SEC Filings

10-Q
HORNBECK OFFSHORE SERVICES INC /LA filed this Form 10-Q on 05/09/2018
Entire Document
 
Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-32108
 
  Hornbeck Offshore Services, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
72-1375844
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
103 NORTHPARK BOULEVARD, SUITE 300
COVINGTON, LA 70433
(Address of Principal Executive Offices) (Zip Code)
(985) 727-2000
(Registrant’s Telephone Number, Including Area Code)
 
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  
 
Accelerated filer  
 
 
 
Non-accelerated filer  (Do not check if a smaller reporting company)
 
Smaller reporting company  
 
 
 
 
 
Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The total number of shares of common stock, par value $.01 per share, outstanding as of April 30, 2018 was 37,495,205.
 



HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2018
TABLE OF CONTENTS
 
 


i


PART 1—FINANCIAL INFORMATION
Item 1—Financial Statements
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
March 31,
2018
 
December 31,
2017
 
(Unaudited)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
170,836

 
$
186,849

Accounts receivable, net of allowance for doubtful accounts of $6,277 and $6,054, respectively
41,564

 
44,702

Other current assets
14,707

 
16,890

Total current assets
227,107

 
248,441

Property, plant and equipment, net
2,481,735

 
2,501,013

Deferred charges, net
13,672

 
12,812

Other assets
6,541

 
6,612

Total assets
$
2,729,055

 
$
2,768,878

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
18,360

 
$
16,196

Accrued interest
14,652

 
14,734

Accrued payroll and benefits
11,330

 
9,475

Other accrued liabilities
12,612

 
8,457

Total current liabilities
56,954

 
48,862

Long-term debt, including deferred gain of $18,251 and $18,911, and net of original issue discount of $6,850 and $7,862 and deferred financing costs of $9,295 and $10,134, respectively
1,082,017

 
1,080,826

Deferred tax liabilities, net
188,830

 
197,465

Other liabilities
2,207

 
3,801

Total liabilities
1,330,008

 
1,330,954

Stockholders’ equity:
 
 
 
Preferred stock: $0.01 par value; 5,000 shares authorized; no shares issued and outstanding

 

Common stock: $0.01 par value; 100,000 shares authorized; 37,493 and 37,144 shares issued and outstanding, respectively
375

 
371

Additional paid-in-capital
760,352

 
760,278

Retained earnings
629,943

 
668,598

Accumulated other comprehensive income
8,377

 
8,677

Total stockholders’ equity
1,399,047

 
1,437,924

Total liabilities and stockholders’ equity
$
2,729,055

 
$
2,768,878



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

1


HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
Three Months Ended 
 March 31,
 
2018
 
2017
 
(Unaudited)
Revenues:
 
 
 
Vessel revenues
$
33,134

 
$
35,849

Non-vessel revenues
8,453

 
8,230

 
41,587

 
44,079

Costs and expenses:
 
 
 
Operating expenses
35,969

 
27,935

Depreciation
24,648

 
24,677

Amortization
1,992

 
3,724

General and administrative expenses
12,875

 
14,242

 
75,484

 
70,578

Gain on sale of assets
43

 
18

Operating loss
(33,854
)
 
(26,481
)
Other income (expense):
 
 
 
Interest income
644

 
401

Interest expense
(13,945
)
 
(13,809
)
Other income (expense), net
9

 
(323
)
 
(13,292
)
 
(13,731
)
Loss before income taxes
(47,146
)
 
(40,212
)
Income tax benefit
(8,491
)
 
(12,314
)
Net loss
$
(38,655
)
 
$
(27,898
)
Loss per share:
 
 
 
Basic loss per common share
$
(1.04
)
 
$
(0.76
)
Diluted loss per common share
$
(1.04
)
 
$
(0.76
)
Weighted average basic shares outstanding
37,339

 
36,596

Weighted average diluted shares outstanding
37,339

 
36,596



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

2


HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
 
Three Months Ended 
 March 31,
 
2018
 
2017
 
(Unaudited)
Net loss
$
(38,655
)
 
$
(27,898
)
Other comprehensive income:
 
 
 
Foreign currency translation income (loss)
(300
)
 
1,769

Total comprehensive loss
$
(38,955
)
 
$
(26,129
)


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

3


HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Three Months Ended 
 March 31,
 
2018
 
2017
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(38,655
)
 
$
(27,898
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation
24,648

 
24,677

Amortization
1,992

 
3,724

Stock-based compensation expense
2,868

 
2,042

Provision for bad debts
223

 
3,748

Deferred tax benefit
(8,556
)
 
(14,432
)
Amortization of deferred financing costs
1,139

 
3,263

Gain on sale of assets
(43
)
 
(18
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(3,802
)
 
4,769

Other current and long-term assets
2,282

 
(2,459
)
Deferred drydocking charges
(1,970
)
 
(3,129
)
Accounts payable
8,919

 
1,195

Accrued liabilities and other liabilities
2,164

 
2,147

Accrued interest
(83
)
 
(1,248
)
Net cash used in operating activities
(8,874
)
 
(3,619
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Costs incurred for OSV newbuild program
(2,690
)
 
(3,288
)
Net proceeds from sale of assets
43

 
32

Vessel capital expenditures
(3,906
)
 
(161
)
Non-vessel capital expenditures
(7
)
 
(130
)
Net cash used in investing activities
(6,560
)
 
(3,547
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Shares withheld for payment of employee withholding taxes
(536
)
 
(573
)
Net cash used in financing activities
(536
)
 
(573
)
Effects of exchange rate changes on cash
(43
)
 
(227
)
Net decrease in cash and cash equivalents
(16,013
)
 
(7,966
)
Cash and cash equivalents at beginning of period
186,849

 
217,027

Cash and cash equivalents at end of period
$
170,836

 
$
209,061

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
 
 
 
Cash paid for interest
$
15,131

 
$
13,756

Cash paid for income taxes
$
449

 
$
349



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

4

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1. Basis of Presentation
The accompanying unaudited consolidated financial statements do not include certain information and footnote disclosures required by United States generally accepted accounting principles, or GAAP. The interim financial statements and notes are presented as permitted by instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements have been included and consist only of normal recurring items. The unaudited quarterly financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Annual Report on Form 10-K of Hornbeck Offshore Services, Inc. (together with its subsidiaries, the “Company”) for the year ended December 31, 2017. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
The consolidated balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

2. Recent Accounting Pronouncements

Standard
 
Description
 
Required Date of Adoption
 
Effect on the financial statements and other significant matters
Standards that have been adopted
 
 
ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606)
 
This standard requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 requires retrospective application.
 
January 1, 2018
 
This ASU replaces most existing revenue recognition guidance in U.S. GAAP. The Company adopted ASU 2014-09 on January 1, 2018 under the modified retrospective method. Based on the Company's review of its open revenue-related contracts on the date of adoption, it was determined that there was no cumulative effect of applying the new standard and therefore no adjustment to the opening retained earnings balance was needed as of January 1, 2018. See Note 3 - Revenue from Contracts with Customers for additional information.
 
 
 
 
 
 
 
ASU No. 2017-01, "Business Combinations" (Topic 805): Clarifying the Definition of a Business
 
This standard provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 requires prospective application.
 
January 1, 2018
 
The Company adopted ASU No. 2017-01 on January 1, 2018 under the prospective application. This adoption had no impact on its consolidated financial statements.


Standards that have not been adopted
 
 
ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"
 
This standard requires measurement and recognition of expected credit losses for financial assets held. ASU No. 2016-13 requires modified retrospective application. Early adoption is permitted.
 
January 1, 2020
 
The Company believes that the implementation of this new guidance will not have a material impact on its consolidated financial statements.
 
 
 
 
 
 
 
ASU No. 2016-02, "Leases" (Topic 842)
 
This standard requires lessees to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. ASU 2016-02 requires a modified retrospective application. Early adoption is permitted.
 
January 1, 2019
 
The Company continues to evaluate the impact this new guidance will have on its consolidated financial statements. See further discussion below.

ASC 842, Leases 

Lessor Accounting    
    
In the Company's 2017 Form 10-K, it disclosed plans to early adopt ASC 842, Leases, effective January 1, 2018, utilizing both of the practical expedients proposed by the FASB related to the new lease standard. These practical expedients include 1) a proposed transition option that will allow companies to not apply the new lease standard in the comparative periods presented in their financial statements in the year of adoption and will allow the Company to continue to apply legacy guidance, ASC 840 Leases, including its disclosure requirements, for comparative periods presented, and 2) an option for lessors to combine lease and non-lease components contained within the same agreement when certain criteria are met. However, because these practical expedients, which are expected to impact the Company's application of ASC 842, have not yet been approved by the FASB, the Company did not early adopt ASC 842 effective January 1, 2018. As disclosed in its 2017 Form 10-K, the Company does not expect a change in the timing or amounts of revenue recognized upon the adoption of this standard.

Lessee Accounting

The main difference between current accounting standards and ASC 842 is the recognition of right-of-use assets and corresponding liabilities by lessees for those leases classified as operating leases under current accounting standards. The estimated impact of the adoption of this ASC based on the lease arrangements for which the Company is the lessee as of March 31, 2018, will be an increase to assets and liabilities on the Company's financial statements to reflect the right of use assets and lease obligations in a range from $27.0 million to $30.0 million. The adoption of the new standard is not expected to result in a change in the amount of lease expense currently being recognized.

3. Revenues from Contracts with Customers

Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue - Revenue from Contracts with Customers using the modified retrospective method. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. Accordingly, the Company did not make an adjustment to the opening balance of retained earnings in order to account for the implementation of the new requirements of this standard, and it did not restate prior period information for the effects of the new standard. We do not expect the adoption of this guidance to have a material effect on our results of operations in future periods.

5

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





The services that are provided by the Company represent a single performance obligation under our contracts that are satisfied at a point in time or over time. We earn revenues primarily by (1) chartering the Company's vessels, including operation of such vessels, (2) providing vessel management services to third party vessel owners, and (3) providing shore-based port facility services, including rental of land. These revenue streams are provided to customers based upon contracts that include fixed or determinable prices and do not generally include right of return or other significant post-delivery obligations. The Company's vessel revenue, vessel management revenue and port facility revenue are recognized either at a point in time or over the passage of time when the customer has received or is receiving the benefit from the applicable service. Revenues are recognized when the performance obligations are satisfied in accordance with contractual terms and in an amount that reflects the consideration that the Company expects to be entitled to in exchange for the services rendered or rentals provided. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. Invoices are typically billed to our customers on a monthly basis and payment terms on customer invoices typically range 30 - 60 days.

A performance obligation under contracts with the Company's customers to render services is the unit of account under Topic 606. The Company accounts for services rendered separately if they are distinct and the service is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered provided on its own or with other resources that are readily available to the customer. A contracts transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

As of March 31, 2018, the Company has certain remaining performance obligations representing contracted vessel revenues for which work has not been performed and such contracts have an original expected duration of more than one year. As of March 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations for such contracts was $35.5 million, of which $33.8 million and $1.7 million are expected to be recognized in 2018 and 2019, respectively. The Company has elected to apply the optional exemption for the disclosure of the remaining performance obligations for any of its revenue streams that are expected to have a duration of one year or less and, therefore, such amounts have not been disclosed.

Revenue Disaggregation
For the three months ended March 31, 2018 and 2017, the Company recognized revenue as follows (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Vessel revenues
$
33,134

 
$
35,849

Vessel management revenues
7,759

 
7,452

Shore-based facility revenues
694

 
778

 
$
41,587

 
$
44,079



6

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




4. Loss Per Share
Basic loss per common share was calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per common share was calculated by dividing net loss by the weighted average number of common shares outstanding during the year plus the effect of dilutive stock options and restricted stock unit awards. When reporting a net loss, the Company uses weighted average basic shares outstanding to calculate diluted earnings per share. Weighted average number of common shares outstanding was calculated by using the sum of the shares determined on a daily basis divided by the number of days in the period. The table below reconciles the Company’s loss per share (in thousands, except for per share data): 
 
Three Months Ended 
 March 31,
 
2018
 
2017
Net loss
$
(38,655
)
 
$
(27,898
)
Weighted average number of shares of common stock outstanding
37,339

 
36,596

Add: Net effect of dilutive stock options and unvested restricted stock (1)(2)(3)

 

Weighted average number of dilutive shares of common stock outstanding
37,339

 
36,596

Loss per common share:
 
 
 
Basic loss per common share
$
(1.04
)
 
$
(0.76
)
Diluted loss per common share
$
(1.04
)
 
$
(0.76
)
 
(1)
Due to a net loss, the Company excluded from the calculation of loss per share the effect of equity awards representing the rights to acquire 750 and 978 shares of common stock for the three months ended March 31, 2018 and 2017, respectively.
(2)
For the three months ended March 31, 2018 and 2017, the 2019 convertible senior notes were not dilutive, as the average price of the Company’s stock was less than the effective conversion price of such notes. It is the Company's stated intention to redeem the principal amount of its 2019 convertible senior notes in cash and the Company has used the treasury method for determining potential dilution in the diluted earnings per share computation.
(3)
Dilutive unvested restricted stock units are expected to fluctuate from quarter to quarter depending on the Company’s performance compared to a predetermined set of performance criteria. See Note 7 to these financial statements for further information regarding certain of the Company’s restricted stock grants.

5. Property, Plant and Equipment

Asset Impairment Assessment

In accordance with ASC 360, the Company periodically reviews long-lived asset valuations when events or changes in circumstances indicate that an asset’s carrying value may not be recoverable. If indicators of impairment exist, the Company assesses the recoverability of its long-lived assets by comparing the projected future undiscounted cash flows associated with the related long-lived asset group over their remaining estimated useful lives. If the sum of the estimated undiscounted cash flows are less than the carrying amounts of the asset group, the assets are written down to their estimated fair values based on the expected discounted future cash flows or appraised values attributable to the assets. The future cash flows are subjective and are based on the Company’s current assumptions regarding future dayrates, utilization, operating expense, G&A expense and recertification costs that could differ from actual results.

During the second quarter of 2016, the Company determined that it observed indicators of impairment related to its vessels. This resulted from the rapid deterioration of its second quarter 2016 operating results, as well as the uncertainty regarding future market conditions and the related impact on the Company's projected operating results. For the purposes of calculating the undiscounted cash flows, the Company grouped its vessels into two groups, OSVs and MPSVs, and used a probability-weighted undiscounted cash flow projection to test for recoverability. After reviewing the results of this calculation, the Company determined that each of its asset groups had sufficient projected undiscounted cash flows to recover the remaining book value of the Company's long-lived assets within such groups. While the Company has not observed any new impairment

7

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




indicators since the second quarter of 2016, the Company has reviewed and updated, as necessary, the assumptions used in determining its undiscounted cash flow projections for each asset group to reflect current market conditions. After reviewing the results of these updated projections, the Company determined that each of its asset groups continue to have sufficient projected undiscounted cash flows to recover the remaining book value of the Company's long-lived assets within such group.

6. Long-Term Debt
As of the dates indicated, the Company had the following outstanding long-term debt (in thousands):
 
March 31,
2018
 
December 31,
2017
5.875% senior notes due 2020, net of deferred financing costs of $1,836 and $2,061
$
365,106

 
$
364,881

5.000% senior notes due 2021, net of deferred financing costs of $2,899 and $3,142
447,101

 
446,858

1.500% convertible senior notes due 2019, net of original issue discount of $5,680 and $6,634 and deferred financing costs of $1,273 and $1,486
92,695

 
91,527

First-lien credit facility due 2023, including deferred gain of $18,251 and $18,911, and net of original issue discount of $1,171 and $1,228, and deferred financing costs of $3,287 and $3,445
177,115

 
177,560

 
$
1,082,017

 
$
1,080,826

The table below summarizes the Company's cash interest payments (in thousands):
 
Cash Interest Payments
 
Payment Dates
5.875% senior notes due 2020
$
10,779

 
April 1 and October 1
5.000% senior notes due 2021
11,250

 
March 1 and September 1
1.500% convertible senior notes due 2019
747

 
March 1 and September 1
First-lien credit facility due 2023 (1)
1,142

 
Variable
 
(1)
The interest rate on the first-lien credit facility is variable based on the Company's election. The amount reflected in this table is the monthly amount payable based on the 30-day LIBOR interest rate that was elected and in effect on March 31, 2018. Please see further discussion of the variable interest rate below.
First-Lien Credit Facility
The Company's $300 million first-lien credit facility currently provides for $136.7 million of additional available liquidity, $68.0 million of which is required to be drawn by December 31, 2018 with the remaining balance required to be drawn by September 1, 2019. The Facility matures in June 2023. The Company can use draws under the facility for working capital and general corporate purposes, including the acquisition of distressed assets and/or the refinancing of existing debt, subject to, among other things, compliance with certain covenants requiring the Company to maintain access to liquidity (cash and credit availability) of $25.0 million at all times. The minimum liquidity level required for prepayment of the Company’s existing indebtedness and/or certain other restricted payments is $65.0 million. As of May 2, 2018, the credit facility was collateralized by 51 domestic high-spec OSVs and MPSVs, including a security interest in two pending MPSV newbuilds, and associated personalty, as well as by certain deposit and securities accounts. Borrowings accrue interest, at the Company’s option, at either an adjusted London Interbank Offered Rate (subject to a 1.00% floor) plus an applicable margin or the greatest of (a) the prime rate announced by The Wall Street Journal, (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%, and (c) the London Interbank Offered Rate plus, 1%, plus, an applicable a margin.
On March 27, 2018, the Company entered into an amendment with our first-lien lenders to clarify various provisions in and made certain technical revisions to our first-lien credit facility, primarily dealing with the administerial permissabilities regarding vessel reflagging transactions and permitted acquisition indebtedness, among other matters.

8

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




The agreement governing the first-lien credit facility and the indentures governing the Company's 2020 senior notes and 2021 senior notes impose certain restrictions on the Company. Such restrictions affect, and in many cases limit or prohibit, among other things, the Company's ability to incur additional indebtedness, make capital expenditures, redeem equity, create liens, sell assets and make dividend or other restricted payments.
The Company estimates the fair value of its 2020 senior notes, 2021 senior notes, 2019 convertible senior notes and first-lien credit facility by primarily using quoted market prices. Given the observability of the inputs to these estimates, the Company has assigned a Level 2 of the three-level valuation hierarchy for such outstanding notes.
As of the dates indicated below, the Company had the following face values, carrying values and fair values (in thousands):
 
March 31, 2018
 
December 31, 2017
 
Face Value
 
Carrying Value
 
Fair Value
 
Face Value
 
Carrying Value
 
Fair Value
5.875% senior notes due 2020
$
366,942

 
$
365,106

 
$
240,347

 
$
366,942

 
$
364,881

 
$
244,714

5.000% senior notes due 2021
450,000

 
447,101

 
246,938

 
450,000

 
446,858

 
236,250

1.500% convertible senior notes due 2019
99,647

 
92,695

 
75,794

 
99,647

 
91,527

 
74,486

First-lien credit facility due 2023 (1)
163,322

 
177,115

 
162,995

 
163,322

 
177,560

 
162,505

 
$
1,079,911

 
$
1,082,017

 
$
726,074

 
$
1,079,911

 
$
1,080,826

 
$
717,955

 
(1)
The carrying value of the first-lien credit facility due 2023 includes a deferred gain of $18,251 less original issue discount and deferred financing costs of $4,458.
Capitalized Interest
During the three months ended March 31, 2018, the Company capitalized approximately $2.3 million of interest costs related to the construction of vessels. During the three months ended March 31, 2017, the Company capitalized approximately $2.4 million of interest costs related to the construction of vessels.

7. Incentive Compensation
Stock-Based Incentive Compensation Plan
The Company’s stock-based incentive compensation plan covers a maximum of 4.95 million shares of common stock that allows the Company to grant restricted stock awards, restricted stock unit awards, or collectively restricted stock, stock options, stock appreciation rights and fully-vested common stock to employees and directors. As of March 31, 2018, the Company has granted awards covering 4.68 million shares of common stock under such plan.
During the three months ended March 31, 2018, the Company granted 1,518,777 time-based and 939,391 performance based phantom restricted stock units. The phantom shares to be received under the performance-based phantom restricted stock units are calculated based on the Company's performance compared to two pre-determined criteria, as defined by the phantom restricted stock agreements governing such awards. The actual number of shares that could be received by the award recipients can range from 0% to 150% of the awards granted depending on the Company's performance.
The fair value of the Company’s performance-based phantom restricted stock units, which is the stock price on the date of grant, is applied to the total shares that are expected to fully vest and is amortized over the vesting period, which is generally three years, based on the Company’s internal performance measured against the pre-determined criteria, as applicable. The compensation expense related to time-based phantom

9

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




restricted stock units are amortized over a vesting period of up to three years, as applicable, and is determined based on the market price of the Company’s stock on the date of grant applied to the total shares that are expected to fully vest. All phantom restricted stock units are re-measured quarterly and classified as a liability, due to the settlement of these awards in cash. In addition to the phantom restricted stock units granted in 2018, the Company granted performance-based and time-based restricted stock units and phantom restricted stock units in prior years. During the three months ended March 31, 2018, the Company issued 326,753 shares of common stock due to vestings of restricted stock units.
The impact of stock-based compensation expense charges on the Company’s operating results are reflected in the table below (in thousands, except for per share data):
 
Three Months Ended 
 March 31,
 
2018
 
2017
Income before taxes
$
2,868

 
$
2,042

Net income
$
2,351

 
$
1,417

Earnings per common share:
 
 
 
Basic earnings per common share
$
0.06

 
$
0.04

Diluted earnings per common share
$
0.06

 
$
0.04


8. Commitments and Contingencies
Vessel Construction
During the first quarter of 2018, the Company notified the shipyard that it was terminating the construction contracts for the final two vessels in the Company's fifth OSV newbuild program due to performance issues at the shipyard. The Company is working with the issuer of the shipyard's performance bonds in order to complete the construction of the vessels at a completion yard. The cost of this nearly completed 24-vessel newbuild program, before construction period interest, is expected to be approximately $1,335.0 million, of which $17.2 million, and $44.7 million are expected to be incurred in the remainder of 2018 and fiscal 2019, respectively. From the inception of this program through March 31, 2018, the Company had incurred $1,273.1 million, or 95.4%, of total expected project costs.
Vessel Acquisitions
On April 13, 2018, the Company entered into a definitive vessel purchase agreement with Aries Marine Corporation and certain of its affiliates to acquire four high-spec Jones Act-qualified OSVs and related equipment for $36.6 million in cash, subject to usual and customary closing conditions. Two of the vessels are 300 class OSVs and two are 280 class OSVs. The Company expects to close on the purchase of such assets during the second quarter of 2018.
Contingencies
In the normal course of its business, the Company becomes involved in various claims and legal proceedings in which monetary damages are sought. It is management's opinion that the Company's liability, if any, under such claims or proceedings would not materially affect the Company's financial position or results of operations. The Company insures against losses relating to its vessels, pollution and third party liabilities, including claims by employees under Section 33 of the Merchant Marine Act of 1920, or the Jones Act. Third party liabilities and pollution claims that relate to vessel operations are covered by the Company’s entry in a mutual protection and indemnity association, or P&I Club, as well as by marine liability policies in excess of the P&I Club’s coverage. The Company provides reserves for any individual claim deductibles for which the Company remains responsible by using an estimation process that considers Company-specific and industry data, as well as management’s experience, assumptions and consultation with outside counsel. As additional

10

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




information becomes available, the Company will assess the potential liability related to its pending claims and revise its estimates. Although historically revisions to such estimates have not been material, changes in estimates of the potential liability could materially impact the Company’s results of operations, financial position or cash flows.
9. Other Accrued Liabilities
Other accrued liabilities include the following (in thousands): 
 
March 31, 2018
 
December 31, 2017
Accrued lease expense
$
5,213

 
$
5,142

Deferred revenue
1,527

 
460

Other
5,872

 
2,855

Total
$
12,612

 
$
8,457


10. Income Taxes
The Tax Cuts and Jobs Act, or the Act, was signed into law on December 22, 2017. The primary impact of this legislation was a reduction of the U.S. federal corporate tax rate from 35% to 21% generally effective January 1, 2018. As of December 31, 2017, the Company included in its income tax benefit rate a preliminary estimate related to executive compensation, alternative minimum tax refundable credits, taxation in its foreign jurisdictions, and re-measurement of its deferred taxes. As of March 31, 2018, the Company has not identified or recorded any revisions to its provisional amounts and has not completed its accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, the Company made reasonable estimates of the effects and recorded provisional amounts. The Company's provisional estimates on Global Intangible Low Taxed Income, Foreign Derived Intangible Income, Base Erosion and Anti-Abuse, and the IRC Section 163(j) interest limitation did not materially impact its effective tax benefit rate for the three months ended March 31, 2018. The Company will continue to refine its calculations as additional tax guidance becomes available and its internal analysis is completed. The accounting for the tax effects of the Act will be completed in 2018 as allowed under Staff Accounting Bulletin 118, which was issued by the Securities and Exchange Commission on December 22, 2017.
The effective tax benefit rate for the three months ended March 31, 2018 and 2017 was 18.0% and 30.6%, respectively. The lower benefit rate for the quarter ended March 31, 2018 was due to the reduction of the statutory corporate income tax rate from 35% to 21% resulting from the Act. In addition, the Company established a $2.2 million valuation allowance for state net operating losses and foreign tax credit carryforwards based upon management's conclusion that it is more likely than not such losses and credits will not be realized by their expiration dates.

11

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




11. Condensed Consolidating Financial Statements of Guarantors
The following tables present the condensed consolidating balance sheets as of March 31, 2018 and December 31, 2017, the condensed consolidating statements of operations, the condensed consolidating statements of comprehensive income (loss) and condensed consolidating statements of cash flows for the three months ended March 31, 2018 and 2017, respectively, for the domestic subsidiaries of the Company that serve as co-borrower and/or guarantors of the Company's 2019 convertible senior notes, 2020 senior notes, 2021 senior notes and the first-lien credit facility, as well as the financial results for the Company's subsidiaries that do not serve as guarantors. The co-borrower and/or guarantor subsidiaries of the 2019 convertible senior notes, 2020 senior notes, 2021 senior notes and the first-lien credit facility are 100% owned by the Company. The guarantees are full and unconditional and joint and several. The non-guarantor subsidiaries of such notes include all of the Company's foreign subsidiaries.

12

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Condensed Consolidating Balance Sheet
(In thousands, except per share data)
 
As of March 31, 2018
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
21

 
$
164,169

 
$
6,646

 
$

 
$
170,836

Accounts receivable, net of allowance for doubtful accounts of $6,277

 
36,787

 
4,821

 
(44
)
 
41,564

Other current assets
21

 
13,515

 
1,171

 

 
14,707

Total current assets
42

 
214,471

 
12,638

 
(44
)
 
227,107

Property, plant and equipment, net

 
2,360,550

 
121,185

 

 
2,481,735

Deferred charges, net

 
12,427

 
1,245

 

 
13,672

Intercompany receivable
1,779,885

 
660,465

 
40,476

 
(2,480,826
)
 

Investment in subsidiaries
730,013

 
8,602

 

 
(738,615
)
 

Other assets

 
5,916

 
625

 

 
6,541

Total assets
$
2,509,940

 
$
3,262,431

 
$
176,169

 
$
(3,219,485
)
 
$
2,729,055

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
17,797

 
$
563

 
$

 
$
18,360

Accrued interest
14,652

 

 

 

 
14,652

Accrued payroll and benefits

 
10,718

 
612

 

 
11,330

Other accrued liabilities

 
12,483

 
172

 
(43
)
 
12,612

Total current liabilities
14,652

 
40,998

 
1,347

 
(43
)
 
56,954

Long-term debt, including deferred gain of $18,251, and net of original issue discount of $6,850 and deferred financing costs of $9,295
1,082,017

 

 

 

 
1,082,017

Deferred tax liabilities, net

 
184,238

 
4,592

 

 
188,830

Intercompany payables
22,603

 
2,271,756

 
195,070

 
(2,489,429
)
 

Other liabilities

 
2,163

 
44

 

 
2,207

Total liabilities
1,119,272

 
2,499,155

 
201,053

 
(2,489,472
)
 
1,330,008

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
Preferred stock: $0.01 par value; 5,000 shares authorized; no shares issued and outstanding

 

 

 

 

Common stock: $0.01 par value; 100,000 shares authorized; 37,493 shares issued and outstanding
375

 

 

 

 
375

Additional paid-in capital
760,350

 
37,978

 
8,604

 
(46,580
)
 
760,352

Retained earnings
629,943

 
725,298

 
(41,865
)
 
(683,433
)
 
629,943

Accumulated other comprehensive income

 

 
8,377

 

 
8,377

Total stockholders’ equity
1,390,668

 
763,276

 
(24,884
)
 
(730,013
)
 
1,399,047

Total liabilities and stockholders’ equity
$
2,509,940

 
$
3,262,431

 
$
176,169

 
$
(3,219,485
)
 
$
2,729,055

 
 
 
 
 
 
 
 
 
 

13

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Condensed Consolidating Balance Sheet
(In thousands, except per share data)
 
As of December 31, 2017
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4

 
$
178,746

 
$
8,099

 
$

 
$
186,849

Accounts receivable, net of allowance for doubtful accounts of $6,054

 
40,407

 
4,295

 

 
44,702

Other current assets
29

 
16,051

 
810

 

 
16,890

Total current assets
33

 
235,204

 
13,204

 

 
248,441

Property, plant and equipment, net

 
2,379,097

 
121,916

 

 
2,501,013

Deferred charges, net

 
11,408

 
1,404

 

 
12,812

Intercompany receivable
1,778,711

 
648,920

 
39,445

 
(2,467,076
)
 

Investment in subsidiaries
790,734

 
8,602

 

 
(799,336
)
 

Other assets

 
5,984

 
628

 

 
6,612

Total assets
$
2,569,478

 
$
3,289,215

 
$
176,597

 
$
(3,266,412
)
 
$
2,768,878

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
15,643

 
$
553

 
$

 
$
16,196

Accrued interest
14,734

 

 

 

 
14,734

Accrued payroll and benefits

 
8,458

 
1,017

 

 
9,475

Other accrued liabilities

 
8,129

 
328

 

 
8,457

Total current liabilities
14,734

 
32,230

 
1,898

 

 
48,862

Long-term debt, including deferred gain of $18,911, and net of original issue discount of $7,862 and deferred financing costs of $10,134
1,080,826

 

 

 

 
1,080,826

Deferred tax liabilities, net

 
192,793

 
4,672

 

 
197,465

Intercompany payables
140,019

 
2,240,832

 
190,177

 
(2,571,028
)
 

Other liabilities

 
3,802

 
(1
)
 

 
3,801

Total liabilities
1,235,579

 
2,469,657

 
196,746

 
(2,571,028
)
 
1,330,954

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
Preferred stock: $0.01 par value; 5,000 shares authorized; no shares issued and outstanding

 

 

 

 

Common stock: $0.01 par value; 100,000 shares authorized; 37,144 shares issued and outstanding
371

 

 

 

 
371

Additional paid-in capital
758,690

 
37,975

 
8,602

 
(44,989
)
 
760,278

Retained earnings
574,838

 
781,583

 
(37,428
)
 
(650,395
)
 
668,598

Accumulated other comprehensive income

 

 
8,677

 

 
8,677

Total stockholders’ equity
1,333,899

 
819,558

 
(20,149
)
 
(695,384
)
 
1,437,924

Total liabilities and stockholders’ equity
$
2,569,478

 
$
3,289,215

 
$
176,597

 
$
(3,266,412
)
 
$
2,768,878

 
 
 
 
 
 
 
 
 
 

14

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Condensed Consolidating Statement of Operations
(In thousands)
 
Three Months Ended March 31, 2018
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
Revenues
$

 
$
40,315

 
$
1,329

 
$
(57
)
 
$
41,587

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating expenses

 
33,985

 
2,038

 
(54
)
 
35,969

Depreciation

 
23,306

 
1,342

 

 
24,648

Amortization

 
1,799

 
193

 

 
1,992

General and administrative expenses
56

 
12,369

 
453

 
(3
)
 
12,875

 
56

 
71,459

 
4,026

 
(57
)
 
75,484

Gain on sale of assets

 
43

 

 

 
43

Operating loss
(56
)
 
(31,101
)
 
(2,697
)
 

 
(33,854
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest income

 
569

 
75

 

 
644

Interest expense
(13,945
)
 

 

 

 
(13,945
)
Equity in earnings (losses) of consolidated subsidiaries
(24,654
)
 

 

 
24,654

 

Other income (expense), net

 
2,016

 
(2,007
)
 

 
9

 
(38,599
)
 
2,585

 
(1,932
)
 
24,654

 
(13,292
)
Income (loss) before income taxes
(38,655
)
 
(28,516
)
 
(4,629
)
 
24,654

 
(47,146
)
Income tax benefit

 
(8,299
)
 
(192
)
 

 
(8,491
)
Net income (loss)
$
(38,655
)
 
$
(20,217
)
 
$
(4,437
)
 
$
24,654

 
$
(38,655
)


Condensed Consolidating Statement of Comprehensive Income (Loss)
(In thousands)
 
Three Months Ended March 31, 2018
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
Net income (loss)
$
(38,655
)
 
$
(20,217
)
 
$
(4,437
)
 
$
24,654

 
$
(38,655
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation loss

 

 
(300
)
 

 
(300
)
Total comprehensive income (loss)
$
(38,655
)
 
$
(20,217
)
 
$
(4,737
)
 
$
24,654

 
$
(38,955
)





15

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Condensed Consolidating Statement of Operations
(In thousands)
 
Three Months Ended March 31, 2017
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
Revenues
$

 
$
33,722

 
$
10,315

 
$
42

 
$
44,079

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating expenses

 
24,529

 
3,366

 
40

 
27,935

Depreciation

 
23,354

 
1,323

 

 
24,677

Amortization

 
3,312

 
412

 

 
3,724

General and administrative expenses
36

 
13,586

 
618

 
2

 
14,242

 
36

 
64,781

 
5,719

 
42

 
70,578

Gain on sale of assets

 
17

 
1

 

 
18

Operating income (loss)
(36
)
 
(31,042
)
 
4,597

 

 
(26,481
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest income

 
325

 
76

 

 
401

Interest expense
(13,809
)
 

 

 

 
(13,809
)
Equity in earnings (losses) of consolidated subsidiaries
(14,053
)
 

 

 
14,053

 

Other income (expense), net

 
2,623

 
(2,946
)
 

 
(323
)
 
(27,862
)
 
2,948

 
(2,870
)
 
14,053

 
(13,731
)
Income (loss) before income taxes
(27,898
)
 
(28,094
)
 
1,727

 
14,053

 
(40,212
)
Income tax expense (benefit)

 
(12,484
)
 
170

 

 
(12,314
)
Net income (loss)
$
(27,898
)
 
$
(15,610
)
 
$
1,557

 
$
14,053

 
$
(27,898
)

Condensed Consolidating Statement of Comprehensive Income (Loss)
(In thousands)
 
Three Months Ended March 31, 2017
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
Net income (loss)
$
(27,898
)
 
$
(15,610
)
 
$
1,557

 
$
14,053

 
$
(27,898
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation gain (loss)

 
(150
)
 
1,919

 

 
1,769

Total comprehensive income (loss)
$
(27,898
)
 
$
(15,760
)
 
$
3,476

 
$
14,053

 
$
(26,129
)




16

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Condensed Consolidating Statement of Cash Flows
(In thousands)

 
Three Months Ended March 31, 2018
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
553

 
$
(9,055
)
 
$
(372
)
 
$

 
$
(8,874
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 

Costs incurred for OSV newbuild program #5

 
(2,690
)
 

 

 
(2,690
)
Net proceeds from sale of assets

 
43

 

 

 
43

Vessel capital expenditures

 
(2,852
)
 
(1,054
)
 

 
(3,906
)
Non-vessel capital expenditures

 
(23
)
 
16

 

 
(7
)
Net cash used in investing activities

 
(5,522
)
 
(1,038
)
 

 
(6,560
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Shares withheld for employee withholding taxes
(536
)
 

 

 

 
(536
)
Net cash used in financing activities
(536
)
 

 

 

 
(536
)
Effects of exchange rate changes on cash

 

 
(43
)
 

 
(43
)
Net increase (decrease) in cash and cash equivalents
17

 
(14,577
)
 
(1,453
)
 

 
(16,013
)
Cash and cash equivalents at beginning of period
4

 
178,746

 
8,099

 

 
186,849

Cash and cash equivalents at end of period
$
21

 
$
164,169

 
$
6,646

 
$

 
$
170,836

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
 
 
 
 
 
 
 
 
 
Cash paid for interest
$
15,131

 
$

 
$

 
$

 
$
15,131

Cash paid for income taxes
$

 
$
278

 
$
171

 
$

 
$
449



17

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




Condensed Consolidating Statement of Cash Flows
(In thousands)


 
Three Months Ended March 31, 2017
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
579

 
$
(15,013
)
 
$
10,815

 
$

 
$
(3,619
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 

Costs incurred for OSV newbuild program #5

 
(3,534
)
 
246

 

 
(3,288
)
Net proceeds from sale of assets

 
32

 

 

 
32

Vessel capital expenditures

 
(53
)
 
(108
)
 

 
(161
)
Non-vessel capital expenditures

 
(113
)
 
(17
)
 

 
(130
)
Net cash provided by (used in) investing activities

 
(3,668
)
 
121

 

 
(3,547
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Shares withheld for employee withholding taxes
(573
)
 

 

 

 
(573
)
Net cash used in financing activities
(573
)
 

 

 

 
(573
)
Effects of exchange rate changes on cash

 
(151
)
 
(76
)
 

 
(227
)
Net increase (decrease) in cash and cash equivalents
6

 
(18,832
)
 
10,860

 

 
(7,966
)
Cash and cash equivalents at beginning of period
9

 
212,196

 
4,822

 

 
217,027

Cash and cash equivalents at end of period
$
15

 
$
193,364

 
$
15,682

 
$

 
$
209,061

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
 
 
 
 
 
 
 
 
 
Cash paid for interest
$
13,756

 
$

 
$

 
$

 
$
13,756

Cash paid for income taxes
$

 
$
128

 
$
221

 
$

 
$
349





18


Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our unaudited consolidated financial statements and notes to unaudited consolidated financial statements in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto included in our Annual Report on Form 10-K as of and for the year ended December 31, 2017. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements. See “Forward Looking Statements” for additional discussion regarding risks associated with forward-looking statements. In this Quarterly Report on Form 10-Q, “company,” “we,” “us,” “our” or like terms refer to Hornbeck Offshore Services, Inc. and its subsidiaries, except as otherwise indicated. Please refer to Item 5—Other Information for a glossary of terms used throughout this Quarterly Report on Form 10-Q.
In this Quarterly Report on Form 10-Q, we rely on and refer to information regarding our industry from the BOEM, EIA and IHS-Petrodata, Inc. These organizations are not affiliated with us and are not aware of and have not consented to being named in this Quarterly Report on Form 10-Q. We believe this information is reliable. In addition, in many cases we have made statements in this Quarterly Report on Form 10-Q regarding our industry and our position in the industry based on our experience in the industry and our own evaluation of market conditions.
General

While oil prices have recently increased from previous lows experienced earlier in this downcycle, they still remain below levels that prevailed between 2005 and late 2014. This commodity price driven industry downturn has caused major, international and independent oil companies with deepwater operations to significantly reduce their capital spending budgets for the worldwide exploration or production of oil. Less spending by our customers combined with a global oversupply of OSVs for current market conditions, including high-spec OSVs in our core markets, have resulted in significant reductions in our dayrates and utilization.
The principal question facing the offshore oilfield-related industry is the duration of the current downturn in offshore activities. Our current view is that market conditions will remain weak for all or most of 2018. However, given the recent improvement in oil prices, global economic improvement, growth in oil demand and lower exploration and development costs achieved by our customers, we believe that the necessary elements for improved conditions in our market may be taking shape. While impossible to predict with assurance, this market improvement may take-hold as early as 2019. However, a loss of confidence in the oil price recovery or an inability by our customers to sustain cost improvements could derail or postpone a recovery.
While we have taken extensive measures to reduce costs, these reductions alone will not be sufficient to mitigate the full impact of revenue loss over an extended period of time. Even in light of our currently depressed operating levels, we believe cash generated from operations together with cash on hand and availability under the first-lien credit facility should be sufficient to fund our operations and commitments, including the pending $36.6 million four-vessel acquisition, through at least the end of 2019. However, absent the combination of a significant recovery of market conditions such that cash flow from operations were to increase materially from projected levels coupled with a refinancing and/or further management of our funded debt obligations, we do not currently expect to have sufficient liquidity to repay the full amount of our remaining tranches of 2020 senior notes and 2021 senior notes when they mature in fiscal years 2020 and 2021, respectively. The first-lien credit facility was the first step in addressing the maturities of our unsecured notes. We remain fully cognizant of the challenges currently facing the offshore oil and gas industry and continue to review our capital structure and assess our strategic options.

19


In the GoM, two high-spec OSVs have been delivered into the domestic market so far this year. We expect an additional six high-spec OSVs to be delivered into domestic service through 2019. We do not anticipate significant growth in the supply of high-spec OSVs beyond the currently anticipated level of 199 of such vessels by the end of 2019. During the first quarter of 2018, there was an average of roughly 34 floating rigs available in the GoM, while an average of 21.3 were working. As of May 2, 2018, there were 31 rigs available and 23 were working. However, five floating rigs have contracts that will expire during the remainder of 2018. We do not know whether the remaining rigs will receive contract renewals for operations in the GoM. Once a rig arrives in the GoM, it can take several months to commence work and, therefore, we do not know the timing of when operations of newly arrived rigs will begin, if at all. Given these market conditions, we anticipate our average dayrates and utilization levels will continue to be depressed for the foreseeable future. However, the GoM is one of the premier deepwater markets in the world and we are committed to supporting our customers in this market. We believe that once the current supply and demand fundamentals return to more normal conditions, our results from operations will improve. Due to a seasonal slowdown in demand, we experienced soft market conditions for our MPSVs in the first three months of 2018. These vessels are used for a wide variety of oilfield applications that are not necessarily related to drilling. Also, we have not seen a significant pick up in the expansion of offshore infrastructure, such as field development that more meaningfully drives MPSV utilization.
In recognition of these weak market conditions, we stacked OSVs and MPSVs on various dates commencing on October 1, 2014. As of March 31, 2018, we had 44 OSVs stacked. As of May 2, 2018, we had 40 OSVs stacked. These 40 stacked vessels represent 57% of our fleetwide vessel headcount, and 39% of our total OSV and MPSV deadweight tonnage. We may consider stacking additional vessels or reactivating vessels as market conditions warrant. By stacking vessels, we have significantly reduced our on-going cash outlays and lowered our risk profile; however, we also have fewer revenue-producing units in service that can contribute to our results and produce cash flows to cover our fixed costs and commitments. While we may choose to stack additional vessels should market conditions warrant, our current expectation is to retain our active fleet in the market to accept contracts at the best available terms even if such contracts are below our breakeven cash cost of operations. Upon completing the pending four-vessel acquisition from Aries Marine and certain of its affiliates, we plan to introduce the vessels into our operating fleet and do not currently plan on stacking the vessels.
During the first quarter of 2018, Mexico completed Round 2 of its deepwater auctions. In such auction, there were 19 deepwater blocks awarded that are estimated to bring in USD $4.5 billion of investment in each block over their respective lives. We consider Mexico to be a long-term market for our services, especially in light of energy reforms expected to be carried out there. We continue to explore opportunities to place additional vessels into Mexico to support PEMEX in its ongoing shallow water activity and non-PEMEX customers in support of future shelf and deepwater activity there. In June 2018, Mexico will elect a new President. The leading candidate has stated his intention to roll back some or all of the energy reforms. We continue to monitor political developments and their impact on the Mexican market.
In Brazil, Petrobras has moved towards an "all Brazilian flag" vessel fleet, which has limited opportunities in Brazil for foreign-flagged vessels, except where highly specialized services are required. In January 2016, we placed one of our newbuild HOSMAX 310 class OSVs into Brazilian registry and have imported that vessel into Brazil. In October 2016, Brazil enacted new legislation that will allow international oil companies to participate as operators of pre-salt offshore developments, reversing a policy that had reserved such properties to Petrobras, exclusively. By doing so, the Brazilian government has created the possibility that foreign operators might spur additional exploration and development activity that has been dampened by low oil prices and Petrobras' difficulties. In March 2018, the Brazilian National Petroleum Agency completed a deepwater auction that netted over USD $2.0 billion for the Brazilian government. The outcome of this bidding process is viewed positively for growing the participation of international oil companies in the Brazilian offshore sector, which is one of our core markets.

20


Our Vessels
All of our current vessels are qualified under the Jones Act to engage in U.S. coastwise trade, except for nine foreign-flagged new generation OSVs and two foreign-flagged MPSVs. As of March 31, 2018, our 18 active new generation OSVs, eight MPSVs and four managed OSVs were operating in domestic and international areas as noted in the following table:
Operating Areas
Domestic
 
GoM
21

Other U.S. coastlines (1)
6

 
27

Foreign
 
Brazil
1

Mexico
1

Other Latin America
1

 
3

Total Vessels (2)
30

 
(1)
Includes two owned vessels and four managed vessels supporting the military.
(2)
Excluded from this table are 44 new generation OSVs that were stacked as of March 31, 2018. Also excluded are the four vessels included in the pending acquisition from Aries Marine Corporation and certain of its affiliates expected to close in the second quarter of 2018.

Critical Accounting Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. In other circumstances, we are required to make estimates, judgments and assumptions that we believe are reasonable based on available information. We base our estimates and judgments on historical experience and various other factors that we believe are reasonable based upon the information available. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies and estimates are discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Results of Operations
The tables below set forth the average dayrates, utilization rates and effective dayrates for our owned new generation OSVs and the average number and size of vessels owned during the periods indicated. These vessels generate a substantial portion of our revenues and operating profit. Excluded from the OSV information below are the results of operations for our MPSVs, our shore-base facility and vessel management services, including the four non-owned vessels managed for the U.S. Navy. The Company does not provide average or effective dayrates for its MPSVs. MPSV dayrates are impacted by highly variable customer-required cost-of-sales associated with ancillary equipment and services, such as ROVs, accommodation units and cranes, which are typically recovered through higher dayrates charged to the customer. Due to the fact that each of our MPSVs have a workload capacity and significantly higher income generating potential than each of the Company’s new generation OSVs, the utilization and dayrate levels of our MPSVs can have a very large impact on our results of operations. For this reason, our consolidated operating results, on a period-to-period basis, are disproportionately impacted by the level of dayrates and utilization achieved by our eight MPSVs.

21


 
Three Months Ended 
 March 31,
 
2018
 
2017
Offshore Supply Vessels:
 
 
 
Average number of new generation OSVs (1)
62.0

 
62.0

Average number of active new generation OSVs (2)
18.0

 
18.1

Average new generation OSV fleet capacity (DWT)
220,072

 
220,030

Average new generation OSV capacity (DWT)
3,550

 
3,549

Average new generation OSV utilization rate (3)
20.7
%
 
19.7
%
Effective new generation OSV utilization rate (4)
71.3
%
 
67.5
%
Average new generation OSV dayrate (5)
$
17,985

 
$
27,767

Effective dayrate (6)
$
3,723

 
$
5,470

 
(1)
We owned 62 new generation OSVs as of March 31, 2018. Excluded from this data are eight MPSVs owned and operated by the Company as well as four non-owned vessels managed for the U.S. Navy. Also excluded are the four Aries Marine vessels we have agreed to purchase.
(2)
In response to weak market conditions, we elected to stack certain new generation OSVs on various dates since October 1, 2014. Active new generation OSVs represent vessels that are immediately available for service during each respective period.
(3)
Utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenues.
(4)
Effective utilization rate is based on a denominator comprised only of vessel-days available for service by the active fleet, which excludes the impact of stacked vessel days.
(5)
Average new generation OSV dayrates represent average revenue per day, which includes charter hire, crewing services, and net brokerage revenues, based on the number of days during the period that the OSVs generated revenues.
(6)
Effective dayrate represents the average dayrate multiplied by the average utilization rate.
Non-GAAP Financial Measures
We disclose and discuss EBITDA as a non-GAAP financial measure in our public releases, including quarterly earnings releases, investor conference calls and other filings with the Securities and Exchange Commission. We define EBITDA as earnings (net income) before interest, income taxes, depreciation and amortization. Our measure of EBITDA may not be comparable to similarly titled measures presented by other companies. Other companies may calculate EBITDA differently than we do, which may limit its usefulness as a comparative measure.
We view EBITDA primarily as a liquidity measure and, as such, we believe that the GAAP financial measure most directly comparable to this measure is cash flows provided by operating activities. Because EBITDA is not a measure of financial performance calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.
EBITDA is widely used by investors and other users of our financial statements as a supplemental financial measure that, when viewed with our GAAP results and the accompanying reconciliations, we believe EBITDA provides additional information that is useful to gain an understanding of the factors and trends affecting our ability to service debt, pay deferred taxes and fund drydocking charges and other maintenance capital expenditures. We also believe the disclosure of EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity from quarter to quarter and year to year.
EBITDA is also a financial metric used by management as a supplemental internal measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; to compare to the EBITDA of other companies when evaluating potential acquisitions; and to assess our ability to service existing fixed charges and incur additional indebtedness.

22


The following table provides the detailed components of EBITDA as we define that term for the three months ended March 31, 2018 and 2017, respectively (in thousands):
 
Three Months Ended 
 March 31,
 
2018
 
2017
Components of EBITDA:
 
 
 
Net loss
$
(38,655
)
 
$
(27,898
)
Interest, net
 
 
 
Debt obligations
13,945

 
13,809

Interest income
(644
)
 
(401
)
Total interest, net
13,301

 
13,408

Income tax benefit
(8,491
)
 
(12,314
)
Depreciation
24,648

 
24,677

Amortization
1,992

 
3,724

EBITDA
$
(7,205
)
 
$
1,597

The following table reconciles EBITDA to cash flows provided by operating activities for the three months ended March 31, 2018 and 2017, respectively (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
EBITDA Reconciliation to GAAP:
 
 
 
EBITDA
$
(7,205
)
 
$
1,597

Cash paid for deferred drydocking charges
(1,970
)
 
(3,129
)
Cash paid for interest
(15,131
)
 
(13,756
)
Cash paid for taxes
(449
)
 
(349
)
Changes in working capital
12,833

 
6,246

Stock-based compensation expense
2,868

 
2,042

Gain on sale of assets
(43
)
 
(18
)
Changes in other, net
223

 
3,748

Net cash flows used in operating activities
$
(8,874
)
 
$
(3,619
)
In addition, we have also historically made certain adjustments, as applicable, to EBITDA for losses on early extinguishment of debt, stock-based compensation expense and interest income, to internally evaluate our performance based on the computation of ratios used in certain financial covenants of our credit agreements with various lenders, whenever applicable. We believe that such ratios can, at times, be material components of financial covenants and, when applicable, failure to comply with such covenants could result in the acceleration of indebtedness or the imposition of restrictions on our financial flexibility.
The following table provides certain detailed adjustments to EBITDA, as defined in our first-lien credit facility, for the three months ended March 31, 2018 and 2017, respectively (in thousands):
 
Three Months Ended 
 March 31,
 
2018
 
2017
Stock-based compensation expense
$
2,868

 
$
2,042

Interest income
644

 
401

Set forth below are the material limitations associated with using EBITDA as a non-GAAP financial measure compared to cash flows provided by operating activities.
EBITDA does not reflect the future capital expenditure requirements that may be necessary to replace our existing vessels as a result of normal wear and tear,

23


EBITDA does not reflect the interest, future principal payments and other financing-related charges necessary to service the debt that we have incurred in acquiring and constructing our vessels,
EBITDA does not reflect the deferred income taxes that we will eventually have to pay once we are no longer in an overall tax net operating loss carryforward position, as applicable, and
EBITDA does not reflect changes in our net working capital position.
Management compensates for the above-described limitations in using EBITDA as a non-GAAP financial measure by only using EBITDA to supplement our GAAP results.


24


Summarized financial information for the three months ended March 31, 2018 and 2017, respectively, is shown below in the following table (in thousands, except percentage changes):
 
Three Months Ended 
 March 31,
 
Increase (Decrease)
 
 
2018
 
2017
 
$
Change
 
%
Change
 
Revenues:
 
 
 
 
 
 
 
 
    Vessel revenues
 
 
 
 
 
 
 
 
Domestic
$
25,224

 
$
30,920

 
$
(5,696
)
 
(18.4
)
%
Foreign
7,910

 
4,929

 
2,981

 
60.5

%
 
33,134

 
35,849

 
(2,715
)
 
(7.6
)
%
    Non-vessel revenues
8,453

 
8,230

 
223

 
2.7

%
 
41,587

 
44,079

 
(2,492
)
 
(5.7
)
%
Operating expenses
35,969

 
27,935

 
8,034

 
28.8

%
Depreciation and amortization
26,640

 
28,401

 
(1,761
)
 
(6.2
)
%
General and administrative expenses
12,875

 
14,242

 
(1,367
)
 
(9.6
)
%
 
75,484

 
70,578

 
4,906

 
7.0

%
Gain on sale of assets
43

 
18

 
25

 
>100.0

%
Operating loss
(33,854
)
 
(26,481
)
 
(7,373
)
 
27.8

%
Interest expense
13,945

 
13,809

 
136

 
1.0

%
Interest income
644

 
401

 
243

 
60.6

%
Income tax benefit
(8,491
)
 
(12,314
)
 
3,823

 
(31.0
)
%
Net loss
$
(38,655
)
 
$
(27,898
)
 
$
(10,757
)
 
38.6