Annual report pursuant to Section 13 and 15(d)

Note 10 - Fair Value Measurements

v3.19.1
Note 10 - Fair Value Measurements
12 Months Ended
Dec. 31, 2018
Notes to Financial Statements  
Fair Value Disclosures [Text Block]
10.
FAIR VALUE MEASUREMENTS
 
The fair value of an asset or liability is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value and defines
three
levels of inputs that
may
be used to measure fair value.
Level 
1
inputs are quoted prices in active markets for identical assets or liabilities.
Level 
2
inputs are observable inputs other than quoted prices included in
Level 
1
that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are
not
active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived from observable market data.
Level 
3
inputs are unobservable inputs that are supported by little or
no
market activity and are significant to the fair value of the assets or liabilities.
 
The Company's financial assets and liabilities as of
December 31
that are measured at fair value on a recurring basis were as follows (in thousands):
 
   
Level 1
   
Level 2
   
Level 3
(1)
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Construction reserve funds
  $
28,221
    $
    $
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (included in other current liabilities)
   
     
1,659
     
 
Conversion Option Liability on Convertible Senior Notes
   
     
     
5,276
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (included in other receivables)
  $
    $
419
    $
 
Construction reserve funds
   
45,361
     
     
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (included in other current liabilities)
   
     
66
     
 
Conversion Option Liability on Convertible Senior Notes    
     
     
6,832
 

(
1
)
For the year ended
December 31, 2018,
the Company recognized a
$1.6
million gain in the fair market valuation of the Convertible Senior Notes, as valued by an independent
third
-party.
 
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 marine transportation and energy industries.
 
The estimated fair value of the Company's other financial assets and liabilities as of
December 31
were as follows (in thousands):
 
   
Carrying
   
Estimated Fair Value
 
   
Amount
 
 
Level 1
   
Level 2
   
Level 3
 
201
8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
  $
96,852
    $
96,852
    $
    $
 
Investments, at cost, in 50% or less owned companies (included in other assets)
 
 
                                                 
132
 
 
 see below
   
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portion
   
                                                   404,666
     
     
388,949
     
 
201
7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
  $
112,551
    $
112,551
    $
    $
 
Investments, at cost, in 50% or less owned companies (included in other assets)
   
132
     
see below
     
 
     
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portion
   
314,899
     
     
291,932
     
 
 
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 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 the Company's investments, at cost, in
50%
or less owned companies because of the lack of a quoted market price and the inability to estimate fair value without incurring excessive costs. Considerable judgment was required in developing certain of the estimates of fair value and, accordingly, the estimates presented herein are
not
necessarily indicative of the amounts that the Company could realize in a current market exchange.
 
The Company's non-financial assets and liabilities that were measured at fair value during the years ended
December 31
were as follows (in thousands):
 
   
Level 1
   
Level 2
   
Level 3
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment:
                       
AHTS
  $
    $
2,000
    $
 
Liftboats
   
     
     
134,775
 
Specialty
   
     
4,500
     
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment:
                       
AHTS
  $
    $
12,400
    $
 
FSV
   
     
175
     
 
Specialty
   
     
750
     
 
Investments, at equity, in 50% or less owned companies
   
     
20,658
     
20,430
 
 
Property and equipment.
During the years ended
December 
31,
2018
and
2017,
the Company recognized impairment charges of
$14.6
million and
$27.5
million, respectively, associated with certain offshore support vessels (see Note
1
).  The
Level
2
fair values were determined based on the contracted sales prices of the property and equipment, sales prices of similar property and equipment or scrap value, as applicable. The
Level
3
fair values were determined based on
third
-party valuations using significant inputs that are unobservable in the market. Due to limited market transactions, the primary valuation methodology applied by the appraisers was an estimated cost approach less estimated economic depreciation for comparably aged and conditioned assets less estimated economic obsolescence based on market data or utilization and rates per day worked trending of the vessels since
2014.
 
The significant unobservable inputs used in the fair value measurement for the AHTS fleet during
2018
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.
 
Investments, at equity, in
50%
or less owned companies.
During the year ended
December 31, 2018,
the Company marked its investments to
zero
in certain of its
50%
of less owned companies. 
December 
31,
2017,
the Company marked its investments to fair value in certain of its
50%
or less owned companies. The
Level
2
fair values were determined based on the purchase price of acquired interests or sales prices of similar equipment held in the venture. The
Level
3
fair values were determined based on
third
-party valuations using significant inputs that are unobservable in the market. The Company's partner declined to participate in a capital call from Falcon Global during
2017
and, as a consequence, the Company obtained
100%
voting control of Falcon Global in accordance with the terms of the operating agreement (see Note
4
). Upon the change in control, the Company's investment in Falcon Global was deemed to approximate fair value.