Note 2 — Summary of Significant Accounting Policies

Principles of Consolidation

Our consolidated financial statements include the accounts of majority-owned subsidiaries. The equity method is used to account for investments in affiliates in which we do not have majority ownership, but have the ability to exert significant influence. We account for our Deepwater Gateway, Independence Hub and former Australian joint venture investments under the equity method of accounting. Noncontrolling interests represent the minority shareholders’ proportionate share of the equity in Kommandor LLC (Note 6). All material intercompany accounts and transactions have been eliminated.

Reclassifications

Certain reclassifications were made to previously-reported amounts in the consolidated financial statements and notes thereto to make them consistent with the current presentation format. The most significant of these reclassifications are associated with our discontinued oil and gas operations. As noted in Note 1, ERT qualified as discontinued operations following the announcement of the definitive agreement for the sale of ERT. Accordingly, all operations and financial positions related to ERT have been presented as discontinued operations even if they did not qualify as a discontinued operation in that period.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are highly liquid financial instruments with original maturities of three months or less. They are carried at cost plus accrued interest, which approximates fair value.

Statement of Cash Flow Information

The following table provides supplemental cash flow information for the periods stated (in thousands):


		Year Ended December 31,
		2013		2012		2011

Interest paid, net of interest capitalized	$	39,040	$	68,735	$	81,000
Income taxes paid	$	113,331	$	43,111	$	11,216

Total non-cash investing activities for the years ended December 31, 2013, 2012 and 2011 include $9.5 million, $51.1 million and $26.1 million, respectively, of accruals for property and equipment capital expenditures.

Accounts Receivable and Allowance for Uncollectible Accounts

Accounts receivable are stated at the historical carrying amount net of write-offs and allowance for uncollectible accounts. The amount of our net accounts receivable approximates fair value. We establish an allowance for uncollectible accounts receivable based on historical experience and any specific customer collection issues that we have identified. Uncollectible accounts receivable are written off when a settlement is reached for an amount that is less than the outstanding historical balance or when we have determined that the balance will not be collected (Note 15).

Property and Equipment

Overview. Property and equipment is recorded at cost. Property and equipment is depreciated on a straight line basis over the estimated useful life of each respective asset. The following is a summary of the gross components of property and equipment (dollars in thousands):


	Estimated Useful Life		2013		2012

ROVs/Vessels	10 to 30 years	$	1,671,451	$	1,822,642
Machinery, equipment, buildings and leasehold improvements	5 to 30 years		288,332		229,154
Total property and equipment		$	1,959,783	$	2,051,796

The cost of repairs and maintenance is charged to expense as incurred, while the cost of improvements is capitalized. Repair and maintenance expense totaled $31.5 million, $39.3 million and $32.3 million for the years ended December 31, 2013, 2012 and 2011, respectively. Included in machinery, equipment, buildings and leasehold improvements were $17.5 million and $18.5 million of capitalized software costs ($4.8 million and $6.0 million, net of accumulated amortization) at December 31, 2013 and 2012, respectively. The total amount charged to expense related to the amortization of these software costs was $1.8 million for the year ended December 31, 2013 and $2.6 million during each of the years ended December 31, 2012 and 2011.

Assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in the future cash flows expected to be generated by an asset group. If, upon review, the sum of the undiscounted pretax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value and reported as an impairment charge in the periods in which the determination of the impairment is made. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. Our marine vessels are assessed on a vessel by vessel basis, while our remotely operated vehicles (“ROVs”) are grouped and assessed by asset class. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or based on a multiple of operating cash flows validated with historical market transactions of similar assets where possible. The expected future cash flows used for impairment reviews and related fair value calculations are based on assessments of operating costs, project margins and capital project decisions, considering all available information at the date of review. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. These fair value measurements fall within Level 3 of the fair value hierarchy.

In 2011, in connection with the reorganization of our Australian well intervention operations, we conducted an impairment assessment of its well intervention equipment, which resulted in a $6.6 million charge to reduce the carrying value of such well intervention equipment to its then estimated fair value. In 2012, we decided to discontinue our well intervention operations in Australia. We recorded a $4.6 million impairment charge to reduce our well intervention assets in Australia to their fair value of $5.0 million. In 2012, as a result of diminished work opportunities for the Intrepid, we placed the subsea construction vessel in cold-stack mode and later sold the vessel for $14.5 million in cash, which resulted in asset impairment and related loss on disposal charges totaling $28.1 million. Also in 2012, we entered into an agreement to sell our two remaining subsea construction pipelay vessels, the Caesar and the Express, and other related pipelay equipment for a total sales price of $238.3 million. In connection with the announcement of the sale of our remaining subsea construction pipelay vessels and related equipment, we recorded an impairment charge of $157.8 million to reduce the carrying cost of the Caesar and other related pipelay equipment to their respective fair values as determined by the definitive sales agreement. In June 2013, we completed the sale of the Caesar and related equipment for $138.3 million, which amount included $30 million of funds deposited with us at the time the agreement was entered into by the parties. In July 2013, we completed the sale of the Express for $100 million, including the remaining $20 million of previously deposited funds. In June 2013, we entered into an agreement to sell our spoolbase property located in Ingleside, Texas for $45 million to the same group of companies that acquired the Caesar and the Express. In January 2014, we closed the sale of our Ingleside spoolbase. In connection with this sale, we received $15 million in cash, including a $5 million deposit we received at the time the agreement was signed, and hold a $30 million promissory note, in which a $10 million principal reduction in the note’s balance is required to be paid to us on each December 31 in 2014, 2015 and 2016. See Note 3 for disclosure related to the impairment charges associated with certain of our former oil and gas properties.

Assets are classified as held for sale when we have a formalized plan for disposal and those assets meet the held for sale criteria. Our continuing operations had no assets meeting the requirements to be classified as assets held for sale at December 31, 2013 and 2012.

Interest from external borrowings is capitalized on major projects until the assets are ready for their intended use. Capitalized interest is added to the cost of the underlying asset and is amortized over the useful life of the asset in the same manner as the underlying asset. The total of our interest expense capitalized during each of the three years ended December 31, 2013, 2012 and 2011 was $10.4 million, $4.9 million and $1.3 million, respectively.

Equity Investments

We periodically review our equity investments in Deepwater Gateway and Independence Hub for impairment. Under the equity method of accounting, an impairment loss would be recorded whenever the fair value of an equity investment is determined to be below its carrying amount and the reduction is considered to be other than temporary. In judging “other than temporary,” we would consider the length of time and extent to which the fair value of the investment has been less than the carrying amount of the equity investment, the near-term and long-term operating and financial prospects of the equity company and our longer-term intent of retaining the investment in the entity. We previously invested in an Australian joint venture that engaged in well intervention operations in the Southeast Asia region. We fully impaired our investment in that joint venture and recorded a $10.6 million other than temporary impairment charge in 2011. We exited this Australian joint venture in 2012.

Goodwill and Other Intangible Assets

We are required to perform an annual impairment analysis of goodwill. We elected November 1 to be our annual impairment assessment date for goodwill. However, we could be required to evaluate the recoverability of goodwill prior to the annual assessment date if we experience disruption to the business, unexpected significant declines in operating results, divestiture of a significant component of the business, emergence of unanticipated competition, loss of key personnel or a sustained decline in market capitalization. Our goodwill impairment test involves a comparison of the fair value with our carrying amount. The fair value is determined using discounted cash flows and other market-related valuation models. At the time of our annual assessment of goodwill on November 1, 2013, we had two reporting units with goodwill.

Goodwill impairment is determined using a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any.

The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit were acquired in a business combination).

We use both the income approach and the market approach to estimate the fair value of our reporting units under the first step of our goodwill impairment assessment. Under the income approach, a discounted cash flow analysis is performed requiring us to make various judgmental assumptions about future revenue, operating margins, growth rates and discount rates. These judgmental assumptions are based on our budgets, long-term business plans, economic projections, anticipated future cash flows and market place data. Under the market approach, the fair value of each reporting unit is calculated by applying an average peer total invested capital EBITDA (defined as earnings before interest, income taxes and depreciation and amortization) multiple to the upcoming fiscal year’s forecasted EBITDA for each reporting unit. Judgment is required when selecting peer companies that operate in the same or similar lines of business and are potentially subject to the same economic risks.

Our goodwill at December 31, 2013, 2012 and 2011 was associated with our Well Intervention and Robotics segments. In our 2013 goodwill impairment analysis, the fair value of both of our reporting units with goodwill exceeded their respective carrying value. Therefore, we concluded that our goodwill at December 31, 2013 was not impaired. As a result of the adoption of an update issued by the Financial Accounting Standards Board (the “FASB”) in 2011 to simplify goodwill impairment testing, we performed qualitative assessments during 2012 and 2011 to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount including goodwill. Based on the then current and historical evidence supporting these reporting units’ carrying value being sufficient to maintain their recorded goodwill amounts, we concluded that there was no indication of goodwill impairment and we did not perform the quantitative step one impairment analysis. We continue to monitor the current and future operations of these two reporting units to determine whether or not the quantitative assessment is once again necessary. We conduct the quantitative test at least every three years with the latest such test occurring on November 1, 2013.

The changes in the carrying amount of goodwill are as follows (in thousands):


		Well
		Intervention		Robotics		Total

Balance at December 31, 2011	$	17,108	$	45,107	$	62,215
Other adjustments (1)		720		-		720
Balance at December 31, 2012		17,828		45,107		62,935
Other adjustments (1)		295		-		295
Balance at December 31, 2013	$	18,123	$	45,107	$	63,230

(1) Reflects foreign currency adjustment for certain amounts of our goodwill.

Our intangible assets, other than goodwill, consist of intellectual property and patented technology related to our well intervention operations. We amortize these intangible assets on a straight-line basis over their estimated useful life or their legal life, whichever is shorter. At December 31, 2013, our remaining intangible assets, other than goodwill, totaled $1.9 million ($0.6 million, net of accumulated amortization of $1.3 million). Total amortization expense for intangible assets was $0.1 million for each of the years ended December 31, 2013, 2012, and 2011.

Recertification Costs and Deferred Dry Dock Charges

Our vessels are required by regulation to be recertified after certain periods of time. Recertification costs are incurred while a vessel is in dry dock. In addition, routine repairs and maintenance are performed and at times, major replacements and improvements are performed. We expense routine repairs and maintenance costs as they are incurred. We defer and amortize dry dock and related recertification costs over the length of time for which we expect to receive benefits from the dry dock and related recertification, which is generally 30 months but can be as long as 60 months if the appropriate permitting is obtained. A dry dock and related recertification process typically lasts one to two months, a period during which the vessel is idle and generally not available to earn revenue. Major replacements and improvements that extend the vessel’s economic useful life or functional operating capability are capitalized and depreciated over the vessel’s remaining economic useful life.

As of December 31, 2013 and 2012, capitalized deferred dry dock charges included within “Other assets, net” in the accompanying consolidated balance sheets (Note 4) totaled $24.8 million and $22.7 million, respectively, net of accumulated amortization of $14.5 million and $5.9 million, respectively. During the years ended December 31, 2013, 2012 and 2011, dry dock amortization expense was $14.8 million, $8.6 million and $7.6 million, respectively.

Convertible Preferred Stock

In December 2012, the holder of the remaining $1 million of Convertible Preferred Stock converted it into 361,402 shares of our common stock. We had previously presented the Convertible Preferred Stock below liabilities but not as a component of shareholders’ equity, because we were, under certain instances, required to settle any future conversions in cash. The dividend rate was 4% for 2012 and 2011. Our Convertible Preferred Stock was assessed for inclusion in our diluted earnings per share calculation using the if converted method (see “Earnings Per Share”) below.

Revenue Recognition

Revenues from our services are derived from contracts, which are both short-term and long-term in duration. Our long-term services contracts are contracts that contain either lump-sum, turnkey provisions or provisions for specific time, material and equipment charges, which are billed in accordance with the terms of such contracts. We recognize revenue as it is earned at estimated collectible amounts. Further, we record revenues net of taxes collected from customers and remitted to governmental authorities.

Unbilled revenue represents revenue attributable to work completed prior to period end that has not yet been invoiced. All amounts included in unbilled revenue at December 31, 2013 and 2012 are expected to be billed and collected within one year.

Dayrate Contracts. Revenues generated from specific time, materials and equipment contracts are generally earned on a dayrate basis and recognized as amounts are earned in accordance with contract terms. In connection with these contracts, we may receive revenues for mobilization of equipment and personnel. Revenues related to mobilization are deferred and recognized over the period in which contracted services are performed using the straight-line method. Incremental costs incurred directly for mobilization of equipment and personnel to the contracted site, which typically consist of materials, supplies and transit costs, are also deferred and recognized using the same method. Our policy to amortize the revenues and costs related to mobilization on a straight-line basis over the estimated contract service period is consistent with the general pace of activity, level of services being provided and dayrates being earned over the service period of the contract. Mobilization costs to move vessels when a contract does not exist are expensed as incurred.

Turnkey Contracts. Revenue on significant turnkey contracts is recognized under the percentage-of-completion method based on the ratio of costs incurred to total estimated costs at completion. In determining whether a contract should be accounted for using the percentage-of-completion method, we consider whether:

	•		the customer provides specifications for the construction of facilities or for the provision of related services;
	•		we can reasonably estimate our progress towards completion and our costs;
	•		the contract includes provisions for the enforceable rights regarding the goods or services to be provided, consideration to be received, and the manner and terms of payment;
	•		the customer can be expected to satisfy its obligations under the contract; and
	•		we can be expected to perform our contractual obligations.

Under the percentage-of-completion method, we recognize estimated contract revenue based on costs incurred to date as a percentage of total estimated costs. Changes in the expected cost of materials and labor, productivity, scheduling and other factors affect the total estimated costs. Additionally, external factors, including weather and other factors outside of our control, may also affect the progress and estimated cost of a project’s completion and, therefore, the timing of income and revenue recognition. We routinely review estimates related to our contracts and reflect revisions to profitability in earnings on a current basis. If a current estimate of total contract cost indicates an ultimate loss on a contract, we recognize the projected loss in full when it is first determined. We recognize additional contract revenue related to claims when the claim is probable and legally enforceable.

Whenever we have a contract that qualifies as a loss contract, we estimate the future shortfall between our anticipated future revenues and future costs.

Income Taxes

Deferred income taxes are based on the differences between financial reporting and tax bases of assets and liabilities. We utilize the liability method of computing deferred income taxes. The liability method is based on the amount of current and future taxes payable using tax rates and laws in effect at the balance sheet date. Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted and income is earned. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. We consider the undistributed earnings of our principal non-U.S. subsidiaries to be permanently reinvested.

It is our policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At December 31, 2013, we believe we have appropriately accounted for any unrecognized tax benefits. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.

Foreign Currency

Because we operate in various regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar (primarily with respect to Helix Well Ops (U.K.) Limited (“WOUK”)). The functional currency for WOUK is the applicable local currency (British Pound). Previously, our Australian well intervention subsidiary (“WOSEA”) had the Australian Dollar as its functional currency. We ceased operations in Australia in 2012. Results of operations for these subsidiaries are translated into U.S. dollars using average exchange rates during the period. Assets and liabilities of these foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at December 31, 2013 and 2012 and the resulting translation adjustments, which were unrealized gains of $5.0 million and $7.3 million, respectively, are included in accumulated other comprehensive income (loss), a component of shareholders’ equity. All foreign currency transaction gains and losses are recognized currently in the consolidated statements of operations.

Our foreign currency gains (losses) totaling $0.7 million in 2013, $(0.5) million in 2012 and $(2.1) million in 2011 are included in “Other income (expense), net” in the accompanying consolidated statements of operations. These realized amounts are exclusive of any unrealized gains or losses from our foreign currency exchange derivative contracts.

Derivative Instruments and Hedging Activities

Our continuing operations are exposed to market risks associated with interest rates and foreign currency exchange rates. Our risk management activities involve the use of derivative financial instruments to hedge the impact of market risk exposure related to variable interest rates and foreign currency exchange rates. All derivatives are reflected in the accompanying consolidated balance sheets at fair value.

We formally document all relationships between hedging instruments and the related hedged items, as well as our risk management objectives, strategies for undertaking various hedge transactions and our methods for assessing and testing correlation and hedge ineffectiveness. All hedging instruments are linked to the hedged asset, liability, firm commitment or forecasted transaction. We also assess, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in our hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. We discontinue hedge accounting if we determine that a derivative is no longer highly effective as a hedge, or it is probable that a hedged transaction will not occur. If hedge accounting is discontinued because it is probable the hedged transaction will not occur, deferred gains or losses on the hedging instruments are recognized in earnings immediately. If the forecasted transaction continues to be probable of occurring, any deferred gains or losses in accumulated other comprehensive income (loss) are amortized to earnings over the remaining period of the original forecasted transaction.

We engage solely in cash flow hedges. Hedges of cash flow exposure are entered into to hedge a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. Changes in the derivative fair values that are designated as cash flow hedges are deferred to the extent that the hedges are effective. These fair value changes are recorded as a component of accumulated other comprehensive income or loss (a component of shareholders’ equity) until the hedged transactions occur and are recognized in earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized immediately in earnings. In addition, any change in the fair value of a derivative that does not qualify for hedge accounting is recorded in earnings in the period in which the change occurs.

Interest Rate Risk

We enter into interest rate swaps from time to time to stabilize cash flows related to our long-term debt subject to variable interest rates. Changes in the fair value of an interest rate swap are deferred to the extent the swap is effective. These changes are recorded as a component of accumulated other comprehensive income (loss) until the anticipated interest payments occur and are recognized in interest expense. The ineffective portion of the interest rate swap, if any, is recognized immediately in earnings within the line titled “Net interest expense.” The amount of ineffectiveness associated with our interest rate swap contracts was immaterial for all periods presented.

Since January 2010, we had interest rate swap contracts to fix the interest rate on $200 million of indebtedness under our former credit facility. The last of these monthly contracts would have matured in January 2014. Under the terms of our former credit facility, we were required to use a portion of the proceeds from the sales of the Caesar, the Express and ERT to make payments to reduce our indebtedness. Because it was probable that we would pay off the corresponding indebtedness before the expiration of our interest rate swaps, we concluded in December 2012 that the swaps no longer qualified as cash flow hedges. Thus, at December 31, 2012, we recorded losses of approximately $0.6 million ($0.4 million net of tax) to reflect the mark-to-market adjustments for changes in the fair values of the interest rate swaps. In February 2013, we settled all of our interest rate swap contracts remaining at December 31, 2012 for $0.6 million.

In September 2013, we entered into interest rate swap contracts to fix the interest rate on $148.1 million of our Term Loan debt (Note 7). These monthly contracts began in October 2013 and extend through October 2016. The fair value of our remaining interest rate swaps was a net liability of $0.3 million and $0.5 million at December 31, 2013 and 2012, respectively.

Foreign Currency Exchange Rate Risk

Because we operate in various regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar. We entered into various foreign currency exchange contracts to stabilize expected cash outflows relating to certain vessel charters that are denominated in British pounds and Norwegian kroner. The aggregate fair value of the foreign exchange contracts was a net liability of $15.0 million at December 31, 2013 and a net asset of $0.1 million at December 31, 2012.

In January 2013, we entered into foreign currency exchange contracts to hedge through September 2017 the foreign currency exposure associated with the Grand Canyon charter payments. In February 2013, we entered into similar foreign currency exchange contracts for the Grand Canyon II and the Grand Canyon III charter payments through July 2019 and February 2020, respectively. These contracts currently qualify for hedge accounting treatment. All of our remaining foreign exchange contracts are not accounted for as hedge contracts and changes in their fair value are being marked-to-market in earnings in each reporting period. We recorded gains (losses) totaling $(0.6) million in 2013, $0.4 million in 2012 and $0.2 million in 2011 associated with foreign exchange contracts not qualifying for hedge accounting.

See Note 16 for more information regarding the accounting for our derivative contracts including our commodity contracts associated with ERT.

Earnings Per Share

We have shares of restricted stock issued and outstanding, which remain subject to vesting requirements. Holders of such shares of unvested restricted stock are entitled to the same liquidation and dividend rights as the holders of our outstanding common stock and are thus considered participating securities. Under applicable accounting guidance, the undistributed earnings for each period are allocated based on the participation rights of both the common shareholders and holders of any participating securities as if earnings for the respective periods had been distributed. Because both the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, we are required to compute earnings per share (“EPS”) amounts under the two class method in periods in which we have earnings from continuing operations. For periods in which we have a net loss we do not use the two class method as holders of our restricted shares are not contractually obligated to share in such losses.

The presentation of basic EPS amounts on the face of the accompanying consolidated statements of operations is computed by dividing the net income applicable to Helix common shareholders by the weighted average shares of outstanding common stock. The calculation of diluted EPS is similar to basic EPS, except that the denominator includes dilutive common stock equivalents and the income included in the numerator excludes the effects of the impact of dilutive common stock equivalents, if any. The computations of the numerator (Income) and denominator (Shares) to derive the basic and diluted EPS amounts presented on the face of the accompanying consolidated statements of operations for the years ended December 31, 2013, 2012 and 2011 are as follows (in thousands):


		Year Ended December 31,
		2013			2012			2011
		Income	Shares		Income	Shares		Income	Shares
Basic:
Continuing operations:
Net income (loss) applicable to Helix	$	109,922		$	(46,334)		$	129,939
Less: Income from discontinued operations, net of tax		(1,073)			(23,684)			(95,221)
Income (loss) from continuing operations		108,849			(70,018)			34,718
Less: Undistributed income allocable to participating securities – continuing operations		(801)			-			(427)
Income (loss) applicable to common shareholders – continuing operations	$	108,048	105,032	$	(70,018)	104,449	$	34,291	104,528


Discontinued operations:
Income from discontinued operations, net of tax	$	1,073		$	23,684		$	95,221
Less: Undistributed income allocable to participating securities – discontinued operations		(8)			-			(1,172)
Income applicable to common shareholders – discontinued operations	$	1,065	105,032	$	23,684	104,449	$	94,049	104,528


		Year Ended December 31,
		2013			2012			2011
		Income	Shares		Income	Shares		Income	Shares
Diluted:
Continuing operations:
Income (loss) applicable to common shareholders – continuing operations	$	108,048	105,032	$	(70,018)	104,449	$	34,291	104,528
Effect of dilutive securities:
Share-based awards other than participating securities		-	152		-	-		-	64
Undistributed income reallocated to participating securities		1	-		-	-		2	-
Convertible preferred stock		-	-		-	-		40	361
Income (loss) applicable to common shareholders – continuing operations	$	108,049	105,184	$	(70,018)	104,449	$	34,333	104,953

Discontinued operations:
Income from discontinued operations, net of tax	$	1,073	105,184	$	23,684	104,449	$	95,221	104,953

We had net losses from continuing operations for the year ended December 31, 2012. Accordingly, our diluted EPS calculation for 2012 was equivalent to our basic EPS calculation because it excluded any assumed exercise or conversion of common stock equivalents because they were deemed to be anti-dilutive, meaning their inclusion would have reduced the reported net loss per share in those respective years. Shares that otherwise would have been included in the diluted per share calculations for the year ended December 31, 2012, assuming we had earnings from continuing operations, are as follows (in thousands):


		2012

Diluted shares (as reported)		104,449
Share-based awards		382
Convertible preferred stock		334
Total		105,165

The diluted EPS calculation also excluded dividends and related costs associated with the convertible preferred stock that otherwise would have been added back to net income if assumed conversion of the shares was dilutive during the year.

No diluted shares were included for the 2032 Notes for the years ended December 31, 2013 and 2012 as the conversion price of $25.02 (and conversion trigger of $32.53 per share) was not met in either period, and because we have the right to settle any such future conversions in cash at our sole discretion (Note 7). No diluted shares were included for the 2025 Notes as the conversion price of $32.14 (and conversion trigger of $38.57 per share) was not met in the years ended December 31, 2012 and 2011.

Major Customers and Concentration of Credit Risk

The market for our products and services is primarily the offshore oil and gas industry. Oil and gas companies spend capital on exploration, drilling and production operations, the amount of which is generally dependent on the prevailing view of future oil and gas prices that are subject to many external factors which may contribute to significant volatility. Our customers consist primarily of major and independent oil and gas producers and suppliers, pipeline transmission companies, alternative (renewable) energy companies and offshore engineering and construction firms. We perform ongoing credit evaluations of our customers and provide allowances for probable credit losses when necessary. The percent of consolidated revenue from major customers, those whose total represented 10% or more of our consolidated revenues is as follows: 2013 — Shell (14%); 2012 — Shell (12%) and 2011 — Shell (10%). Most of the revenues from Shell were generated by our Well Intervention segment. We provided services to over 65 customers in 2013.

Fair Value Measurements

Current fair value accounting standards define fair value, establish a consistent framework for measuring fair value and expand disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. These standards also clarify that fair value is an exit price, representing the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. These fair value accounting rules establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:


	•		Level 1. Observable inputs such as quoted prices in active markets;
	•		Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
	•		Level 3. Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of three valuation techniques as follows:

(a)

Market Approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

(b)

Cost Approach. Amount that would be required to replace the service capacity of an asset (replacement cost).

(c)

Income Approach. Techniques to convert expected future cash flows to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models).

Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, our long-term debt and various derivative instruments. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the highly liquid nature of these instruments. The following table provides additional information related to other financial instruments measured at fair value on a recurring basis at December 31, 2013 (in thousands):


		Level 1		Level 2 (1)		Level 3		Total	Valuation Technique
Assets:
Foreign exchange contracts	$	–	$	69	$	–	$	69	(c)
Interest rate swaps		–		446		–		446	(c)

Liabilities:
Fair value of long-term debt (2)		536,213		109,474		–		645,687	(a)
Foreign exchange contracts		–		15,071		–		15,071	(c)
Interest rate swaps		–		746		–		746	(c)
Total net liability	$	536,213	$	124,776	$	–	$	660,989

(1) Unless otherwise indicated, the fair value of our Level 2 derivative instruments reflects our best estimate and is based upon exchange or over-the-counter quotations whenever they are available. Quoted valuations may not be available due to location differences or terms that extend beyond the period for which quotations are available. Where quotes are not available, we utilize other valuation techniques or models to estimate market values. These modeling techniques require us to make estimations of future prices, price correlation and market volatility and liquidity based on market data. Our actual results may differ from our estimates, and these differences could be positive or negative.

(2) See Note 7 for additional information regarding our long-term debt. The fair value of our long-term debt at December 31, 2013 and 2012 is as follows (in thousands):


		2013				2012
		Carrying		Fair		Carrying		Fair
		Value		Value (e)		Value		Value (e)

Term Loans (mature July 2015) (a)	$	-	$	-	$	367,181	$	368,295
Revolving Credit Facility (matures July 2015) (a)		-		-		100,000		100,000
Term Loan (matures June 2018)		292,500		293,963		-		-
2025 Notes (mature December 2025) (b)		-		-		3,487		3,487
2032 Notes (mature March 2032) (c)		200,000		242,250		200,000		239,320
Senior Unsecured Notes (mature January 2016) (d)		-		-		274,960		283,209
MARAD Debt (matures February 2027)		100,168		109,474		105,288		123,187
Total debt	$	592,668	$	645,687	$	1,050,916	$	1,117,498

(a) Relates to the term loans and revolving credit facility under our former credit agreement, which was terminated in June 2013.

(b) This remaining amount was repurchased by us in February 2013.

(d) We redeemed our remaining Senior Unsecured Notes in July 2013.

(e) The estimated fair value of all debt, other than the MARAD debt, was determined using Level 1 inputs using the market approach. The fair value of the MARAD debt was determined using a third party evaluation of the remaining average life and outstanding principal balance of the MARAD indebtedness as compared to other governmental obligations in the marketplace with similar terms. The fair value of the MARAD Debt was estimated using Level 2 fair value inputs using the market approach.

Debt Discount

On January 1, 2009, we recorded a discount of $60.2 million related to our Convertible Senior Notes due 2025 (the “2025 Notes”) as required. To arrive at this discount amount, we estimated the fair value of the liability component of the 2025 Notes as of the date of their issuance (March 30, 2005) using an income approach. To determine this estimated fair value, we used borrowing rates of similar market transactions involving comparable liabilities at the time of issuance and an expected life of 7.75 years, which represented the earliest period that the holders could require us to repurchase the 2025 Notes (Note 7). The discount related to our 2025 Notes became fully amortized in December 2012.

In connection with the issuance of our Convertible Senior Notes due 2032 (the “2032 Notes”), we recorded a discount of $35.4 million under existing accounting requirements. To arrive at this discount amount, we estimated the fair value of the liability component of the 2032 Notes as of the date of their issuance (March 12, 2012) using an income approach. To determine this estimated fair value, we used borrowing rates of similar market transactions involving comparable liabilities at the time of issuance and an expected life of 6.0 years. In selecting the expected life, we selected the earliest date that the holders could require us to repurchase all or a portion of the 2032 Notes (March 15, 2018). The remaining unamortized amount of the discount of the 2032 Notes was $26.5 million at December 31, 2013 (Note 7).

Investment Available for Sale

In 2009 we sold substantially all of our owned shares of the publicly-traded Cal Dive common stock for net proceeds of $418.2 million, net of underwriting fees. Following these sale transactions, we owned 0.5 million shares of Cal Dive common stock, representing less than 1% of the total outstanding shares of Cal Dive. Accordingly we classified our remaining interest in Cal Dive as an investment available for sale. As an investment available for sale, the value of our remaining interest was marked-to-market at each period end with the corresponding change in value being reported as a component of accumulated other comprehensive income (loss) in the accompanying consolidated balance sheet. In March 2011, we sold our remaining 0.5 million shares of Cal Dive common stock on the open market for gross proceeds of $3.6 million resulting in a pre-tax gain of $0.8 million.

New Accounting Standards

We do not expect any recent accounting standards to have a material impact on our financial position, results of operations or cash flows.