Quarterly Report (10-q)

Date : 11/09/2016 @ 3:53PM
Source : Edgar (US Regulatory)
Stock : Hornbeck Offshore Services (HOS)
Quote : 3.19  -0.24 (-7.00%) @ 4:47PM
Hornbeck share price Chart

Quarterly Report (10-q)


 
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 September 30, 2016
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   
 
Non-accelerated filer   
 
 
 
Accelerated filer   
 
Smaller reporting company   
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 October 31, 2016 was 36,374,365 .
 



HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016
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)
 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
225,461

 
$
259,801

Accounts receivable, net of allowance for doubtful accounts of $2,158 and $2,877, respectively
44,506

 
91,202

Other current assets
14,071

 
13,033

Total current assets
284,038

 
364,036

Property, plant and equipment, net
2,598,244

 
2,574,661

Deferred charges, net
20,778

 
35,273

Other assets
10,363

 
10,446

Total assets
$
2,913,423

 
$
2,984,416

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
13,185

 
$
35,742

Accrued interest
13,531

 
14,795

Accrued payroll and benefits
8,204

 
11,396

Other accrued liabilities
12,250

 
23,612

Total current liabilities
47,170

 
85,545

Long-term debt, net of original issue discount of $33,782 and $41,600 and deferred financing costs of $10,934 and $13,119, respectively
1,080,284

 
1,070,281

Deferred tax liabilities, net
359,273

 
381,619

Other liabilities
1,496

 
808

Total liabilities
1,488,223

 
1,538,253

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; 36,374 and 35,985 shares issued and outstanding, respectively
364

 
360

Additional paid-in-capital
751,907

 
748,041

Retained earnings
657,235

 
701,838

Accumulated other comprehensive income (loss)
15,694

 
(4,076
)
Total stockholders’ equity
1,425,200

 
1,446,163

Total liabilities and stockholders’ equity
$
2,913,423

 
$
2,984,416



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  
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Vessel revenues
$
43,670

 
$
108,308

 
$
157,170

 
$
366,608

Non-vessel revenues
8,257

 
7,973

 
25,250

 
20,743

 
51,927

 
116,281

 
182,420

 
387,351

Costs and expenses:
 
 
 
 
 
 
 
Operating expenses
29,375

 
54,938

 
104,134

 
173,900

Depreciation
23,467

 
20,958

 
68,298

 
61,114

Amortization
4,580

 
6,392

 
16,675

 
20,192

General and administrative expenses
9,031

 
12,188

 
30,084

 
37,143

 
66,453

 
94,476

 
219,191

 
292,349

Gain on sale of assets
81

 
11,004

 
36

 
44,060

Operating income (loss)
(14,445
)
 
32,809

 
(36,735
)
 
139,062

Other income (expense):
 
 
 
 
 
 
 
Interest income
401

 
381

 
1,164

 
988

Interest expense
(12,820
)
 
(9,712
)
 
(34,888
)
 
(29,895
)
Other income
1,592

 
94

 
2,048

 
1,016

 
(10,827
)
 
(9,237
)
 
(31,676
)
 
(27,891
)
Income (loss) before income taxes
(25,272
)
 
23,572

 
(68,411
)
 
111,171

Income tax expense (benefit)
(8,769
)
 
9,148

 
(23,808
)
 
41,679

Net income (loss)
$
(16,503
)
 
$
14,424

 
$
(44,603
)
 
$
69,492

Earnings (loss) per share
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
(0.45
)
 
$
0.40

 
$
(1.23
)
 
$
1.95

Diluted earnings (loss) per common share
$
(0.45
)
 
$
0.40

 
$
(1.23
)
 
$
1.92

Weighted average basic shares outstanding
36,338

 
35,832

 
36,205

 
35,723

Weighted average diluted shares outstanding
36,338

 
36,383

 
36,205

 
36,256



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  
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Unaudited)
Net income (loss)
$
(16,503
)
 
$
14,424

 
$
(44,603
)
 
$
69,492

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation income (loss)
(908
)
 
(2,866
)
 
19,770

 
(3,120
)
Total comprehensive income (loss)
$
(17,411
)
 
$
11,558

 
$
(24,833
)
 
$
66,372



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)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
(44,603
)
 
$
69,492

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
68,298

 
61,114

Amortization
16,675

 
20,192

Stock-based compensation expense
6,557

 
7,957

Provision for bad debts
(719
)
 
(697
)
Deferred tax expense (benefit)
(21,097
)
 
41,516

Amortization of deferred financing costs
8,131

 
7,267

Gain on sale of assets
(36
)
 
(44,060
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
50,321

 
44,910

Other current and long-term assets
591

 
1,185

Deferred drydocking charges
(3,214
)
 
(12,034
)
Accounts payable
(8,406
)
 
(8,271
)
Accrued liabilities and other liabilities
(14,523
)
 
(2,804
)
Accrued interest
(1,264
)
 
(1,299
)
Net cash provided by operating activities
56,711

 
184,468

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Costs incurred for OSV newbuild program
(73,198
)
 
(152,415
)
Net proceeds from sale of assets
506

 
152,000

Vessel capital expenditures
(18,706
)
 
(47,460
)
Non-vessel capital expenditures
(414
)
 
(15,855
)
Net cash used in investing activities
(91,812
)
 
(63,730
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Deferred financing costs
(1,102
)
 
(2,089
)
Net cash proceeds from other shares issued
732

 
1,966

Net cash used in financing activities
(370
)
 
(123
)
Effects of exchange rate changes on cash
1,131

 
(3,120
)
Net increase (decrease) in cash and cash equivalents
(34,340
)
 
117,495

Cash and cash equivalents at beginning of period
259,801

 
185,123

Cash and cash equivalents at end of period
$
225,461

 
$
302,618

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
 
 
 
Cash paid for interest
$
38,871

 
$
39,151

Cash paid for income taxes
$
2,688

 
$
3,331



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, 2015 . The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 . Certain reclassifications have been made to prior period results to conform to current year presentation.
The consolidated balance sheet at December 31, 2015 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.

5

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





2. Recent Accounting Pronouncements
The following table provides a brief description of recent accounting pronouncements that could have a material effect on our financial statements:
Standard
 
Description
 
Date of Adoption
 
Effect on the financial statements and other significant matters
Standards that are not yet adopted
 
 
Accounting Standards Update (ASU) No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments"
 
The standard clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU No. 2016-15 requires retrospective application. Early adoption is permitted.
 
January 1, 2018
 
The Company believes that the implementation of this new guidance will not have a material impact on it consolidated financial statements.
 
 
 
 
 
 
 
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. Early adoption is permitted.
 
January 1, 2020
 
The Company believes that the implementation of this new guidance will not have a material impact on it consolidated financial statements.
 
 
 
 
 
 
 
ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting"
 
This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeitures and classification of related amounts within the statement of cash flows. Early adoption is permitted.
 
January 1, 2017
 
The Company is evaluating the effect of this new standard on its financial statements and related disclosures.
 
 
 
 
 
 
 
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 is evaluating the effect of this new standard on its financial statements and related disclosures.
 
 
 
 
 
 
 
ASU No. 2014-15, "Presentation of Financial Statements - Going Concern"
 
The standard requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern. Early adoption is permitted.
 
January 1, 2017
 
The Company believes that the implementation of this new guidance will not have a material impact on it consolidated financial statements.
 
 
 
 
 
 
 
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 to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 requires retrospective application.
 
January 1, 2018
 
The Company is evaluating the effect of this new standard on its financial statements and related disclosures.

6

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




3. Earnings (Loss) Per Share
Basic earnings (loss) per common share was calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share was calculated by dividing net income (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. 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 earnings per share (in thousands, except for per share data): 
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
(16,503
)
 
$
14,424

 
$
(44,603
)
 
$
69,492

Weighted average number of shares of common stock outstanding
36,338

 
35,832

 
36,205

 
35,723

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

 
551

 

 
533

Weighted average number of dilutive shares of common stock outstanding
36,338

 
36,383

 
36,205

 
36,256

Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
(0.45
)
 
$
0.40

 
$
(1.23
)
 
$
1.95

Diluted earnings (loss) per common share
$
(0.45
)
 
$
0.40

 
$
(1.23
)
 
$
1.92

 
(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 988 and 974 shares of common stock for the three and nine months ended September 30, 2016 . For the three and nine months ended September 30, 2015 , the Company had 317 and 326 anti-dilutive stock options, respectively. Stock options are anti-dilutive when the exercise price of the options is greater than the average market price of the common stock for the period or when the results from operations are a net loss.
(2)
For the three and nine months ended September 30, 2016 and 2015 , 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 6 to these financial statements for further information regarding certain of the Company’s restricted stock grants.

4 . 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 three months ended June 30, 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 groups 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 has sufficient projected undiscounted cash flows to recover

7

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




the remaining book value of the Company's long-lived assets within such group. During the third quarter of 2016 , the Company reviewed the assumptions used in preparing the undiscounted cash flow projections and it concluded that such assumptions remain consistent with current market conditions. In addition, the Company has not observed any additional indicators of impairment related to its vessels during the three months ended September 30, 2016 .

Vessel Sales

On March 30, 2016, the Company closed on the sale of its last remaining non-core conventional OSV, the Cape Breton , for cash consideration of $420,000 . The sale resulted in a pre-tax loss of approximately $45,000 ( $31,000 after-tax or $0.00 per diluted share). During the three months ended September 30, 2016 , the Company sold vessel-related equipment for cash consideration of $0.1 million . The sale resulted in a pre-tax gain of approximately $81,000 ( $53,000 after-tax or $0.00 per diluted share).

On February 27, 2015, the Company closed on the sale of three 250EDF class OSVs, the HOS Arrowhead , the HOS Eagleview and the HOS Westwind , which were previously chartered to the U.S. Navy, for cash consideration of $114.0 million . The sale resulted in a pre-tax gain of approximately $33.1 million ( $20.7 million after-tax or $0.57 per diluted share). On August 28, 2015, the Company closed on the sale of the HOS Black Powder for cash consideration of $38.0 million . The sale resulted in a pre-tax gain of approximately $11.0 million ( $6.7 million after-tax or $0.19 per diluted share). These vessels are now managed by the Company for the U.S. Navy.

5 . Long-Term Debt
As of the dates indicated, the Company had the following outstanding long-term debt (in thousands):
 
September 30,
2016
 
December 31,
2015
5.875% senior notes due 2020, net of deferred financing costs of $3,255 and $3,944
$
371,745

 
$
371,056

5.000% senior notes due 2021, net of deferred financing costs of $4,353 and $5,080
445,647

 
444,920

1.500% convertible senior notes due 2019, net of original issue discount of $33,782 and $41,600 and deferred financing costs of $3,326 and $4,095
262,892

 
254,305

Revolving credit facility due 2020

 

 
$
1,080,284

 
$
1,070,281

The table below summarizes the Company's cash interest payments (in thousands):
 
Semi-Annual Cash Interest Payment
 
Payment Dates
5.875% senior notes due 2020
$
11,000

 
April 1 and October 1
5.000% senior notes due 2021
11,300

 
March 1 and September 1
1.500% convertible senior notes due 2019
2,300

 
March 1 and September 1

8

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




Revolving Credit Facility
On July 29, 2016 , the Company amended its existing revolving credit facility. The amended facility provides continued access to a reduced level of standby liquidity for working capital and general corporate purposes, including acquisitions, newbuild and conversion programs and other capital expenditures. The changes to the Company’s revolving credit facility were effective July 29, 2016, and commenced with the fiscal quarter ending September 30, 2016. The more significant changes to the facility are noted below:
reduce the borrowing base from $300.0 million to $200.0 million ;
increase the unused commitment fee to 50 basis points for all pricing levels;
increase the London Interbank Offered Rate, or LIBOR, spreads on funded borrowings by 25 basis points for all pricing levels;
increase the minimum collateral-to-loan value ratio from 150% of the borrowing base to 200% of the borrowing base, which resulted in a decrease in the fair value of collateral pledged from $450.0 million to $400.0 million ;
delay the previously scheduled step-down in the total debt-to-capitalization ratio, as defined, from 55% to 50% by six quarters to commence with the fiscal quarter ending September 30, 2018 ;
reduce the minimum interest coverage ratio from 3.00x to 1.00x with a step-up to 1.25x for the fiscal quarter ending September 30, 2018 and a step-up to 1.50x for the fiscal quarter ending March 31, 2019 ;
allow the Company the option of making a one-time election to suspend the interest coverage ratio for a holiday period of no more than four quarters, ending no later than December 31, 2017 , with a single permitted rescission. If the Company elects to exercise the interest coverage holiday, then the borrowing base will be capped at $75.0 million during the holiday and the LIBOR spreads for funded borrowings will be increased by an additional 50 basis points during and after the interest coverage holiday;
inclusion of an anti-cash hoarding provision that limits the Company's cash balance to no more than $50.0 million at any time during which the revolving credit facility is drawn;
increase minimum liquidity (cash and credit facility availability) required for prepayment of the Company's 2019 convertible senior notes, 2020 senior notes, and 2021 senior notes from $100.0 million to $150.0 million subject to a maximum senior secured leverage ratio of 2 -to-1;
permit the Company to create one or more Investment Entities, as defined. The Investment Entities would be capitalized (i) by the Company, by transferring certain vessels identified in the First Amendment and (ii) by one or more unaffiliated third parties, by depositing cash, with the cash funding being available for acquisitions;
amend the definitions of EBITDA and Pro Forma EBITDA to provide that, commencing with the earlier of (a) the first full fiscal quarter after the expiration of the interest coverage holiday and (b) the fiscal quarter ending March 31, 2018, or the Applicable Period, and until the third immediately following fiscal quarter thereafter, EBITDA and Pro Forma EBITDA, as applicable, shall mean, with respect to the Company and its consolidated subsidiaries, (a) for the Applicable Period, EBITDA, or Pro Forma EBITDA, as applicable, for such fiscal quarter multiplied by four, (b) for the Applicable Period and the immediately following fiscal quarter, EBITDA, or Pro Forma EBITDA, as applicable, for such fiscal quarters multiplied by two, and (c) for the Applicable Period and the two immediately following fiscal quarters, EBITDA, or Pro Forma EBITDA, as applicable, for such fiscal quarters multiplied by one and one-third;

9

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




reduce the amount of liens permitted to secure debt (other than the Amended Facility) of any loan party from $50.0 million at any one time to $15.0 million , and to prohibit such liens during the interest coverage holiday;
condition Restricted Payments, as defined, on pro forma compliance with the interest coverage ratio and the total debt-to-capitalization ratio and compliance with a maximum senior secured leverage ratio of 2-to-1;
increase the amount of cash or cash equivalents on deposit or unused availability under the Amended Facility or a combination of both from $20.0 million to $100.0 million and require a maximum senior secured leverage ratio of 2-to-1 in order to permit a loan party to merge with another person, acquire or form a new subsidiary, make an investment (other than in an Investment Entity) or acquire any vessel or other capital assets; and
limit sales or other dispositions of property or subsidiaries owning properties, other than inventory, certain equipment or investments in the Investment Entities, to (i) less than twenty percent (20%) of the consolidated net tangible assets of the Company if at the time of such sale or disposition the senior secured leverage ratio is less than or equal to 2-to-1, or (ii) less than ten percent (10%) of the consolidated net tangible assets of the Company if at the time of such sale or disposition the senior secured leverage ratio is greater than 2-to-1.
As of September 30, 2016 , there were no amounts drawn under the Company’s $200.0 million revolving credit facility. As of September 30, 2016 , the Company was in compliance with all financial covenants required by its revolving credit facility and the full amount of the undrawn borrowing base under the facility was available to the Company for all permissible uses of proceeds, including working capital, if necessary, but subject to the anti-cash hoarding provision described above.
The Company estimates the fair value of its 2020 senior notes, 2021 senior notes and 2019 convertible senior notes by primarily using quoted market prices. The fair value of the Company’s revolving credit facility, when there are outstanding balances, approximates its carrying value. Given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2 of the three-level valuation hierarchy. As of the dates indicated below, the Company had the following face values, carrying values and fair values (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Face Value
 
Carrying Value
 
Fair Value
 
Face Value
 
Carrying Value
 
Fair Value
5.875% senior notes due 2020
$
375,000

 
$
371,745

 
$
229,688

 
$
375,000

 
$
371,056

 
$
257,813

5.000% senior notes due 2021
450,000

 
445,647

 
258,187

 
450,000

 
444,920

 
308,250

1.500% convertible senior notes due 2019
300,000

 
262,892

 
170,445

 
300,000

 
254,305

 
170,340

 
$
1,125,000

 
$
1,080,284

 
$
658,320

 
$
1,125,000

 
$
1,070,281

 
$
736,403

Capitalized Interest
During the three and nine months ended September 30, 2016 , the Company capitalized approximately $4.2 million and $ 14.3 million , respectively, of interest costs related to the construction of vessels. During the three and nine months ended September 30, 2015 , the Company capitalized approximately $6.3 million and $18.2 million , respectively, of interest costs related to the construction of vessels.


10

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




6 . 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 September 30, 2016 , the Company has granted awards covering 4.4 million shares of common stock under such plan.
During the nine months ended September 30, 2016 , the Company granted phantom restricted stock units, time-based restricted stock units and fully-vested common stock as noted in the table below.
 
Directors
 
Executive Officers
 
Certain Managers
Performance-based phantom restricted stock units
 
 
X
 
 
Time-based phantom restricted stock units
 
 
X
 
X
Time-based restricted stock units
 
 
X
 
X
Fully-vested common stock
X
 
 
 
 
The shares to be received under the performance-based phantom restricted stock units are calculated based on the Company's performance compared to three 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. During the nine months ended September 30, 2016 , the Company granted 396,369 time-based restricted stock units, 467,272 time-based and 522,402 performance based phantom restricted stock units and 139,133 shares of fully-vested common stock.
The fair value of the Company’s performance-based restricted stock units and 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 restricted stock units and phantom 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. In addition, 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 restricted stock units granted in 2016 , the Company granted performance-based and time-based restricted stock units and phantom stock units in prior years. During the nine months ended September 30, 2016 , the Company issued 389,355 shares, in the aggregate, of stock due to: 1) vestings of restricted stock units, 2) employee purchases under the Company's Employee Stock Purchase Plan and 3) the issuance of fully-vested common stock.
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  
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Income before taxes
$
2,341

 
$
3,183

 
$
6,557

 
$
7,957

Net income
$
1,529

 
$
1,948

 
$
4,275

 
$
4,973

Earnings per common share:
 
 
 
 
 
 
 
Basic earnings per common share
$
0.04

 
$
0.05

 
$
0.12

 
$
0.14

Diluted earnings per common share
$
0.04

 
$
0.05

 
$
0.12

 
$
0.14


11

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





7. Commitments and Contingencies
Vessel Construction
In February 2016, the Company announced plans to enhance the marketability of the four remaining 310 class MPSVs. The first two of those MPSVs, which were delivered in the third quarter of 2016, were enhanced by increasing the berthing capacity, expanding the cargo-carrying capabilities and expanding the work area for ROVs. The functionality of the second two MPSVs, which are still under construction, will be increased by adding a 60-foot mid-body plug, installation of an additional crane, increasing the berthing capacity, expanding the cargo-carrying capacities and expanding the work areas for ROVs. These latter two MPSVs have been upgraded to a 400 class designation. The incremental aggregate cost of these four conversions and construction change orders will be approximately $70.0 million.
In August 2016, the Company announced that it had reached an agreement with the shipyard to postpone the delivery of the final two 400 class MPSVs to be delivered under this program to the first and second quarters of 2018 without any additional cost to the Company. In addition, the payment terms for the remainder of the contract were adjusted to shift $43.3 million of construction milestone draws from the remainder of 2016 and 2017 into 2018. The Company's fifth OSV newbuild program consists of four 300 class OSVs, five 310 class OSVs, ten 320 class OSVs, three 310 class MPSVs and two 400 class MPSVs.
As of September 30, 2016 , the Company had placed 22 vessels in service under such program. The aggregate cost of the Company's fifth OSV newbuild program, excluding construction period interest, is expected to be approximately $1,335.0 million , of which $6.9 million , $21.8 million , and $43.3 million are expected to be incurred in the remainder of 2016 , 2017 , and 2018, respectively. From the inception of this program through September 30, 2016 , the Company had incurred $1,263.0 million , or 94.6% , of total expected project costs.
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 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.
Vessel charters with Petrobras included limitations regarding fuel consumption. Petrobras has asserted claims against the Company relating to excess fuel consumption in 2010 and 2011. The Company’s exposure for these assessments, net of amounts accrued, is in the range of approximately $0.5 million to $3.0 million . The Company disagrees with a majority of these assessments. During the second quarter of 2015, the Brazilian court ruled in the Company's favor related to these claims. Subsequent to this ruling, Petrobras has filed and been denied multiple appeals. Petrobras has the ability to request a final review of the case by the Supreme Court. While the Company cannot currently estimate the amounts or timing of the resolution of these

12

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




matters, the Company believes that the outcome will not have a material impact on its liquidity or financial position, but the ultimate resolution could have a material impact on its interim or annual results of operations.
During 2013, the Company commenced the process of assigning the in-country vessel management services for its four vessels operating in Brazil from a third-party provider to a wholly-owned subsidiary of the Company. As a result, this assignment has been interpreted by local authorities as a new importation of these vessels resulting in an importation assessment ranging from $0.5 million to $3.5 million . The Company disagrees with this interpretation and related assessment. During the third quarter of 2015, the Brazilian court ruled in the Company's favor related to these claims and this decision has been appealed to another court. As of September 30, 2016 , these potential duties have not been assessed or recorded in its financial statements. While the Company cannot estimate the amounts or timing of the resolution of this matter, the Company believes that the outcome will not have a material impact on its liquidity or financial position, but the ultimate resolution could have a material impact on its interim or annual results of operations. 
During 2012, a customer, ATP Oil and Gas, Inc., initiated a reorganization proceeding under Chapter 11 of the United States Bankruptcy Code, which was subsequently converted to a Chapter 7 case. Pre-petition receivables from ATP are $4.8 million and the Company has recorded $0.9 million in reserves. The Company believes its claim is secured under the Louisiana Oil Well Lien Act. A legal challenge related to the Company's liens has been raised in the bankruptcy proceedings by parties whose interests are affected by the liens. The Company, together with its outside legal counsel, believe its lien position is valid, but the Bankruptcy Court has disagreed. The matter is now being reviewed by the federal district court in Houston, Texas. An unfavorable final judgment would render the Company's position to that of an unsecured creditor in the bankruptcy proceeding. While the Company believes that the net receivables are collectible, it will continue to monitor the proceedings, which may result in actual collections that may materially differ from the current estimate.

8. Other Accrued Liabilities
Other accrued liabilities include the following (in thousands):  
 
September 30, 2016
 
December 31, 2015
Accrued lease expense
$
4,659

 
$
4,339

Deferred revenue
1,158

 
5,734

Current taxes payable
892

 
3,958

Other
5,541

 
9,581

Total
$
12,250

 
$
23,612



13

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




9. Condensed Consolidating Financial Statements of Guarantors
The following tables present the condensed consolidating balance sheets as of September 30, 2016 and December 31, 2015 , the condensed consolidating statement of operations and the condensed consolidating statement of comprehensive income (loss) for the three and nine months ended September 30, 2016 and the condensed consolidating statement of cash flows for the nine months ended September 30, 2016 for the domestic subsidiaries of the Company that serve as guarantors of the Company's 2019 convertible senior notes, 2020 senior notes and 2021 senior notes and the financial results for the Company's subsidiaries that do not serve as guarantors. The guarantor subsidiaries of the 2019 convertible senior notes, 2020 senior notes and 2021 senior notes are 100% owned by the Company. The guarantees are full and unconditional and joint and several and prior to the fourth quarter of 2015, all of the Company's non-guarantor subsidiaries were minor as defined in the Securities and Exchange Commission regulations. The non-guarantor subsidiaries of such notes include all of the Company's foreign subsidiaries.

14

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




Condensed Consolidating Balance Sheet
(In thousands, except per share data)
 
As of September 30, 2016
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
17

 
$
216,126

 
$
9,318

 
$

 
$
225,461

Accounts receivable, net of allowance for doubtful accounts of $2,158

 
38,463

 
9,612

 
(3,569
)
 
44,506

Other current assets
38

 
13,503

 
530

 

 
14,071

Total current assets
55

 
268,092

 
19,460

 
(3,569
)
 
284,038

Property, plant and equipment, net

 
2,473,049

 
125,195

 

 
2,598,244

Deferred charges, net
2,791

 
17,244

 
743

 

 
20,778

Intercompany receivable
1,722,917

 
200,182

 
85,683

 
(2,008,782
)
 

Investment in subsidiaries
775,816

 
8,602

 

 
(784,418
)
 

Other assets
1,743

 
6,320

 
2,300

 

 
10,363

Total assets
$
2,503,322

 
$
2,973,489

 
$
233,381

 
$
(2,796,769
)
 
$
2,913,423

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
12,737

 
$
5,600

 
$
(5,152
)
 
$
13,185

Accrued interest
13,531

 

 

 

 
13,531

Accrued payroll and benefits

 
7,367

 
837

 

 
8,204

Other accrued liabilities

 
10,891

 
1,503

 
(144
)
 
12,250

Total current liabilities
13,531

 
30,995

 
7,940

 
(5,296
)
 
47,170

Long-term debt, net of original issue discount of $33,782 and deferred financing costs of $10,934
1,080,284

 

 

 

 
1,080,284

Deferred tax liabilities, net

 
359,273

 

 

 
359,273

Intercompany payables

 
1,794,147

 
221,510

 
(2,015,657
)
 

Other liabilities

 
1,496

 

 

 
1,496

Total liabilities
1,093,815

 
2,185,911

 
229,450

 
(2,020,953
)
 
1,488,223

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; 36,374 shares issued and outstanding
364

 

 

 

 
364

Additional paid-in capital
751,908

 
37,978

 
8,601

 
(46,580
)
 
751,907

Retained earnings
657,235

 
749,450

 
(20,214
)
 
(729,236
)
 
657,235

Accumulated other comprehensive loss

 
150

 
15,544

 

 
15,694

Total stockholders’ equity
1,409,507

 
787,578

 
3,931

 
(775,816
)
 
1,425,200

Total liabilities and stockholders’ equity
$
2,503,322

 
$
2,973,489

 
$
233,381

 
$
(2,796,769
)
 
$
2,913,423

 
 
 
 
 
 
 
 
 
 

15

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, 2015
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
10

 
$
252,651

 
$
7,140

 
$

 
$
259,801

Accounts receivable, net of allowance for doubtful accounts of $2,877

 
41,963

 
54,416

 
(5,177
)
 
91,202

Other current assets
12

 
12,955

 
66

 

 
13,033

Total current assets
22

 
307,569

 
61,622

 
(5,177
)
 
364,036

Property, plant and equipment, net

 
2,472,367

 
102,294

 

 
2,574,661

Deferred charges, net
3,198

 
56,022

 
27,362

 
(51,309
)
 
35,273

Intercompany receivable
1,751,046

 
186,054

 
59,413

 
(1,996,513
)
 

Investment in subsidiaries
785,472

 
8,602

 

 
(794,074
)
 

Other assets
1,743

 
6,648

 
2,055

 

 
10,446

Total assets
$
2,541,481

 
$
3,037,262

 
$
252,746

 
$
(2,847,073
)
 
$
2,984,416

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
34,214

 
$
7,519

 
$
(5,991
)
 
$
35,742

Accrued interest
14,795

 

 

 

 
14,795

Accrued payroll and benefits

 
10,944

 
452

 

 
11,396

Other accrued liabilities

 
16,989

 
6,623

 

 
23,612

Total current liabilities
14,795

 
62,147

 
14,594

 
(5,991
)
 
85,545

Long-term debt, net of original issue discount of $41,600 and deferred financing costs of $13,119
1,070,281

 

 

 

 
1,070,281

Deferred tax liabilities, net

 
381,619

 

 

 
381,619

Intercompany payables
6,164

 
1,801,830

 
247,615

 
(2,055,609
)
 

Other liabilities

 
808

 

 

 
808

Total liabilities
1,091,240

 
2,246,404

 
262,209

 
(2,061,600
)
 
1,538,253

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; 35,985 shares issued and outstanding
360

 

 

 

 
360

Additional paid-in capital
748,043

 
37,978

 
8,602

 
(46,582
)
 
748,041

Retained earnings
701,838

 
752,761

 
(13,870
)
 
(738,891
)
 
701,838

Accumulated other comprehensive loss

 
119

 
(4,195
)
 

 
(4,076
)
Total stockholders’ equity
1,450,241

 
790,858

 
(9,463
)
 
(785,473
)
 
1,446,163

Total liabilities and stockholders’ equity
$
2,541,481

 
$
3,037,262

 
$
252,746

 
$
(2,847,073
)
 
$
2,984,416

 
 
 
 
 
 
 
 
 
 

16

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




Condensed Consolidating Statement of Operations
(In thousands)
 
Three Months Ended September 30, 2016
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
Revenues
$

 
$
50,798

 
$
1,467

 
$
(338
)
 
$
51,927

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating expenses

 
26,282

 
3,414

 
(321
)
 
29,375

Depreciation

 
22,188

 
1,279

 

 
23,467

Amortization

 
4,269

 
311

 

 
4,580

General and administrative expenses
36

 
7,542

 
1,468

 
(15
)
 
9,031

 
36

 
60,281

 
6,472

 
(336
)
 
66,453

Gain on sale of assets

 
81

 

 

 
81

Operating loss
(36
)
 
(9,402
)
 
(5,005
)
 
(2
)
 
(14,445
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest income

 
259

 
142

 

 
401

Interest expense
(12,820
)
 

 

 

 
(12,820
)
Equity in earnings (losses) of consolidated subsidiaries
(3,647
)
 

 

 
3,647

 

Other income (expense), net

 
(790
)
 
2,381

 
1

 
1,592

 
(16,467
)
 
(531
)
 
2,523

 
3,648

 
(10,827
)
Income (loss) before income taxes
(16,503
)
 
(9,933
)
 
(2,482
)
 
3,646

 
(25,272
)
Income tax benefit

 
(7,279
)
 
(1,490
)
 

 
(8,769
)
Net income (loss)
$
(16,503
)
 
$
(2,654
)
 
$
(992
)
 
$
3,646

 
$
(16,503
)


Condensed Consolidating Statement of Comprehensive Income (Loss)
(In thousands)
 
Three Months Ended September 30, 2016
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
Net income (loss)
$
(16,503
)
 
$
(2,654
)
 
$
(992
)
 
$
3,646

 
$
(16,503
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation loss

 
(3
)
 
(905
)
 

 
(908
)
Total comprehensive income (loss)
$
(16,503
)
 
$
(2,657
)
 
$
(1,897
)
 
$
3,646

 
$
(17,411
)




17

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




Condensed Consolidating Statement of Operations
(In thousands)
 
Nine Months Ended September 30, 2016
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
Revenues
$

 
$
171,034

 
$
9,386

 
$
2,000

 
$
182,420

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating expenses

 
89,666

 
12,525

 
1,943

 
104,134

Depreciation

 
65,040

 
3,258

 

 
68,298

Amortization

 
15,671

 
1,004

 

 
16,675

General and administrative expenses
148

 
26,978

 
2,901

 
57

 
30,084

 
148

 
197,355

 
19,688

 
2,000

 
219,191

Gain on sale of assets

 
36

 

 

 
36

Operating loss
(148
)
 
(26,285
)
 
(10,302
)
 

 
(36,735
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest income

 
732

 
432

 

 
1,164

Interest expense
(34,886
)
 

 
(2
)
 

 
(34,888
)
Equity in earnings of consolidated subsidiaries
(9,655
)
 

 

 
9,655

 

Other income (expense), net

 
(560
)
 
2,523

 
85

 
2,048

 
(44,541
)
 
172

 
2,953

 
9,740

 
(31,676
)
Income (loss) before income taxes
(44,689
)
 
(26,113
)
 
(7,349
)
 
9,740

 
(68,411
)
Income tax benefit

 
(22,803
)
 
(1,005
)
 

 
(23,808
)
Net income (loss)
$
(44,689
)
 
$
(3,310
)
 
$
(6,344
)
 
$
9,740

 
$
(44,603
)


Condensed Consolidating Statement of Comprehensive Income (Loss)
(In thousands)
 
Nine Months Ended September 30, 2016
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
Net income (loss)
$
(44,689
)
 
$
(3,310
)
 
$
(6,344
)
 
$
9,740

 
$
(44,603
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation gain

 
31

 
19,739

 

 
19,770

Total comprehensive income (loss)
$
(44,689
)
 
$
(3,279
)
 
$
13,395

 
$
9,740

 
$
(24,833
)


18

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




Condensed Consolidating Statement of Cash Flows
(In thousands)
 
Nine Months Ended September 30, 2016
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
377

 
$
54,277

 
$
2,057

 
$

 
$
56,711

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Costs incurred for OSV newbuild program #5

 
(72,584
)
 
(614
)
 

 
(73,198
)
Net proceeds from sale of assets

 
506

 

 

 
506

Vessel capital expenditures

 
(18,282
)
 
(424
)
 

 
(18,706
)
Non-vessel capital expenditures

 
(473
)
 
59

 

 
(414
)
Net cash used in investing activities

 
(90,833
)
 
(979
)
 

 
(91,812
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 

Deferred financing costs
(1,102
)
 

 

 

 
(1,102
)
Net cash proceeds from other shares issued
732

 

 

 

 
732

Net cash used in financing activities
(370
)
 

 

 

 
(370
)
Effects of exchange rate changes on cash

 
31

 
1,100

 

 
1,131

Net increase (decrease) in cash and cash equivalents
7

 
(36,525
)
 
2,178

 

 
(34,340
)
Cash and cash equivalents at beginning of period
10

 
252,651

 
7,140

 

 
259,801

Cash and cash equivalents at end of period
$
17

 
$
216,126

 
$
9,318

 
$

 
$
225,461

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
 
 
 
 
 
 
 
 
 
Cash paid for interest
$
38,871

 
$

 
$

 
$

 
$
38,871

Cash paid for income taxes
$

 
$
484

 
$
2,204

 
$

 
$
2,688




19


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, 2015 . 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

During the first nine months of 2016 , oil prices averaged $41 per barrel. The drop in oil price, since October 2014, is due to surplus oil, driven in part by a significant rise in U.S. shale oil production, as well as other previously unavailable sources of supply, coupled with Organization of the Petroleum Exporting Countries, or OPEC, suppliers in the Middle East and Russia not reducing their output. In addition, economic weakness in many regions of the world, notably Europe and China, has reduced the previously expected oil consumption growth rate. As a result of lower oil prices, major and independent oil companies with deepwater operations have significantly reduced their capital spending budgets, which are the principal demand drivers for our services. 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 issue facing the industry is the ultimate duration of the current downturn. 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 the currently reduced level of EBITDA generation, our cash on hand provides a healthy cushion for the foreseeable future. However, we do not believe that our current cash on hand, revolving credit availability and cash generated from operations under current market conditions will be sufficient to repay all three tranches of our $1,125.0 million of face value in funded debt that begins to mature in September 2019. We are proactively considering various ways to address these maturities well in advance and have retained the advisory firm of PricewaterhouseCoopers Corporate Finance, LLC to advise us in this effort.
In the GoM, nine high-spec OSVs have been delivered into the domestic market during 2016 , including one of our own. We expect an additional 13 high-spec OSVs to be delivered into domestic service through 2018. We do not anticipate significant growth in the supply of high-spec OSVs beyond the currently anticipated level of 207 of such vessels by the end of 2018. In the market place, we continue to observe operators shortening or canceling rig contracts, which we believe will further reduce demand for vessels. During the third quarter of 2016 , there was an average of roughly 38 floating rigs available in the GoM, while an average of 22.6 were working. This average active rig count decreased 4.8 and 14.8 rigs from the sequential and prior-year quarters, respectively. As of November 2, 2016 , there were 37 rigs available and 24

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were working. However, five floating rigs have contracts that will expire during the remainder of 2016 . We do not know whether the remaining rigs will receive contract renewals for operations in the GoM. We expect two new rigs to arrive in the GoM during the fourth quarter of 2016 . 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. Given these market conditions, we anticipate our average dayrates and utilization levels will continue to be depressed. 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 feel that once the current supply and demand fundamentals return to more normal conditions, our results from operations will improve.
In recognition of these weak market conditions, we stacked 45 OSVs on various dates from October 2014 through September 2016 . Post quarter-end, we have stacked an additional new generation OSV to date and we currently plan to stack two more vessels during the fourth quarter of 2016. These 48 stacked vessels represent 71% of our current OSV and MPSV vessel headcount and 54% of our fleetwide total deadweight tonnage. By stacking vessels, we have significantly reduced and expect to continue reducing our cash outlays and lower our risk profile; however, we will 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 current active fleet of 24 vessels in the market and to accept contracts at the best available terms even if such contracts are below our cash break even cost of operations.
In Mexico, while the energy reform continues to progress, questions remain on the timing of the incremental activity expected in the Mexican deepwater GoM given the current oil price environment. PEMEX budget reductions have resulted in contract cancellations and drastically curtailed the number of our vessels operating in Mexico from 2015 levels. In the nine months ended September 30, 2016, six of our Mexican-flagged vessels were stacked. Nevertheless, we consider Mexico to be a long-term market for our services, especially in light of energy reforms expected to be carried out there. Despite current oil prices, 26 companies have been pre-approved as bidders for the first Mexican deepwater lease auction, which is scheduled to occur in December 2016. 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 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 the vessel into Brazil. In October 2016, Brazil enacted new legislation that will allow international oil companies to participate as an operator of pre-salt offshore developments, reversing a policy that reserved these properties to Petrobras exclusively. By doing so, the Brazilian government has created the possibility that foreign operators might spur additional activity that has been dampened by low oil prices and Petrobras' difficulties.

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Our Vessels
All of our current vessels are qualified under the Jones Act to engage in U.S. coastwise trade, except for eight foreign-flagged new generation OSVs, one foreign-flagged well-stimulation vessel and two foreign-flagged MPSVs. As of September 30, 2016 , our 17 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
18

Other U.S. coastlines (1)
6

 
24

Foreign
 
Brazil
1

Mexico
1

Middle East
1

Other Latin America
2

 
5

Total Vessels (2)
29

 
(1)
Includes two owned vessels and four managed vessels supporting the military.
(2)
Excluded from this table are 45 new generation OSVs that were stacked as of September 30, 2016 .
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 U.S. 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, 2015 .
During the three months ended June 30, 2016, we identified indicators of impairment relating to our vessels. As required by current accounting guidance, we calculated the probability-weighted undiscounted cash flows for each of our asset groups over their respective remaining useful lives. The total of the probability-weighted undiscounted cash flows was greater than the net book values of our asset groups and, therefore, we concluded that we did not have an impairment to our long-lived assets as of June 30, 2016. See Note 4 to our consolidated financial statements included herein for further discussion. We have not observed any additional indicators of impairment related to our vessels subsequent to June 30, 2016. We will continue to closely monitor market conditions and potential impairment indicators as long as this market downturn persists.
Results of Operations
The tables below set forth the average dayrates, utilization rates and effective dayrates for our 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 vessels managed for the U.S. Navy. The Company does not provide average or

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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.
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Offshore Supply Vessels:
 
 
 
 
 
 
 
Average number of new generation OSVs (1)
62.0

 
59.6

 
61.9

 
60.1

Average number of active new generation OSVs (2)
17.9

 
41.5

 
22.0

 
45.0

Average new generation OSV fleet capacity (DWT)
221,629

 
205,734

 
220,885

 
205,467

Average new generation OSV capacity (DWT)
3,575

 
3,451

 
3,570

 
3,419

Average new generation OSV utilization rate (3)
22.0
%
 
50.3
%
 
27.0
%
 
57.1
%
Effective new generation OSV utilization rate (4)
76.3
%
 
72.2
%
 
76.0
%
 
76.2
%
Average new generation OSV dayrate (5)
$
25,639

 
$
25,699

 
$
25,488

 
$
26,885

Effective dayrate (6)
$
5,641

 
$
12,927

 
$
6,882

 
$
15,351

 
(1)
We owned 62 new generation OSVs as of September 30, 2016 . Excluded from this data are eight MPSVs owned and operated by the Company as well as four vessels managed for the U.S. Navy. During the first nine months of 2016 , we placed in service two 310 class OSVs, the HOS Briarwood and the HOS Brass Ring.
(2)
In response to weak market conditions, we elected to stack 45 new generation OSVs on various dates from October 2014 through September 2016 . 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 their usefulness as comparative measures.
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 reconciliation, we believe 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.

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EBITDA is also a fina