 31, 2018 and 2017, the Company owed Mr. Fabrikant and his affiliates $0.5 million and $0.5 million, respectively, for undistributed net barge pool results.
Mr. Fabrikant is a director of SEACOR Marine. The Company has provided certain transition services to SEACOR Marine related to the Spin-off and the total amount earned from these transition services during the years ended December 31, 2018 and 2017 was $4.6 million and $3.5 million, respectively. As of December 31, 2018, SEACOR Marine owed the Company $0.5 million for these services and other costs and expenses and is included in other receivables in the accompanying consolidated balance sheets.
Critical Accounting Policies and Estimates
Basis of Consolidation. The consolidated financial statements include the accounts of SEACOR and its controlled subsidiaries. Control is generally deemed to exist if the Company has greater than 50% of the voting rights of a subsidiary. All significant intercompany accounts and transactions are eliminated in consolidation.
Noncontrolling interests in consolidated subsidiaries are included in the consolidated balance sheets as a separate component of equity. The Company reports consolidated net income (loss) inclusive of both the Company’s and the noncontrolling interests’ share, as well as the amounts of consolidated net income (loss) attributable to each of the Company and the noncontrolling interests. If a subsidiary is deconsolidated upon a change in control, any retained noncontrolled equity investment in the former controlled subsidiary is measured at fair value and a gain or loss is recognized in net income (loss) based on such fair value. If a subsidiary is consolidated upon a change in control, any previous noncontrolled equity investment in the subsidiary is measured at fair value and a gain or loss is recognized based on such fair value.
The Company employs the equity method of accounting for investments in 50% or less owned companies that it does not control but has the ability to exercise significant influence over the operating and financial policies of the business venture. Significant influence is generally deemed to exist if the Company has between 20% and 50% of the voting rights of a business venture but may exist when the Company’s ownership percentage is less than 20%. In certain circumstances, the Company may have an economic interest in excess of 50% but may not control and consolidate the business venture. Conversely, the Company may have an economic interest less than 50% but may control and consolidate the business venture. The Company reports its
investments in and advances to these business ventures in the accompanying consolidated balance sheets as investments, at equity, and advances to 50% or less owned companies. The Company reports its share of earnings or losses from investments in 50% or less owned companies in the accompanying consolidated statements of income (loss) as equity in earnings (losses) of 50% or less owned companies, net of tax.
The Company employs the cost method of accounting for investments in 50% or less owned companies it does not control or exercise significant influence. These investments in private companies are carried at cost and are adjusted only for capital distributions and other-than-temporary declines in fair value.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include those related to allowance for doubtful accounts, useful lives of property and equipment, impairments, income tax provisions and certain accrued liabilities. Actual results could differ from those estimates and those differences may be material.
Revenue Recognition. Revenue is recognized when (or as) the Company transfers promised goods or services to its customers in amounts that reflect the consideration to which the Company expects to be entitled to in exchange for those goods or services, which occurs when (or as) the Company satisfies its contractual obligations and transfers control of the promised goods or services to its customers. Costs to obtain or fulfill a contract are expensed as incurred.
Revenue from Contracts with Customers. Ocean Services primarily earns revenues from voyage charters, contracts of affreightment, tariff based port and infrastructure services, unit freight logistics services, and technical ship management agreements with vessel owners. Ocean Services transfers control of the service to the customer and satisfies its performance obligation over the term of the contract, and therefore recognizes revenue over the term of the contract while related costs are expensed as incurred. Voyage charters are contracts to carry cargoes on a single voyage basis for a predetermined price, regardless of time to complete. Contracts of affreightment are contracts for cargoes that are committed on a multi-voyage basis for various periods of time, with minimum and maximum cargo tonnages specified over the period at a fixed or escalating rate per ton. Tariff based port and infrastructure services typically include operating harbor tugs alongside oceangoing vessels to escort them to their berth, assisting with the docking and undocking of these oceangoing vessels and escorting them back out to sea. They are contracted using prevailing port tariff terms on a per-use basis. In the unit freight logistics trade, transportation services typically include transporting shipping containers, rail cars, project cargoes, automobiles and U.S. military vehicles and are generally contracted on a per unit basis for the specified cargo and destination, typically in accordance with a publicly available tariff rate or based on a negotiated rate when moving larger volumes over an extended period. Managed services include technical ship management agreements whereby Ocean Services provides technical ship management services to third-party customers for a predetermined price over a specified period of time, typically a year or more.
Inland Services primarily earns revenues from contracts of affreightment, terminal operations, fleeting operations and repair and maintenance services. Inland Services transfers control of the service to the customer and satisfies its performance obligation over the term of the contract, and therefore recognizes revenue over the term of the contract while related costs are expensed as incurred. Contracts of affreightment are contracts whereby customers are charged an established rate per ton to transport cargo from point-to-point. Terminal operations includes tank farms and dry bulk and container handling facilities that are marketed under contractual rates and terms driven by throughput volume. Fleeting operations includes fleeting services whereby barges are held in fleeting areas for an agreed-upon day rate and shifting services whereby harbor boats are used to pick up and drop off barges to assist in assembling tows and to move barges to and from the dock for loading and unloading at predetermined per-shift fees. Other operations primarily include a machine shop specializing in towboat and barge cleaning, repair and maintenance services that are charged on an hourly or a fixed fee basis depending on the scope and nature of the work.
Witt O’Brien’s primarily earns revenues from time and material and retainer contracts. Witt O’Brien’s transfers control of the service to the customer and satisfies its performance obligation over the term of the contract, and therefore recognizes revenue over the term of the contract while related costs are expensed as incurred. Time and material contracts primarily relate to emergency response, debris management or consulting services that Witt O’Brien’s performs for a predetermined fee. Retainer contracts, which are nearly all with vessel services operators and oil companies, are contracted based on agreed-upon rates.
The Company’s Other business segment includes Cleancor, which primarily earns revenues from the sale of liquefied natural gas. Under these arrangements, control of the goods are transfered to the customer and performance obligations are satisfied at a point in time, and therefore revenue is recognized upon delivery while any related costs are expensed as incurred.
Lease Revenues. The Company’s lease revenues are primarily from time charters, bareboat charters and non-vessel rental agreements that are recognized ratably over the lease term as services are provided, typically on a per day basis. Under a time charter, the Company provides a vessel to a customer for a set term and is responsible for all operating expenses, typically excluding fuel. Under a bareboat charter, the Company provides a vessel to a customer for a set term and the customer assumes responsibility
for all operating expenses and risks of operation. Under a non-vessel rental agreement, the Company provides non-vessel property or equipment to a customer for a set term and the customer assumes responsibility for all operating expenses and risks of operation.
Trade Receivables. Customers of Ocean Services are primarily multinational oil companies, refining companies, oil trading companies, major gasoline retailers, large industrial consumers of crude, petroleum and chemicals, trading houses, pools, major automobile manufacturers and shippers, the U.S. Government and regional power utilities. Customers of Inland Services are primarily major agricultural companies, fertilizer companies, trading companies and industrial companies. Customers of Witt O’Brien’s are primarily governments, energy companies, ship managers and owners, healthcare providers, universities and school systems. Customers of the Company’s other business activities primarily include agricultural and feed companies, asphalt producers and municipalities and government agencies. All customers are granted credit on a short-term basis and related credit risks are considered minimal. The Company routinely reviews its trade receivables and makes provisions for probable doubtful accounts; however, those provisions are estimates and actual results could differ from those estimates and those differences may be material. Trade receivables are deemed uncollectible and removed from accounts receivable and the allowance for doubtful accounts when collection efforts have been exhausted.
Property and Equipment. Equipment, stated at cost, is depreciated using the straight line method over the estimated useful life of the asset to an estimated salvage value. With respect to each class of asset, the estimated useful life is typically based upon a newly built asset being placed into service and represents the point at which it is typically not justifiable for the Company to continue to operate the asset in the same or similar manner. From time to time, the Company may acquire older assets that have already exceeded their useful life as set forth in the Company’s useful life policy, in which case the Company depreciates such assets based on its best estimate of remaining useful life, typically the next survey or certification date.
As of December 31, 2018, the estimated useful life (in years) of each of the Company’s major classes of new equipment was as follows:
______________________
(1)
Roll On/Roll Off.
Impairment of Long-Lived Assets. The Company performs an impairment analysis of long-lived assets used in operations, including intangible assets, when indicators of impairment are present. These indicators may include a significant decrease in the market price of a long-lived asset or asset group, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group. If the carrying values of the assets are not recoverable, as determined by the estimated undiscounted cash flows, the estimated fair value of the assets or asset groups are compared to their current carrying values and impairment charges are recorded if the carrying value exceeds fair value. The Company performs its testing on an asset or asset group basis. Generally, fair value is determined using valuation techniques, such as expected discounted cash flows or appraisals, as appropriate.
Impairment of 50% or Less Owned Companies. Investments in 50% or less owned companies are reviewed periodically to assess whether there is an other-than-temporary decline in the carrying value of the investment. In its evaluation, the Company considers, among other items, recent and expected financial performance and returns, impairments recorded by the investee and the capital structure of the investee. When the Company determines the estimated fair value of an investment is below carrying value and the decline is other-than-temporary, the investment is written down to its estimated fair value. Actual results may vary from the Company’s estimates due to the uncertainty regarding projected financial performance, the severity and expected duration of declines in value, and the available liquidity in the capital markets to support the continuing operations of the investee, among other factors. Although the Company believes its assumptions and estimates are reasonable, the investee’s actual performance compared with the estimates could produce different results and lead to additional impairment charges in future periods.
Goodwill. Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of net identified tangible and intangible assets acquired. As of December 31, 2018, substantially all of the Company’s goodwill is related to Witt
O’Brien’s. The Company performs an annual impairment test of goodwill on October 1 of each year and further periodic tests to the extent indicators of impairment develop between annual impairment tests. The Company’s impairment review process compares the fair value of the reporting unit to its carrying value, including the goodwill, related to the reporting unit. To determine the fair value of the reporting unit, the Company may use various approaches including an asset or cost approach, market approach or income approach or any combination thereof. These approaches may require the Company to make certain estimates and assumptions including projections of future cash flows, revenues and expenses. These estimates and assumptions are reviewed each time the Company tests goodwill for impairment and are typically developed as part of the Company’s routine business planning and forecasting process. Although the Company believes its assumptions and estimates are reasonable, the Company’s actual performance against its estimates could produce different results and lead to impairment charges in future periods.
Business Combinations. The Company recognizes 100% of the fair value of assets acquired, liabilities assumed, and noncontrolling interests when the acquisition constitutes a change in control of the acquired entity. Shares issued in consideration for a business combination, contingent consideration arrangements and pre-acquisition loss and gain contingencies are all measured and recorded at their acquisition-date fair value. Subsequent changes to fair value of contingent consideration arrangements are generally reflected in earnings. Any in-process research and development assets acquired are capitalized as are certain acquisition-related restructuring costs if the criteria related to exit or disposal cost obligations are met as of the acquisition date. Acquisition-related transaction costs are expensed as incurred and any changes in income tax valuation allowances and tax uncertainty accruals are recorded as an adjustment to income tax expense (benefit). The operating results of entities acquired are included in the accompanying consolidated statements of income (loss) from the date of acquisition.
Income Taxes. Deferred income tax assets and liabilities have been provided in recognition of the income tax effect attributable to the book and tax basis differences of assets and liabilities reported in the accompanying consolidated financial statements. Deferred tax assets or liabilities are provided using the enacted tax rates expected to apply to taxable income in the periods in which they are expected to be settled or realized. Interest and penalties relating to uncertain tax positions are recognized in interest expense and administrative and general, respectively, in the accompanying consolidated statements of income (loss). The Company records a valuation allowance to reduce its deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company records any liability associated with global intangible low-taxed income (GILTI) in the period it is incurred.
In the normal course of business, the Company may be subject to challenges from tax authorities regarding the amount of taxes due. These challenges may alter the timing or amount of taxable income or deductions. As part of the calculation of income tax expense (benefit), the Company determines whether the benefits of its tax positions are at least more likely than not of being sustained based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained, the Company accrues the largest amount of the tax benefit that is more likely than not of being sustained. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of its tax benefits and actual results could vary materially from these estimates.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2018, a subsidiary of the Company whose functional currency is the Colombian peso had intercompany capital lease obligations of $23.1 million (75.2 billion Colombian pesos). A 10% weakening in the exchange rate of the Colombian peso against the U.S. dollar as of December 31, 2018 would result in foreign currency losses of $1.8 million, net of tax.
The Company has foreign currency exchange risks related to its barge operations conducted on rivers located in Colombia where its functional currency is the Colombian peso. Net consolidated assets of 12.7 billion Colombian pesos ($3.9 million) are included in the Company’s consolidated balance sheets as of December 31, 2018. A 10% strengthening in the exchange rate of the Colombian peso against the U.S. dollar as of December 31, 2018, would increase other comprehensive loss by $0.3 million, net of tax, due to translation.
As of December 31, 2018, the Company held marketable securities with a fair value of $30.3 million consisting of equity securities. The Company’s investment in these securities primarily includes its position in Dorian. A 10% decline in the value of the Company’s investments in marketable securities as of December 31, 2018 would reduce income by $2.4 million, net of tax.
The Company’s outstanding debt is primarily in fixed interest rate instruments. Although the fair value of these debt instruments will vary with changes in interest rates, the Company’s operations are not significantly affected by interest rate fluctuations. As of December 31, 2018, the Company had variable rate debt instruments (due 2020 through 2023) totaling $88.9 million that calls for the Company to pay interest based on LIBOR plus applicable margins. The interest rates reset either monthly or quarterly. As of December 31, 2018, the average interest rate on these variable rate borrowings was 4.75%.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes are included in Part IV of this Form 10-K and incorporated herein by reference.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
With the participation of the Company’s principal executive officer and principal financial officer, management evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2018. Based on their evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2018.
The Company’s disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company in the reports it files or furnishes under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosures. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those internal control systems determined to be effective can provide only a level of reasonable assurance with respect to financial statement preparation and presentation.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Because of the inherent limitations in any internal control system, no matter how well designed, misstatements may occur and not be prevented or detected. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation.
Management conducted an evaluation of the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2018 based on the updated framework set forth in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on its evaluation, management concluded that, as of December 31, 2018, the Company’s internal control over financial reporting was effective based on the specified criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by the Company’s independent auditor, Grant Thornton LLP, a registered certified public accounting firm, and its attestation report thereon is included in Part IV of this Annual Report on Form 10-K and incorporated herein by reference. Grant Thornton LLP also audited the Company’s consolidated financial statements, as stated in its report accompanying the consolidated financial statements included in Part IV of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) that occurred during the three months ended December 31, 2018 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required to be disclosed pursuant to this Item 10 is incorporated in its entirety herein by reference to the Company’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
NYSE Annual Certification. The Chief Executive Officer of the Company has previously submitted to the NYSE the annual certification required by Section 303A.12(a) of the NYSE Listed Company Manual and there were no qualifications to such certification. SEACOR Holdings Inc. has filed the certifications of its Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 with the SEC as exhibits to this Annual Report on Form 10-K.
The information required to be disclosed pursuant to this Item 11
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required to be disclosed pursuant to this Item 12 is incorporated in its entirety herein by reference to the “Security Ownership of Certain Beneficial Owners and Management” portion of the Company’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required to be disclosed pursuant to this Item 13 is incorporated in its entirety herein by reference to the “Certain Relationships and Related Transactions” portion of the Company’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required to be disclosed pursuant to this Item 14 is incorporated in its entirety herein by reference to the “Ratification or Appointment of Independent Auditors” portion of the Company’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year.
PART IV
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Except for the Financial Statement Schedule set forth above, all other required schedules have been omitted since the information is either included in the consolidated financial statements, not applicable or not required.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
SEACOR Holdings Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of SEACOR Holdings Inc., a Delaware corporation, and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated February 26, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Fort Lauderdale, Florida
February 26, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
SEACOR Holdings Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of SEACOR Holdings Inc., a Delaware corporation, and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income (loss), comprehensive income (loss), changes in equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes and financial statement schedule included under Item 15(a)(collectively referred to as the “financial statements”). In our opinion, based on our audits and the report of the other auditors, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We did not audit the financial statements of Trailer Bridge, Inc., a joint venture, the investment in which is accounted for by the equity method of accounting. The investment in Trailer Bridge, Inc. was $56,363,546 and $47,323,635, respectively, of consolidated total assets as of December 31, 2018 and 2017, and the equity in its net income was $7,141,529 and $3,053,628, respectively, of consolidated net income for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Trailer Bridge, Inc., is based solely on the report of the other auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018 based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 26, 2019 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition for the three years in the period ended December 31, 2018 due to the adoption of FASB Accounting Standards Codification (Topic 606), Revenue from Contracts with Customers.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
Retrospective adjustments to previously issued financial statements
We also have audited the adjustments to the 2016 financial statements to retrospectively apply the change in accounting for revenue recognition due to the adoption of Financial Accounting Standard Board Topic 606, Revenue from Contracts with Customers, as described in Note 1. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2016 financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2016 financial statements taken as a whole.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2017.
Fort Lauderdale, Florida
February 26, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of SEACOR Holdings Inc.
We have audited, before the effects of the adjustments to reflect the retrospective adoption of Financial Accounting Standard Board Topic 606 described in Note 1, the accompanying consolidated statements of loss, comprehensive loss, changes in equity and cash flows of SEACOR Holdings Inc. for the year ended December 31, 2016 (the 2016 consolidated financial statements before the effects of the adjustments discussed in Note 1 are not presented herein). Our audit also included the financial statement schedule listed in the Index at Item 15(a) for the year ended December 31, 2016. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements, before the effects of the adjustments to reflect the retrospective adoption of Financial Accounting Standard Board Topic 606 described in Note 1, referred to above, present fairly, in all material respects, the consolidated results of operations and cash flows of SEACOR Holdings Inc. for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended December 31, 2016, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We were not engaged to audit, review, or apply any procedures to the adjustments to reflect the retrospective adoption of Financial Accounting Standard Board Topic 606 described in Note 1 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by Grant Thornton LLP.
/s/ Ernst & Young LLP
Boca Raton, Florida
March 30, 2017, except for the presentation of discontinued operations and Note 18, as to which the date is February 28, 2018.
SEACOR HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements
and should be read in conjunction herewith.
SEACOR HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements
and should be read in conjunction herewith.
SEACOR HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements
and should be read in conjunction herewith.
The accompanying notes are an integral part of these consolidated financial statements
and should be read in conjunction herewith.
The accompanying notes are an integral part of these consolidated financial statements
and should be read in conjunction herewith.
SEACOR HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES
Nature of Operations and Segmentation. SEACOR Holdings Inc. (“SEACOR”) and its subsidiaries (collectively referred to as the “Company”) are a diversified holding company with interests in domestic and international transportation and logistics, risk management consultancy and other businesses. Accounting standards require public business enterprises to report information about each of their operating business segments that exceed certain quantitative thresholds or meet certain other reporting requirements. Operating business segments have been defined as a component of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company has identified the following reporting segments:
Ocean Transportation & Logistics Services (“Ocean Services”). Ocean Services owns and operates a diversified fleet of bulk transportation, port and infrastructure, and logistics assets, including U.S. coastwise eligible vessels and vessels trading internationally. Ocean Services has a 51% controlling interest in certain subsidiaries (collectively “SEA-Vista”) that operate U.S.-flag petroleum and chemical carriers servicing the U.S. coastwise crude oil, petroleum products and chemical trades. Ocean Services’ dry bulk vessels also operate in the U.S. coastwise trade. Ocean Services’ port and infrastructure services include a wholly owned harbor and offshore towing subsidiary assisting deep-sea vessels docking in U.S. Gulf and East Coast ports, providing ocean towing services between U.S. ports and providing oil terminal support and bunkering operations in St. Eustatius and the Bahamas. Ocean Services’ logistics services include U.S.-flag Pure Car/Truck Carriers (“PCTCs”) operating globally under the U.S. Maritime Security Program (“MSP”) and liner, short-sea, rail car and project cargo transportation and logistics solutions to and from ports in the Southeastern United States, the Caribbean (including Puerto Rico), the Bahamas and Mexico. Ocean Services also provides technical ship management services for third-party vessel owners. Ocean Services contributed 50%, 54% and 44% of consolidated operating revenues during the years ended December 31, 2018, 2017 and 2016, respectively.
Inland Transportation & Logistics Services (“Inland Services”). Inland Services markets and operates domestic river transportation equipment, and owns fleeting and high-speed multi-modal terminal locations adjacent to and along the U.S. Inland Waterways, primarily in the St. Louis, Memphis and Baton Rouge areas. Inland Services’ barges are primarily used for moving agricultural and industrial commodities and containers on the U.S. Inland Waterways, the Mississippi River, Illinois River, Tennessee River, Ohio River and their tributaries and the Gulf Intracoastal Waterways. Internationally, Inland Services also owns inland river liquid tank barges that operate on the Magdalena River in Colombia. These barges primarily transport petroleum products. Inland Services also has a 50% interest in dry-cargo barge operations on the Parana-Paraguay River Waterways in Brazil, Bolivia, Paraguay, Argentina and Uruguay primarily transporting agricultural and industrial commodities, a 57% interest in towboat operations on the U.S. Inland Waterways and a 50% interest in grain terminals/elevators along the U.S. Inland waterways. Inland Services contributed 34%, 38% and 48% of consolidated operating revenues during the years ended December 31, 2018, 2017 and 2016, respectively.
Witt O’Brien’s. Witt O’Brien’s provides crisis and emergency management services for both the public and private sectors. These services strengthen clients’ resilience and assist their response to natural and man-made disasters by enhancing their ability to prepare for, respond to and recover from such disasters, while mitigating the impact of future disruptions on operations and helping communities build back stronger. Witt O’Brien’s contributed 16%, 8% and 8% of consolidated operating revenues during the years ended December 31, 2018, 2017 and 2016, respectively. During the year ended December 31, 2018, one Witt O’Brien’s customer (Virgin Islands Public Finance Authority) accounted for $91.3 million, or 11%, of consolidated operating revenues.
Other. The Company’s Other business segment includes CLEANCOR Energy Solutions LLC (“Cleancor”), a full service provider that delivers clean fuel to end users, displacing legacy petroleum-based fuels (see Note 2). Cleancor primarily earns revenues from the sale of liquefied natural gas (“LNG”) (see Note 17). Other also has activities, which primarily include lending and leasing activities and noncontrolling investments in various other businesses, primarily sales, storage, and maintenance support for general aviation in Asia and an agricultural commodity trading and logistics business that is primarily focused on the global origination, and trading and merchandising of sugar.
Discontinued Operations. The Company reports the historical financial position, results of operations and cash flows of disposed businesses as discontinued operations when it has no continuing interest in the business. On June 1, 2017, the Company completed the spin-off of SEACOR Marine Holdings Inc. (“SEACOR Marine”), the company that operated SEACOR’s Offshore Marine Services business segment, by means of a dividend of all the issued and outstanding common stock of SEACOR Marine to SEACOR’s shareholders (the “Spin-off”). SEACOR Marine is now an independent company whose common stock is listed on the New York Stock Exchange under the symbol “SMHI.” For all periods presented herein, the Company has reported the historical results of operations and cash flows of SEACOR Marine as discontinued operations (see Note 18).
On July 3, 2017, the Company completed the sale of its 70% interest in Illinois Corn Processing LLC (“ICP”), the company that operated SEACOR’s Illinois Corn Processing business segment. The Company received $21.0 million in cash and a note from the buyer for $32.8 million, after working capital adjustments, resulting in a gain of $10.9 million, net of tax. On September 15, 2017, the Company received payment of the outstanding balance of the note, including accrued and unpaid interest. For all periods presented herein, the Company has reported the historical results of operations and cash flows of ICP as discontinued operations (see Note 18).
Basis of Consolidation. The consolidated financial statements include the accounts of SEACOR and its controlled subsidiaries. Control is generally deemed to exist if the Company has greater than 50% of the voting rights of a subsidiary. All significant intercompany accounts and transactions are eliminated in consolidation.
Noncontrolling interests in consolidated subsidiaries are included in the consolidated balance sheets as a separate component of equity. The Company reports consolidated net income (loss) inclusive of both the Company’s and the noncontrolling interests’ share, as well as the amounts of consolidated net income (loss) attributable to each of the Company and the noncontrolling interests. If a subsidiary is deconsolidated upon a change in control, any retained noncontrolled equity investment in the former controlled subsidiary is measured at fair value and a gain or loss is recognized in net income (loss) based on such fair value. If a subsidiary is consolidated upon a change in control, any previous noncontrolled equity investment in the subsidiary is measured at fair value and a gain or loss is recognized based on such fair value.
The Company employs the equity method of accounting for investments in 50% or less owned companies that it does not control but has the ability to exercise significant influence over the operating and financial policies of the business venture. Significant influence is generally deemed to exist if the Company has between 20% and 50% of the voting rights of a business venture but may exist when the Company’s ownership percentage is less than 20%. In certain circumstances, the Company may have an economic interest in excess of 50% but may not control and consolidate the business venture. Conversely, the Company may have an economic interest less than 50% but may control and consolidate the business venture. The Company reports its investments in and advances to these business ventures in the accompanying consolidated balance sheets as investments, at equity, and advances to 50% or less owned companies. The Company reports its share of earnings or losses from investments in 50% or less owned companies in the accompanying consolidated statements of income (loss) as equity in earnings (losses) of 50% or less owned companies, net of tax.
The Company employs the cost method of accounting for investments in 50% or less owned companies it does not control or exercise significant influence. These investments in private companies are carried at cost and are adjusted only for capital distributions and other-than-temporary declines in fair value.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include those related to allowance for doubtful accounts, useful lives of property and equipment, impairments, income tax provisions and certain accrued liabilities. Actual results could differ from those estimates and those differences may be material.
Adoption of New Accounting Standards. On January 1, 2018, the Company adopted Financial Accounting Standard Board (“FASB”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). As a consequence of adopting Topic 606, the Company now recognizes all of the operating revenues and expenses associated with the dry-cargo barge pools it manages along with additional operating expenses reflective of barge pool earnings attributable to third-party barge owners and not the Company in its capacity as manager. Under Topic 606, the Company determined it was a principal with respect to the third-party barge owners. Previously, the Company recognized operating revenues and expenses only for its proportionate share of the barge pools in which it participated, as it acted as an agent. All prior periods have been adjusted to reflect the retrospective adoption of Topic 606, which resulted in additional revenues and operating expenses of $73.0 million and $83.7 million for the years ended December 31, 2017 and 2016, respectively. The adoption of Topic 606 had no impact on previously reported balance sheets, operating income (loss), net income (loss) or earnings (loss) per share.
On January 1, 2018, the Company adopted ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which eliminates the deferral of the tax effects of intercompany asset sales other than inventory until the transferred assets are sold to a third party or recovered through use. As a result of the adoption of the standard, the deferred tax charges previously recognized from those sales resulted in a decrease in deferred tax assets and a cumulative adjustment to retained earnings of $2.5 million in the consolidated balance sheets and statements of changes in equity as of January 1, 2018.
Revenue Recognition. Revenue is recognized when (or as) the Company transfers promised goods or services to its customers in amounts that reflect the consideration to which the Company expects to be entitled to in exchange for those goods or services, which occurs when (or as) the Company satisfies its contractual obligations and transfers control of the promised goods or services to its customers. Costs to obtain or fulfill a contract are expensed as incurred.
Revenue from Contracts with Customers. Ocean Services primarily earns revenues from voyage charters, contracts of affreightment, tariff based port and infrastructure services, unit freight logistics services, and technical ship management agreements with vessel owners (see Note 17). Ocean Services transfers control of the service to the customer and satisfies its performance obligation over the term of the contract, and therefore recognizes revenue over the term of the contract while related costs are expensed as incurred. Voyage charters are contracts to carry cargoes on a single voyage basis for a predetermined price, regardless of time to complete. Contracts of affreightment are contracts for cargoes that are committed on a multi-voyage basis for various periods of time, with minimum and maximum cargo tonnages specified over the period at a fixed or escalating rate per ton. Tariff based port and infrastructure services typically include operating harbor tugs alongside oceangoing vessels to escort them to their berth, assisting with the docking and undocking of these oceangoing vessels and escorting them back out to sea. They are contracted using prevailing port tariff terms on a per-use basis. In the unit freight logistics trade, transportation services typically include transporting shipping containers, rail cars, project cargoes, automobiles and U.S. military vehicles and are generally contracted on a per unit basis for the specified cargo and destination, typically in accordance with a publicly available tariff rate or based on a negotiated rate when moving larger volumes over an extended period. Managed services include technical ship management agreements whereby Ocean Services provides technical ship management services to third-party customers for a predetermined price over a specified period of time, typically a year or more.
Inland Services primarily earns revenues from contracts of affreightment, terminal operations, fleeting operations and repair and maintenance services (see Note 17). Inland Services transfers control of the service to the customer and satisfies its performance obligation over the term of the contract, and therefore recognizes revenue over the term of the contract while related costs are expensed as incurred. Contracts of affreightment are contracts whereby customers are charged an established rate per ton to transport cargo from point-to-point. Terminal operations includes tank farms and dry bulk and container handling facilities that are marketed under contractual rates and terms driven by throughput volume. Fleeting operations includes fleeting services whereby barges are held in fleeting areas for an agreed-upon day rate and shifting services whereby harbor boats are used to pick up and drop off barges to assist in assembling tows and to move barges to and from the dock for loading and unloading at predetermined per-shift fees. Other operations primarily include a machine shop specializing in towboat and barge cleaning, repair and maintenance services that are charged on an hourly or a fixed fee basis depending on the scope and nature of the work.
Witt O’Brien’s primarily earns revenues from time and material and retainer contracts (see Note 17). Witt O’Brien’s transfers control of the service to the customer and satisfies its performance obligation over the term of the contract, and therefore recognizes revenue over the term of the contract while related costs are expensed as incurred. Time and material contracts primarily relate to emergency response, debris management or consulting services that Witt O’Brien’s performs for a predetermined fee. Retainer contracts, which are nearly all with vessel services operators and oil companies, are contracted based on agreed-upon rates.
The Company’s Other business segment includes Cleancor, which primarily earns revenues from the sale of liquefied natural gas (see Note 17). Under these arrangements, control of the goods are transfered to the customer and performance obligations are satisfied at a point in time, and therefore revenue is recognized upon delivery while any related costs are expensed as incurred.
Contract liabilities from contracts with customers arise when the Company has received consideration prior to performance and are included in other current liabilities in the accompanying consolidated balance sheets. The Company’s contract liability activity for the year ended December 31 was a follows (in thousands):
Lease Revenues. The Company’s lease revenues are primarily from time charters, bareboat charters and non-vessel rental agreements that are recognized ratably over the lease term as services are provided, typically on a per day basis. Under a time charter, the Company provides a vessel to a customer for a set term and is responsible for all operating expenses, typically excluding fuel. Under a bareboat charter, the Company provides a vessel to a customer for a set term and the customer assumes responsibility for all operating expenses and risks of operation. Under a non-vessel rental agreement, the Company provides non-vessel property or equipment to a customer for a set term and the customer assumes responsibility for all operating expenses and risks of operation.
Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of U.S. treasury securities, money market instruments, time deposits and overnight investments.
Restricted Cash and Restricted Cash Equivalents. Restricted cash and restricted cash equivalents primarily relates to cash collateral for letters of credit and banking facility requirements.
Marketable Securities. Marketable equity securities with readily determinable fair values and debt securities are reported in the accompanying consolidated balance sheets as marketable securities. These investments are stated at fair value, as determined by their market observable prices, with both realized and unrealized gains and losses reported in the accompanying consolidated statements of income (loss) as marketable security losses, net. Short sales of marketable securities are stated at fair value in the accompanying consolidated balance sheets with both realized and unrealized gains and losses reported in the accompanying consolidated statements of income (loss) as marketable security losses, net. Long and short marketable security positions are primarily in energy, marine, transportation and other related businesses. Marketable securities are classified as trading securities for financial reporting purposes with gains and losses reported as operating activities in the accompanying consolidated statements of cash flows.
The Company’s most significant marketable security position is its investment in 5,200,000 shares of Dorian LPG Ltd. (“Dorian”), a publicly traded company listed on the New York Stock Exchange under the symbol “LPG” (see Note 11). Dorian’s closing share price was $5.83 and $8.22 as of December 31, 2018 and 2017, respectively. The Company’s cost basis in Dorian is $13.66 per share.
Trade Receivables. Customers of Ocean Services are primarily multinational oil companies, refining companies, oil trading companies, major gasoline retailers, large industrial consumers of crude, petroleum and chemicals, trading houses, pools, major automobile manufacturers and shippers, the U.S. Government and regional power utilities. Customers of Inland Services are primarily major agricultural companies, fertilizer companies, trading companies and industrial companies. Customers of Witt O’Brien’s are primarily governments, energy companies, ship managers and owners, healthcare providers, universities and school systems. Customers of the Company’s other business activities primarily include agricultural and feed companies, asphalt producers and municipalities and government agencies. All customers are granted credit on a short-term basis and related credit risks are considered minimal. The Company routinely reviews its trade receivables and makes provisions for probable doubtful accounts; however, those provisions are estimates and actual results could differ from those estimates and those differences may be material. Trade receivables are deemed uncollectible and removed from accounts receivable and the allowance for doubtful accounts when collection efforts have been exhausted.
Other Receivables. Other receivables primarily consists of income tax and insurance claim receivables. Other receivables also includes amounts due from certain of the Company’s 50% or less owned companies for working capital in excess of working capital advances, which are typically settled monthly in arrears.
Derivative Instruments. The Company accounts for derivatives through the use of a fair value concept whereby all of the Company’s derivative positions are stated at fair value in the accompanying consolidated balance sheets. Realized and unrealized gains and losses on derivatives not designated as hedges are reported in the accompanying consolidated statements of income (loss) as derivative gains (losses), net. Realized and unrealized gains and losses on derivatives designated as fair value hedges are recognized as corresponding increases or decreases in the fair value of the underlying hedged item to the extent they are effective, with any ineffective portion reported in the accompanying consolidated statements of income (loss) as derivative gains (losses), net. Realized and unrealized gains and losses on derivatives designated as cash flow hedges are reported as a component of other comprehensive income (loss) in the accompanying consolidated statements of comprehensive income (loss) to the extent they are effective and reclassified into earnings on the same line item associated with the hedged transaction and in the same period the hedged transaction affects earnings. Any ineffective portions of cash flow hedges are reported in the accompanying consolidated statements of income (loss) as derivative gains (losses), net. Realized and unrealized gains and losses on derivatives designated as cash flow hedges that are entered into by the Company’s 50% or less owned companies are also reported as a component of the Company’s other comprehensive income (loss) in proportion to the Company’s ownership percentage, with reclassifications and ineffective portions being included in equity in earnings (losses) of 50% or less owned companies, net of tax, in the accompanying consolidated statements of income (loss).
Concentrations of Credit Risk. The Company is exposed to concentrations of credit risk associated with its cash, cash equivalents, restricted cash and restricted cash equivalents, construction reserve funds and derivative instruments. The Company minimizes its credit risk relating to these positions by monitoring the financial condition of the financial institutions and counterparties involved and by primarily conducting business with large, well-established financial institutions and diversifying its counterparties. The Company does not currently anticipate nonperformance of its significant counterparties. The Company is also exposed to concentrations of credit risk relating to its receivables due from customers in the industries described above. The Company does not generally require collateral or other security to support its outstanding receivables. The Company minimizes its credit risk relating to receivables by performing ongoing credit evaluations and, to date, credit losses have not been material.
Inventories. Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Inventories consist primarily of fuel and fuel oil consumed by the Company’s vessels in its Ocean Services and Inland Services business segments. The Company records write-downs, as needed, to adjust the carrying amount of inventories to the lower of cost or market. During the years ended December 31, 2018, 2017 and 2016, the Company had no market write-downs of inventory.
Property and Equipment. Equipment, stated at cost, is depreciated using the straight line method over the estimated useful life of the asset to an estimated salvage value. With respect to each class of asset, the estimated useful life is typically based upon a newly built asset being placed into service and represents the point at which it is typically not justifiable for the Company to continue to operate the asset in the same or similar manner. From time to time, the Company may acquire older assets that have already exceeded their useful life as set forth in the Company’s useful life policy, in which case the Company depreciates such assets based on its best estimate of remaining useful life, typically the next survey or certification date.
As of December 31, 2018, the estimated useful life (in years) of each of the Company’s major classes of new equipment was as follows:
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(1)
Roll On/Roll Off.
The Company’s major classes of property and equipment as of December 31 were as follows (in thousands):
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(1)
Includes property and equipment acquired in business acquisitions at acquisition date fair value.
(2)
Includes land and buildings, leasehold improvements, fixed-wing aircraft, vehicles and other property and equipment.
(3)
Includes LNG Equipment and other property and equipment.
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(1)
Includes property and equipment acquired in business acquisitions at acquisition date fair value.
(2)
Includes land and buildings, leasehold improvements, fixed-wing aircraft, vehicles and other property and equipment.
During the years ended December 31, 2018, 2017 and 2016, depreciation expense totaled $69.9 million, $72.1 million, and $60.2 million, respectively.
Equipment maintenance and repair costs and the costs of routine overhauls, dry-dockings and inspections performed on vessels and equipment are charged to operating expense as incurred. Expenditures that extend the useful life or improve the marketing and commercial characteristics of equipment as well as major renewals and improvements to other properties are capitalized.
Certain interest costs incurred during the construction of equipment are capitalized as part of the assets’ carrying values and are amortized over such assets’ estimated useful lives. During the years ended December 31, 2018, 2017 and 2016 capitalized interest totaled $0.2 million, $2.7 million and $11.5 million, respectively.
As of December 31, 2018, the Company’s construction in progress totaling $8.1 million primarily consisted of the construction of and upgrades to inland river towboats and the construction of other Inland Services equipment, and is included in historical cost in the accompanying consolidated balance sheets.
Intangible Assets. The Company’s intangible assets primarily arose from business acquisitions (see Note 2) and consist of trademarks and tradenames, customer relationships and acquired contractual rights. These intangible assets are amortized over their estimated useful lives generally ranging from one to 15 years. During the years ended December 31, 2018, 2017 and 2016, the Company recognized amortization expense of $4.7 million, $2.9 million and $2.4 million, respectively.
The Company’s intangible assets by type were as follows (in thousands):
Future amortization expense of intangible assets for each of the years ended December 31 is as follows (in thousands):
Impairment of Long-Lived Assets. The Company performs an impairment analysis of long-lived assets used in operations, including intangible assets, when indicators of impairment are present. These indicators may include a significant decrease in the market price of a long-lived asset or asset group, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group. If the carrying values of the assets are not recoverable, as determined by the estimated undiscounted cash flows, the estimated fair value of the assets or asset groups are compared to their current carrying values and impairment charges are recorded if the carrying value exceeds fair value. The Company performs its testing on an asset or asset group basis. Generally, fair value is determined using valuation techniques, such as expected discounted cash flows or appraisals, as appropriate. During the year ended December 31, 2018, the Company did not recognize any impairment charges related to its property and equipment held for use. During the years ended December 31, 2017 and 2016, the Company recognized impairment charges of $0.4 million and $1.1 million, respectively, related to property and equipment held for use, which are included in gains (losses) on asset dispositions and impairments, net in the accompanying consolidated statements of income (loss).
In October 2016, Witt O’Brien’s announced the launch of a strategic growth program to focus on core services by eliminating non-core and lower margin businesses. Witt O’Brien’s core services include providing resilience solutions for key areas of critical infrastructure, including, but not limited to, government, energy, transportation, healthcare and education, in the United States and abroad. Witt O’Brien’s protects and enhances its customers’ enterprise value by strengthening their ability to prepare for, respond to and recover from natural and man-made disasters, including hurricanes, infectious disease, terrorism, cyber
breaches, oil spills, shipping incidents and other disruptions. The operations scheduled for elimination include a governmental relations unit, the Company’s European (primarily United Kingdom) operations, software products and an insurance unit. As a consequence of the restructuring, during the year ended December 31, 2016, Witt O’Brien’s recorded an impairment charge of $10.0 million to write off the carrying value of customer related intangible assets associated with the non-core service lines that were eliminated. This impairment charge is included in gains (losses) on asset dispositions and impairments, net in the accompanying consolidated statements of income (loss).
Impairment of 50% or Less Owned Companies. Investments in 50% or less owned companies are reviewed periodically to assess whether there is an other-than-temporary decline in the carrying value of the investment. In its evaluation, the Company considers, among other items, recent and expected financial performance and returns, impairments recorded by the investee and the capital structure of the investee. When the Company determines the estimated fair value of an investment is below carrying value and the decline is other-than-temporary, the investment is written down to its estimated fair value. Actual results may vary from the Company’s estimates due to the uncertainty regarding projected financial performance, the severity and expected duration of declines in value, and the available liquidity in the capital markets to support the continuing operations of the investee, among other factors. Although the Company believes its assumptions and estimates are reasonable, the investee’s actual performance compared with the estimates could produce different results and lead to additional impairment charges in future periods. During the years ended December 31, 2018, 2017 and 2016, the Company recognized impairment charges of $0.1 million, $0.9 million and $7.7 million, respectively, related to its 50% or less owned companies, which are included in equity in earnings (losses) of 50% or less owned companies, net of tax in the accompanying consolidated statements of income (loss) (see Note 4).
Goodwill. Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of net identified tangible and intangible assets acquired. As of December 31, 2018, substantially all of the Company’s goodwill is related to Witt O’Brien’s. The Company performs an annual impairment test of goodwill on October 1 of each year and further periodic tests to the extent indicators of impairment develop between annual impairment tests. The Company’s impairment review process compares the fair value of the reporting unit to its carrying value, including the goodwill, related to the reporting unit. To determine the fair value of the reporting unit, the Company may use various approaches including an asset or cost approach, market approach or income approach or any combination thereof. These approaches may require the Company to make certain estimates and assumptions including projections of future cash flows, revenues and expenses. These estimates and assumptions are reviewed each time the Company tests goodwill for impairment and are typically developed as part of the Company’s routine business planning and forecasting process. Although the Company believes its assumptions and estimates are reasonable, the Company’s actual performance against its estimates could produce different results and lead to impairment charges in future periods.
During the years ended December 31, 2018 and 2017, the Company did not recognize any impairment charges related to its goodwill. Based on an evaluation of the implied fair value of goodwill compared to its carrying value, during the year ended December 31, 2016, the Company recognized an impairment charge of $19.6 million to reduce the goodwill carrying value to fair value, which is included in gains (losses) on asset dispositions and impairments, net in the accompanying consolidated statements of income (loss). The estimated fair value of the reporting unit was based on values established by independent valuation specialists.
Business Combinations. The Company recognizes 100% of the fair value of assets acquired, liabilities assumed, and noncontrolling interests when the acquisition constitutes a change in control of the acquired entity. Shares issued in consideration for a business combination, contingent consideration arrangements and pre-acquisition loss and gain contingencies are all measured and recorded at their acquisition-date fair value. Subsequent changes to fair value of contingent consideration arrangements are generally reflected in earnings. Any in-process research and development assets acquired are capitalized as are certain acquisition-related restructuring costs if the criteria related to exit or disposal cost obligations are met as of the acquisition date. Acquisition-related transaction costs are expensed as incurred and any changes in income tax valuation allowances and tax uncertainty accruals are recorded as an adjustment to income tax expense (benefit). The operating results of entities acquired are included in the accompanying consolidated statements of income (loss) from the date of acquisition (see Note 2).
Debt Discount and Issuance Costs. Debt discounts and costs incurred in connection with the issuance of debt are amortized over the life of the related debt using the effective interest rate method for term loans and straight line method for revolving credit facilities and is included in interest expense in the accompanying consolidated statements of income (loss).
Self-insurance Liabilities. The Company maintains hull, liability and war risk, general liability, workers compensation and other insurance customary in the industries in which it operates. Certain excess and property insurance policies are obtained through SEACOR sponsored programs, with premiums charged to participating businesses based on management’s risk assessment or insured asset values. The marine hull and liability policies have significant annual aggregate deductibles that are accrued based on actual claims incurred. The Company also maintains self-insured health benefit plans for its participating employees. Exposure to the health benefit plans are limited by maintaining stop-loss and aggregate liability coverage. To the extent that estimated self-insurance losses, including the accrual of annual aggregate deductibles, differ from actual losses realized, the Company’s insurance reserves could differ significantly and may result in either higher or lower insurance expense in future periods.
Income Taxes. Deferred income tax assets and liabilities have been provided in recognition of the income tax effect attributable to the book and tax basis differences of assets and liabilities reported in the accompanying consolidated financial statements. Deferred tax assets or liabilities are provided using the enacted tax rates expected to apply to taxable income in the periods in which they are expected to be settled or realized. Interest and penalties relating to uncertain tax positions are recognized in interest expense and administrative and general, respectively, in the accompanying consolidated statements of income (loss). The Company records a valuation allowance to reduce its deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company records any liability associated with global intangible low-taxed income (GILTI) in the period it is incurred.
In the normal course of business, the Company may be subject to challenges from tax authorities regarding the amount of taxes due. These challenges may alter the timing or amount of taxable income or deductions. As part of the calculation of income tax expense (benefit), the Company determines whether the benefits of its tax positions are at least more likely than not of being sustained based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained, the Company accrues the largest amount of the tax benefit that is more likely than not of being sustained. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of its tax benefits and actual results could vary materially from these estimates.
Deferred Gains - Equipment Sale-Leaseback Transactions and Financed Equipment Sales. From time to time, the Company enters into equipment sale-leaseback transactions with finance companies or provides seller financing on sales of its equipment to third parties or 50% or less owned companies. A portion of the gains realized from these transactions is not immediately recognized in income and has been recorded in the accompanying consolidated balance sheets in deferred gains and other liabilities. In sale-leaseback transactions (see Note 3), gains are deferred to the extent of the present value of future minimum lease payments and are amortized as reductions to rental expense over the applicable lease terms. In financed equipment sales (see Note 3), gains are deferred to the extent that the repayment of purchase notes is dependent on the future operations of the sold equipment and are amortized based on cash received from the buyers. Deferred gain activity related to these transactions for the years ended December 31 was as follows (in thousands):
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(1)
On January 1, 2019 the Company will adopt FASB Topic 842, Leases (“Topic 842”). In accordance with Topic 842, the Company will reduce these gains by $26.9 million through a beginning period retained earnings adjustment.
Deferred Gains - Equipment Sales to the Company’s 50% or Less Owned Companies. A portion of the gains realized from non-financed sales of the Company’s vessels and barges to its 50% or less owned companies is not immediately recognized in income and has been recorded in the accompanying consolidated balance sheets in deferred gains and other liabilities. Effective January 1, 2009, the Company adopted new accounting rules related to the sale of its vessels and barges to its 50% or less owned companies. In most instances, these sale transactions are now considered a sale of a business in which the Company relinquishes control to its 50% or less owned companies. Subsequent to the adoption of the new accounting rules, gains are deferred only to the extent of the Company’s uncalled capital commitments and are amortized as those commitments lapse or funded amounts are returned. For transactions occurring prior to the adoption of the new accounting rules, gains were deferred and are being amortized based on the Company’s ownership interest, cash received and the applicable equipment’s useful lives. Deferred gain activity related to these transactions for the years ended December 31 was as follows (in thousands):
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(1)
On January 1, 2019, the Company will adopt Topic 842. In accordance with Topic 842, the Company will reduce these gains by $2.3 million through a beginning period retained earnings adjustment.
Stock Based Compensation. Stock based compensation is amortized to compensation expense on a straight line basis over the requisite service period of the grants using the Black-Scholes valuation model. The Company does not estimate forfeitures in its expense calculations as forfeiture history has been minor. The Company presents the excess tax benefits from the exercise of stock options as a financing cash flow in the accompanying consolidated statements of cash flows.
Foreign Currency Translation. The assets, liabilities and results of operations of certain SEACOR subsidiaries are measured using their functional currency, which is the currency of the primary foreign economic environment in which they operate. Upon consolidating these subsidiaries with SEACOR, their assets and liabilities are translated to U.S. dollars at currency exchange rates as of the balance sheet dates and their revenues and expenses are translated at the weighted average currency exchange rates during the applicable reporting periods. Translation adjustments resulting from the process of translating these subsidiaries’ financial statements are reported in other comprehensive income (loss) in the accompanying consolidated statements of comprehensive income (loss).
Accumulated Other Comprehensive Loss. The components of accumulated other comprehensive loss were as follows (in thousands):
Foreign Currency Transactions. Certain SEACOR subsidiaries enter into transactions denominated in currencies other than their functional currency. Gains and losses resulting from changes in currency exchange rates between the functional currency and the currency in which a transaction is denominated are included in foreign currency gains (losses), net in the accompanying consolidated statements of income (loss) in the period in which the currency exchange rates change.
Earnings (Loss) Per Share. Basic earnings (loss) per common share of SEACOR are computed based on the weighted average number of common shares issued and outstanding during the relevant periods. Diluted earnings (loss) per common share of SEACOR are computed based on the weighted average number of common shares issued and outstanding plus the effect of potentially dilutive securities through the application of the treasury stock and if-converted methods. Dilutive securities for this purpose assumes restricted stock grants have vested, common shares have been issued pursuant to the exercise of outstanding stock options and common shares have been issued pursuant to the conversion of all outstanding convertible notes.
Computations of basic and diluted earnings (loss) per common share of SEACOR for the years ended December 31 were as follows (in thousands, except share data):
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(1)
For the years ended December 31, 2018, 2017 and 2016, diluted earnings per common share of SEACOR excluded 333,510, 1,924,217 and 2,020,677, respectively, of certain share awards as the effect of their inclusion in the computation would be anti-dilutive.
(2)
For the years ended December 31, 2018 and 2016 diluted earnings per common share of SEACOR excluded 1,946,917 and 1,825,326 shares, respectively, issuable pursuant to the Company’s 3.0% Convertible Senior Notes (see Note 7) as the effect of their inclusion in the computation would be anti-dilutive.
(3)
For the year ended December 31, 2018 diluted earnings per share of SEACOR excluded 983,351 shares issuable pursuant to the Company’s 3.25% Convertible Senior Notes (see Note 7) as the effect of their inclusion in the computation would be anti-dilutive.
(4)
For the year ended December 31, 2016, diluted earnings per common share of SEACOR excluded 2,664,208 shares issuable pursuant to the Company’s 2.5% Convertible Senior Notes (see Note 7) as the effect of their inclusion in the computation would be anti-dilutive.
New Accounting Pronouncements. On February 25, 2016, the FASB issued a comprehensive new leasing standard that is meant to improve transparency and comparability among companies by requiring lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts and also requires additional disclosures about leasing arrangements. The new standard is effective for interim and annual periods beginning after December 15, 2018. The Company will adopt this standard using a modified prospective approach with recognition of a cumulative-effect adjustment to the opening balance of retained earnings at the adoption date. The Company has determined the adoption will have a material impact on its financial statements. Specifically, the Company will be recording material right-of-use assets and lease liabilities of $174.6 million for certain of its equipment, office and land leases. The Company’s computation of its right-of-use assets and lease liabilities required it to make certain assumptions, including lease discount rates.
On June 16, 2016, the FASB issued an amendment to the accounting standards, which replaces the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. The new standard is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for annual periods beginning after December 15, 2018. The Company has not yet determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
On January 26, 2017, the FASB issued an amendment to the accounting standards, which simplified wording and removed step two of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step two of the goodwill test. The new standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2020, with early adoption permitted for interim or annual goodwill impairment tests on testing dates after January 1, 2017. The Company has not yet determined what impact, if any, the adoption of the new standard will have on its consolidated financial position, results of operations or cash flows.
2. BUSINESS ACQUISITIONS
Cleancor. On June 1, 2018, the Company acquired a controlling interest in Cleancor, a full service solution provider that delivers clean fuel to end users displacing legacy petroleum-based fuels, through the acquisition of its partners’ 50% equity interest for $3.2 million in cash. In addition, immediately prior to consolidation, the Company contributed as capital $1.9 million of notes receivable due from Cleancor. The Company performed a fair value analysis and the purchase price was allocated to the acquired assets and liabilities based on their fair value resulting in no goodwill being recorded.
SCA. On March 1, 2018, the Company acquired Strategic Crisis Advisors LLC (“SCA”) for $1.5 million to be paid in two installments. The purchase price includes $0.9 million in contingent consideration that is dependent upon SCA meeting predetermined revenue targets for the twelve months following the acquisition date. The Company performed a fair value analysis and the purchase price was allocated to the acquired assets and liabilities based on their fair value resulting in no goodwill being recorded.
ISH. On July 3, 2017, International Shipholding Corporation (“ISH”) emerged from bankruptcy pursuant to its chapter 11 plan of reorganization (the “Plan”) confirmed by the U.S. Bankruptcy Court for the Southern District of New York (the “ISH Acquisition”). Pursuant to the Plan, SEACOR Ocean Transport Inc., a wholly-owned subsidiary of SEACOR, acquired all of the equity of the reorganized ISH. Under the terms of the Plan, the Company paid consideration consisting of $10.5 million in cash, converted $18.1 million of debtor-in-possession financing into equity and assumed $28.7 million of debt primarily from a new credit facility that is secured by the assets and equity of ISH and is non-recourse to SEACOR and its subsidiaries other than ISH (see Note 7). ISH, through its subsidiaries, operates a diversified fleet of U.S. and foreign-flag vessels including four leased-in PCTCs and two owned U.S.-flag bulk carriers that provide worldwide and domestic maritime transportation services to commercial and governmental customers. In addition, ISH has investments in two 50% or less owned companies that operate two foreign-flag rail ferries and a railcar repair and maintenance facility. The Company has excluded pro forma financial information with respect to the ISH Acquisition as financial information for the specific assets acquired under the Plan were not material or reasonably attainable. The Company performed a fair value analysis and the purchase price was allocated to the acquired assets and liabilities based on their fair value resulting in no goodwill being recorded.
CCM. On October 31, 2016, the Company acquired certain assets from Central Contracting & Marine, Inc. (“CCM”) consisting primarily of terminal and fleeting assets, including five inland river harbor boats, for $18.1 million in cash. The Company performed a fair value analysis and the purchase price was allocated to the acquired assets based on their fair values resulting in no goodwill being recorded.
SeaJon II. On December 2, 2016, the Company acquired a controlling interest in SeaJon II LLC (“SeaJon II”), which owns one U.S.-flag offshore tug, through the acquisition of its partner’s 50% equity interest for $3.4 million in cash (see Note 4). The Company performed a fair value analysis and the purchase price was allocated to the acquired assets and liabilities based on their fair values resulting in no goodwill being recorded.
Purchase Price Allocation. The allocation of the purchase price for the Company’s acquisitions for the years ended December 31 was as follows (in thousands):
______________________
(1)
Net of debtor-in-possession financing converted into equity of $18.1 million, in 2017.
(2)
Includes $1.5 million of consideration to be paid in two installments.
(3)
Purchase price is net of cash acquired totaling $3.6 million, $16.4 million and $0.9 million in 2018, 2017 and 2016, respectively.
3. EQUIPMENT ACQUISITIONS AND DISPOSITIONS
Equipment Additions. The Company’s capital expenditures were $50.3 million, $114.6 million and $252.8 million during the years ended December 31, 2018, 2017, and 2016, respectively. Major owned equipment placed in service for the years ended December 31 were as follows:
______________________
(1)
Excludes two U.S.-flag bulk carriers acquired in the ISH acquisition (see Note 2).
(2)
Excludes five inland river harbor boats acquired in the CCM acquisition and one U.S.-flag offshore tug acquired in the SeaJon II acquisition (see Note 2).
Equipment Dispositions. During the year ended December 31, 2018, the Company sold property and equipment for net proceeds of $16.1 million and gains of $6.6 million. In addition, the Company recognized previously deferred gains of $13.0 million.
During the year ended December 31, 2017, the Company sold property and equipment for net proceeds of $164.8 million and gains of $23.3 million, of which $10.0 million were recognized currently and $13.3 million were deferred (see Note 1). Equipment dispositions included the sale-leaseback of one U.S.-flag petroleum and chemical carrier for $134.9 million, with leaseback terms of 104 months and 50 dry-cargo barges for $12.5 million with leaseback terms of 84 months. Gains of $13.3 million related to the sale-leasebacks were deferred and are being amortized over the respective minimum lease periods. In addition, the Company recognized previously deferred gains of $2.3 million. The Company also recognized a loss of $0.3 million related to the total loss of one inland river specialty barge.
During the year ended December 31, 2016, the Company sold property and equipment for net proceeds of $153.0 million ($143.0 million in cash, $8.0 million in seller financing and one U.S.-flag harbor tug valued at $2.0 million) and gains of $11.3 million, of which $2.3 million were recognized currently and $9.0 million were deferred (see Note 1). Equipment dispositions included the sale-leaseback of one U.S.-flag petroleum and chemical carrier for $61.0 million, with leaseback terms of 76 months. Gains of $8.2 million related to the sale-leaseback were deferred and are being amortized over the minimum lease period. In addition, the Company recognized previously deferred gains of $2.4 million.
Major equipment dispositions for the years ended December 31 were as follows:
4. INVESTMENTS, AT EQUITY, AND ADVANCES TO 50% OR LESS OWNED COMPANIES
Investments, at equity, and advances to 50% or less owned companies as of December 31 were as follows (in thousands):
______________________
(1)
The Company’s ownership percentage represents its economic interest in the joint venture.
Combined Condensed Financial Information. Summarized financial information for the Company’s investments, at equity, excluding SCFCo and Trailer Bridge, as of and for the years ended December 31 was as follows (in thousands):
As of December 31, 2018 and 2017, cumulative undistributed net losses of 50% or less owned companies accounted for by the equity method and included in the Company’s consolidated retained earnings were $65.0 million and $40.1 million, respectively.
Trailer Bridge. Trailer Bridge, Inc. (“Trailer Bridge”), an operator of U.S.-flag RORO and deck barges, provides marine transportation services between Jacksonville, Florida, San Juan, Puerto Rico and Puerto Plata, Dominican Republic. In December 2016, the Company and other major investors recapitalized Trailer Bridge by agreeing to exchange outstanding subordinated debt for equity. As a consequence of the recapitalization, the Company’s noncontrolling interest in Trailer Bridge increased to 55.3% resulting in an equity loss of $2.2 million, net of tax. The Company provided secured financing to Trailer Bridge and during the years ended December 31, 2017 and 2016, the Company provided advances of $2.0 million and $1.7 million, respectively, on the secured financing. During the year ended December 31, 2017, the Company received repayments of $6.0 million on the secured financing. As of December 31, 2017, there was no outstanding balance on the secured financing. During the years ended December 31, 2018, 2017 and 2016, the Company received $3.5 million, $3.1 million and $3.0 million, respectively, for the time charter of a U.S.-flag harbor tug to Trailer Bridge. Prior to July 1, 2016, the Company also provided Trailer Bridge with technical and commercial management services and during the year ended December 31, 2016, received $0.3 million for these services.
RF Vessel Holdings. On July 3, 2017, as part of the ISH Acquisition (see Note 2), the Company acquired a 100% interest in Rail-Ferry Vessel Holdings LLC (“RF Vessel Holdings”), which owns two foreign-flag rail ferries. On September 1, 2017, the Company sold a 50% interest in RF Vessel Holdings to G&W Agave Holdings (MI) Inc. for $1.9 million and retained a 50% ownership interest in the newly-formed joint venture. During the year ended December 31, 2018, the Company and its partner each contributed capital of $9.1 million to RF Vessel Holdings.
Golfo de Mexico. On July 3, 2017, as part of the ISH Acquisition (see Note 2), the Company acquired a 100% interest in Golfo de Mexico Rail-Ferry Holdings LLC (“Golfo de Mexico”), which operates the two foreign-flag rail ferries owned by RF Vessel Holdings. On September 1, 2017, the Company sold a 50% interest in Golfo de Mexico to G&W Agave Holdings (MI) Inc. for $3.1 million and retained a 50% ownership interest in the newly-formed joint venture. During the year ended December 31, 2018, the Company and its partner each contributed capital of $4.6 million to Golfo de Mexico. During the year ended December 31, 2017, the Company received dividends of $0.3 million from Golfo de Mexico. The Company provides Golfo de Mexico with technical, commercial and administrative management services and during the years ended December 31, 2018 and 2017, the Company received $1.1 million and $0.3 million, respectively, for these services.
KSM. On April 1, 2017, the Company and Kotug Caribbean Holdings LLC formed Kotug Seabulk Maritime LLC (“KSM”) to operate four foreign-flag harbor tugs and one foreign-flag ocean liquid tank barge in Freeport, Grand Bahama. The Company has a 50% ownership interest in KSM. During the years ended December 31, 2018 and 2017, the Company and its partner each contributed capital of $1.0 million and $0.3 million, respectively, to KSM. The Company provides KSM with technical, commercial and administrative management services and during the years ended December 31, 2018 and 2017, received $0.4 million and $0.3 million, respectively, for these services. During the years ended December 31, 2018 and 2017, the Company received $1.3 million and $1.1 million, respectively, for the bareboat charter of two foreign-flag harbor tugs to KSM.
SeaJon. SeaJon LLC (“SeaJon”) owned an articulated tug-barge operating in the Great Lakes trade that was sold to a third party in June 2017 and, as of December 31, 2017, SeaJon had been liquidated. During the year ended December 31, 2017, the Company received capital distributions of $3.5 million and dividends of $12.5 million from SeaJon. During the year ended December 31, 2016, the Company received dividends of $0.6 million from SeaJon.
SEA-Access. SEA-Access LLC (“SEA-Access”) was formed to acquire and operate the M/V Eagle Ford, a 124,000 dwt U.S.-flag petroleum and chemical carrier. In June 2016, the M/V Eagle Ford was scrapped and, as of December 31, 2016, SEA-Access had been liquidated. During the year ended December 31, 2016, the Company received capital distributions of $8.4 million and dividends of $2.0 million from SEA-Access. The Company provided SEA-Access with technical and commercial management services and during the year ended December 31, 2016, received $0.5 million for these services.
SeaJon II. SeaJon II LLC (“SeaJon II”) was formed to own a U.S.-flag offshore tug on time charter to Trailer Bridge. The Company provided SeaJon II with technical and commercial management services and during the year ended December 31, 2016, received $0.1 million for these services. On December 2, 2016, the Company acquired a controlling interest in SeaJon II through the acquisition of its partner’s 50% equity interest for $3.4 million in cash (see Note 2). Upon the change in control, the Company marked its investment in SeaJon II to fair value resulting in a loss of $1.9 million, net of tax, which is included in equity in earnings (losses) of 50% or less owned companies in the accompanying consolidated statements of income (loss).
SCFCo. SCFCo Holdings LLC (“SCFCo”) was established to operate inland river dry-cargo barges and inland river towboats on the Parana-Paraguay Rivers and a terminal facility at Port Ibicuy, Argentina. During the years ended December 31, 2017 and 2016, the Company contributed capital of $0.4 million and $0.8 million, respectively, to SCFCo. During the years ended December 31, 2017 and 2016, the Company provided SCFCo with working capital advances and loans of $2.5 million and $1.8 million, respectively. During the years ended December 31, 2018 and 2017, the Company received repayments on these working capital advances and loans of $2.6 million and $1.7 million, respectively. As of December 31, 2018, $30.5 million of working capital advances and loans remained outstanding. The Company also provides SCFCo with certain information technology services and received $0.1 million, $0.1 million and $0.1 million, respectively, for these services during the years ended December 31, 2018, 2017 and 2016. During the year ended December 31, 2016, the Company identified indicators of impairment in its investment in SCFCo as a result of continuing losses and recognized impairment charges of $7.7 million for an other-than-temporary decline in the fair value of its investment. As of December 31, 2018, the Company’s carrying value of its investment in SCFCo was $23.4 million lower than its proportionate share of the underlying equity in SCFCo.
Summarized financial information for SCFCo as of and for the years ended December 31 was as follows (in thousands):
Bunge-SCF Grain. Bunge-SCF Grain LLC (“Bunge-SCF Grain”) operates terminal grain elevators in Illinois. The Company has provided Bunge-SCF Grain with working capital advances. As of December 31, 2018, the total outstanding balance of working capital advances was $7.0 million. Bunge-SCF Grain also operates and manages the Company’s grain storage and handling facility in McLeansboro, Illinois, and the Company received $0.9 million, $1.1 million and $1.0 million in rental income for the years ended December 31, 2018, 2017 and 2016, respectively. Certain dry-cargo barge pools managed by the Company provide freight transportation to Bunge-SCF Grain and those pools received $10.7 million, $7.2 million and $7.2 million for these services during the years ended December 31, 2018, 2017 and 2016, respectively.
SCF Bunge Marine. SCF Bunge Marine LLC (“SCF Bunge Marine”) provides towing services on the U.S. Inland Waterways, primarily the Mississippi River, Illinois River, Tennessee River and Ohio River. The Company time charters seven inland river towboats to SCF Bunge Marine, of which four are bareboat chartered-in by the Company from a third-party leasing company. The Company and its partner are required to fund SCF Bunge Marine, if necessary, to support the payment of its time charter obligations to the Company. Pursuant to the time charter, the Company received charter fees of $50.8 million, $38.7 million and $35.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. During the year ended December 31, 2018, the Company contributed capital of $0.5 million to SCF Bunge Marine. During the years ended December 31, 2018, 2017 and 2016, the Company received dividends of $4.6 million, $0.1 million and $2.5 million, respectively, from SCF Bunge Marine. Certain dry-cargo barge pools managed by the Company obtain towing services from SCF Bunge Marine and those pools paid $54.5 million, $41.4 million and $40.2 million for these services during the years ended December 31, 2018, 2017 and 2016, respectively.
Other Inland Services. The Company’s other Inland Services 50% or less owned company operates a fabrication facility.
O’Brien’s do Brazil. O’Brien’s do Brasil Consultoria em Emergencias e Meio Ambiente A/A (“O’Brien’s do Brazil”) is an emergency consulting organization providing preparedness, response and recovery services in Brazil. During the years ended December 31, 2018, 2017 and 2016, the Company received dividends of $0.2 million, $0.1 million and $0.1 million, respectively.
Hawker Pacific. Hawker Pacific Airservices, Limited (“Hawker Pacific”) is an aviation sales and support organization and a distributor of aviation components from leading manufacturers. On April 30, 2018, the Company sold its 34.2% interest in Hawker Pacific for $78.0 million in cash and recognized a gain of $53.9 million, which is included in other, net in the accompanying consolidated statements of income (loss). During the years ended December 31, 2018, 2017 and 2016, the Company received management fees of $0.1 million, $0.3 million and $0.3 million, respectively, from Hawker Pacific.
VA&E. VA&E Trading USA LLC and VA&E Trading LLP (collectively “VA&E”), were formed to focus on the global origination, trading and merchandising of sugar, pairing producers and buyers and arranging for the transportation and logistics of the product. Through November 2016, the Company provided VA&E an unsecured revolving credit facility of up to $6.0 million, a term loan of $1.1 million and a subordinated loan of $3.5 million. During the year ended December 31, 2016, the Company received repayments of $12.4 million and advanced $10.0 million on the revolving credit facility and received repayments of $1.1 million on its term loan. In December 2016, the Company maintained its subordinated loan of $3.5 million, provided an uncommitted credit facility of up to $3.5 million and terminated the revolving credit facility and term loan. During the year ended December 31, 2017, the Company advanced $3.5 million on the uncommitted credit facility. During the year ended December 31, 2018, the Company received repayments of $5.4 million and advanced $5.4 million on the uncommitted credit facility. As of December 31, 2018, the Company had outstanding advances of $7.4 million to VA&E, inclusive of accrued and unpaid interest. In addition, during the year ended December 31, 2018, the Company received dividends of $0.4 million from VA&E.
Avion. Avion Pacific Limited (“Avion”) is a distributor of aircraft and aircraft related parts. During the years ended December 31, 2017 and 2016, the Company made advances of $1.0 million and $3.0 million, respectively, to Avion. During the year ended December 31, 2017, the Company received repayments on advances of $4.0 million from Avion. As of December 31, 2018 and 2017, the Company had no outstanding advances to Avion. During the year ended December 31, 2018, the Company received dividends of $0.8 million from Avion.
Cleancor. CLEANCOR Energy Solutions LLC (“Cleancor”) is a full service solution provider delivering clean fuel to end users displacing legacy petroleum-based fuels. On June 1, 2018, the Company acquired a controlling interest in Cleancor through the acquisition of its partners’ equity interest (see Note 2).
Other. The Company’s other 50% or less owned companies are primarily industrial aviation businesses in Asia. During the year ended December 31, 2018, the Company received repayments on working capital advances of $0.4 million and received capital distributions of $0.6 million from these 50% or less owned companies. During the year ended December 31, 2017, the Company received repayments on working capital advances of $0.4 million from these 50% or less owned companies. During the year ended December 31, 2016, the Company made advances of $0.8 million to these 50% or less owned companies. As of December 31, 2018, total advances outstanding to these 50% or less owned companies were $2.0 million.
5. CONSTRUCTION RESERVE FUNDS
The Company has established, pursuant to Section 511 of the Merchant Marine Act, 1936, as amended, construction reserve fund accounts subject to agreements with the Maritime Administration. In accordance with this statute, the Company is permitted to deposit proceeds from the sale of certain vessels into the construction reserve fund accounts and defer the taxable gains realized from the sale of those vessels. Qualified withdrawals from the construction reserve fund accounts are only permitted for the purpose of acquiring qualified U.S.-flag vessels as defined in the statute and approved by the Maritime Administration. To the extent that sales proceeds are reinvested in replacement vessels, the carryover depreciable tax basis of the vessels originally sold is attributed to the U.S.-flag vessels acquired using such qualified withdrawals. The construction reserve funds must be committed for expenditure within three years of the date of sale of the equipment, subject to two one-year extensions that can be granted at the discretion of the Maritime Administration, or be released for the Company’s general use as nonqualified withdrawals. For nonqualified withdrawals, the Company is obligated to pay taxes on the previously deferred gains at the prevailing statutory tax rate plus penalties and interest thereon for the period such taxes were deferred.
6. LEASES AND NOTES RECEIVABLE FROM THIRD PARTIES
From time to time, the Company engages in lending and leasing activities involving various types of equipment. The Company recognizes interest income as payments are due, typically monthly, and expenses all costs associated with its lending and leasing activities as incurred. These leases and notes receivable are typically collateralized by the underlying equipment and require scheduled lease payments or periodic principal and interest payments. As of December 31, 2018 and 2017, the outstanding balance of leases and notes receivable from third parties was $2.3 million and $2.8 million, respectively, and is included in other long-term assets in the accompanying consolidated balance sheets. During the years ended December 31, 2018, 2017 and 2016, the Company made advances on notes receivable from third parties of $0.1 million, $10.1 million and $9.1 million, respectively, and received repayments on notes receivable from third parties of $0.6 million, $34.5 million and $6.3 million, respectively. During the year ended December 31, 2016, the Company recognized reserves of $6.7 million for one of its notes receivable from third parties following non-performance and a decline in the underlying collateral value.
7. LONG-TERM DEBT
The Company’s borrowings as of December 31 were as follows (in thousands):
______________________
(1)
Excludes unamortized discount and unamortized issue costs of $7.2 million and $0.7 million, respectively, as of December 31, 2018 and $22.9 million and $2.3 million, respectively, as of December 31, 2017.
(2)
Excludes unamortized discount and unamortized issue costs of $21.1 million and $1.9 million, respectively, as of December 31, 2018.
(3)
Excludes unamortized discount and unamortized issue costs of $0.2 million and $0.3 million, respectively, as of December 31, 2017.
(4)
Excludes unamortized issue costs of $0.4 million and $0.7 million as of December 31, 2018 and December 31, 2017, respectively.
(5)
Excludes unamortized issue costs of $0.1 million as of December 31, 2017.
(6)
Excludes unamortized issue costs of $0.1 million and $0.1 million as of December 31, 2018 and December 31, 2017, respectively.
The Company’s contractual long-term debt maturities for the years ended December 31 are as follows (in thousands):
3.0% Convertible Senior Notes. On November 13, 2013, SEACOR issued $230.0 million aggregate principal amount of its 3.0% Convertible Senior Notes due November 15, 2028 (the “3.0% Convertible Senior Notes”). Interest on the 3.0% Convertible Senior Notes is payable semi-annually on May 15 and November 15 of each year. Beginning November 15, 2020, contingent interest is payable during any subsequent semi-annual interest period if the average trading price of the 3.0% Convertible Senior Notes for a defined period is greater than or equal to $1,200 per bond ($1,000 face value). The amount of contingent interest payable for any such period will be equal to 0.45% per annum of such average trading price of the 3.0% Convertible Senior Notes. Prior to August 15, 2028, the 3.0% Convertible Senior Notes are convertible into shares of SEACOR common stock, par value $0.01 per share (“Common Stock”), at a conversion rate (“Conversion Rate”) of 12.5892 shares per bond ($1,000 face value) only if certain conditions are met, as more fully described in the indenture. After August 15, 2028, holders may elect to convert at any time. The Company has reserved the maximum number of shares of Common Stock needed upon conversion, or 1,350,620 shares as of December 31, 2018. On or after November 19, 2018, the 3.0% Convertible Senior Notes may be redeemed, in whole or in part, at a price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. On November 19, 2020, November 20, 2023 or if the Company undergoes a fundamental change, as more fully described in the indenture, the holders of the 3.0% Convertible Senior Notes may require SEACOR to purchase for cash all or part of the notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of purchase.
The Company accounts separately for the liability and equity components of the 3.0% Convertible Senior Notes and the associated underwriting fees in a manner that reflects the Company’s non-convertible borrowing rate. The resulting debt discount and offering costs associated with the liability component are amortized as additional non-cash interest expense over the seven year period for which the debt is expected to be outstanding (November 19, 2020) for an overall effective annual interest rate of 7.4%.
On May 15, 2018, the Company exchanged $117.8 million aggregate principal amount of its outstanding 3.0% Convertible Senior Notes for a like principal amount of new 3.25% Convertible Senior Notes (see discussion below). In addition, during the year ended December 31, 2018, the Company purchased $4.9 million in principal amount of its 3.0% Convertible Senior Notes for total consideration of $4.7 million. These transactions resulted in debt extinguishment losses of $5.4 million included in the accompanying consolidated statements of income (loss).
2.5% Convertible Senior Notes. On December 11, 2012, SEACOR issued $350.0 million aggregate principal amount of its 2.5% Convertible Senior Notes due December 15, 2027 (the “2.5% Convertible Senior Notes”). Interest on the 2.5% Convertible Senior Notes is payable semi-annually on June 15 and December 15 of each year. Beginning December 15, 2017, contingent interest is payable during any subsequent semi-annual interest period if the average trading price of the 2.5% Convertible Senior Notes for a defined period is greater than or equal to $1,200 per bond ($1,000 face value). The amount of contingent interest payable for any such period will be equal to 0.25% per annum of such average trading price of the 2.5% Convertible Senior Notes. Prior to September 15, 2027, the 2.5% Convertible Senior Notes are convertible into shares of Common Stock at a conversion rate of 19.0381 shares per bond ($1,000 face value) only if certain conditions are met, as more fully described in the indenture. After September 15, 2027, holders may elect to convert at any time. The Company has reserved the maximum number of shares of Common Stock needed upon conversion, or 1,227,101 shares as of December 31, 2018. On December 12, 2017, the Company entered into a supplemental indenture, which amended the indenture to provide holders with an additional put right for their Notes on May 31, 2018. In addition, the Company surrendered and waived its right to redeem the Notes until May 31, 2018. Subsequent to May 31, 2018, the 2.5% Convertible Senior Notes may be redeemed, in whole or in part, at a price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. On December 19, 2022, or if the Company undergoes a fundamental change, as more fully described in the indenture as amended by the first supplemental indenture dated as of December 12, 2017, the holders of the 2.5% Convertible Senior Notes may require SEACOR to purchase for cash all or part of the notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of purchase.
The Company accounts separately for the liability and equity components of the 2.5% Convertible Senior Notes and the associated underwriting fees in a manner that reflects the Company’s non-convertible borrowing rate. The resulting debt discount and offering costs associated with the liability component is amortized as additional non-cash interest expense over the five year
period for which the debt was expected to be outstanding (December 19, 2017) for an overall effective annual interest rate of 6.5%. Beginning December 19, 2017, the effective annual interest rate is equal to the stated coupon rate of 2.5%.
During the year ended December 31, 2017, the Company purchased $61.7 million in principal amount of its 2.5% Convertible Senior Notes for total consideration of $61.9 million. Consideration of $60.5 million was allocated to the settlement of the long-term debt resulting in gains on debt extinguishment of $0.1 million included in the accompanying consolidated statements of income (loss). Consideration of $1.4 million was allocated to the purchase of the conversion option embedded in the 2.5% Convertible Senior Notes as included in the accompanying consolidated statements of changes in equity. Pursuant to the put option set forth in the indenture and governing the 2.5% Convertible Senior Notes, the Company completed a tender offer for the 2.5% Convertible Senior Notes in which, on December 19, 2017, the Company purchased $31.0 million in principal amount of its 2.5% Convertible Senior Notes that were validly surrendered for purchase for total consideration of $31.0 million.
During the year ended December 31, 2016, the Company purchased $127.4 million in principal amount of its 2.5% Convertible Senior Notes for total consideration of $124.7 million. Consideration of $117.3 million was allocated to the settlement of the long-term debt resulting in gains on debt extinguishment of $3.3 million included in the accompanying consolidated statements of income (loss). Consideration of $7.4 million was allocated to the purchase of the conversion option embedded in the 2.5% Convertible Senior Notes as included in the accompanying consolidated statements of changes in equity.
3.25% Convertible Senior Notes. On May 15, 2018, SEACOR issued $117.8 million aggregate principal amount of its 3.25% Convertible Senior Notes due May 15, 2030 (the “3.25% Convertible Senior Notes”). Interest on the 3.25% Convertible Senior Notes is payable semi-annually on May 15 and November 15 of each year. Beginning May 15, 2025, contingent interest is payable during any subsequent semi-annual interest period if the average trading price of the 3.25% Convertible Senior Notes for a defined period is greater than or equal to $1,200 per bond ($1,000 face value). The amount of contingent interest payable for any such period will be equal to 0.45% per annum of such average trading price of the 3.25% Convertible Senior Notes. Prior to February 15, 2030, the 3.25% Convertible Senior Notes are convertible into shares of Common Stock, at a Conversion Rate of 13.1920 shares per bond ($1,000 face value) only if certain conditions are met, as more fully described in the indenture. After February 15, 2030, holders may elect to convert at any time. The Company has reserved the maximum number of shares of Common Stock needed upon conversion, or 1,553,780 shares as of December 31, 2018. On or after May 15, 2022, the 3.25% Convertible Senior Notes may be redeemed, in whole or in part, at a price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. On May 15, 2025, or if the Company undergoes a fundamental change, as more fully described in the indenture, the holders of the 3.25% Convertible Senior Notes may require SEACOR to purchase for cash all or part of the notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of purchase.
The Company accounts separately for the liability and equity components of the 3.25% Convertible Senior Notes and the associated underwriting fees in a manner that reflects the Company’s non-convertible borrowing rate. Of the total issued amount of $117.8 million and offering costs of $2.5 million, the Company allocated $95.1 million and $2.0 million, respectively, to the liability component and $22.7 million and $0.5 million, respectively, to the equity component. The resulting debt discount and offering costs associated with the liability component are amortized as additional non-cash interest expense over the seven year period for which the debt is expected to be outstanding (May 15, 2025) for an overall effective annual interest rate of 7.2%.
7.375% Senior Notes. On September 24, 2009, SEACOR issued $250.0 million aggregate principal amount of its 7.375% Senior Notes due October 1, 2019 (the “7.375% Senior Notes”). The 7.375% Senior Notes were issued under a supplemental indenture dated as of September 24, 2009 (the “2009 Supplemental Indenture”) to the base indenture relating to SEACOR’s senior debt securities, dated as of January 10, 2001, between SEACOR and U.S. Bank National Association, as trustee. Interest on the 7.375% Senior Notes was payable semi-annually on April 1 and October 1 of each year. The 7.375% Senior Notes were redeemed at a price equal to the principal amount, plus accrued and unpaid interest to the date of redemption, plus a specified “make-whole” premium. The 2009 Supplemental Indenture contained covenants including, among others, limitations on liens and sale and leasebacks of certain Principal Properties, as defined, and certain restrictions on SEACOR consolidating with or merging into any other Person, as more fully described in the indenture.
During the year ended December 31, 2018, and prior to their redemption, the Company purchased $5.7 million in principal amount of its 7.375% Senior Notes for $5.9 million. On October 31, 2018, the Company redeemed the remaining $147.4 million in principal amount of its 7.375% Senior Notes for $153.0 million including a make-whole premium of $5.6 million calculated in accordance with the terms of the indenture. These transactions resulted in losses on debt extinguishment of $6.1 million included in the accompanying consolidated statements of income (loss).
During the year ended December 31, 2017, the Company purchased $7.6 million in principal amount of its 7.375% Senior Notes for $7.7 million resulting in losses on debt extinguishment of $0.2 million included in the accompanying consolidated statements of income (loss).
During the year ended December 31, 2016, the Company purchased $35.2 million in principal amount of its 7.375% Senior Notes for $33.1 million resulting in gains on debt extinguishment of $1.9 million included in the accompanying consolidated statements of income (loss).
SEA-Vista Credit Facility. On April 15, 2015, SEA-Vista entered into a $300.0 million credit agreement with a syndicate of lenders that matures in 2020 (the “SEA-Vista Credit Facility”) and is secured by substantially all of SEA-Vista’s tangible and intangible assets, including its fleet of U.S.-flag petroleum and chemical carriers (See Note 1), with no recourse to SEACOR or its other subsidiaries. The SEA-Vista Credit Facility is comprised of three tranches: (i) a $100.0 million revolving credit facility (the “Revolving Loan”); (ii) an $80.0 million term loan (the “Term A-1 Loan”); and (iii) a $120.0 million delayed draw term loan (the “Term A-2 Loan”). The proceeds from the SEA-Vista Credit Facility were and will be used to fund SEA-Vista’s working capital, general corporate purposes, capital commitments and the redemption of its Title XI Bonds. All three loans bear interest at a variable rate determined by reference to the London Interbank Offered Rate (“LIBOR”) plus a margin of between 2.00% and 2.75% as determined in accordance with the SEA-Vista Credit Facility or, at the election of SEA-Vista, a Base Rate plus a margin of between 1.25% and 1.75% as determined in accordance with the SEA-Vista Credit Facility. A quarterly fee is payable on the unused commitments of all three tranches. SEA-Vista incurred $3.1 million of issuance costs related to the SEA-Vista Credit Facility.
Each of the loans under the SEA-Vista Credit Facility will mature on April 15, 2020 (the “Maturity Date”), which may be accelerated in certain circumstances. The principal of the Term A-1 Loan is repayable commencing in June 2015 in quarterly installments of 1.25% of the aggregate principal amount of the Term A-1 Loan through June 30, 2017. Commencing on September 30, 2017, the principal of each of the Term A-1 Loan and the Term A-2 Loan is repayable in quarterly installments of 2.50% of the aggregate principal amount of such loans, with the outstanding principal balance, interest and all other amounts outstanding for all loans, including the Revolving Loan, due and payable on the Maturity Date. In addition, SEA-Vista has the right to make optional prepayments on each of the loans without penalty in minimum amounts of $1.0 million.
During the year ended December 31, 2018, SEA-Vista repaid $39.0 million on the Revolving Loan, $3.3 million on the Term A-1 Loan and $5.5 million on the Term A-2 Loan. In addition, as of December 31, 2018, SEA-Vista had $94.0 million of borrowing capacity under the SEA-Vista Credit Facility.
During the year ended December 31, 2017, SEA-Vista drew $44.9 million and repaid $85.9 million on the Revolving Loan, $39.4 million on the Term A-1 Loan and $63.1 million on the Term A-2 Loan resulting in debt extinguishment losses of $0.7 million.
During the year ended December 31, 2016, SEA-Vista drew $87.0 million and repaid $14.0 million on the Revolving Loan, and made scheduled repayments of $3.8 million on the Term A-1 Loan.
The SEA-Vista Credit Facility contains various financial maintenance and restrictive covenants including: funded debt to adjusted EBITDA; adjusted EBITDA to interest expense plus amortization; aggregate collateral vessel value to the sum of funded debt and unused and unexpired commitments; and minimum liquidity. In addition, the SEA-Vista Credit Facility restricts the payment of dividends and distributions as defined in the SEA-Vista Credit Facility.
ISH Credit Facility. On July 3, 2017, ISH emerged from bankruptcy pursuant to the Plan (see Note 2). In conjunction with the emergence under the Plan, ISH assumed debt of $25.0 million under a credit facility with a maturity date of July 2020. The facility consisted of two tranches: (i) a $5.0 million revolving credit facility (the “ISH Revolving Loan”) and (ii) a $20.0 million term loan (the “ISH Term Loan”) (collectively the “ISH Credit Facility”). ISH incurred $0.1 million of issuance costs in connection with the ISH Credit Facility. The proceeds from this facility were used for general working capital purposes and payments to ISH’s creditors in accordance with the Plan.
Interest on both loans were based on a variable rate of either LIBOR multiplied by the Statutory Reserve Rate or Prime Rate plus an applicable margin, as defined in the ISH Credit Facility. A quarterly fee of 0.5% was payable on the unused commitment of the ISH Revolving Loan. Beginning September 30, 2017, ISH was required to make quarterly prepayments on the ISH Term Loan of $0.7 million. Commencing with the calendar year ending December 31, 2018, ISH was required to make annual prepayments on the ISH Term Loan in an amount equal to 50% of excess cash flow as defined in the credit agreement.
The ISH Credit Facility contained various financial and restrictive covenants applicable to ISH and its subsidiaries including indebtedness to EBITDA and adjusted EBITDA to interest expense maintenance, as defined in the ISH Credit Facility. The ISH Credit Facility was non-recourse to SEACOR and its subsidiaries other than ISH. The ISH Credit Facility was secured by substantially all of ISH’s assets, including its fleet of U.S.-flag bulk carriers (See Notes 1 and 2).
During the year ended December 31, 2018, ISH repaid the outstanding balance of $12.2 million on the ISH Term Loan and terminated the credit facility resulting in debt extinguishment losses of $0.1 million included in the accompanying consolidated statements of income (loss). During the year ended December 31, 2017, ISH repaid $7.8 million on the ISH Term Loan and $5.0 million on the ISH Revolving Loan.
Other. During 2017, the Company acquired $3.9 million of other debt related to the ISH acquisition (see Note 2). This debt bore interest at 7.0% and was collateralized by certain acquired assets. As of December 31, 2018, this debt had been fully repaid. In addition, the Company has various other obligations including equipment and facility mortgages. As of December 31, 2018, these obligations have maturities ranging from 2020 through 2026, have interest rates ranging from to 3.4% to 4.3% and require periodic payments of interest and principal. During the year ended December 31, 2016, proceeds from the issuance of other debt, net of issue costs was $7.4 million. During the years ended December 31, 2018, 2017 and 2016, repayments on other debt was $2.1 million (including the repayment and termination of the debt related to the ISH acquisition), $3.0 million and $0.4 million, respectively.
Letters of Credit. As of December 31, 2018, the Company had outstanding letters of credit totaling $9.5 million with various expiration dates through 2027.
Guarantees. The Company has guaranteed the payments of amounts owned under certain sale-leaseback transactions, equipment financing and multi-employer pension obligations on behalf of SEACOR Marine. As of December 31, 2018, these guarantees on behalf of SEACOR Marine totaled $41.9 million and the amount declines as payments are made on the outstanding obligations through 2023. The Company earns a fee from SEACOR Marine of 50 basis points per annum on these guarantees. For the years ended December 31, 2018 and 2017, the Company earned fees of $0.3 million and $0.6 million, respectively, related to these arrangements.
Repurchase Authority. SEACOR’s Board of Directors previously approved a securities repurchase plan that authorizes the Company to acquire Common Stock, 7.375% Senior Notes, 3.0% Convertible Senior Notes, 3.25% Convertible Senior Notes, 2.5% Convertible Senior Notes (collectively the “Securities”), which may be acquired through open market purchases, privately negotiated transactions or otherwise, depending on market conditions. As of December 31, 2018, SEACOR had remaining authorization for Securities repurchases of $66.7 million.
8. INCOME TAXES
Income (loss) before income tax expense (benefit) and equity in earnings (losses) of 50% or less owned companies derived from U.S. and foreign companies for the years ended December 31 were as follows (in thousands):
The Company files a consolidated U.S. federal tax return. The components of income tax expense (benefit) for the years ended December 31 were as follows (in thousands):
The following table reconciles the difference between the statutory federal income tax rate for the Company and the effective income tax rate for the years ended December 31:
On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, eliminating or capping certain deductions, imposing a mandatory one-time tax on accumulated earnings in foreign subsidiaries, introducing new tax regimes and changing how foreign earnings are subject to U.S. taxation. The statutory corporate tax rate reduction is effective for tax years beginning on or after January 1, 2018. During the year ended December 31, 2017, the Company recorded a net income tax benefit of $66.9 million as a consequence of reducing its net deferred tax liabilities to reflect the change in the statutory tax rate.
The Company records an additional income tax benefit or expense based on the difference between the fair market value of share awards at the time of grant and the fair market value at the time of vesting or exercise. For the year ended December 31, 2016, an additional net income tax expense was recorded in stockholders’ equity of $2.3 million.
During the year ended December 31, 2013, the Company provided for income taxes of $10.1 million relating to potential tax exposures surrounding the spin-off of Era Group Inc. (“Era Group”) by means of a dividend to SEACOR’s shareholders of all the issued and outstanding common stock of Era Group. During the year ended December 31, 2017, the Company reversed this provision as the statute of limitations expired. In addition, the Company reversed accumulated accrued interest of $2.0 million related to this provision, included as a reduction in interest expense in the accompanying consolidated statements of income (loss).
The components of the net deferred income tax liabilities for the years ended December 31 were as follows (in thousands):
During the year ended December 31, 2018, the Company decreased its valuation allowance for state net operating loss carryforwards from $6.7 million to $4.0 million.
9. DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES
Cash Flow Hedges. One of the Company’s 50% or less owned companies, had an interest rate swap agreement designated as a cash flow hedge that matured in April 2017. This interest rate swap called for this company to pay a fixed interest rate of 2.79% on the amortized notional value and receive a variable interest rate based on LIBOR on the amortized notional value. By entering into this interest rate swap agreement, this company converted the variable LIBOR component of certain of its outstanding borrowings to a fixed interest rate.
Other Derivative Instruments. The Company recognized gains (losses) on derivative instruments not designated as hedging instruments for the years ended December 31 as follows (in thousands):
The exchange option liability on subsidiary convertible senior notes terminated on June 1, 2017 as a consequence of the Spin-Off.
The Company enters and settles forward currency exchange, option and future contracts with respect to various foreign currencies. These contracts enable the Company to buy currencies in the future at fixed exchange rates, which could offset possible consequences of changes in currency exchange rates with respect to the Company’s business conducted outside of the United States. As of December 31, 2018, there were no outstanding forward currency exchange contracts.
Certain of the Company’s 50% or less owned companies have entered and settled positions in various exchange traded commodity swap, option and future contracts. As of December 31, 2018, there were no outstanding contracts.
10. FAIR VALUE MEASUREMENTS
The fair value of an asset or liability is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value and defines three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived from observable market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
The Company’s financial assets and liabilities as of December 31 that are measured at fair value on a recurring basis were as follows (in thousands):
______________________
(1)
Marketable security losses, net include losses of $12.4 million, gains of $0.1 million and losses of $18.5 million for the years ended December 31, 2018, 2017 and 2016, respectively, related to marketable security positions held by the Company as of December 31, 2018. Marketable security losses, net include gains of $0.1 million and losses of $18.5 million for the years ended December 31, 2017 and 2016, respectively, related to marketable security positions held by the Company as of December 31, 2017.
The estimated fair value of the Company’s other financial assets and liabilities as of December 31 were as follows (in thousands):
______________________
(1)
The estimated fair value includes the embedded conversion options on the Company’s 3.0% and 3.25% Convertible Senior Notes.
The fair value of the Company’s long-term debt and notes receivable from third parties was estimated based upon quoted market prices or by using discounted cash flow analyses based on estimated current rates for similar types of arrangements. It was not practicable to estimate the fair value of certain of the Company’s investments, at cost, in 50% or less owned companies because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. Considerable judgment was required in developing certain of the estimates of fair value and, accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The Company’s non-financial assets that were measured at fair value during the years ended December 31 were as follows (in thousands):
Investments, at equity, and advances in 50% or less owned companies. During the year ended December 31, 2018, the Company marked its investment in Cleancor to fair value as a consequence of the Company acquiring its partners’ 50% interest, resulting in a gain of $0.1 million, net of tax, based on the fair value of the acquired interest (see Note 2). In addition, During the year ended December 31, 2018, the company identified indicators of impairment in one of the Company’s other 50% or less owned companies and, as a consequence, recognized an impairment charge of $0.1 million for an other-than-temporary decline in fair value. The investment was determined to have an immaterial value.
During the year ended December 31, 2017, the Company identified indicators of impairment for its investment in VA&E based on their recent financial results. The Company evaluated the fair value of VA&E and determined that its assets and liabilities were carried at fair value except for property and equipment and certain deferred tax assets. Based on this evaluation, the Company concluded its carrying value was in excess of fair value and the impairment was other than temporary resulting in an impairment charge of $0.9 million, net of tax, of its equity investment.
11. STOCK REPURCHASES AND DIVIDENDS
SEACOR’s Board of Directors previously approved a securities repurchase plan that authorizes the Company to acquire its Securities, which may be acquired through open market purchases, privately negotiated transactions or otherwise, depending on market conditions.
During the years ended December 31, 2018, 2017 and 2016, the Company acquired no shares of Common Stock for treasury under the Securities repurchase plan. As of December 31, 2018, SEACOR had remaining authorization for Securities repurchases of $66.7 million.
During the years ended December 31, 2017 and 2016, the Company acquired for treasury 212,659 and 47,455 shares of Common Stock, respectively, for aggregate purchase prices of $12.3 million and $2.4 million, respectively, from its employees to cover their tax withholding obligations related to share award transactions. These shares were purchased in accordance with the terms of the Company’s Share Incentive Plans and not pursuant to the repurchase authorizations granted by SEACOR’s Board of Directors.
On June 1, 2017, the Company completed the Spin-off of SEACOR Marine by means of a dividend of all of the issued and outstanding common stock of SEACOR Marine to SEACOR’s shareholders. In the Spin-off, holders of SEACOR Common Stock received approximately 1.005 shares of SEACOR Marine common stock for each share of SEACOR Common Stock held as of the record date for the Spin-off.
On December 20, 2017, the Company distributed 3,977,135 shares of Dorian common stock with a value of $31.4 million (based on the closing share price on that date) to its stockholders with each holder of Common Stock receiving approximately 0.2215 shares of Dorian common stock for each share of SEACOR Common Stock held as of the record date for such distribution. The Compensation Committee of the Board of Directors elected, at its discretion, to distribute shares of Dorian on the Company’s restricted shares outstanding on the record date rather than depositing the shares in escrow pending the lapsing of restrictions.
12. NONCONTROLLING INTERESTS IN SUBSIDIARIES
Noncontrolling interests in the Company’s consolidated subsidiaries as of December 31 were as follows (in thousands):
SEA-Vista. SEA-Vista owns and operates the Company’s fleet of U.S.-flag petroleum and chemical carriers used in the U.S. coastwise trade of crude oil, petroleum and specialty chemical products. As of December 31, 2018 and 2017, the net assets of SEA-Vista were $303.4 million and $262.3 million, respectively. During the year ended December 31, 2018, the net income of SEA-Vista was $51.2 million, of which $25.1 million was attributable to noncontrolling interests. During the year ended December 31, 2017, the net income of SEA-Vista was $45.9 million, of which $22.5 million was attributable to noncontrolling interests. During the year ended December 31, 2016, the net income of SEA-Vista was $36.3 million, of which $17.8 million was attributable to noncontrolling interests.
13. SAVINGS, MULTI-EMPLOYER AND DEFINED BENEFIT PENSION PLANS
SEACOR Savings Plan. The Company provides a defined contribution plan (the “Savings Plan”) for its eligible U.S.-based employees. The Company’s contribution to the Savings Plan is limited to 3.5% of an employee’s wages depending upon the employee’s level of voluntary wage deferral into the Savings Plan and is subject to annual review by the Board of Directors. The Company’s Savings Plan costs were $2.0 million, $1.8 million and $1.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.
SEACOR Deferred Compensation Plan. In 2005, the Company established a non-qualified deferred compensation plan, as amended (the “Deferred Compensation Plan”) to provide certain highly compensated executives and non-employee directors the ability to defer receipt of up to 75% of their cash base salary and up to 100% of their cash bonus. Each participant’s compensation deferrals are credited to a bookkeeping account and, subject to certain restrictions, each participant may elect to have their cash deferrals in such account indexed against one or more investment options, solely for purposes of determining amounts payable under the Deferred Compensation Plan (the Company is not obligated to actually invest any deferred amounts in the selected investment options).
Participants may receive a distribution of deferred amounts, plus any earnings thereon (or less any losses), on a date specified by the participant or, if earlier, upon a separation from service or upon a change of control (as defined). All distributions to participants following a separation from service shall be in the form of a lump sum, except if such separation qualifies as “retirement” under the terms of the plan, in which case it may be paid in installments if previously elected by the participant. Distributions to “Key Employees” upon a separation from service (other than due to death) will not commence until at least six months after the separation from service. Participants are always 100% vested in the amounts they contribute to their Deferred Compensation Plan accounts. The Company, at its option, may contribute amounts to participants’ accounts, which may be subject to vesting requirements.
The obligations of the Company to pay deferred compensation under the Deferred Compensation Plan are general unsecured obligations of the Company and rank equally with other unsecured indebtedness of the Company that is outstanding from time to time. As of December 31, 2018 and 2017, the Company had obligations of $0.6 million and $0.5 million, respectively, related to the Deferred Compensation Plan that are included in the accompanying consolidated balance sheets as deferred gains and other liabilities. The total amount of the Company’s obligation under the Deferred Compensation Plan will vary depending upon the level of participation by participants and the amount of compensation that participants elect to defer under the plan. The duration of the Deferred Compensation Plan is indefinite (subject to the Board of Directors’ discretion to amend or terminate the plan).
AMOPP and SPP. Certain subsidiaries of the Company are participating employers in two industry-wide, multi-employer defined benefit pension plans, the American Maritime Officers Pension Plan (the “AMOPP” - EIN: 13-1936709) and the Seafarers Pension Plan (the “SPP” - EIN: 13-6100329). The Company’s participation in these plans relates to certain employees of the Company’s Ocean Services business segment. During the years ended December 31, 2018, 2017 and 2016, the Company made contributions of $2.5 million, $2.4 million and $1.8 million, respectively in the aggregate to the AMOPP and SPP.
Under federal pension law, the AMOPP was deemed in critical status for the 2009 and 2010 plan years. The AMOPP was frozen in January 2010 and a ten year rehabilitation plan was adopted by the AMOPP trustees in February 2010 whereby benefit changes and increased contributions by participating employers were expected to improve the funded status of the AMOPP. On December 28, 2012, the AMOPP was elevated to endangered status primarily as a result of favorable investment performance and the rehabilitation plan adopted by the AMOPP trustees. Based on an actuarial valuation performed as of September 30, 2017, the latest period for which an actuarial valuation is available, if the Company chose to fully withdraw from the AMOPP at that time, its withdrawal liability would have been $34.4 million. That liability may change in future years based on various factors, primarily employee census. As of December 31, 2018, the Company had no intention to withdraw from the AMOPP and no deficit amounts have been invoiced. Depending upon the results of the future actuarial valuations and the ten year rehabilitation plan, it is possible that the AMOPP will experience further funding deficits, requiring the Company to recognize additional payroll related operating expenses in the periods invoices are received or contribution levels are increased.
The SPP was neither in endangered or critical status for the 2016 plan year, the latest period for which a report is available, as the SPP was fully funded.
Multi-Employer Defined Contribution Plans. In accordance with collective bargaining agreements between the Company and the American Maritime Officers Union, the latest of which expires on August 31, 2019, the Seafarers International Union, the latest of which expires on July 31, 2022, the Masters Mates and Pilots Union, which expires July 2, 2022 and the Marine Engineer Benefit Association, which expires July 2, 2022, the Company makes periodic contributions to various defined contribution and 401(k) plans for the benefit of the participants. The contributions to these plans are expensed as incurred and are included in operating expenses in the accompanying consolidated statements of income (loss). During the years ended December 31, 2018, 2017 and 2016, the Company made contributions of $1.0 million, $1.0 million and $0.3 million, respectively, in the aggregate to these plans. During the years ended December 31, 2018, 2017 and 2016, none of the Company’s contributions to any of these plans exceeded 5% of total contributions to each plan and the Company did not pay any material surcharges. As of December 31, 2018, there is no required minimum future contributions to these plans. The Company’s obligations for future contributions are based upon the number of employees subject to the collective bargaining agreements, their rates of pay and the number of days worked. Future negotiations of collective bargaining agreements between the Company and the participating unions, including the contribution levels for these plans or any additional plans that may come into existence, may result in increases to the Company’s wage and benefit costs and those increases may be material.
ISH Retirement Plan. ISH sponsored a defined benefit pension plan (the “ISH Retirement Plan”) covering non-union employees prior to its acquisition by the Company on July 3, 2017 (see Note 2). The ISH Retirement Plan generally provided participants with benefits based on years of service and compensation levels for participants hired prior to September 1, 2006. From that date forward, the benefit was calculated prospectively under a cash balance formula with pay credits based on age plus service years and interest credits based on an as defined U.S. treasury rate. Effective July 3, 2017, in conjunction with the Plan, an amendment was made to the ISH Retirement Plan that fully vested all active participants as of January 1, 2017 and froze the retirement benefits effective August 31, 2017. As of August 31, 2017, all retirement benefits earned were fully preserved and will be paid in accordance with the ISH Retirement Plan and legal requirements.
The funded status of the ISH Retirement Plan and the related pension income (expense) as of and for the years ended December 31, were as follows (in thousands):
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(1)
Included in other assets in the accompanying consolidated balance sheets.
(2)
For 2017, pension income for the period July 3, 2017 through December 31, 2017.
The significant assumptions used in determining the projected benefit obligation as of December 31, and pension income (expense) for the years ended December 31, were as follows:
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(1)
For the period July 3, 2017 through August 31, 2017, the date retirement benefits were frozen.
The future benefit payments expected to be paid in each of the next five fiscal years are as follows (in thousands):
14. SHARE BASED COMPENSATION
Share Incentive Plans. SEACOR’s stockholders approved the 2014 Share Incentive Plan to provide for the grant of options to purchase shares of Common Stock, stock appreciation rights, restricted stock, stock awards, performance awards and restricted stock units to non-employee directors, key officers and employees of the Company. The 2014 Share Incentive Plan superseded the 2007 Share Incentive Plan (collectively including all predecessor plans, the “Share Incentive Plans”). The Compensation Committee of the Board of Directors administers the Share Incentive Plans. A total of 6,650,000 shares of Common Stock have been authorized for grant under the Share Incentive Plans. All shares issued pursuant to such grants are newly issued shares of Common Stock. The exercise price per share of options granted cannot be less than 100% of the fair market value of Common Stock at the date of grant under the Share Incentive Plans. Grants to date have been limited to stock awards, restricted stock, restricted stock units and options to purchase shares of Common Stock.
Restricted stock typically vests from one to five years after date of grant and options to purchase shares of Common Stock typically vest and become exercisable from one to five years after date of grant. Options to purchase shares of Common Stock granted under the Share Incentive Plans expire no later than the tenth anniversary of the date of grant. In the event of a participant’s death, retirement, termination by the Company without cause or a change in control of the Company, as defined in the Share Incentive Plans, restricted stock vests immediately and options to purchase shares of Common Stock vest and become immediately exercisable.
Employee Stock Purchase Plans. During the year ended December 31, 2018, SEACOR’s stockholders approved an amendment to the 2009 Employee Stock Purchase Plan (collectively including all predecessor plans, the “Employee Stock Purchase Plans”) increasing the shares of Common Stock available for issuance under the plan by 300,000 and extending the term to ten years from the date of the Company’s 2018 annual meeting of stockholders. The Employee Stock Purchase Plans permit the Company to offer Common Stock for purchase by eligible employees at a price equal to 85% of the lesser of (i) the fair market value of Common Stock on the first day of the offering period or (ii) the fair market value of Common Stock on the last day of the offering period. Common Stock is made available for purchase under the Employee Stock Purchase Plans for six-month offering periods. The Employee Stock Purchase Plans are intended to comply with Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”), but is not intended to be subject to Section 401(a) of the Code or the Employee Retirement Income Security Act of 1974. The Board of Directors of SEACOR may amend or terminate the Employee Stock Purchase Plans at any time; however, no increase in the number of shares of Common Stock reserved for issuance under the Employee Stock Purchase Plans may be made without stockholder approval. A total of 900,000 shares of Common Stock have been approved for purchase under the Employee Stock Purchase Plans with all shares issued from those held in treasury.
Share Award Transactions. The following transactions have occurred in connection with the Company’s share based compensation plans during the years ended December 31:
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(1)
On June 2, 2017, the Company granted 846,353 stock options to existing option holders under make-whole provisions upon the Spin-off.
(2)
Shares available for future grants and ESPP purchases were adjusted on June 2, 2017 to reflect the Spin-off in accordance with make-whole provisions of the plans.
During the years ended December 31, 2018, 2017 and 2016, the Company recognized $4.0 million, $32.5 million and $14.1 million, respectively, of compensation expense related to stock awards, stock options, employee stock purchase plans purchases and restricted stock (collectively referred to as “share awards”). During 2017, compensation expense related to stock awards included $16.6 million associated with the Spin-off and the accelerated vesting of incentive share awards in advance of changes in the U.S. federal income tax code. As of December 31, 2018, the Company had approximately $9.0 million in total unrecognized compensation costs of which $3.2 million and $2.6 million are expected to be recognized in 2019 and 2020, respectively, with the remaining balance recognized through 2023.
The weighted average values of grants under the Company’s Share Incentive Plans were $29.72, $37.20 and $31.31 for the years ended December 31, 2018, 2017 and 2016, respectively. The fair value of each option granted during the years ended December 31, 2018, 2017 and 2016, is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (a) no dividend yield, (b) weighted average expected volatility of 26.6%, 25.5% and 26.5%, respectively, (c) weighted average discount rates of 2.78%, 1.92% and 1.59%, respectively, and (d) expected lives of 5.58 years, 5.59 years and 6.25 years, respectively.
During the year ended December 31, 2018, the number of shares and the weighted average grant price of restricted stock transactions were as follows:
During the year ended December 31, 2018, no restricted stock vested. During the years ended December 31, 2017 and 2016, the total grant date fair value of restricted stock that vested was $26.1 million and $10.8 million, respectively.
During the year ended December 31, 2018, the number of shares and the weighted average exercise price on stock option transactions were as follows:
During the years ended December 31, 2018, 2017 and 2016, the aggregate intrinsic value of exercised stock options was $3.9 million, $5.6 million and $1.4 million, respectively. As of December 31, 2018, the weighted average remaining contractual term for total outstanding stock options and vested/exercisable stock options was 5.23 and 4.00 years, respectively. As of December 31, 2018, the aggregate intrinsic value of all options outstanding and all vested/exercisable options outstanding was $2.0 million and $1.7 million, respectively.
15. RELATED PARTY TRANSACTIONS
The Company manages barge pools as part of its Inland Services segment. Pursuant to the pooling agreements, operating revenues and expenses of participating barges are combined and the net results are allocated on a pro-rata basis based on the number of barge days contributed by each participant. Companies controlled by Mr. Fabrikant, the Executive Chairman and Chief Executive Officer of SEACOR, and trusts established for the benefit of Mr. Fabrikant’s children, own barges that participate in the barge pools managed by the Company. Mr. Fabrikant and his affiliates were participants in the barge pools prior to the acquisition of SCF Marine Inc. by SEACOR in 2000. During the years ended December 31, 2018, 2017 and 2016, Mr. Fabrikant and his affiliates earned $0.8 million, $0.5 million and $0.8 million, respectively, of net barge pool results (after payment of $0.1 million, $0.1 million and $0.1 million, respectively, in management fees to the Company). As of December 31, 2018 and 2017, the Company owed Mr. Fabrikant and his affiliates $0.5 million and $0.5 million, respectively, for undistributed net barge pool results.
Mr. Fabrikant is a director of SEACOR Marine. The Company has provided certain transition services to SEACOR Marine related to the Spin-off and the total amount earned from these transition services during the years ended December 31, 2018 and 2017 was $4.6 million and $3.5 million, respectively. As of December 31, 2018, SEACOR Marine owed the Company $0.5 million for these services and other costs and expenses and is included in other receivables in the accompanying consolidated balance sheets.
16. COMMITMENTS AND CONTINGENCIES
The Company's capital commitments as of December 31, 2018 by year of expected payment were as follows (in thousands):
Ocean Services' capital commitments included an interest in two foreign- flag rail ferries and other equipment and vessel improvements. Inland Services’ capital commitments included two inland river towboats and other equipment and vessel and terminal improvements. Subsequent to December 31, 2018, the Company committed to purchase additional property and equipment for $3.9 million.
During 2012, the Company sold National Response Corporation (“NRC”), NRC Environmental Services Inc., SEACOR Response Ltd., and certain other subsidiaries to J.F. Lehman & Company, a private equity firm (the “SES Business Transaction”).
On December 15, 2010, O’Brien’s Response Management L.L.C. (“ORM”) and NRC were named as defendants in one of the several “master complaints” filed in the overall multi-district litigation relating to the Deepwater Horizon oil spill response and clean-up in the Gulf of Mexico, which is currently pending in the U.S. District Court for the Eastern District of Louisiana (the “MDL”). The “B3” master complaint naming ORM and NRC asserted various claims on behalf of a putative class against multiple defendants concerning the clean-up activities generally and the use of dispersants specifically. Both prior to and following the filing of the aforementioned “B3” master complaint, individual civil actions naming the Company, ORM, and/or NRC alleging B3 exposure-based injuries and/or damages were consolidated with the MDL and stayed pursuant to court order. On February 16, 2016, all but eleven “B3” claims against ORM and NRC were dismissed with prejudice (the “B3 Dismissal Order”). On August 2, 2016, the Court granted an omnibus motion for summary judgment as it concerns ORM and NRC in its entirety, dismissing the remaining eleven plaintiffs’ claims against ORM and NRC with prejudice (the “Remaining Eleven Plaintiffs’ Dismissal Order”). The deadline to appeal both of these orders has expired. At present, there is only one remaining claim. On April 8, 2013, the Company, ORM, and NRC were named as defendants in William and Dianna Fitzgerald v. BP Exploration et al., No. 2:13-CV-00650 (E.D. La.) (the “Fitzgerald Action”), which is a suit by a husband and wife whose son allegedly participated in the clean-up effort and became ill as a result of his exposure to oil and dispersants. While the decedent in the Fitzgerald Action’s claims against ORM and NRC were dismissed by virtue of the Remaining Eleven Plaintiffs’ Dismissal Order, the claim as against the Company remains stayed.
Following a status conference with the Court on February 17, 2017, the Court issued several new pretrial orders in connection with the remaining claims in the MDL. Various submissions followed, and on July 18, 2017, the Court issued an order dismissing all remaining “B3” claims in the MDL with prejudice, with the exception of certain claims specifically listed on an exhibit annexed to the order (the “Master MDL B3 Dismissal Order”). Nathan Fitzgerald, the decedent in the Fitzgerald Action, was listed on the exhibit annexed to the Master MDL B3 Dismissal Order. The Court has since issued a list of those plaintiffs compliant with its previous orders and thus whose “B3” claims remain pending; the last version of this compliance list was issued on April 6, 2018 and the claim for the decedent in the Fitzgerald Action remains listed as a pending claim. On April 9, 2018, the Court issued an order requiring remaining “B3” plaintiffs to submit particularized statements of claim, and such a statement was submitted on behalf of the decedent in the Fitzgerald Action on July 9, 2018. On September 20, 2018, the Court issued an order indicating which statements of claim were sufficient and which were not, requiring the latter plaintiffs to show cause; the statement submitted on behalf of the decedent in the Fitzgerald Action was deemed sufficient, requiring nothing further at the time of the order. The Company is unable to estimate the potential exposure, if any, resulting from this matter, to the extent it remains viable, but believes it is without merit and does not expect that it will have a material effect on its consolidated financial position, results of operations or cash flows.
On February 18, 2011, Triton Asset Leasing GmbH, Transocean Holdings LLC, Transocean Offshore Deepwater Drilling Inc., and Transocean Deepwater Inc. (collectively “Transocean”) named ORM and NRC as third-party defendants in a Rule 14(c) Third-Party Complaint in Transocean’s own Limitation of Liability Act action, which is part of the overall MDL, tendering to ORM and NRC the claims in the “B3” master complaint that have already been asserted against ORM and NRC. Various contribution and indemnity cross-claims and counterclaims involving ORM and NRC were subsequently filed. The Company believes that the potential exposure, if any, resulting therefrom has been reduced as a result of the various developments in the MDL, including the B3 Dismissal Order and Remaining Eleven Plaintiffs’ Dismissal Order, and does not expect that these matters will have a material effect on its consolidated financial position, results of operations or cash flows.
Separately, on March 2, 2012, the Court announced that BP Exploration and BP America Production Company (“BP America”) and (collectively “BP”) and the Plaintiffs had reached an agreement on the terms of two proposed class action settlements that will resolve, among other things, Plaintiffs’ economic loss and property damage claims and clean-up related claims against BP. The Company, ORM, and NRC had no involvement in negotiating or agreeing to the terms of either settlement, nor are they parties or signatories thereto. The BP settlement pertaining to personal injury claims (the “Medical Settlement”) purported to resolve the “B3” claims asserted against BP and also established a right for class members to pursue individual claims against BP (but not ORM or NRC) for later-manifested physical conditions. The back-end litigation-option (“BELO”) provision of the Medical Settlement has specifically-delineated procedures and limitations, should any “B3” class member seek to invoke their BELO right. For example, there are limitations on the claims and defenses that can be asserted, as well as on the issues, elements, and proofs that may be litigated at any trial and the potential recovery for any Plaintiff. Notwithstanding that the Company, ORM, and NRC are listed on the Medical Settlement’s release as to claims asserted by Plaintiffs, the Medical Settlement still permits BP to seek indemnity from any party, to the extent BP has a valid indemnity right. The Medical Settlement was approved by the Court on January 11, 2013 and made effective on February 12, 2014. As of early February 2019, BP has tendered approximately 700 claims invoking BELO rights for indemnity pursuant to service contracts to ORM and approximately 70 such claims to NRC. ORM and NRC have rejected BP’s contention that BP is entitled to defense and indemnity coverage from ORM and/or NRC for any of the “B3” claims referenced in BP’s indemnity demands. Moreover, the Company believes that (1) ORM has contractual indemnity coverage for the above-referenced BELO claims through its separate agreements with sub-contractors that worked for ORM during the Deepwater Horizon oil spill response and (2) NRC’s services contract with BP does not provide for broad contractual indemnity as BP contends. The Company, ORM, and NRC are of the belief that BP’s indemnity demands with respect to any “B3” claims, including those involving Medical Settlement class members invoking BELO rights, are untimely and improper and vigorously defend its interest. Overall, however, the Company believes that both settlements have reduced the potential exposure in connection with the various cases relating to the Deepwater Horizon oil spill response and clean-up. The Company is unable to estimate the potential exposure, if any, resulting from these claims, but does not expect that they will have a material effect on its consolidated financial position, results of operations or cash flows.
In the ordinary course of the Company’s business, it may agree to indemnify its counterparty to an agreement. If the indemnified party makes a successful claim for indemnification, the Company would be required to reimburse that party in accordance with the terms of the indemnification agreement. Indemnification agreements generally, but not always, are subject to threshold amounts, specified claim periods and other restrictions and limitations.
In connection with the SES Business Transaction, the Company remains contingently liable for work performed in connection with the Deepwater Horizon oil spill response. Pursuant to the agreement governing the sale, the Company’s potential liability to the purchaser may not exceed the consideration received by the Company for the SES Business Transaction. The Company is currently indemnified under contractual agreements with BP for the potential “B3” liabilities relating to cleanup work performed in connection with the Deepwater Horizon oil spill response; this indemnification is unrelated to, and thus not impacted by, the indemnification BP has demanded for the BELO cases referenced above.
In the ordinary course of its business, the Company becomes involved in various other litigation matters including, among other things, claims by third parties for alleged property damages and personal injuries. Management has used estimates in determining the Company’s potential exposure to these matters and has recorded reserves in its financial statements related thereto where appropriate. It is possible that a change in the Company’s estimates of that exposure could occur, but the Company does not expect such changes in estimated costs would have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
As of December 31, 2018, the Company leases in three U.S.-flag petroleum and chemical carriers, five U.S.-flag harbor tugs, four U.S.-flag PCTCs, 48 inland river dry-cargo barges, four inland river towboats, six inland river harbor boats and certain facilities and other equipment. These leasing agreements have been classified as operating leases for financial reporting purposes and related rental fees are charged to expense over the lease terms. The leases generally contain purchase and lease renewal options or rights of first refusal with respect to the sale or lease of the equipment. As of December 31, 2018, the remaining lease terms of the U.S.-flag petroleum and chemical carriers, which are subject to subleases, have remaining durations from 1 to 92 months. The lease terms of the other equipment range in duration from 1 to 207 months. Certain of the equipment leases are the result of sale-leaseback transactions with finance companies (see Note 3) and certain of the gains arising from such sale-leaseback transactions have been deferred in the accompanying consolidated balance sheets and are being amortized as reductions in rental expense over the lease terms (see Note 1).
Total rental expense for the Company’s operating leases during the years ended December 31, 2018, 2017 and 2016 was $52.8 million, $42.8 million and $35.2 million, respectively. For operating leases with a remaining term in excess of one year as of December 31, 2018, the future minimum payments in the years ended December 31 were as follows (in thousands):
____________________
(1)
The total minimum offsetting payments to be received under existing non-cancelable subleases subject to these future minimum lease payments.
As of December 31, 2018, arrangements with remaining terms in excess of one year under which the Company earns lease revenues included the bareboat charter of three U.S.-flag petroleum and chemical carriers, the time charter of four U.S.-flag petroleum and chemical carriers, four U.S.-flag PCTCs, three inland river towboats and one U.S.-flag offshore tug, and the lease of various other property and equipment. As of December 31, 2018, future minimum lease revenues from these arrangements in the years ended December 31 were as follows (in thousands):
____________________
(1)
The total payments to be made under existing non-cancelable leases for the property and equipment subject to these future minimum lease revenues.
17. SEGMENT INFORMATION
The following tables summarize the operating results, capital expenditures and assets of the Company’s reportable segments.
______________________
(1)
Cash and near cash assets includes cash, cash equivalents, restricted cash, restricted cash equivalents, marketable securities and construction reserve funds.
______________________
(1)
Costs of goods sold related to product sales was $2.1 million.
______________________
(1)
Cash and near cash assets includes cash, cash equivalents, restricted cash, restricted cash equivalents, marketable securities and construction reserve funds.
______________________
(1)
Cash and near cash assets includes cash, cash equivalents, restricted cash, restricted cash equivalents, marketable securities and construction reserve funds.
18. DISCONTINUED OPERATIONS
The Company’s discontinued operations consist of SEACOR Marine and ICP, as following the Spin-off and sale, respectively, the Company has no continuing involvement in either of these businesses (see Note 1). Summarized selected operating results of the Company’s discontinued operations for the years ended December 31 were as follows (in thousands):
19. SUPPLEMENTAL INFORMATION FOR STATEMENTS OF CASH FLOWS
Supplemental information for the years ended December 31 was as follows (in thousands):
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected financial information for interim quarterly periods is presented below (in thousands, except share data). Earnings per common share of SEACOR Holdings Inc. are computed independently for each of the quarters presented and the sum of the quarterly earnings per share may not necessarily equal the total for the year.
SEACOR HOLDINGS INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2018, 2017 and 2016
(in thousands)
______________________
(1)
Trade receivable amounts deemed uncollectible that were removed from accounts receivable and allowance for doubtful accounts.
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report:
1., 2. and audited financial statements for Trailer Bridge, Inc. as of and for three years in the period ended December 31, 2018. Financial Statements and Financial Statement Schedules - See Index to Consolidated Financial Statements and Financial Statement Schedule of this Form 10-K.
3. Exhibits
*
Incorporated herein by reference as indicated.
+
Management contracts or compensatory plans or arrangements required to be filed as an Exhibit pursuant to Item 15 (b) of the rules governing the preparation of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form 10-K for the fiscal year ended December 31, 2018, to be signed on its behalf by the undersigned, and in the capacities indicated, thereunto duly authorized.
SEACOR Holdings Inc. (Registrant)
By:
/s/ BRUCE WEINS
Bruce Weins, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: February 26, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Trailer Bridge, Inc.
Jacksonville, Florida
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Trailer Bridge, Inc., (the Company), as of December 31, 2018 and 2017, the related statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
/s/ Pivot CPAs
We have served as the Company’s auditor since 2012.
Ponte Vedra Beach, Florida
February 14, 2019
INDEPENDENT AUDITOR’S REPORT
Board of Directors and Stockholders
Trailer Bridge, Inc.
We have audited the accompanying financial statements of Trailer Bridge, Inc., (the “Company”), which comprise the statements of operations and cash flows for the years ended December 31, 2016, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of its operations and cash flows of Trailer Bridge, Inc., for the year ended December 31, 2016 in accordance with accounting principles generally accepted in the United States of America.
/s/ Pivot CPAs
Ponte Vedra Beach, Florida
February 14, 2019
TRAILER BRIDGE, INC.
BALANCE SHEETS
(in thousands, except for share data)
The accompanying notes are an integral part of these financial statements
TRAILER BRIDGE, INC.
STATEMENTS OF OPERATIONS
(in thousands)
The accompanying notes are an integral part of these financial statements
TRAILER BRIDGE, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except for share data)
The accompanying notes are an integral part of these financial statements
TRAILER BRIDGE, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these financial statements
TRAILER BRIDGE, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands, except for share data)
The accompanying notes are an integral part of these financial statements
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Trailer Bridge, Inc. (the "Company") is a domestic trucking and marine transportation company with contract and common carrier authority. Highway transportation services are offered in the continental United States, while marine transportation is offered between Jacksonville, Florida, San Juan, Puerto Rico, Puerto Plata, Dominican Republic and other Caribbean islands. The Company also earns revenue from chartering its vessels that are not in liner service to third party operators.
Cash and Cash Equivalents
The Company considers cash on hand and all highly liquid amounts on deposit with financial institutions with original maturities of three months or less to be cash equivalents. At times, such amounts on deposit may be in excess of the F.D.I.C. insurance limits of $250,000 per depositor at each financial institution. The Company had cash in excess of federally insured limits at December 31, 2018 of approximately $18.9 million.
Trade Receivables
The Company performs periodic credit evaluations of its customer’s financial condition and as a condition of the extension of credit customers agree that the Company shall have the right to exercise a lien against any shipment tendered. Receivables are generally due within 30 days. Credit losses have been within management’s expectations. The Company records a monthly provision based on specific known collectability problems, historical losses, and current economic information. It is the Company’s policy to write off receivables once it is determined that additional efforts of collection will not result in the collection of the receivable.
Property and Equipment
Property and equipment were restated as of April 1, 2012 to their estimated fair value in accordance with reorganization. Property and equipment acquired after April 1, 2012 are recorded at cost. Property and equipment are depreciated to their estimated salvage values on a straight-line method based on the following estimated useful lives:
Leasehold improvements and equipment under capital leases are amortized over the lesser of the estimated lives of the asset or the lease terms.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by net undiscounted cash flows expected to be generated by the assets. An impairment loss is recognized if the carrying value exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
The Company had approximately $8.8 million in acquisitions in progress at December 31, 2018 which includes approximately $5.5 million related to the purchase of new chassis and containers not placed in service.
Revenue Recognition and Classification
In accordance with Accounting Standard Codification (“ASC”) 605-20-25-13, “Services for Freight-in-Transit at the End of a Reporting Period”, the Company recognizes voyage revenue ratably over the duration of a voyage based on the relative transit time in each reporting period commonly referred to as the “percentage of completion” method. Voyage expenses are recognized as incurred. The Company has in place vessel fuel surcharges that are stipulated in the Company’s tariff in addition to a quarterly fluctuating fuel scale at predetermined levels based upon the price of fuel. The fuel surcharge is distinguished from freight revenues and is reported in the Company’s operating revenue on the percentage of complete method. Fuel surcharge was approximately $27.5 million, $24.7 million and $24.9 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Net demurrage and charter-hire revenue are included in Operating Revenues. Net demurrage is a charge assessed for failure to return empty freight equipment on time less a demurrage related allowance for bad debt. Charter-hire is rental revenue for vessels not in use in a liner service. The Company recognizes demurrage and charter-hire revenue based on negotiated fees included in the contracts of its customers. These amounts are computed daily and recognized as incurred.
Also included in Operating Revenue, the Company recognizes revenue earned on its logistics business upon delivery. Additionally, logistics revenue is reported on a gross basis versus a net basis in accordance with ASC 605-45, “Revenue Recognition - Principal Agent Considerations”. The Company reports logistics revenue on a gross basis because it bears the risks and benefits associated with revenue-generated activities by, among other things, acting as a principal in the transaction, establishing prices, managing all aspects of the shipping process, and bearing credit risk with customer collections. Logistics revenue was approximately $25.3 million, $19.1 million and $12.7 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Income Taxes
ASC 740-10 “Accounting for Uncertainty in Income Taxes” prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Under ASC 740-10, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. In the ordinary course of business there is inherent uncertainty in quantifying the Company’s income tax positions. The Company assesses its income tax positions and records tax benefits for all years subject to examination based on management’s evaluation of the facts, circumstances and information available at the reporting date.
For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company recognizes the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized in the Company’s financial statements.
Dry-dock Costs
The Company expenses maintenance and repair costs, including regulatory dry-docking of its vessels, as incurred.
Advertising Costs
The Company’s advertising costs are expensed as incurred and recorded as part of other operating expenses in the statements of operations. Advertising costs for the years ended December 31, 2018, 2017, and 2016 was $278,490, $92,214 and $19,605, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). This amendment supersedes existing accounting standards and creates a single framework for revenue recognition. ASU 2014-09 is effective for fiscal years beginning after December 15, 2018 and requires either a retrospective application to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the standard recognized at the date of adoption. The Company has significantly completed its evaluation of the new standard and does not expect the adoption of ASU 2014-09 to have a material impact on the Company’s financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 provides specific guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. This guidance is effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The adoption of this guidance requires a retrospective transition method to each period presented. The Company does not expect the adoption of ASU 2016-18 will have a material impact on the Company's financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Subtopic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross versus net. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. The effective date of this new standard is the same as ASU No. 2014-09 discussed above. The Company does not expect the adoption of ASU 2016-08 to have a material impact on the Company’s financial statements.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The amendment requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. ASU 2016-02 will also require disclosures to clarify the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years beginning after December 15, 2019 and the standard will be adopted using a modified retrospective transition method. The Company is currently assessing the impact that this standard will have on its financial statements.
2. RESTRICTED CASH
During October 2013, legislation was passed in Puerto Rico prohibiting the Puerto Rico Port Authority from charging a shipping company an enhanced security scan fee for scanning inbound cargo containers at the ports of Puerto Rico if the containers are not actually scanned. The Puerto Rico Port Authority appealed this ruling and a final decision from the appellate court upheld the original ruling. In accordance with an agreement with Puerto Rico, the Company agreed to deposit all payments made by its customers for scan fees on containers never scanned into an enhanced security escrow account. At December 31, 2016, the Company had recorded a scan fee liability of approximately $1.1 million for scan fee surcharges billed to customers for inbound containers that were never scanned. Approximately $0.9 million of the billed scan fee surcharges had been collected and deposited in an escrow account and recorded as restricted cash on the balance sheet at December 31, 2016. During 2017, the Company recognized the remaining $1.1 million liability in revenue.
3. WARRANTS
In connection with a reorganization during 2012, the Company authorized 12,098 and issued 8,590 Series A warrants and authorized 8,972 and issued 6,370 Series B warrants to certain holders of prepetition common stock. The fair value of the Series A and Series B warrants was $115.19 and $67.25 respectively, and was determined utilizing the Black-Scholes model based on a five year exercise term ending April 2, 2017, common stock price of $353.69, annual volatility of 60%, and a risk free interest rate of 1.06%.
All warrants were attached to the new common stock of the successor company. The Series A warrants entitle the holders to purchase, in the aggregate, up to 8,590 common shares at an exercise price of $747.66 per common share. The Series B warrants entitle the holders to purchase, in the aggregate, up to 6,370 shares of common stock at an exercise price of $1,424.07 per common share.
On April 2, 2017, all outstanding warrants expired without exercise and the balance of $1.4 million was transferred to Additional Paid In Capital.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, (in thousands):
Depreciation and amortization expense on property and equipment was approximately $7.6 million, $7.4 million, and $7.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31 (in thousands):
6. LONG TERM DEBT
(A) Secured Notes
At January 1, 2017 secured notes of approximately $3.6 million were held by entities holding approximately 93% of the Company’s common stock. The Company could, at its option, elect to pay interest on the secured notes entirely in cash or entirely in paid-in-kind (PIK) notes. Generally, interest paid with PIK notes was at an annual rate of 12% plus LIBOR. During 2017, the Company repurchased all remaining secured notes plus interest for cash in the amount of $3,641,961. The Company did not recognize gain or loss on the exchange.
The summary of the exchange and cash repurchases of secured notes is as follows (in thousands):
(B) Term Loan Credit Facility
The Company entered into a term loan credit facility with certain stockholders in an aggregate principal amount not to exceed $16.1 million. The credit facility, as amended October 10, 2016, matured in November 2020 and included interest at a fixed rate of 12%. On November 21, 2017 the Company repaid the credit facility in full and the facility was extinguished.
(C) Wells Fargo Credit Agreement
The Company entered into a credit agreement (the “Revolver”) with a total credit facility of $30 million. Generally, interest is at the LIBOR rate plus an applicable rate margin of from 3% to 3.50%. The Revolver is secured by a first lien on all Company assets excluding barges. Debt covenants as defined in the agreement include certain compliance, financial, and equipment covenants. The Revolver matures May 29, 2020.
Long term debt consists of the following at December 31, (in thousands):
7. INCOME TAXES
The American Jobs Creation Act of 2004 instituted an elective tonnage tax regime whereby a corporation may elect to pay an alternate tax on qualifying shipping activities of its U.S. flag vessels rather than the traditional federal corporate income tax on the taxable income from such vessels. The Company made a Section 1354 election to be taxed under this alternate tonnage tax regime on its 2007 federal tax return. This election applies to all subsequent federal income tax returns unless the Company revokes this tax treatment.
As a result of the Section 1354 election, the Company is not able to utilize its Federal net operating losses (NOL’s) for qualifying taxable income under the alternate tonnage tax regime, however NOL’s may be utilized for taxable income from other services not generated from qualifying shipping activities and reported as traditional federal taxable income. As of December 31, 2018, the Company has available federal NOL’s related to non-tonnage tax eligible activities of approximately $72.3 million. Taking into consideration continuing operating losses related to non-tonnage tax eligible activities, the Company determined that it is not more likely than not that available federal NOL’s and other net deferred tax assets will be utilized and therefore has fully reserved its net deferred tax assets, including Federal NOL’s as of December 31, 2018 and 2017.
States do not recognize the alternate tonnage tax election and therefore the Company files traditional state corporate income tax returns. The Company had state NOL’s of approximately $36.7 million and $49.8 million at December 31, 2018 and 2017, respectively, which began expiring in 2015 and will continue through 2036. Taking into consideration recent operating losses, the Company determined that it is not more likely than not that available state NOL’s will be utilized and therefore has fully reserved the deferred tax assets related to the state NOL’s as of December 31, 2018 and 2017.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the Tax Reform Act) was enacted into law by President Trump. The Tax Reform Act significantly revised the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%, and changes in business-related exclusions, and deductions and credits. During 2017 as a result of the rate change, the Company reduced its net deferred income tax assets by approximately $8.7 million with an offsetting reduction to its net deferred income tax reserve.
Puerto Rico
On June 30, 2013, Puerto Rico enacted the Tax Burden Adjustment and Redistribution Act (TBARA). TBARA impacted income tax and imposed a new tax on gross income as part of the alternative minimum tax (AMT) regime. On February 18, 2014, the Company submitted a request to the Puerto Rico Treasury Department for relief from the new AMT regime. In January 2015, the Company entered into a Closing Agreement with the Puerto Rico Treasury Department in which partial relief was granted from the new AMT regime for tax years through 2015. During 2016, certain provisions of TBARA were held to be unconstitutional by the First Circuit Court of Appeals of Puerto Rico and the Company calculated its 2018 and 2017 Puerto Rico tax liability after adjusting for the portions of the TBARA Act that were found to be unconstitutional.
The Company had Puerto Rico NOL’s of approximately $81 million and $84 million at December 31, 2018 and 2017, respectively, which begin expiring in 2023 through 2024. Taking into consideration recent operating losses, the Company determined that it is not more likely than not that available Puerto Rico NOL’s will be utilized and therefore has fully reserved the Puerto Rico NOL’s as of December 31, 2018 and 2017.
The provision for income taxes is comprised of the following for the years ended December 31, (in thousands):
The Company files U.S. federal and certain applicable U.S. state income tax returns. The Company also files an income tax return in the Commonwealth of Puerto Rico. Generally, the Company is no longer subject to U.S. federal tax examinations for years before the Company’s 2014 tax year. Management has reviewed and evaluated the relevant technical merits of each of its tax positions and determined that there are no uncertain tax positions that would have a material impact on these financial statements.
Deferred income taxes reflect the net tax effect of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income taxes. Under the tonnage tax method, temporary differences do not apply.
Significant components of U.S. federal and state deferred tax assets and liabilities as of December 31, are as follows (in thousands):
8. EMPLOYEE BENEFITS
The Company has a 401(k) Plan, which covers substantially all employees in the United States. Participants are permitted to make contributions of up to 25% of their compensation not to exceed certain limitations. The Company may make discretionary matching contributions to the Plan. In addition, the Company has a 165(e) Plan that covers substantially all employees in Puerto Rico.
The Company has an unqualified incentive bonus program and expensed bonuses of $2,087,217, $1,266,581, and $1,014,299 during the years ended December 31, 2018, 2017, and 2016, respectively, which was included in salaries, wages, and benefits in the accompanying statements of operations. Bonuses are based on employee performance as determined by the Board of Directors.
9. RELATED PARTY TRANSACTIONS
As described in Note 6, the holders of secured notes and the term loan are stockholders of the Company and the Company considers transactions with these stockholders to be related party transactions. Also, as described in Note 10, the Company incurred in aggregate, approximately $3.7 million, $3.0 million, and $3.0 million during the years ended December 31, 2018, 2017 and 2016, respectively, for tug charter-hire from Seabulk Towing and SEAJON II Towing, divisions of a stockholder of the Company and considered related parties.
The Company paid management fees of $0.2 million, and $0.3 million to a stockholder during the years ended December 31, 2017 and 2016, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company is involved in routine litigation and is subject to certain claims which arise in the normal course of business, none of which, in the opinion of management, are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Operating Leases
The Company has various operating lease agreements principally for land leases, office facilities, charter-hire, tug charter and equipment.
The Company has a long-term lease agreement with the Port Authority of Jacksonville for premise and ramp usage expiring in 2023 with two renewal options of five years each. Annual rent is approximately $1.2 million with additional rent if the Company does not achieve minimum tonnage throughput at the port. During the years ended December 31, 2018, 2017 and 2016, the Company exceeded the minimum tonnage requirement under this lease agreement.
The Company leases for tug charter-hire include the use of the tug and labor associated with tug charters. In addition, the Company is responsible for all fuel costs associated with its tug charter-hire agreements.
Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 2018, are as follows (in thousands):
Included in the amounts in the table above is tug charter-hire of approximately $5.8 million during 2019.
Rent expense for all operating leases, including leases with terms of less than one year, was approximately $18.5 million, $18.2 million and $18.1 million for the years ended December 31, 2018, 2017 and 2016, respectively, and is recorded as a part of purchased transportation and other rent in the accompanying statements of operations.
Included in rent expense was approximately $14.8 million, $15.1 million, and $14.8 million related to tug charter hire for the years ended December 31, 2018, 2017 and 2016, respectively, including related party expense as follows (in thousands):
11. CONCENTRATION OF GEOGRAPHIC AND MARKET RISK
The Jones Act provides that all vessels operating between ports in the United States, including the noncontiguous areas of Puerto Rico, Alaska and Hawaii, must be built, owned, operated and crewed substantially by U.S. citizens. The Company cannot assure that the Jones Act will not be repealed or amended in the future. If the Jones Act were repealed or substantially amended and, as a consequence, competition was to increase in the Puerto Rico market, the Company’s business and cash flow could be adversely affected.
12. SUBSEQUENT EVENTS
The Company evaluated the accounting and disclosure requirements for subsequent events through February 14, 2019, the date of this report.