TIDEWATER INC. The following discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our future results of operations could differ materially from our historical results or those anticipated in our forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" in Item 1A and elsewhere in this Annual Report on Form 10-K. With respect to this section, the cautionary language applicable to such forward-looking statements described under "Forward-Looking Statements" found before Item 1 of this Annual Report on Form 10-K is incorporated by reference into this Item 7. This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk" in Part II, Items 7. and 7A. of the company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 ." Upon emergence from Chapter 11 bankruptcy, we adopted fresh-start accounting in accordance with provisions of theFinancial Accounting Standards Board's (FASB) Accounting Standards Codification No. 852, "Reorganizations" (ASC 852), which resulted in our becoming a new entity for financial reporting purposes onJuly 31, 2017 (the "Effective Date"). Upon the adoption of fresh-start accounting, our assets and liabilities were recorded at their fair values as ofJuly 31, 2017 . As a result of the adoption of fresh-start accounting, our consolidated financial statements subsequent toJuly 31, 2017 are not comparable to our consolidated financial statements on and prior toJuly 31, 2017 . Refer to Note (18), "Fresh-start Accounting," for further details on the impact of fresh-start accounting on our consolidated financial statements. References to "Successor" or "Successor Company " relate to the financial position and results of operations of the reorganized company subsequent toJuly 31, 2017 . References to "Predecessor" or "Predecessor Company " relate to our financial position and results of operations throughJuly 31, 2017 .
About Tidewater
Our vessels and associated vessel services provide support for all phases of offshore oil and natural gas exploration, field development and production. These services include towing of, and anchor handling for, mobile offshore drilling units; transporting supplies and personnel necessary to sustain drilling, workover and production activities; offshore construction and seismic and subsea support; and a variety of specialized services such as pipe and cable laying. In addition, we have one of the broadest geographic operating footprints in the offshore vessel industry. Our global operating footprint allows us to react quickly to changing local market conditions and to be responsive to the changing requirements of the many customers with which we believe we have strong relationships. We are also one of the most experienced international operators in the offshore energy industry with a history spanning over 60 years. OnJuly 31, 2017 , we successfully emerged from Chapter 11 bankruptcy proceedings and adopted fresh-start accounting. Refer to Notes (17) and (18) of Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 for further details on our Chapter 11 bankruptcy and emergence and the adoption of fresh-start accounting. OnNovember 15, 2018 (the "Merger Date"), we completed our merger withGulfMark Offshore, Inc. ("GulfMark") pursuant to the Agreement and Plan of the Merger datedJuly 15, 2018 . GulfMark's balances and results are included in our consolidated financial statements and disclosures beginning on the Merger Date. Therefore, our balances and results for the year endedDecember 31, 2019 include GulfMark's operations while our balances and results for the year endedDecember 30, 2018 do not include GulfMark's operations except for the last 45 days. AtDecember 31, 2019 , we owned 217 vessels with an average age of 10.6 years (excluding five joint venture vessels, but including 61 stacked vessels and four active vessels designated for sale) available to serve the global energy industry. The average age of our 152 active vessels atDecember 31, 2019 is 9.7 years.
Principal Factors That Drive Our Results
Our revenues, net earnings and cash flows from operations are largely dependent
upon the activity level of our offshore marine vessel fleet. As is the case with
the numerous other vessel operators in our industry, our business activity is
largely dependent on the level of exploration, field development and production
activity of our customers. Our customers'
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business activity, in turn, is dependent on current and expected crude oil and
natural gas prices, which fluctuate depending on expected future levels of
supply and demand for crude oil and natural gas, and on estimates of the cost to
find, develop and produce crude oil and natural gas reserves.
Our revenues in all segments are driven primarily by our fleet size, vessel utilization and day rates. Because a sizeable portion of our operating and depreciation costs do not change proportionally with changes in revenue, our operating profit is largely dependent on revenue levels.
Operating costs consist primarily of crew costs, repair and maintenance costs, insurance costs, fuel, lube oil and supplies costs and other vessel operating costs. Fleet size, fleet composition, geographic areas of operation, supply and demand for marine personnel, and local labor requirements are the major factors which affect overall crew costs in all segments. In addition, our newer, more technologically sophisticated vessels generally require a greater number of specially trained, more highly compensated fleet personnel than our older, smaller and less sophisticated vessels. Crew costs may increase if competition for skilled personnel intensifies, although a weaker offshore energy market chould mitigate any potential inflation of crew costs. Costs related to the recertification of vessels are deferred and amortized over 30 months on a straight-line basis. Maintenance costs incurred at the time of the recertification drydocking that are not related to the recertification of the vessel are expensed as incurred. Costs related to vessel improvements that either extend the vessel's useful life or increase the vessel's functionality are capitalized and depreciated. Insurance costs are dependent on a variety of factors, including our safety record and pricing in the insurance markets, and can fluctuate over time. Our vessels are generally insured for up to their estimated fair market value in order to cover damage or loss resulting from marine casualties, adverse weather conditions, mechanical failure, collisions, and property losses to the vessel. We also purchase coverage for potential liabilities stemming from third-party losses with limits that we believe are reasonable for our operations, but do not generally purchase business interruption insurance or similar coverage. Insurance limits are reviewed annually, and third-party coverage is purchased based on the expected scope of ongoing operations and the cost of third-party coverage. Fuel and lube costs can also fluctuate in any given period depending on the number and distance of vessel mobilizations, the number of active vessels off charter, drydockings, and changes in fuel prices. We also incur vessel operating costs that are aggregated as "other" vessel operating costs. These costs consist of brokers' commissions, including commissions paid to unconsolidated joint venture companies, training costs, satellite communication fees, agent fees, port fees and other miscellaneous costs. Brokers' commissions are incurred primarily in our non-U.S. operating areas where brokers oftentimes assist us in obtaining work. Brokers generally are paid a percentage of day rates billed upon collection of the amounts invoiced and, accordingly, commissions paid to brokers generally fluctuate in accordance with vessel revenue. Sonatide Joint Venture We previously disclosed the significant financial and operational challenges that we confront with respect to operations inAngola , as well as steps that we have taken to address or mitigate those risks. Most of our attention has been focused in three areas: (i) reducing the net receivable balance due from Sonatide, our Angolan joint venture with Sonangol, for vessel services; (ii) reducing the foreign currency risk created by virtue of provisions of Angolan law that require that payment for a portion of the services provided by Sonatide be paid in Angolan kwanza; and (iii) optimizing opportunities, consistent with Angolan law, for services provided by us to be paid for directly inU.S. dollars. We have been informed that, as part of a broad privatization program, Sonagal intends to seek to divest itself from the Sonatide joint venture in 2020.
Industry Conditions and Outlook
Our business is directly impacted by the level of activity in worldwide offshore oil and natural gas exploration, development and production, which in turn is influenced by trends in oil and natural gas prices. In addition, oil and natural gas prices are affected by a host of geopolitical and economic forces, including the fundamental principles of supply and demand. In particular, the oil price is significantly influenced by actions of theOrganization of Petroleum Exporting Countries , orOPEC . Prices are subject to significant uncertainty and, as a result, are extremely volatile. Beginning in late 2014, oil prices declined significantly from levels of over$100.00 per barrel and continued to decline throughout 2015 and into 2016 causing an industry-wide downturn. Prices reached a low of less than$30.00 per barrel in the first quarter of 2016 and then began a partial recovery into the$50.00 to$60.00 per barrel range. Currently, prices range between$50.00 and$65.00 per barrel. Although prices have been more stable since 2016, they are still at levels that are not 34 -------------------------------------------------------------------------------- expected to sustain significant increases in exploration and production activities, and consequently continue to adversely affect the drilling and support service industry. Commodity prices at these levels have negatively impacted our revenues, earnings and cash flows, and further sustained reduced levels of oil and natural gas prices could have a material adverse effect on our liquidity. Deepwater activity is a significant segment of the global offshore crude oil and natural gas markets, and a significant component of our business. Development typically involves significant capital investment and multi-year development plans. Such projects are generally underwritten by the participating exploration, field development and production companies using relatively conservative crude oil and natural gas pricing assumptions. Although these projects are generally less susceptible to short-term fluctuations in the price of crude oil and natural gas, deepwater exploration and development projects can be more costly relative to other onshore and offshore exploration and development. As a result, generally depressed crude oil prices have caused, and may continue to cause, many of our customers and potential customers to reevaluate their future capital expenditures in regards to deepwater projects. Results of Operations We manage and measure our business performance primarily based on four distinct geographic operating segments:Americas ,Middle East /Asia Pacific ,Europe/Mediterranean Sea andWest Africa . The following table compares vessel revenues for our owned and operated vessel fleet, and the related percentage of vessel revenue. This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk" in Part II, Items 7. and 7A. of the company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 .
Our 2019 results are affected by the following factors:
• We entered into a business combination with GulfMark in the fourth quarter
of 2018. At December 31, 2018 , we owned 257 offshore support vessels
operated in our four segments throughout the world. Of the 257 owned
vessels, 92 were stacked. During 2019, we sold 40 vessels, primarily from
the stacked fleet. Our active vessels count for 2019 was consistently
between 155 and 165 vessels.
• The GulfMark business combination primarily affected the
in both segments.
• In the third quarter of 2019 we performed an obsolescence review of ourmarine supplies inventory and recorded impairment expense of approximately
$5.2 million . • In the fourth quarter of 2019, we recorded impairment expense of$26.7
million. We identified and reclassified 46 of our vessels from property and
equipment to assets held for sale. In conjunction with the reclassification,
we revalued the vessels at the lower of net book value and estimated net
realizable value. We wrote off
our cost on a vessel under construction in
to complete.
• We actively reduced our staff, in particular in the corporate office,
throughout 2019. Our separation costs associated with these reductions
totaled approximately
awards.
The above factors are discussed in more detail and in context in the
consolidated and segment results of operations comparisons for the years ended
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The following tables present vessel revenue by segment, vessel operating costs
by segment, the related segment vessel revenue and operating costs as a
percentage of segment vessel revenues, total vessel revenue and operating costs
and the related total vessel revenue and operating costs as a percentage of
total vessel revenues for our owned and operated vessel fleet:
Year Ended Year Ended
December 31, 2019 December 31, 2018
(In thousands) % %
Vessel revenues:
Americas $ 136,958 29 % $ 118,534 30 %
Middle East/Asia Pacific 90,321 19 % 80,195 20 %
Europe/Mediterranean 123,711 26 % 56,263 14 %
West Africa 126,025 26 % 142,214 36 %
Total vessel revenues $ 477,015 100 % $ 397,206 100 %
Year Ended Year Ended
December 31, December 31,
2019 2018
(In thousands) % %
Vessel operating costs:
Americas:
Crew costs $ 63,521 46 % $ 48,016 40 %
Repair and maintenance 12,076 9 % 8,267 7 %
Insurance 227 0 % (44 ) <1 %
Fuel, lube and supplies 8,332 6 % 7,840 7 %
Other 12,086 9 % 7,506 6 %
96,242 70 % 71,585 60 %
Middle East/Asia Pacific :
Crew costs $ 37,164 41 % $ 33,487 42 %
Repair and maintenance 9,409 10 % 7,294 9 %
Insurance 1,921 2 % (72 ) (<1 %)
Fuel, lube and supplies 9,053 10 % 8,357 10 %
Other 7,759 9 % 9,471 12 %
65,306 72 % 58,537 73 %
Europe /Mediterranean:
Crew costs $ 51,018 41 % $ 25,681 46 %
Repair and maintenance 13,416 11 % 7,747 14 %
Insurance 2,124 2 % 854 2 %
Fuel, lube and supplies 6,627 5 % 5,434 10 %
Other 10,652 9 % 6,911 11 %
83,837 68 % 46,627 83 %
West Africa:
Crew costs $ 35,896 28 % $ 46,156 32 %
Repair and maintenance 12,860 10 % 10,413 7 %
Insurance 1,857 1 % (687 ) (<1 %)
Fuel, lube and supplies 12,347 10 % 12,858 9 %
Other 20,851 17 % 24,091 17 %
83,811 67 % 92,831 65 %
Total:
Crew costs $ 187,599 39 % $ 153,340 39 %
Repair and maintenance 47,761 10 % 33,721 8 %
Insurance 6,129 1 % 51 0 %
Fuel, lube and supplies 36,359 8 % 34,489 9 %
Other 51,348 11 % 47,979 12 %
Total Vessel Operating Costs $ 329,196 69 % $ 269,580 68 %
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The following tables present vessel operations general and administrative
expenses by segment, the related segment vessel operations general and
administrative expenses as a percentage of segment vessel revenues, total vessel
operations general and administrative expenses and the related total vessel
operations general and administrative expenses as a percentage of total vessel
revenues.
Year Ended Year Ended
December 31, 2019 (A) December 31, 2018
(In thousands) % %
Vessel operations general and
administrative expenses:
Americas (B) $ 14,028 10 % $ 22,042 19 %
Middle East/Asia Pacific 9,618 11 % 14,205 18 %
Europe/Mediterranean (C) 11,110 9 % 7,610 14 %
West Africa 12,751 10 % 25,529 18 %
Total vessel operations general
and administrative expenses $ 47,507 10 % $ 69,386 17 %
(A) Prior to
administrative functions were allocated to the segment general and
administrative expenses. Beginning January 1, 2019 , these previously
allocated costs are included in corporate general and administrative
expenses.
(B) Included in
consolidation of shore-based operations.
(C) Included in
the year ended
related to the consolidation of shore-based operations in Aberdeen,
Scotland .
The following tables present depreciation and amortization expense by segments,
the related segment depreciation and amortization expense as a percentage of
segment vessel revenues, total depreciation and amortization expense and the
related total depreciation and amortization expense as a percentage of total
vessel revenues.
Year Ended Year Ended
December 31, 2019 December 31, 2018
(In thousands) % %
Depreciation and amortization
expense:
Americas $ 27,493 20 % $ 16,047 14 %
Middle East/Asia Pacific 21,440 24 % 11,871 15 %
Europe/Mediterranean 30,053 24 % 11,385 20 %
West Africa 21,166 17 % 16,612 12 %
Total depreciation and
amortization expense $ 100,152 21 % $ 55,915 14 %
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The following tables compare operating income and other components of earnings before income taxes, and its related percentage of total revenues.
Year Ended Year Ended
December 31, 2019 December 31, 2018
(In thousands) % %
Vessel operating profit (loss):
Americas (A) $ (805 ) (0 %) $ 8,860 2 %
Middle East/Asia Pacific (6,044 ) (1 %) (4,417 ) (1 %)
Europe/Mediterranean (B) (1,289 ) (0 %) (9,359 ) (2 %)
West Africa 8,298 2 % 7,240 2 %
160 0 % 2,324 1 %
Other operating profit 6,734 1 % 3,742 1 %
6,894 1 % 6,066 2 %
Corporate expenses (C) (57,988 ) (12 %) (42,972 ) (11 %)
Gain on asset dispositions, net 2,263 0 % 10,624 3 %
Impairment of due from affiliate - - (20,083 ) (5 %)
Long-lived asset impairments and other (37,773 ) (8 %)
(61,132 ) (15 %)
Operating loss (86,604 ) (18 %) (107,497 ) (25 %)
Foreign exchange gain (loss) (1,269 ) (0 %) 106 <1 %
Equity in net earnings (loss) of
unconsolidated companies (3,152 ) (1 %) (18,864 ) (5 %) Interest income and other, net 6,598 1 % 11,294 3 % Loss on early extinguishment of debt - - (8,119 ) (2 %) Interest and other debt costs (29,068 ) (6 %) (30,439 ) (7 %) Loss before income taxes$ (113,495 ) (23 %)$ (153,519 ) (37 %)
(A) Included in
31, 2018 are $0.6 million of lease exit charges related to the
consolidation of shore-based operations.
(B) Included in
31, 2018 are $1.7 million of lease exit charges related to the
consolidation of shore based operations in Aberdeen, Scotland .
(C) Included in corporate expenses for the year ended
of restricted stock awards, for certain executive officers and other
corporate employees. Included in corporate expenses for the year ended
related to the GulfMark business combination, (ii)
incremental general and administrative expenses related to the GulfMark
entities (which includes $2.3 million of expenses related to the
abandonment of office lease in Houston, Texas ), (iii) $0.9 million of
expenses related to the abandonment of office lease in New Orleans,
Louisiana to consolidate corporate operations and (iv) $1.2 million of
post-business combination restructuring costs related to employee
severance.
Years Ended
Our total revenues for the years endedDecember 31, 2019 andDecember 31, 2018 were$486.5 million and$406.5 million , respectively. Incremental revenues as a result of the business combination with GulfMark for the year endedDecember 31, 2019 were$92.0 million . Vessel operating costs for the years endedDecember 31, 2019 andDecember 31, 2018 were$329.2 million and$269.6 million , respectively. Incremental vessel operating costs as a result of the GulfMark business combination for the year endedDecember 31, 2019 were$61.4 million . Depreciation and amortization expense for the years endedDecember 31, 2019 andDecember 31, 2018 was$101.9 million and$58.3 million , respectively. Depreciation and amortization expense was higher in the current period because of a$27.1 million increase as a result of the business combination with GulfMark and a$24.9 million increase in amortization of deferred drydocking and survey costs. 38
-------------------------------------------------------------------------------- General and administrative expenses for the years endedDecember 31, 2019 andDecember 31, 2018 were$103.7 million and$110.0 million , respectively. General and administrative expenses decreased overall in 2019 but there were significant one time charges for severance in 2019 and for costs associated with the GulfMark business combination, primarily legal fees and certain exit costs for duplicate facilities, in 2018.
Included in gain on asset dispositions, net for the year ended
During the year endedDecember 31, 2019 , we recognized foreign exchange losses of$1.3 million and for the year endedDecember 31, 2018 we recognized gains of$0.1 million . These foreign exchange gains and losses were primarily the result of the revaluation of Norwegian Kroner and Brazilian-Reais denominated balances to ourU.S. dollar reporting currency. In addition, our income tax expense increased$9.5 million in the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 primarily due to recognition of discrete tax expense associated with uncertain tax positions and write-offs of certain assets in our international operations. Americas Segment Operations. Vessel revenues in theAmericas segment increased 16%, or$18.4 million , during the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 . Approximately$30.0 million of the increase is the result of the nine average active additional vessels added to the fleet resulting primarily from the GulfMark business combination. Overall,Americas segment utilization increased from 46.1% during 2018 to 54.4% during 2019; however, average day rates during these same periods decreased 16%, which was generally due to a greater portion of the segment's vessels being hired at current prevailing day rates which were lower than those in 2018. Operating profit for theAmericas segment for the year endedDecember 31, 2019 , was$9.7 million less than operating profit for the year endedDecember 31, 2018 . The decrease is primarily related to the increase in vessel operating costs primarily related to requirements for increased local crewing on vessels operating inBrazil and additional vessels working in theU.S. Gulf of Mexico , some of which required additional repairs and maintenance during 2019. For the year endedDecember 31, 2019 , incremental increases related to the addition of GulfMark vessels to theAmericas fleet included vessel operating expenses of$16.1 million , depreciation of$8.0 million and general and administrative expenses of$0.4 million . Offsetting these expense increases is a reduction to general and administrative expenses as a result of our new policy beginning onJanuary 1, 2019 to discontinue the allocation of certain corporate general and administrative expenses.Middle East /Asia Pacific Segment Operations. Vessel revenues in the MiddleEast/Asia Pacific segment increased$10.1 million during the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 . TheMiddle East /Asia Pacific active vessel fleet count was 2 vessels higher for 2019 than for 2018. MiddleEast/Asia Pacific segment utilization increased from 57.0% to 63.8% and average day rates were relatively flat. Operating loss for theMiddle East /Asia Pacific segment increased$1.6 million largely related to higher depreciation expense primarily related to the additional incremental GulfMark vessels and the amortization of deferred dry docking costs. For the year endedDecember 31, 2019 , incremental increases related to the addition of GulfMark vessels to theMiddle East /Asia Pacific vessel fleet included vessel operating expenses of$2.4 million , depreciation of$2.0 million and general and administrative expenses of$0.7 million . Overall reductions to general and administrative expenses were primarily attributable to our new policy beginning onJanuary 1, 2019 to discontinue the allocation of certain corporate general and administrative expenses.Europe /Mediterranean Segment Operations. Vessel revenues in theEurope /Mediterranean segment increased 120%, or$67.4 million , during the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 . TheEurope /Mediterranean vessel fleet increased by 14 active vessels on a net basis, 15 of which were incrementally added to the segment as a result of the business combination with GulfMark. The business combination with GulfMark resulted in$60.5 million in additional revenue in 2019.Europe /Mediterranean segment utilization decreased slightly from 64.3% to 60.9%; however, average day rates increased by 25%. These increases in average day rates are due to the increasing demand for vessels in theNorth Sea and Mediterranean. Operating loss for theEurope /Mediterranean segment decreased 86%, or$8.1 million , for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 . 39
-------------------------------------------------------------------------------- For the year endedDecember 31, 2019 , incremental increases related to the addition of GulfMark vessels to theEurope /Mediterranean vessel fleet included vessel operating expenses of$42.9 million , depreciation of$16.3 million and general and administrative expenses of$4.9 million . Offsetting these expense increases is a reduction to general and administrative expenses as a result of our new policy beginning onJanuary 1, 2019 to discontinue the allocation of certain corporate general and administrative expenses. West Africa Segment Operations. Vessel revenues in theWest Africa segment decreased 11%, or$16.2 million , during the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 . TheWest Africa active vessel fleet decreased by four vessels during the comparative periods.West Africa segment utilization increased slightly from 49.6% to 50.4% and average day rates increased by 2%. The decreases in revenue were mainly due to the capacity reduction in addition due to the mix of higher specification vessels working in the segment and more spot market activity in 2019 as compared to 2018. Operating profit for theWest Africa segment was$8.3 million for the year endedDecember 31, 2019 , as compared to$7.2 million for the year endedDecember 31, 2018 . This increase in profitability is due to decreases in vessel costs, primarily as a result of the devaluation of a currency which was used to pay a portion of crew costs, and general and administrative expenses. The reductions to general and administrative expenses are primarily the result of our new policy beginning onJanuary 1, 2019 to discontinue the allocation of certain corporate general and administrative expenses. Other Items. Asset Impairments, Assets Held For Sale and Other. The table below summarizes the number of vessels impaired and the amount of impairment and other expense incurred. Year Year Ended Ended (In thousands, except vessel counts) December 31, 2019 December 31, 2018 Number of vessels impaired during the period 35
56
Amount of impairment and other expense incurred $ 37,773 $ 61,132 During the third quarter of 2019, in conjunction with our review of conditions that would indicate potential impairment in the value of our assets, we identified certain obsolete marine service and vessel supplies and parts inventory and charged$5.2 million of impairment expense. We considered this valuation approach to be a Level 3 fair value measurement due to the level of estimation involved in valuing obsolete inventory. In 2011, we contracted with a Brazilian shipyard to construct a vessel that was not completed. We initiated arbitration proceedings (per the construction contract) seeking completion of the hull or rescission of the contract and the return of funds. In response, the shipyard initiated a separate lawsuit seeking the amounts due under the contract. As of the fresh-start date, we recorded$1.8 million in other assets which represented the unimpaired balance of the construction costs that were expected to be returned to us once the dispute was resolved. During 2019, our final appeal was denied and the case was remanded back to the original courts. Our local counsel informed us that is now more likely that not that the shipyard will prevail in the dispute and that we would be liable for the additional payment of$4.0 million . As a result, a$5.8 million expense was recorded in the fourth quarter of 2019. Also in the fourth quarter of 2019, we evaluated our fleet for vessels to be considered for disposal. We determined that 42 of our 61 stacked vessels should be scrapped or sold. In addition, we identified four vessels in our active fleet that should be designated for sale. AtDecember 31, 2019 we reclassified the vessels from property and equipment to assets held for sale. In conjunction with this reclassification, we adjusted the carrying value of these assets to the lower of current net book value or the expected net realizable sale value. This resulted in a$26.7 million charge to impairment expense and the reclassification of the remaining$39.3 million of carrying value to assets held for sale. We considered this valuation approach to be a Level 3 fair value measurement due to the level of estimation involved in valuing assets to be scrapped or sold. We do not separate our asset impairment expense by segment because of the significant movement of our assets between segments.
Refer to Note (9) of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further details on our asset impairments of our due from affiliates balance.
Gains on Asset Dispositions, Net. During the year endedDecember 31 2019 , we recognized gains of$2.3 million related to the sale of 40 vessels and other assets. During the year endedDecember 31, 2018 , we recognized net gains of$10.6 million , related to the sale of 38 vessels and other assets. 40 -------------------------------------------------------------------------------- Foreign Exchange Gains and Losses. During the year endedDecember 31, 2019 , we recognized net foreign exchange loss of$1.3 million , largely related to the Norwegian Kroner and the Brazilian Reais. During the year endedDecember 31, 2018 , we recognized a net foreign exchange gain of$0.1 million . During the yearDecember 31, 2018 , the exchange rate of the Angolan kwanza versus theU.S. dollar devalued from a ratio of approximately 168 to 1 to a ratio of approximately 309 to 1, or approximately 84%. In 2019, the ratio of kwanza to USD fell from 309 to 1 to 482 to 1 or 56%. A devaluation in the Angolan kwanza relative to theU.S. dollar resulted in foreign exchange losses for Sonatide to the extent the Angolan kwanza-denominated asset balances were in excess of kwanza-denominated liabilities, 49% of which would be borne by us. However, sinceJune 30, 2018 , our investment balance in Sonatide was reduced to zero as a result of the accumulated losses in excess of our investment, thus, losses from Sonatide's operations afterJune 30, 2018 have not been recognized.
Vessel Utilization and Average Rates by Segment
Year Ended Year Ended
SEGMENT STATISTICS: December 31, 2019 December 31, 2018
Americas fleet:
Utilization 54.4 % 46.1 %
Average vessel day rates 11,796 13,987
Average total vessels 58 51
Average stacked vessels (21 ) (22 )
Average active vessels 37 29
Middle East/Asia Pacific fleet:
Utilization 63.8 % 57.0 %
Average vessel day rates 7,458 7,482
Average total vessels 52 52
Average stacked vessels (10 ) (12 )
Average active vessels 42 40
Europe /Mediterranean fleet:
Utilization 60.9 % 64.3 %
Average vessel day rates 12,052 9,637
Average total vessels 46 25
Average stacked vessels (13 ) (6 )
Average active vessels 33 19
West Africa fleet:
Utilization 50.4 % 49.6 %
Average vessel day rates 9,338 9,196
Average total vessels 73 85
Average stacked vessels (23 ) (31 )
Average active vessels 50 54
Worldwide fleet:
Utilization 56.5 % 52.2 %
Average vessel day rates 10,046 9,809
Average total vessels 229 213
Average stacked vessels (67 ) (71 )
Average active vessels 162 142
Owned or chartered vessels include stacked vessels. We consider a vessel to be
stacked if the vessel crew is furloughed or substantially reduced and limited
maintenance is being performed on the vessel. We reduce operating costs by
stacking vessels when management does not foresee opportunities to profitably or
strategically operate the vessels in the near future. Vessels are stacked when
market conditions warrant and they are no longer considered stacked when they
are returned to active service, sold or otherwise disposed. When economically
practical marketing opportunities arise, the stacked vessels can be returned to
active service by performing any necessary maintenance on the vessel and either
rehiring or returning fleet personnel to operate the vessel. Although not
currently fulfilling charters, stacked vessels are considered to be in service
and are included in the calculation of our utilization statistics.
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We had 19 and 92 stacked vessels at December 31, 2019 and December 31, 2018 ,
respectively. In addition, at December 31, 2019 , 42 previously stacked vessels
had been reclassified from property and equipment to assets held for sale in
current assets. Along with four vessels from our active fleet, we had 46 total
vessels that are classified as assets held for sale at December 31, 2019 .
Vessel Dispositions
We seek opportunities to sell and/or scrap our older vessels when market
conditions warrant and opportunities arise. The majority of our vessels are sold
to buyers who do not compete with us in the offshore energy industry. The number
of vessels disposed by segment are as follows:
Year Ended Year Ended
December 31, 2019 December 31, 2018
Number of vessels disposed by segment:
Americas 21 10
Middle East/Asia Pacific 2 11
Europe/Mediterranean 3 -
West Africa 14 17
Total 40 38
Vessel Deliveries
Year Ended
Year EndedDecember 31, 2018 . We acquired two 260-foot, 3,500 deadweight ton (DWT) of cargo carrying capacity, deepwater PSVs for a total cost of$10.1 million in the year endedDecember 31, 2018 . We also took delivery of one 300-foot, 5,400 DWT of cargo carrying capacity, deepwater PSV which was constructed at a domestic shipyard for a total cost of$53.9 million . In conjunction with our Chapter 11 bankruptcy emergence and application of fresh-start accounting as ofJuly 31, 2017 , this vessel under construction was recorded at its estimated fair value of$7.0 million . The final payment of$4.1 million was made upon delivery in 2018.
General and Administrative Expenses
Consolidated general and administrative expenses and the related percentage of each component to total revenues re as follows:
Year Ended Year Ended
December 31, 2019 December 31, 2018
(In thousands) %
Personnel $ 50,616 10 % $ 57,940 14 %
Office and property 14,510 3 % 12,336 3 %
Professional services 15,909 3 % 22,737 5 %
Other 10,066 2 % 9,314 2 %
Restructuring charges (A) 12,615 3 % 7,696 2 %
$ 103,716 21 % $ 110,023 27 %
Segment and corporate general and administrative expenses and the related percentage of total general and administrative expenses were as follows:
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Year Ended Year Ended
December 31, 2019 December 31, 2018
(In thousands) %
Vessel operations $ 47,507 46 % $ 66,081 60 %
Other operating activities 1 0 % 22 <1 %
Corporate 43,593 42 % 36,224 33 %
Restructuring charges (A) 12,615 12 % 7,696 7 %
$ 103,716 100 % $ 110,023 100 %
(A) Restructuring charges for the year ended
million of severance and termination benefits, including acceleration of
restricted stock awards, for certain executive officers and other corporate
employees. Restructuring charges for the year ended December 31, 2018
include vessel operations costs and corporate costs of $3.4 million and
$4.3 million , respectively, of post-business combination severance and
similar costs and costs related to the exit of leased offices.
Despite higher 2019 incremental general and administrative expense related to
the acquired Gulfmark entities, general and administrative expenses for the year
ended December 31, 2019 have decreased as compared to the comparable prior year
primarily as a result of our continuing efforts to reduce overhead costs due to
the downturn in the offshore services market. General and administrative
expenses for the year ended December 31, 2018 include $9.0 million professional
services expenses related to the business combination with Gulfmark. Prior to
January 1, 2019 , we allocated the costs of certain marine operations related to
general and administrative functions, such as marine management, engineering,
supply chain management, risk management, fleet human resources and health and
safety to the segment general and administrative expenses. Beginning January 1,
2019 , we modified that process to better analyze costs and to align the policies
of the two combined companies. In 2019, the costs related to those previously
allocated functions are included in corporate general and administrative
expenses.
Liquidity, Capital Resources and Other Matters
Reorganization of Tidewater
Refer to Note (17) of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further details on our Chapter 11 bankruptcy and emergence. Availability of Cash AtDecember 31, 2019 , we had$227.6 million in cash and cash equivalents (including restricted cash), including amounts held by foreign subsidiaries, the majority of which is available to us without adverse tax consequences. Included in foreign subsidiary cash are balances held inU.S. dollars and foreign currencies that await repatriation due to various currency conversion and repatriation constraints, partner and tax related matters, prior to the cash being made available for remittance to our domestic accounts. We currently intend that earnings by foreign subsidiaries will be indefinitely reinvested in foreign jurisdictions in order to fund strategic initiatives (such as investment, expansion and acquisitions), fund working capital requirements and repay debt (both third-party and intercompany) of our foreign subsidiaries in the normal course of business. Moreover, we do not currently intend to repatriate earnings of our foreign subsidiaries to the U. S. because cash generated from our domestic businesses and the repayment of intercompany liabilities from foreign subsidiaries are currently deemed to be sufficient to fund the cash needs of our operations in the U. S. Our objective in financing our business is to maintain and preserve adequate financial resources and sufficient levels of liquidity. We do not have a revolving credit facility. Cash and cash equivalents and future net cash provided by operating activities provide us, in our opinion, with sufficient liquidity to meet our liquidity requirements. Indebtedness
Refer to Note (4) of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further details on our indebtedness.
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We may from time to time seek to retire or purchase our outstanding debt through
cash purchases and/or exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases or exchanges,
if any, will depend on prevailing market conditions, our liquidity requirements,
contractual restrictions and other factors. The amounts involved may be
material.
Share Repurchases
Please refer to Note (13) of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Dividends
Please refer to Note (13) of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Operating Activities
Net cash provided by or used in operating activities for any period will fluctuate according to the level of business activity for the applicable period.
Net cash provided by (used in) operating activities is as follows:
Year Ended Year Ended
(In thousands) December 31, 2019 December 31, 2018
Net loss $ (141,219 ) $ (171,771 )
Depreciation and amortization 77,045 51,332
Amortization of deferred drydocking and survey costs 24,886
6,961
Amortization of debt premiums and discounts (4,877 ) (1,856 ) Provision for deferred income taxes 672 572 Gain on asset dispositions, net (2,263 ) (10,624 ) Impairment of due from affiliate - 20,083 Long-lived asset impairments 37,773 61,132 Loss on debt extinguishment - 8,119 Compensation expense - stock based 19,603
13,406
Deferred drydocking and survy costs (70,437 ) (25,968 ) Changes in operating assets and liabilities 4,162 (4,266 ) Changes in due to/from affiliate, net 22,193
28,644
Changes in investments in, at equity, and advances to unconsolidated companies 1,039
28,177
Net cash provided by (used in) operating activities $ (31,423 ) $ 3,941 Net cash used by operating activities for the year endedDecember 31, 2019 , of$31.4 million reflects a net loss of$141.2 million , non-cash asset impairments of$37.8 million , non-cash depreciation and amortization of$101.9 million , a net gain on asset dispositions of$2.3 million and stock-based compensation expense of$19.6 million . We paid out$70.4 million for regulatory drydocks, including reactivations, in 2019. Changes in investments in, at equity, and advances to unconsolidated companies decreased by$1.0 million , primarily reflecting foreign exchange losses recognized by our 49% owned Sonatide joint venture. Net cash provided by operating activities for the year endedDecember 31, 2018 , of$3.9 million reflects a net loss of$171.8 million , which includes non-cash asset impairments of$61.1 million , non-cash impairment of due from affiliate of$20.1 million , non-cash depreciation and amortization of$58.3 million , gain on asset dispositions, net, of$10.6 million , and stock-based compensation expense of$13.4 million . Changes in investments in, at equity, and advances to unconsolidated companies decreased by$28.2 million , which primarily reflects foreign exchange losses recognized by our 49% owned Sonatide joint venture and receipt of$12.3 million of dividends received. Changes in due from/due to affiliate, net, during the year endedDecember 31, 2018 of$28.6 million generally reflect collections from Sonatide due to kwanza conversions and customer receipts in excess of billings that were paid to us. Changes in operating assets and liabilities used$30.2 million of cash in the year endedDecember 31, 2018 . Investing Activities
Net cash provided by investing activities is as follows:
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Year Ended Year Ended
(In thousands) December 31, 2019 December 31, 2018
Proceeds from sales of assets $ 28,847 $ 46,115
Additions to properties and equipment (17,998 ) (21,391 )
Cash and cash equivalents from stock based
business combination - 43,806
Net cash provided by investing activities $ 10,849 $ 68,530 Net cash provided by investing activities for the year endedDecember 31, 2019 , was$10.8 million , reflecting the receipt of proceeds from the sale of assets of$28.8 million related to the disposal of 40 vessels, 22 of which were scrapped. Additions to property and equipment were comprised of$18.0 million , primarily for upgrades to our existing fleet and the implementation of a new enterprise software system. Net cash provided by investing activities for the year endedDecember 31, 2018 , was$68.5 million , reflecting the receipt of proceeds from the sale of assets of$46.1 million related to the disposal of 38 vessels, 22 of which were scrapped. Additions to properties and equipment were comprised of$10.1 million for the purchase of two deepwater PSVs,$6.9 million in capitalized upgrades to existing vessels and equipment,$4.1 million for the construction of offshore support vessels and$0.2 million in other properties and equipment purchases. Refer to Note (2) of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information on our business combination.
Financing Activities
Net cash used in financing activities is as follows:
Year Ended Year Ended
(In thousands) December 31, 2019 December 31, 2018
Principal payments on long-term debt $ (133,693 ) $ (105,169 )
Premiums paid for redemption of secured notes (11,402 ) -
Cash payments to General Unsecured Creditors - (8,377 )
Debt extinguishment - (8,119 )
Cash received for issuance of common stock - 3
Taxes paid on share-based awards (4,467 ) (4,400 )
Other - (2,000 )
Net cash used in financing activities $ (149,562 ) $ (128,062 )
Financing activities for the year ended December 31, 2019 , used $149.6 million
of cash, as a result of the repayment of the $125.0 million of our secured notes
and a $11.4 million redemption premium and consent fee, pursuant to a tender
offer associated with the repayment of secured notes. Financing activities also
included $8.7 million of scheduled semi annual payments on the TROMS offshore
debt.
Financing activities for the year ended December 31, 2018 , used
$128.1 million of cash, as a result of the repayment of the $100.0 million
GulfMark term loan facility upon consummation of the business combination with
GulfMark including an additional $8.1 million payment to settle a make whole
provision, $5.1 million of scheduled semiannual principal payments on Troms
offshore debt, and a $2.0 million payment to acquire the remaining
noncontrolling interest in a consolidated joint venture.
Legal Proceedings
Various legal proceedings and claims are outstanding which arose in the ordinary
course of business. In the opinion of management, the amount of ultimate
liability, if any, with respect to these actions, will not have a material
adverse effect on our financial position, results of operations, or cash flows.
Information related to various commitments and contingencies, including legal
proceedings, is disclosed in Note (14) of Notes to Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K.
Contractual Obligations and Contingent Commitments
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Contractual Obligations The following table summarizes our consolidated contractual obligations as ofDecember 31, 2019 and the effect such obligations, inclusive of interest costs, are expected to have on our liquidity and cash flows in future periods. (In thousands) Payments Due by Fiscal Year More Than Total 2020 2021 2022 2023 2024 5 Years Long-term debt obligations: Secured notes - principal$ 224,793 - - 224,793 - - - Secured notes - interest 46,456 17,983 17,983 10,490 - - -
Troms Offshore debt - principal 72,867 9,890 9,890
9,890 13,695 10,379 19,123 Troms Offshore debt - interest 13,493 3,507 3,008
2,508 1,915 1,277 1,278
Total long-term debt obligations: 357,609 31,380 30,881
247,681 15,610 11,656 20,401 Operating lease obligations: Operating leases
5,661 1,315 1,277 1,072 754 311 932
Total operating lease obligations: 5,661 1,315 1,277
1,072 754 311 932
Other long-term obligations:
Uncertain tax positions (A) 48,578 22,991 2,395 3,565 3,740 2,023 13,864
Pension obligations 61,440 6,547 6,444 6,360 6,262 6,235 29,592 Total other long-term obligations: 110,018 29,538 8,839
9,925 10,002 8,258 43,456
Total obligations $ 473,288 62,233 40,997 258,678 26,366 20,225 64,789
(A) These amounts represent the liability for unrecognized tax benefits under
FASB Interpretation No. 48. The estimated income tax liabilities for
uncertain tax positions will be settled as a result of expiring statutes,
audit activity, competent authority proceedings related to transfer pricing,
or final decisions in matters that are the subject of litigation in various
taxing jurisdictions in which we operate. The timing of any particular
settlement will depend on the length of the tax audit and related appeals
process, if any, or an expiration of a statute. If a liability is settled due
to a statute expiring or a favorable audit result, the settlement of the tax
liability would not result in a cash payment.
Letters of Credit and Surety Bonds
In the ordinary course of business, we had other commitments that we are contractually obligated to fulfill with cash should the obligations be called. These obligations include standby letters of credit, surety bonds and performance bonds that guarantee our performance as it relates to our vessel contracts, insurance, customs and other obligations in various jurisdictions. While these obligations are not normally called, the obligation could be called by the beneficiaries at any time before the expiration date should we breach certain contractual and/or performance or payment obligations. As ofDecember 31, 2019 , we had approximately$50.9 million of outstanding standby letters of credit, surety bonds and performance bonds, geographically concentrated inMexico ,Brazil andNigeria .
Application of Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures and disclosures of any contingent assets and liabilities at the date of the financial statements. We evaluate the reasonableness of these estimates and assumptions continually based on a combination of historical experience and other assumptions and information that comes to our attention that may vary the outlook for the future. Estimates and assumptions about future events and their effects are subject to uncertainty, and accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes. As a result, actual results may differ from estimates under different assumptions. The Nature of Operations and Summary of Significant Accounting Policies, as described in Note (1) of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, should be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations. We have defined a critical accounting estimate as one that is important to the portrayal of our financial condition or results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. We believe the following critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements are described below. There are other items within our consolidated financial statements that require estimation and judgment, but they are not deemed critical as defined above. 46 --------------------------------------------------------------------------------
Business Combination On the Merger Date we completed our business combination with GulfMark. Assets acquired and liabilities assumed in the business combination have been recorded at their estimated fair values as of the Merger Date under the acquisition method of accounting. The estimated fair values of certain assets and liabilities require judgments and assumptions. Refer to Note (2) of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, "Business Combination" for further details on the impact of this business combination on our consolidated financial statements.
Receivables and Allowance for Doubtful Accounts
In the normal course of business, we extend credit to our customers on a short-term basis. Our principal customers are major oil and natural gas exploration, field development and production companies. We routinely review and evaluate our accounts receivable balances for collectability. The determination of the collectability of amounts due from our customers requires us to use estimates and make judgments regarding future events and trends, including monitoring our customers' payment history and current credit worthiness to determine that collectability is reasonably assured, as well as consideration of the overall business climate in which our customers operate. Provisions for doubtful accounts are recorded when it becomes evident that our customer will not make the required payments, which results in a reduction in our receivable balance. We believe that our allowance for doubtful accounts is adequate to cover potential bad debt losses under current conditions; however, uncertainties regarding changes in the financial condition of our customers, either adverse or positive, could impact the amount and timing of any additional provisions for doubtful accounts that may be required.
Impairment of Long-Lived Assets
We review the vessels in our active fleet for impairment whenever events occur or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. In such evaluation, the estimated future undiscounted cash flows generated by an asset group are compared with the carrying amount of the asset group to determine if a write-down may be required. With respect to vessels that are expected to remain in active service, we group together for impairment testing purposes vessels with similar operating and marketing characteristics. Due in part to the modernization of our fleet more vessels that are being stacked are newer vessels that are expected to return to active service. Stacked vessels expected to return to active service are generally newer vessels, have similar capabilities and likelihood of future active service as other currently operating vessels, are generally current with classification societies in regards to their regulatory certification status, and are being actively marketed. Stacked vessels expected to return to active service are evaluated for impairment as part of their assigned active asset group and not individually. We estimate cash flows based upon historical data adjusted for our best estimate of expected future market performance, which, in turn, is based on industry trends. The primary estimates and assumptions used in reviewing active vessel groups for impairment and estimating undiscounted cash flows include utilization rates, average day rates and average daily operating expenses. These estimates are made based on recent actual trends in utilization, day rates and operating costs and reflect management's best estimate of expected market conditions during the period of future cash flows. These assumptions and estimates have changed considerably as market conditions have changed, and they are reasonably likely to continue to change as market conditions change in the future. Although we believe our assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce materially different results. Management estimates may vary considerably from actual outcomes due to future adverse market conditions or poor operating results that could result in the inability to recover the current carrying value of an asset group, thereby possibly requiring an impairment charge in the future. As our fleet continues to age, management closely monitors the estimates and assumptions used in the impairment analysis in order to properly identify evolving trends and changes in market conditions that could impact the results of the impairment evaluation. If an asset group fails the undiscounted cash flow test, we estimate the fair value of each asset group and compare such estimated fair value to the carrying value of each asset group in order to determine if impairment exists.
In addition to the periodic review of our active long-lived assets for impairment when circumstances warrant, we also perform a review of our stacked vessels not expected to return to active service whenever changes in circumstances indicate that the carrying amount of a vessel may not be recoverable.
Management estimates the fair value of each vessel in an asset group and each
vessel not expected to return to active service, considered Level 3, as defined
by ASC 820, Fair Value Measurements and Disclosures, by considering items such
as the vessel's age, length of time stacked, likelihood of a return to active
service, actual recent sales of similar vessels,
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among others. Third party appraisals, broker values or internal valuations based
on recent sale activity are utilized for vessels expected to be sold as an
operating vessel. We leverage information for vessels in a similar class,
similar age, or similar specification to be used as a basis of fair value for
vessels expected to be sold. Internal valuations are also prepared for vessels
expected to be sold as scrap utilizing an estimated scrap value per lightweight
ton based on the region of the vessel is located and the weight of the vessel
and recent scrap activity. We record an impairment charge when the carrying
value of an asset group or a stacked vessel exceeds its estimated fair value.
The estimates of fair value of stacked vessels are also subject to significant
variability, are sensitive to changes in market conditions, and are reasonably
likely to change in the future.
Income Taxes
The asset-liability method is used for determining our income tax provisions,
under which current and deferred tax liabilities and assets are recorded in
accordance with enacted tax laws and rates. Under this method, the amounts of
deferred tax liabilities and assets at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered. In addition, we determine our effective tax rate by estimating our
permanent differences resulting from differing treatment of items for tax and
accounting purposes.
As a global company, we are subject to the jurisdiction of taxing authorities in
the United States and by the respective tax agencies in the countries in which
we operate internationally, as well as to tax agreements and treaties among
these governments. Our operations in these different jurisdictions are taxed on
various bases: actual income before taxes, deemed profits (which are generally
determined using a percentage of revenue rather than profits) and withholding
taxes based on revenue. Determination of taxable income in any tax jurisdiction
requires the interpretation of the related tax laws and regulations and the use
of estimates and assumptions regarding significant future events such as the
amount, timing and character of deductions, permissible revenue recognition
methods under the tax law and the sources and character of income and tax
credits. Changes in tax laws, regulations, agreements and treaties, foreign
currency exchange restrictions or our level of operations or profitability in
each taxing jurisdiction could have an impact on the amount of income taxes that
we provide during any given year. We are periodically audited by various taxing
authorities in the United States and by the respective tax agencies in the
countries in which we operate internationally. The tax audits generally include
questions regarding the calculation of taxable income. Audit adjustments
affecting permanent differences could have an impact on our effective tax rate.
The carrying value of our net deferred tax assets is based on our present belief
that we will more likely than not be unable to generate sufficient future
taxable income in certain tax jurisdictions to utilize such deferred tax assets,
based on estimates and assumptions. If these estimates and related assumptions
change in the future, we may be required to adjust valuation allowances against
our deferred tax assets resulting in additional income tax expense or benefit in
our consolidated statement of operations. Management evaluates the realizability
of the deferred tax assets and assesses the need for changes to valuation
allowances on a quarterly basis. While we have considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the
present need for a valuation allowance, in the event we were to determine that
we would be able to realize our deferred tax assets in the future in excess of
our net recorded amount, an adjustment to the valuation allowance would increase
income in the period such determination was made. Should we determine that we
would not be able to realize all or part of our net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.
Deferred taxes are not provided on undistributed earnings of certain non-
We record uncertain tax positions on the basis of a two-step process in which
(1) we determine whether it is more likely than not that the tax positions would
be sustained on the basis of the technical merits of the position and (2) for
those tax positions that meet the more-likely-than-not recognition threshold, we
recognize the largest amount of tax benefit that was more than 50 percent likely
to be realized upon ultimate settlement with the related tax authority. The
recognition and measurement of tax liabilities for uncertain tax positions in
any tax jurisdiction requires the interpretation of the related tax laws and
regulations as well as the use of estimates and assumptions regarding
significant future events. Changes in tax laws, regulations, agreements and
treaties, foreign currency exchange restrictions or our level of operations or
profitability in each taxing jurisdiction could have an impact on the amount of
income taxes during any given year.
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New Accounting Pronouncements
For information regarding the effect of new accounting pronouncements, refer to Note (1) of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
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