Quarterly report pursuant to Section 13 or 15(d)

Note 7 - Fair Value Measurements

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Note 7 - Fair Value Measurements
9 Months Ended
Sep. 30, 2018
Notes to Financial Statements  
Fair Value Disclosures [Text Block]
7.
FAIR VALUE MEASUREMENTS
 
The fair value of an asset or liability is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value and defines
three
levels of inputs that
may
be used to measure fair value.
Level
1
inputs are quoted prices in active markets for identical assets or liabilities.
Level
2
inputs are observable inputs other than quoted prices included in
Level
1
that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are
not
active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived from observable market data.
Level
3
inputs are unobservable inputs that are supported by little or
no
market activity and are significant to the fair value of the assets or liabilities.
 
The Company’s financial assets
and liabilities as of
September
30, 2018
that are measured at fair value on a recurring basis were as follows (in thousands):
 
   
Level 1
   
Level 2
   
Level 3
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (included in other receivables)
  $
    $
1,565
    $
 
Construction reserve funds
   
35,596
     
     
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
   
     
35
     
17,928
 
Level
3
Measurement
.  The fair value of the conversion option liability on the Convertible Senior Notes is estimated with significant inputs that are both observable and unobservable in the market and therefore is considered a
Level
3
fair value measurement. The Company used a binomial lattice model that assumes the holders will maximize their value by finding the optimal decision between redeeming at the redemption price or converting into shares of Common Stock.  This model estimates the fair value of the conversion option as the differential in the fair value of the notes including the conversion option compared with the fair value of the notes excluding the conversion option.  The significant observable inputs used in the fair value measurement include the price of Common Stock and the risk free interest rate.  The significant unobservable inputs are the estimated Company credit spread and Common Stock volatility, which were based on comparable companies in the transportation and energy industries. 
 
The estimated fair values of the Company’s othe
r financial assets and liabilities as of
September 30, 2018
were as follows (in thousands):
 
   
 
 
 
 
Estimated Fair Value
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
  $
104,519
    $
104,519
    $
    $
 
Investments, at cost, in 50% or less owned companies (included in other assets)
   
132
   
see below
   
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portion
   
415,164
     
     
416,888
     
 
 
The carrying value of cash, cash equivalents and restricted cash approximates fair value. The fair value of the Company’s long-term debt was estimated based upon quoted market prices or by using discounted cash flow analysis based on estimated current rates for similar types of arrangements. It was
not
practicable to estimate the fair value of certain of the Company’s investments, at cost, in
50%
or less owned companies because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. Considerable judgment was required in developing certain of the estimates of fair value and, accordingly, the estimates presented herein are
not
necessarily indicative of the amounts that the Company could realize in a current market exchange.
 
The Company’s other assets and liabilities th
at were measured at fair value during the
nine
months ended
September 30, 2018
were as follows (in thousands):
 
   
Level 1
   
Level 2
   
Level 3
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment:                        
Anchor handling towing supply
  $
    $
2,000
   
$
 
Liftboats
   
     
     
134,775
 
 
Property and equipment
.
During the
nine
months ended
September 30, 2018,
the Company recognized impairment charges of
$3.0
million primarily associated with certain vessels (see Note
1
).  The
Level
2
fair values were determined based on the sales prices of similar property and equipment at scrap value. 
 
The
Level
3
vessels listed above were contributed by MOI to wholly-owned subsidiaries of FGH and recorded at fair value. The
Level
3
fair values were determined based on
two
separate
third
party valuations using significant inputs that are unobservable in the market. Due to limited market transactions, the primary valuation methodology applied by both appraisers was an estimated cost approach less economic depreciation for comparable aged vessels. The
Level
3
fair value of the vessels was based on a simple average between the
two
appraisals.
 
The significant unobservable inputs used in the fair value measurement for the liftboats provided by the appraisers were based on i) quotes from local shipyards, ii) economic life ranging from
25
to
40
 years and iii) economic obsolescence factor ranging from
45%
to
50%.
The calculated yearly physical depreciation was multiplied by the remaining useful life of each vessel, based on the date of build and the residual value was added back to arrive at a base cost approach value for each vessel.