##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 0-51582
 
 HERCULES OFFSHORE, INC.
 (Exact name of registrant as specified in its charter)
 
 Delaware
    
    56-2542838(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)9 Greenway Plaza, Suite 2200Houston, Texas
    
    77046(Address of principal executive offices)
    
    (Zip Code)
 (713) 350-5100
(Registrants telephone number, including area code)
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Common Stock, par value $0.01 per share
    
    Outstanding as of July 23, 2010114,772,344




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##### 



HERCULES OFFSHORE, INC.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three and six months ended June 30, 2010, and June 30,
2009
    
    
    4Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and June 30, 2009
    
    
    5Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2010, and
June 30, 2009
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    44Item 4. Controls and Procedures
    
    
    45PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    45Item 1A. Risk Factors
    
    
    45Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item 6. Exhibits
    
    
    46Signatures
    
    
    47EX-10.1EX-10.2EX-10.3EX-10.4EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 HERCULES OFFSHORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    91,724
    
    
    $
    140,828Restricted Cash
    
    
    7,029
    
    
    
    3,658Accounts Receivable, Net of Allowance for Doubtful Accounts of $33,019 and
$38,522 as of June 30, 2010 and December 31, 2009, Respectively
    
    
    161,488
    
    
    
    133,662Prepaids
    
    
    28,313
    
    
    
    13,706Current Deferred Tax Asset
    
    
    12,195
    
    
    
    22,885Other
    
    
    21,067
    
    
    
    6,675321,816
    
    
    
    321,414Property and Equipment, Net
    
    
    1,841,652
    
    
    
    1,923,603Other Assets, Net
    
    
    29,756
    
    
    
    32,459$
    2,193,224
    
    
    $
    2,277,476LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term Debt and Current Portion of Long-term Debt
    
    $
    4,924
    
    
    $
    4,952Insurance Notes Payable
    
    
    21,930
    
    
    
    5,484Accounts Payable
    
    
    50,803
    
    
    
    51,868Accrued Liabilities
    
    
    52,949
    
    
    
    67,773Interest Payable
    
    
    14,756
    
    
    
    6,624Taxes Payable
    
    
    
    
    
    
    5,671Other Current Liabilities
    
    
    30,895
    
    
    
    34,229176,257
    
    
    
    176,601Long-term Debt, Net of Current Portion
    
    
    854,778
    
    
    
    856,755Other Liabilities
    
    
    8,302
    
    
    
    19,809Deferred Income Taxes
    
    
    205,283
    
    
    
    245,799Commitments and ContingenciesStockholders Equity:Common Stock, $0.01 Par Value; 200,000 Shares Authorized; 116,308 and 116,154 Shares
Issued, Respectively; 114,762 and 114,650 Shares Outstanding, Respectively
    
    
    1,163
    
    
    
    1,162Capital in Excess of Par Value
    
    
    1,922,226
    
    
    
    1,921,037Treasury Stock, at Cost, 1,546 Shares and 1,504 Shares, Respectively
    
    
    (50,320
    )
    
    
    (50,151
    )Accumulated Other Comprehensive Loss
    
    
    (1,762
    )
    
    
    (5,773
    )Retained Deficit
    
    
    (922,703
    )
    
    
    (887,763
    )948,604
    
    
    
    978,512$
    2,193,224
    
    
    $
    2,277,476
  3




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##### Table of Contents



HERCULES OFFSHORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    165,895
    
    
    $
    183,691
    
    
    $
    316,744
    
    
    $
    407,182Costs and Expenses:Operating Expenses
    
    
    108,321
    
    
    
    116,097
    
    
    
    216,957
    
    
    
    265,341Impairment of Property and Equipment
    
    
    
    
    
    
    26,882
    
    
    
    
    
    
    
    26,882Depreciation and Amortization
    
    
    48,350
    
    
    
    51,091
    
    
    
    98,604
    
    
    
    99,937General and Administrative
    
    
    14,798
    
    
    
    15,450
    
    
    
    27,101
    
    
    
    31,742171,469
    
    
    
    209,520
    
    
    
    342,662
    
    
    
    423,902Operating Loss
    
    
    (5,574
    )
    
    
    (25,829
    )
    
    
    (25,918
    )
    
    
    (16,720
    )Other Income (Expense):Interest Expense
    
    
    (21,259
    )
    
    
    (14,561
    )
    
    
    (42,998
    )
    
    
    (30,350
    )Gain on Early Retirement of Debt, Net
    
    
    
    
    
    
    13,747
    
    
    
    
    
    
    
    13,747Other, Net
    
    
    3,183
    
    
    
    3,346
    
    
    
    3,169
    
    
    
    2,690Loss Before Income Taxes
    
    
    (23,650
    )
    
    
    (23,297
    )
    
    
    (65,747
    )
    
    
    (30,633
    )Income Tax Benefit
    
    
    4,666
    
    
    
    11,510
    
    
    
    30,807
    
    
    
    14,335Loss from Continuing Operations
    
    
    (18,984
    )
    
    
    (11,787
    )
    
    
    (34,940
    )
    
    
    (16,298
    )Loss from Discontinued Operation, Net of Taxes
    
    
    
    
    
    
    (242
    )
    
    
    
    
    
    
    (675
    )Net Loss
    
    $
    (18,984
    )
    
    $
    (12,029
    )
    
    $
    (34,940
    )
    
    $
    (16,973
    )Basic Loss Per Share:Loss from Continuing Operations
    
    $
    (0.17
    )
    
    $
    (0.13
    )
    
    $
    (0.30
    )
    
    $
    (0.18
    )Loss from Discontinued Operation
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net Loss
    
    $
    (0.17
    )
    
    $
    (0.14
    )
    
    $
    (0.30
    )
    
    $
    (0.19
    )Diluted Loss Per Share:Loss from Continuing Operations
    
    $
    (0.17
    )
    
    $
    (0.13
    )
    
    $
    (0.30
    )
    
    $
    (0.18
    )Loss from Discontinued Operation
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net Loss
    
    $
    (0.17
    )
    
    $
    (0.14
    )
    
    $
    (0.30
    )
    
    $
    (0.19
    )Weighted Average Shares Outstanding:Basic
    
    
    114,757
    
    
    
    88,733
    
    
    
    114,727
    
    
    
    88,368Diluted
    
    
    114,757
    
    
    
    88,733
    
    
    
    114,727
    
    
    
    88,368
  4




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months Ended June 30,2010
    
    
    2009Cash Flows from Operating Activities:Net Loss
    
    $
    (34,940
    )
    
    $
    (16,973
    )Adjustments to Reconcile Net Loss to Net Cash Provided by
(Used In) Operating Activities:Depreciation and Amortization
    
    
    98,604
    
    
    
    99,937Stock-Based Compensation Expense
    
    
    1,817
    
    
    
    4,115Deferred Income Taxes
    
    
    (32,311
    )
    
    
    (25,063
    )Provision (Benefit) for Doubtful Accounts Receivable
    
    
    (1,771
    )
    
    
    543Amortization of Deferred Financing Fees
    
    
    1,683
    
    
    
    2,096Amortization of Original Issue Discount
    
    
    1,998
    
    
    
    2,386Non-Cash Loss on Derivatives
    
    
    2,835
    
    
    
    Gain on Insurance Settlement
    
    
    
    
    
    
    (8,700
    )Gain on Disposal of Assets
    
    
    (6,729
    )
    
    
    (332
    )Gain on Early Retirement of Debt, Net
    
    
    
    
    
    
    (13,747
    )Impairment of Property and Equipment
    
    
    
    
    
    
    26,882Excess Tax Benefits from Stock-Based Arrangements
    
    
    (377
    )
    
    
    (5,031
    )(Increase) Decrease in Operating Assets -Accounts Receivable
    
    
    (26,055
    )
    
    
    64,738Prepaid Expenses and Other
    
    
    13,027
    
    
    
    8,383Increase (Decrease) in Operating Liabilities -Accounts Payable
    
    
    (1,065
    )
    
    
    (31,542
    )Insurance Notes Payable
    
    
    (7,669
    )
    
    
    (13,236
    )Other Current Liabilities
    
    
    (30,370
    )
    
    
    (5,010
    )Other Liabilities
    
    
    (12,175
    )
    
    
    (1,946
    )Net Cash Provided by (Used In) Operating Activities
    
    
    (33,498
    )
    
    
    87,500Cash Flows from Investing Activities:Additions of Property and Equipment
    
    
    (11,015
    )
    
    
    (62,068
    )Deferred Drydocking Expenditures
    
    
    (7,574
    )
    
    
    (9,662
    )Insurance Proceeds Received
    
    
    
    
    
    
    8,717Proceeds from Sale of Assets, Net
    
    
    9,969
    
    
    
    4,722Increase in Restricted Cash
    
    
    (3,371
    )
    
    
    Net Cash Used in Investing Activities
    
    
    (11,991
    )
    
    
    (58,291
    )Cash Flows from Financing Activities:Short-term Debt Repayments
    
    
    
    
    
    
    (2,455
    )Long-term Debt Repayments
    
    
    (4,003
    )
    
    
    (2,250
    )Redemption of 3.375% Convertible Senior Notes
    
    
    
    
    
    
    (6,099
    )Excess Tax Benefits from Stock-Based Arrangements
    
    
    377
    
    
    
    5,031Other
    
    
    11
    
    
    
    (11
    )Net Cash
Used in Financing Activities
    
    
    (3,615
    )
    
    
    (5,784
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (49,104
    )
    
    
    23,425Cash and Cash Equivalents at Beginning of Period
    
    
    140,828
    
    
    
    106,455Cash and Cash Equivalents at End of Period
    
    $
    91,724
    
    
    $
    129,880
  5




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net Loss
    
    $
    (18,984
    )
    
    $
    (12,029
    )
    
    $
    (34,940
    )
    
    $
    (16,973
    )Other Comprehensive Income, Net of Taxes:Changes Related to Hedge Transactions
    
    
    1,932
    
    
    
    1,988
    
    
    
    4,011
    
    
    
    1,582Comprehensive Loss
    
    $
    (17,052
    )
    
    $
    (10,041
    )
    
    $
    (30,929
    )
    
    $
    (15,391
    )
  6




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 UNAUDITED
 1. General
      Reclassifications
  7




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##### Table of Contents



HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
 Revenue Recognition
  Three Months Ended June 30,
    
    Six Months Ended June 30,2010
    
    2009
    
    2010
    
    2009Mobilization revenue deferred
    
    $
    
    
    
    $
    
    
    
    $
    600
    
    
    $
    12,000Mobilization expense deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Mobilization revenue recognized
    
    
    4,134
    
    
    
    4,233
    
    
    
    7,911
    
    
    
    8,149Mobilization expense recognized
    
    
    676
    
    
    
    700
    
    
    
    1,592
    
    
    
    1,393
   As of

    

    As ofBalance Sheet

    

    June 30,

    

    December 31,Classification
    

2010
    

2009Assets:Deferred Mobilization and Contract Preparation
Expense-Current Portion
    

    Other

    
$
    959

    
$
    1,092Deferred Mobilization and Contract Preparation
Expense-Non-Current Portion
    
    Other Assets, Net
    

    23

    

    1,651Liabilities:Deferred Mobilization Revenue-Current Portion
    

    Other Current Liabilities

    

    18,910

    

    19,406Deferred Mobilization Revenue-Non-Current Portion
    
    Other Liabilities
    

    3,502

    

    12,628
 Accounts Receivable and Allowance for Doubtful Accounts
  Other Assets
   8




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  Cash and Cash Equivalents
  Restricted Cash
  2. Earnings Per Share
  3. Dispositions
 Hercules
191 Hercules 255 Hercules 191 Hercules 255 Hercules 155
 Hercules 100 Hercules 110 Hercules 100 Hercules 110 Hercules 100 Hercules 110 Hercules 110 Hercules 100 Hercules 110
 9




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
 4. Debt
  June
30,
2010
    
    

December
31,
2009Term Loan Facility, due July 2013
    
    $
    478,849
    
    
    $
    482,85210.5% Senior Secured Notes, due October 2017
    
    
    292,595
    
    
    
    292,2723.375% Convertible Senior Notes, due June 2038
    
    
    84,746
    
    
    
    83,0717.375% Senior Notes, due April 2018
    
    
    3,512
    
    
    
    3,512Total Debt
    
    
    859,702
    
    
    
    861,707Less Short-term Debt and Current Portion of Long-term Debt
    
    
    4,924
    
    
    
    4,952Total Long-term Debt, Net of Current Portion
    
    $
    854,778
    
    
    $
    856,755
 Senior secured credit facility
  
    
    The total leverage ratio for any test period is calculated as the ratio of consolidated
indebtedness on the test date to consolidated EBITDA for the trailing twelve months, all as
defined in the Credit Agreement.
 MaximumTest Date
    
    Total Leverage RatioSeptember 30, 2010
    
    8.00 to 1.00December 31, 2010
    
    7.50 to 1.00March 31, 2011
    
    7.00 to 1.00June 30, 2011
    
    6.75 to 1.00September 30, 2011
    
    6.00 to 1.00December 31, 2011
    
    5.50 to 1.00March 31, 2012
    
    5.25 to 1.00June 30, 2012
    
    5.00 to 1.00September 30, 2012
    
    4.75 to 1.00December 31, 2012
    
    4.50 to 1.00March 31, 2013
    
    4.25 to 1.00June 30, 2013
    
    4.00 to 1.00
 -
    
    At June 30, 2010, the Companys total leverage ratio was 8.09. There is no
maximum total leverage requirement for the period ended June 30, 2010.
 
    
    Maintain a minimum level of liquidity, measured as the amount of unrestricted cash and
cash equivalents on hand and availability under the revolving credit facility, of (i)
$100.0 million for the period between October 1, 2009 through December 31, 2010, (ii) $75.0
million during calendar year 2011 and (iii) $50.0 million thereafter. As of June 30, 2010,
as calculated pursuant to the Credit Agreement, the Companys total liquidity was $256.7
million.
    
    Maintain a minimum fixed charge coverage ratio as follows:
 Fixed ChargePeriod
    
    Coverage RatioJuly 1, 2009
    
    
    
    December 31, 2011
    
    1.00 to 1.00January 1, 2012
    
    
    
    March 31, 2012
    
    1.05 to 1.00April 1, 2012
    
    
    
    June 30, 2012
    
    1.10 to 1.00July 1, 2012 and thereafter
    
    
    
    
    
    1.15 to 1.00
 10




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
 -
    
    The consolidated fixed charge coverage ratio for any test period is defined as the
sum of consolidated EBITDA for the test period plus an amount that may be added for the
purpose of calculating the ratio for such test period, not to exceed $130.0 million in
total during the term of the credit facility, to consolidated fixed charges for the
test period, all as defined in the Credit Agreement. As of June 30, 2010, the Companys
fixed charge coverage ratio was 1.0.
 
    
    Mandatory prepayments of debt outstanding under the Credit Agreement with 50% of excess
cash flow as defined in the Credit Agreement for the fiscal years ending December 31, 2010,
2011 and 2012, and with proceeds from:
 -
    
    unsecured debt issuances, with the exception of refinancing;-
    
    secured debt issuances;-
    
    casualty events not used to repair damaged property;-
    
    sales of assets in excess of $25 million annually; and-
    
    unless the Company has achieved a specified leverage ratio, 50% of proceeds from
equity issuances, excluding those for permitted acquisitions or to meet the minimum
liquidity requirements.
     10.5% senior secured notes due 2017
   11




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
    
    
    incur additional indebtedness or issue certain preferred stock;
    
    pay dividends or make other distributions;
    
    make other restricted payments or investments;
    
    sell assets;
    
    create liens;
    
    enter into agreements that restrict dividends and other payments by restricted
subsidiaries;
    
    engage in transactions with its affiliates; and
    
    consolidate, merge or transfer all or substantially all of its assets.
    Year
    
    Optional Redemption Price2013
    
    105.2500%2014
    
    102.6250%2015
    
    101.3125%2016 and thereafter
    
    100.0000%
  3.375% convertible senior notes due 2038
  12




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
    Debt  Debt with
Conversion and Other Options
 Other debt
  Fair value estimate
  June 30, 2010
    
    December 31, 2009Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    Value(in millions)Term Loan Facility, due July 2013
    
    $
    478.8
    
    
    $
    421.4
    
    
    $
    482.9
    
    
    $
    468.410.5% Senior Secured Notes, due October 2017
    
    
    292.6
    
    
    
    265.9
    
    
    
    292.3
    
    
    
    315.83.375% Convertible Senior Notes, due June 2038
    
    
    84.7
    
    
    
    70.0
    
    
    
    83.1
    
    
    
    76.87.375% Senior Notes, due April 2018
    
    
    3.5
    
    
    
    2.4
    
    
    
    3.5
    
    
    
    3.0
 13




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
 5. Derivative Instruments and Hedging
      14




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  June 30, 2010
    
    
    December 31, 2009Balance Sheet
    
    Fair
    
    
    Balance Sheet
    
    FairClassification
    
    Value
    
    
    Classification
    
    ValueDerivatives(a):Interest rate contracts:Other
    
    $
    
    
    
    Other
    
    $
    Total Asset Derivatives
    
    $
    
    
    
    Total Asset Derivatives
    
    $
    Other Current Liabilities
    
    $
    6,976
    
    
    Other Current Liabilities
    
    $
    10,312Other Liabilities
    
    
    
    
    
    Other Liabilities
    
    
    Total Liability Derivatives
    
    $
    6,976
    
    
    Total Liability Derivatives
    
    $
    10,312
 
 (a)
    
    These interest rate contracts were designated as cash flow hedges through July 27, 2009.  Three Months Ended June 30,2010
    
    2009
    
    
    
    
    
    2010
    
    2009
    
    
    
    
    
    2010
    
    2009Derivatives(a)
    
    I.
    
    II.
    
    III.
    
    IV.
    
    V.Interest rate contracts
    
    $
    
    
    
    $
    (605
    )
    
    Interest Expense
    
    $
    (2,972
    )
    
    $
    (3,989
    )
    
    Interest Expense
    
    $
    104
    
    
    $
    
 Six Months Ended June 30,2010
    
    2009
    
    
    
    
    
    2010
    
    2009
    
    
    
    
    
    2010
    
    2009Derivatives(a)
    
    I.
    
    II.
    
    III.
    
    IV.
    
    V.Interest rate contracts
    
    $
    
    
    
    $
    (3,880
    )
    
    Interest Expense
    
    $
    (6,170
    )
    
    $
    (8,403
    )
    
    Interest Expense
    
    $
    (259
    )
    
    $
    
 
 (a)
    
    These interest rate contracts were designated as cash flow hedges through July 27, 2009. 
 I.
    
    Amount of Gain (Loss), Net of Taxes Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion)II.
    
Classification of Gain (Loss) Reclassified from Accumulated
Other Comprehensive Income (Loss) into Income (Loss) (Effective
Portion)III.
    
    Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss) (Effective
Portion)IV.
    
    Classification of Gain (Loss) Recognized in Income (Loss) on DerivativeV.
    
    Amount of Gain (Loss) Recognized in Income (Loss) on Derivative  Cumulative unrealized loss, net of tax of $3,108, as of December 31, 2009
    
    $
    (5,773
    )Reclassification of losses into net income, net of tax of $2,159
    
    
    4,011Cumulative unrealized loss, net of tax of $949, as of June 30, 2010
    
    $
    (1,762
    )
 15




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
 6. Fair Value Measurements
 Fair Value Measurements and Disclosures
 Fair Value Measurements and Disclosures
 Level 1
    
    -
    
    Inputs are quoted prices in active markets for identical assets or liabilities.Level 2
    
    -
    
    Inputs are quoted prices for similar assets or liabilities in an active
market, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are
observable and market-corroborated inputs which are derived principally from
or corroborated by observable market data.Level 3
    
    -
    
    Inputs are derived from valuation techniques in which one or more significant
inputs or value drivers are unobservable.
  (A)
    
    Market approach  Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities(B)
    
    Income approach  Uses valuation techniques to convert future amounts to a single
present amount based on current market expectations about those future amounts,
including present value techniques, option-pricing models and excess earnings method(C)
    
    Cost approach  Based on the amount that currently would be required to replace
the service capacity of an asset (replacement cost)
 Improving Disclosures about Fair Value
Measurements
   Quoted Prices inTotal
    
    Active Markets forFair Value
    
    Identical Asset or
    
    Significant Other
    
    SignificantMeasurement
    
    Liability
    
    Observable Inputs
    
    Unobservable Inputs
    
    ValuationJune 30, 2010
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    TechniqueInterest Rate Contracts
    
    $
    6,976
    
    
    $
    
    
    
    $
    6,976
    
    
    $
    
    
    
    
    A
 16




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##### Table of Contents



HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  Quoted Prices inTotal
    
    Active Markets forFair Value
    
    Identical Asset or
    
    Significant Other
    
    SignificantMeasurement
    
    Liability
    
    Observable Inputs
    
    Unobservable Inputs
    
    ValuationDecember 31, 2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    TechniqueInterest Rate Contracts
    
    $
    10,312
    
    
    $
    
    
    
    $
    10,312
    
    
    $
    
    
    
    
    A
  Quoted Prices inTotal
    
    Active Markets forFair Value
    
    Identical Asset or
    
    Significant Other
    
    SignificantMeasurement
    
    Liability
    
    Observable Inputs
    
    Unobservable Inputs
    
    Valuation
    
    TotalDecember 31, 2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    Technique
    
    Gain (Loss)Assets Held
for Sale
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    A
    
    
    $
    (26,882
    )
 Hercules 110 Hercules 110
 7. Stock-based Compensation
    8. Supplemental Cash Flow Information
  Six Months Ended June 30,2010
    
    2009(In thousands)Cash paid during the period for:Interest, net of capitalized interest
    
    $
    28,628
    
    
    $
    14,982Income taxes
    
    
    23,603
    
    
    
    12,038
  9. Income Tax
  17




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
      18




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
 10. Segments
   Domestic Offshore
 International Offshore
 Inland
 Domestic Liftboats
 International Liftboats
 Delta Towing
  19




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  Three Months Ended June 30, 2010
    
    
    Six Months Ended June 30, 2010Income (Loss)
    
    
    Depreciation
    
    
    
    
    
    
    Income (Loss)
    
    
    Depreciationfrom
    
    
    &
    
    
    
    
    
    
    from
    
    
    &Revenue
    
    
    Operations
    
    
    Amortization
    
    
    Revenue
    
    
    Operations
    
    
    AmortizationDomestic Offshore
    
    $
    34,143
    
    
    $
    (20,520
    )
    
    $
    17,170
    
    
    $
    63,105
    
    
    $
    (50,646
    )
    
    $
    33,709International Offshore
    
    
    73,493
    
    
    
    24,237
    
    
    
    14,473
    
    
    
    146,935
    
    
    
    46,723
    
    
    
    29,404Inland
    
    
    5,180
    
    
    
    (7,728
    )
    
    
    6,239
    
    
    
    9,931
    
    
    
    (13,035
    )
    
    
    13,745Domestic Liftboats
    
    
    17,895
    
    
    
    2,993
    
    
    
    3,668
    
    
    
    29,338
    
    
    
    427
    
    
    
    7,868International Liftboats
    
    
    27,187
    
    
    
    6,493
    
    
    
    4,368
    
    
    
    53,149
    
    
    
    11,796
    
    
    
    9,059Delta Towing
    
    
    7,997
    
    
    
    (282
    )
    
    
    1,614
    
    
    
    14,286
    
    
    
    (1,223
    )
    
    
    3,204165,895
    
    
    
    5,193
    
    
    
    47,532
    
    
    
    316,744
    
    
    
    (5,958
    )
    
    
    96,989Corporate
    
    
    
    
    
    
    (10,767
    )
    
    
    818
    
    
    
    
    
    
    
    (19,960
    )
    
    
    1,615Total Company
    
    $
    165,895
    
    
    $
    (5,574
    )
    
    $
    48,350
    
    
    $
    316,744
    
    
    $
    (25,918
    )
    
    $
    98,604
 Three Months Ended June 30, 2009
    
    
    Six Months Ended June 30, 2009Income (Loss)
    
    
    Depreciation
    
    
    
    
    
    
    Income (Loss)
    
    
    Depreciationfrom
    
    
    &
    
    
    
    
    
    
    from
    
    
    &Revenue
    
    
    Operations
    
    
    Amortization
    
    
    Revenue
    
    
    Operations
    
    
    AmortizationDomestic Offshore
    
    $
    36,970
    
    
    $
    (20,180
    )
    
    $
    15,092
    
    
    $
    96,151
    
    
    $
    (32,120
    )
    
    $
    30,132International Offshore (a)
    
    
    101,757
    
    
    
    17,175
    
    
    
    16,749
    
    
    
    205,209
    
    
    
    60,060
    
    
    
    31,933Inland
    
    
    96
    
    
    
    (17,372
    )
    
    
    8,283
    
    
    
    13,009
    
    
    
    (33,616
    )
    
    
    16,276Domestic Liftboats
    
    
    18,884
    
    
    
    212
    
    
    
    5,747
    
    
    
    41,494
    
    
    
    3,231
    
    
    
    10,796International Liftboats
    
    
    20,747
    
    
    
    8,378
    
    
    
    2,278
    
    
    
    39,389
    
    
    
    15,238
    
    
    
    4,662Delta Towing
    
    
    5,237
    
    
    
    (3,065
    )
    
    
    2,142
    
    
    
    11,930
    
    
    
    (7,322
    )
    
    
    4,426183,691
    
    
    
    (14,852
    )
    
    
    50,291
    
    
    
    407,182
    
    
    
    5,471
    
    
    
    98,225Corporate
    
    
    
    
    
    
    (10,977
    )
    
    
    800
    
    
    
    
    
    
    
    (22,191
    )
    
    
    1,712Total Company
    
    $
    183,691
    
    
    $
    (25,829
    )
    
    $
    51,091
    
    
    $
    407,182
    
    
    $
    (16,720
    )
    
    $
    99,937
 
 (a)
    
    Income (Loss) from Operations for the Companys International Offshore Segment includes a $26.9 million impairment of property and equipment charge
for the three and six months ended June 30, 2009. Total AssetsJune 30,
    
    
    December 31,2010
    
    
    2009Domestic Offshore
    
    $
    865,890
    
    
    $
    870,723International Offshore
    
    
    785,104
    
    
    
    860,252Inland
    
    
    151,211
    
    
    
    160,354Domestic Liftboats
    
    
    89,377
    
    
    
    88,942International Liftboats
    
    
    167,141
    
    
    
    164,221Delta Towing
    
    
    60,313
    
    
    
    62,563Corporate
    
    
    74,188
    
    
    
    70,421Total Company
    
    $
    2,193,224
    
    
    $
    2,277,476
 20




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
 11. Commitments and Contingencies
 Legal Proceedings
 Contingencies  Loss Contingencies
   Robert E. Aaron et al. vs. Phillips 66 Company et al. Circuit Court, Second Judicial District,
Jones County, Mississippi.
   Insurance
   21




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
    Surety Bonds, Bank Guarantees and Unsecured Letters of Credit
   12. Accounting Pronouncements
  13. Subsequent Events
  Hercules 155
  22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
  Hercules 191 Hercules 255 Hercules 191 Hercules 255 Hercules 155
  Domestic Offshore
 International Offshore
 Inland
 Domestic Liftboats
 International Liftboats
 Delta Towing
  23




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24




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RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)Domestic Offshore:Number of rigs (as of end of period)
    
    
    25
    
    
    
    23
    
    
    
    25
    
    
    
    23Revenues
    
    $
    34,143
    
    
    $
    36,970
    
    
    $
    63,105
    
    
    $
    96,151Operating expenses
    
    
    37,229
    
    
    
    40,746
    
    
    
    76,381
    
    
    
    95,159Depreciation and amortization expense
    
    
    17,170
    
    
    
    15,092
    
    
    
    33,709
    
    
    
    30,132General and administrative expenses
    
    
    264
    
    
    
    1,312
    
    
    
    3,661
    
    
    
    2,980Operating loss
    
    $
    (20,520
    )
    
    $
    (20,180
    )
    
    $
    (50,646
    )
    
    $
    (32,120
    )International Offshore:Number of rigs (as of end of period)
    
    
    9
    
    
    
    12
    
    
    
    9
    
    
    
    12Revenues
    
    $
    73,493
    
    
    $
    101,757
    
    
    $
    146,935
    
    
    $
    205,209Operating expenses
    
    
    32,610
    
    
    
    39,128
    
    
    
    67,329
    
    
    
    83,269Impairment of property and equipment
    
    
    
    
    
    
    26,882
    
    
    
    
    
    
    
    26,882Depreciation and amortization expense
    
    
    14,473
    
    
    
    16,749
    
    
    
    29,404
    
    
    
    31,933General and administrative expenses
    
    
    2,173
    
    
    
    1,823
    
    
    
    3,479
    
    
    
    3,065Operating income
    
    $
    24,237
    
    
    $
    17,175
    
    
    $
    46,723
    
    
    $
    60,060Inland:Number of barges (as of end of period)
    
    
    17
    
    
    
    17
    
    
    
    17
    
    
    
    17Revenues
    
    $
    5,180
    
    
    $
    96
    
    
    $
    9,931
    
    
    $
    13,009Operating expenses
    
    
    6,363
    
    
    
    8,857
    
    
    
    12,080
    
    
    
    29,121Depreciation and amortization expense
    
    
    6,239
    
    
    
    8,283
    
    
    
    13,745
    
    
    
    16,276General and administrative expenses
    
    
    306
    
    
    
    328
    
    
    
    (2,859
    )
    
    
    1,228Operating loss
    
    $
    (7,728
    )
    
    $
    (17,372
    )
    
    $
    (13,035
    )
    
    $
    (33,616
    )Domestic Liftboats:Number of liftboats (as of end of period)
    
    
    41
    
    
    
    45
    
    
    
    41
    
    
    
    45Revenues
    
    $
    17,895
    
    
    $
    18,884
    
    
    $
    29,338
    
    
    $
    41,494Operating expenses
    
    
    10,853
    
    
    
    12,418
    
    
    
    20,167
    
    
    
    26,552Depreciation and amortization expense
    
    
    3,668
    
    
    
    5,747
    
    
    
    7,868
    
    
    
    10,796General and administrative expenses
    
    
    381
    
    
    
    507
    
    
    
    876
    
    
    
    915Operating income
    
    $
    2,993
    
    
    $
    212
    
    
    $
    427
    
    
    $
    3,231International Liftboats:Number of liftboats (as of end of period)
    
    
    24
    
    
    
    20
    
    
    
    24
    
    
    
    20Revenues
    
    $
    27,187
    
    
    $
    20,747
    
    
    $
    53,149
    
    
    $
    39,389Operating expenses
    
    
    14,897
    
    
    
    9,113
    
    
    
    29,359
    
    
    
    17,220Depreciation and amortization expense
    
    
    4,368
    
    
    
    2,278
    
    
    
    9,059
    
    
    
    4,662General and administrative expenses
    
    
    1,429
    
    
    
    978
    
    
    
    2,935
    
    
    
    2,269Operating income
    
    $
    6,493
    
    
    $
    8,378
    
    
    $
    11,796
    
    
    $
    15,238
 25




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)Delta Towing:Revenues
    
    $
    7,997
    
    
    $
    5,237
    
    
    $
    14,286
    
    
    $
    11,930Operating expenses
    
    
    6,369
    
    
    
    5,835
    
    
    
    11,641
    
    
    
    14,020Depreciation and amortization expense
    
    
    1,614
    
    
    
    2,142
    
    
    
    3,204
    
    
    
    4,426General and administrative expenses
    
    
    296
    
    
    
    325
    
    
    
    664
    
    
    
    806Operating loss
    
    $
    (282
    )
    
    $
    (3,065
    )
    
    $
    (1,223
    )
    
    $
    (7,322
    )Total Company:Revenues
    
    $
    165,895
    
    
    $
    183,691
    
    
    $
    316,744
    
    
    $
    407,182Operating expenses
    
    
    108,321
    
    
    
    116,097
    
    
    
    216,957
    
    
    
    265,341Impairment of property and equipment
    
    
    
    
    
    
    26,882
    
    
    
    
    
    
    
    26,882Depreciation and amortization
    
    
    48,350
    
    
    
    51,091
    
    
    
    98,604
    
    
    
    99,937General and administrative
    
    
    14,798
    
    
    
    15,450
    
    
    
    27,101
    
    
    
    31,742Operating loss
    
    
    (5,574
    )
    
    
    (25,829
    )
    
    
    (25,918
    )
    
    
    (16,720
    )Interest expense
    
    
    (21,259
    )
    
    
    (14,561
    )
    
    
    (42,998
    )
    
    
    (30,350
    )Gain on early retirement of debt, net
    
    
    
    
    
    
    13,747
    
    
    
    
    
    
    
    13,747Other, net
    
    
    3,183
    
    
    
    3,346
    
    
    
    3,169
    
    
    
    2,690Loss before income taxes
    
    
    (23,650
    )
    
    
    (23,297
    )
    
    
    (65,747
    )
    
    
    (30,633
    )Income tax benefit
    
    
    4,666
    
    
    
    11,510
    
    
    
    30,807
    
    
    
    14,335Loss from continuing operations
    
    
    (18,984
    )
    
    
    (11,787
    )
    
    
    (34,940
    )
    
    
    (16,298
    )Loss from discontinued operation, net of taxes
    
    
    
    
    
    
    (242
    )
    
    
    
    
    
    
    (675
    )Net loss
    
    $
    (18,984
    )
    
    $
    (12,029
    )
    
    $
    (34,940
    )
    
    $
    (16,973
    )
  Three Months Ended June 30, 2010AverageAverage
    
    
    OperatingOperating
    
    
    Available
    
    
    
    
    
    
    Revenue
    
    
    ExpenseDays
    
    
    Days
    
    
    Utilization (1)
    
    
    per Day (2)
    
    
    per Day (3)Domestic Offshore
    
    
    966
    
    
    
    1,072
    
    
    
    90.1
    %
    
    $
    35,345
    
    
    $
    34,729International Offshore
    
    
    533
    
    
    
    819
    
    
    
    65.1
    %
    
    
    137,886
    
    
    
    39,817Inland
    
    
    250
    
    
    
    273
    
    
    
    91.6
    %
    
    
    20,720
    
    
    
    23,308Domestic Liftboats
    
    
    2,503
    
    
    
    3,458
    
    
    
    72.4
    %
    
    
    7,149
    
    
    
    3,139International Liftboats
    
    
    1,224
    
    
    
    2,154
    
    
    
    56.8
    %
    
    
    22,212
    
    
    
    6,916
 Three Months Ended June 30, 2009AverageAverage
    
    
    OperatingOperating
    
    
    Available
    
    
    
    
    
    
    Revenue
    
    
    ExpenseDays
    
    
    Days
    
    
    Utilization (1)
    
    
    per Day (2)
    
    
    per Day (3)Domestic Offshore
    
    
    706
    
    
    
    1,136
    
    
    
    62.1
    %
    
    $
    52,365
    
    
    $
    35,868International Offshore
    
    
    788
    
    
    
    910
    
    
    
    86.6
    %
    
    
    129,133
    
    
    
    42,998Inland
    
    
    
    
    
    
    303
    
    
    
    0.0
    %
    
    
    n/a
    
    
    
    29,231Domestic Liftboats
    
    
    2,444
    
    
    
    3,842
    
    
    
    63.6
    %
    
    
    7,727
    
    
    
    3,232International Liftboats
    
    
    1,005
    
    
    
    1,729
    
    
    
    58.1
    %
    
    
    20,644
    
    
    
    5,271
 26




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##### Table of Contents



Six Months Ended June 30, 2010AverageAverage
    
    
    OperatingOperating
    
    
    Available
    
    
    
    
    
    
    Revenue
    
    
    ExpenseDays
    
    
    Days
    
    
    Utilization (1)
    
    
    per Day (2)
    
    
    per Day (3)Domestic Offshore
    
    
    1,789
    
    
    
    2,062
    
    
    
    86.8
    %
    
    $
    35,274
    
    
    $
    37,042International Offshore
    
    
    1,060
    
    
    
    1,688
    
    
    
    62.8
    %
    
    
    138,618
    
    
    
    39,887Inland
    
    
    490
    
    
    
    543
    
    
    
    90.2
    %
    
    
    20,267
    
    
    
    22,247Domestic Liftboats
    
    
    4,230
    
    
    
    6,878
    
    
    
    61.5
    %
    
    
    6,936
    
    
    
    2,932International Liftboats
    
    
    2,398
    
    
    
    4,314
    
    
    
    55.6
    %
    
    
    22,164
    
    
    
    6,806
 Six Months Ended June 30, 2009AverageAverage
    
    
    OperatingOperating
    
    
    Available
    
    
    
    
    
    
    Revenue
    
    
    ExpenseDays
    
    
    Days
    
    
    Utilization (1)
    
    
    per Day (2)
    
    
    per Day (3)Domestic Offshore
    
    
    1,570
    
    
    
    2,520
    
    
    
    62.3
    %
    
    $
    61,243
    
    
    $
    37,762International Offshore
    
    
    1,583
    
    
    
    1,757
    
    
    
    90.1
    %
    
    
    129,633
    
    
    
    47,393Inland
    
    
    298
    
    
    
    1,026
    
    
    
    29.0
    %
    
    
    43,654
    
    
    
    28,383Domestic Liftboats
    
    
    4,883
    
    
    
    7,712
    
    
    
    63.3
    %
    
    
    8,498
    
    
    
    3,443International Liftboats
    
    
    1,923
    
    
    
    3,439
    
    
    
    55.9
    %
    
    
    20,483
    
    
    
    5,007
 (1)
    
    Utilization is defined as the total number of days our rigs or liftboats, as
applicable, were under contract, known as operating days, in the period as a percentage of
the total number of available days in the period. Days during which our rigs and liftboats
were undergoing major refurbishments, upgrades or construction, and days during which our
rigs and liftboats are cold-stacked, are not counted as available days. Days during which
our liftboats are in the shipyard undergoing drydocking or inspection are considered
available days for the purposes of calculating utilization.(2)
    
    Average revenue per rig or liftboat per day is defined as revenue earned by our rigs or
liftboats, as applicable, in the period divided by the total number of operating days for
our rigs or liftboats, as applicable, in the period. Included in International Offshore
revenue is a total of $3.7 million and $7.3 million related to amortization of deferred
mobilization revenue for the three and six months ended June 30, 2010, respectively and
$4.2 million and $8.0 million for the three and six months ended June 30, 2009,
respectively. Included in International Liftboats revenue is a total of $0.5 million and
$0.6 million related to amortization of deferred mobilization revenue for the three and six
months ended June 30, 2010, respectively and $0.1 million for the six months ended June 30,
2009. There was no such revenue in the three months ended June 30, 2009.(3)
    
    Average operating expense per rig or liftboat per day is defined as operating expenses,
excluding depreciation and amortization, incurred by our rigs or liftboats, as applicable,
in the period divided by the total number of available days in the period. We use available
days to calculate average operating expense per rig or liftboat per day rather than
operating days, which are used to calculate average revenue per rig or liftboat per day,
because we incur operating expenses on our rigs and liftboats even when they are not under
contract and earning a dayrate. In addition, the operating expenses we incur on our rigs
and liftboats per day when they are not under contract are typically lower than the per day
expenses we incur when they are under contract. Included in International Offshore
operating expense is a total of $0.2 million and $0.4 million related to amortization of
deferred mobilization expenses for the three and six months ended June 30, 2010,
respectively and $0.7 million and $1.4 million for the three and six months ended June 30,
2009, respectively. Included in International Liftboats operating expense is a total of
$0.5 million and $1.2 million related to amortization of deferred mobilization expenses for
the
three and six months ended June 30, 2010, respectively. There was no such operating expense
for the three and six months ended June 30, 2009.
 For the Three Months Ended June 30, 2010 and 2009
 Revenues
 Consolidated.
 27




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##### Table of Contents



Domestic Offshore .
 International Offshore . Hercules 170 Hercules 205 Hercules 206 Hercules 170
 Inland.
 Domestic Liftboats.
 International Liftboats.
 Delta Towing.
 Operating Expenses
 Consolidated .
 Domestic Offshore . Hercules 191 Hercules 205
 International Offshore. Hercules 170 Hercules 205 Hercules 206 Hercules 208
 Inland.
 28




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##### Table of Contents



Domestic Liftboats.
 International Liftboats. Whale Shark Whale Shark
 Delta Towing.
 Impairment of Property and Equipment
 Hercules 110
 Depreciation and Amortization
 Hercules 110
 General and Administrative Expenses
  Interest Expense
  Gain
on Early Retirement of Debt, Net
  Income Tax Benefit
  For the Six Months Ended June 30, 2010 and 2009
 Revenues
 Consolidated.
 29




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##### Table of Contents



Domestic Offshore .
 International Offshore . Hercules 156 Hercules
170, Hercules 205 Hercules 206
 Inland.
 Domestic Liftboats.
 International Liftboats.
 Delta Towing.
 Operating Expenses
 Consolidated .
 Domestic Offshore .
 International Offshore. Hercules 156 Hercules 170 Hercules 205 Hercules 206
 Inland.
 30




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##### Table of Contents



Domestic Liftboats.
 International Liftboats. Whale Shark Whale Shark
 Delta Towing.
 Impairment of Property and Equipment
 Hercules 110
 Depreciation and Amortization
  General and Administrative Expenses
  Interest Expense
  Gain
on Early Retirement of Debt, Net
  Income Tax Benefit
  31




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Non-GAAP Financial Measures
 General Rules Regarding Disclosure of Non-GAAP Financial Measures
 32




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##### Table of Contents



For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Operating Loss
    
    $
    (5,574
    )
    
    $
    (25,829
    )
    
    $
    (25,918
    )
    
    $
    (16,720
    )Adjustments:Property and equipment impairment
    
    
    
    
    
    
    26,882
    
    
    
    
    
    
    
    26,882Total adjustments
    
    
    
    
    
    
    26,882
    
    
    
    
    
    
    
    26,882Adjusted Operating Income (Loss)
    
    $
    (5,574
    )
    
    $
    1,053
    
    
    $
    (25,918
    )
    
    $
    10,162Loss from Continuing Operations
    
    $
    (18,984
    )
    
    $
    (11,787
    )
    
    $
    (34,940
    )
    
    $
    (16,298
    )Adjustments:Property and equipment impairment
    
    
    
    
    
    
    26,882
    
    
    
    
    
    
    
    26,882Gain on early retirement of debt, net
    
    
    
    
    
    
    (13,747
    )
    
    
    
    
    
    
    (13,747
    )Tax impact of adjustments
    
    
    
    
    
    
    (8,966
    )
    
    
    
    
    
    
    (8,966
    )Total adjustments
    
    
    
    
    
    
    4,169
    
    
    
    
    
    
    
    4,169Adjusted Loss from Continuing Operations
    
    $
    (18,984
    )
    
    $
    (7,618
    )
    
    $
    (34,940
    )
    
    $
    (12,129
    )Diluted Loss per Share from Continuing Operations
    
    $
    (0.17
    )
    
    $
    (0.13
    )
    
    $
    (0.30
    )
    
    $
    (0.18
    )Adjustments:Property and equipment impairment
    
    
    
    
    
    
    0.30
    
    
    
    
    
    
    
    0.30Gain on early retirement of debt, net
    
    
    
    
    
    
    (0.15
    )
    
    
    
    
    
    
    (0.16
    )Tax impact of adjustments
    
    
    
    
    
    
    (0.11
    )
    
    
    
    
    
    
    (0.10
    )Total adjustments
    
    
    
    
    
    
    0.04
    
    
    
    
    
    
    
    0.04Adjusted Diluted Loss per Share from Continuing Operations
    
    $
    (0.17
    )
    
    $
    (0.09
    )
    
    $
    (0.30
    )
    
    $
    (0.14
    )Loss from Continuing Operations
    
    $
    (18,984
    )
    
    $
    (11,787
    )
    
    $
    (34,940
    )
    
    $
    (16,298
    )Interest expense
    
    
    21,259
    
    
    
    14,561
    
    
    
    42,998
    
    
    
    30,350Income tax benefit
    
    
    (4,666
    )
    
    
    (11,510
    )
    
    
    (30,807
    )
    
    
    (14,335
    )Depreciation and amortization
    
    
    48,350
    
    
    
    51,091
    
    
    
    98,604
    
    
    
    99,937EBITDA
    
    
    45,959
    
    
    
    42,355
    
    
    
    75,855
    
    
    
    99,654Adjustments:Property and equipment impairment
    
    
    
    
    
    
    26,882
    
    
    
    
    
    
    
    26,882Gain on early retirement of debt, net
    
    
    
    
    
    
    (13,747
    )
    
    
    
    
    
    
    (13,747
    )Total adjustments
    
    
    
    
    
    
    13,135
    
    
    
    
    
    
    
    13,135Adjusted EBITDA
    
    $
    45,959
    
    
    $
    55,490
    
    
    $
    75,855
    
    
    $
    112,789
 CRITICAL ACCOUNTING POLICIES
   33




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##### Table of Contents



OUTLOOK
 Offshore
        34




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Inland
   Liftboats
   35




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Sources and Uses of Cash
  Net Cash Used in Operating Activities
    
    $
    (33.5
    )Net Cash Provided by (Used in) Investing Activities:Additions of Property and Equipment
    
    
    (11.0
    )Deferred Drydocking Expenditures
    
    
    (7.6
    )Proceeds from Sale of Assets, Net
    
    
    10.0Increase in Restricted Cash
    
    
    (3.4
    )Total
    
    
    (12.0
    )Net Cash Provided by (Used in) Financing Activities:Long-term Debt Repayments
    
    
    (4.0
    )Excess Tax Benefits from Stock-Based Arrangements
    
    
    0.4Total
    
    
    (3.6
    )Net Decrease in Cash and Cash Equivalents
    
    $
    (49.1
    )
 Sources of Liquidity and Financing Arrangements
  36




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##### Table of Contents



Cash
Requirements and Contractual Obligations
 Debt
     
    
    Eliminate the requirement that we comply with the total leverage ratio financial
covenant for the nine month period commencing October 1, 2009 and ending on June 30, 2010.
    
    Amend the maximum total leverage ratio that we must comply with to the following
schedule. The total leverage ratio for any test period is calculated as the ratio of
consolidated indebtedness on the test date to consolidated EBITDA for the trailing twelve
months, all as defined in the Credit Agreement.
 MaximumTest Date
    
    Total Leverage RatioSeptember 30, 2010
    
    8.00 to 1.00December 31, 2010
    
    7.50 to 1.00March 31, 2011
    
    7.00 to 1.00June 30, 2011
    
    6.75 to 1.00September 30, 2011
    
    6.00 to 1.00December 31, 2011
    
    5.50 to 1.00March 31, 2012
    
    5.25 to 1.00June 30, 2012
    
    5.00 to 1.00September 30, 2012
    
    4.75 to 1.00December 31, 2012
    
    4.50 to 1.00March 31, 2013
    
    4.25 to 1.00June 30, 2013
    
    4.00 to 1.00
 -
    
    At June 30, 2010, our total leverage ratio was 8.09. There is no maximum total
leverage requirement for the period ended June 30, 2010.
 
    
    Require us to maintain a minimum level of liquidity, measured as the amount of
unrestricted cash and cash equivalents we have on hand and availability under the revolving
credit facility, of (i) $100.0 million for the period between October 1, 2009 through
December 31, 2010, (ii) $75.0 million during calendar year 2011 and (iii) $50.0 million
thereafter. As of June 30, 2010, as calculated pursuant to our Credit Agreement, our total
liquidity was $256.7 million.
 37




---



##### Table of Contents




    
    Revise the consolidated fixed charge coverage ratio definition and reduce the minimum fixed
charge coverage ratio that we must maintain to the following schedule:
 Fixed ChargePeriod
    
    Coverage RatioJuly 1, 2009
    
    
    
    December 31, 2011
    
    1.00 to 1.00January 1, 2012
    
    
    
    March 31, 2012
    
    1.05 to 1.00April 1, 2012
    
    
    
    June 30, 2012
    
    1.10 to 1.00July 1, 2012 and thereafter
    
    
    
    
    
    1.15 to 1.00
 -
    
    The consolidated fixed charge coverage ratio for any test period is defined as the
sum of consolidated EBITDA for the test period plus an amount that may be added for the
purpose of calculating the ratio for such test period, not to exceed $130.0 million in
total during the term of the credit facility, to consolidated fixed charges for the
test period, all as defined in the Credit Agreement. As of June 30, 2010, our fixed
charge coverage ratio was 1.0.
 
    
    Require mandatory prepayments of debt outstanding under the Credit Agreement with 50% of
excess cash flow as defined in the Credit Agreement for the fiscal years ending December
31, 2010, 2011 and 2012, and with proceeds from:
 -
    
    unsecured debt issuances, with the exception of refinancing;-
    
    secured debt issuances;-
    
    casualty events not used to repair damaged property;-
    
    sales of assets in excess of $25 million annually; and-
    
    unless we have achieved a specified leverage ratio, 50% of proceeds from equity
issuances, excluding those for permitted acquisitions or to meet the minimum liquidity
requirements.
    38




---



##### Table of Contents




    
    incur additional indebtedness or issue certain preferred stock;
    
    pay dividends or make other distributions;
    
    make other restricted payments or investments;
    
    sell assets;
    
    create liens;
    
    enter into agreements that restrict dividends and other payments by restricted
subsidiaries;
    
    engage in transactions with our affiliates; and
    
    consolidate, merge or transfer all or substantially all of our assets.
   39




---



##### Table of Contents



Year
    
    Optional Redemption Price2013
    
    105.2500%2014
    
    102.6250%2015
    
    101.3125%2016 and thereafter
    
    100.0000%
       June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value(in millions)Term Loan Facility, due July 2013
    
    $
    478.8
    
    
    $
    421.4
    
    
    $
    482.9
    
    
    $
    468.410.5% Senior Secured Notes, due October 2017
    
    
    292.6
    
    
    
    265.9
    
    
    
    292.3
    
    
    
    315.83.375% Convertible Senior Notes, due June 2038
    
    
    84.7
    
    
    
    70.0
    
    
    
    83.1
    
    
    
    76.87.375% Senior Notes, due April 2018
    
    
    3.5
    
    
    
    2.4
    
    
    
    3.5
    
    
    
    3.0
  40




---



##### Table of Contents



Common Stock Offering
  Capital Expenditures
      Off-Balance Sheet Arrangements
 Guarantees
  41




---



##### Table of Contents



Bank Guarantees, Letters of Credit, and Surety Bonds
  Contractual Obligations
  
    
    Settled $5.3 million of insurance notes payable outstanding
at December 31, 2009; and
    
    Financed $24.1 million related to the renewal of certain of
our insurance policies.
  Accounting Pronouncements
  FORWARD-LOOKING STATEMENTS
  
    
    our levels of indebtedness, covenant compliance and access to capital under current
market conditions;
    
    our ability to enter into new contracts for our rigs and liftboats and future
utilization rates and dayrates for the units;
    
    our ability to renew or extend our long-term international contracts, or enter into new
contracts, when such contracts expire;
    
    demand for our rigs and our liftboats and our earnings;
    
    activity levels of our customers and their expectations of future energy prices and
ability to obtain drilling permits;
    
    sufficiency and availability of funds for required capital expenditures, working capital
and debt service;
    
    levels of reserves for accounts receivable;
    
    success of our cost cutting measures and plans to dispose of certain assets;
    
    expected completion times for our refurbishment and upgrade projects;
    
    our plans to increase international operations;
    
    expected useful lives of our rigs and liftboats;
    
    future capital expenditures and refurbishment, reactivation, transportation, repair and
upgrade costs;
    
    our ability to effectively reactivate rigs that we have recently stacked;
 42




---



##### Table of Contents




    
    liabilities and restrictions under coastwise laws of the United States and regulations
protecting the environment;
    
    expected outcomes of litigation, claims and disputes and their expected effects on our
financial condition and results of operations; and
    
    expectations regarding offshore drilling activity and dayrates, market conditions,
demand for our rigs and liftboats, operating revenues, operating and maintenance expense,
insurance coverage, insurance expense and deductibles, interest expense, debt levels and
other matters with regard to outlook.
 :
 
    
    the ability of our customers in the U.S. Gulf of Mexico to obtain drilling permits;
    
    oil and natural gas prices and industry expectations about future prices;
    
    levels of oil and gas exploration and production spending;
    
    demand and supply for offshore drilling rigs and liftboats;
    
    our ability to enter into and the terms of future contracts;
    
    the worldwide military and political environment, uncertainty or instability resulting
from an escalation or additional outbreak of armed hostilities or other crises in the
Middle East, West Africa and other oil and natural gas producing regions or acts of
terrorism or piracy;
    
    the impact of governmental laws and regulations, including new laws and regulations in
the U.S. Gulf of Mexico arising out of the Macondo blowout incident;
    
    the adequacy and costs of sources of credit and liquidity;
    
    uncertainties relating to the level of activity in offshore oil and natural gas
exploration, development and production;
    
    competition and market conditions in the contract drilling and liftboat industries;
    
    the availability of skilled personnel in view of recent reductions in our personnel;
    
    labor relations and work stoppages, particularly in the West African and Mexican labor
environments;
    
    operating hazards such as hurricanes, severe weather and seas, fires, cratering,
blowouts, war, terrorism and cancellation or unavailability of insurance coverage, or
insufficient coverage;
    
    the effect of litigation and contingencies; and
    
    our inability to achieve our plans or carry out our strategy.
  43




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Exposure
     June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value(in millions)Term Loan Facility, due July 2013
    
    $
    478.8
    
    
    $
    421.4
    
    
    $
    482.9
    
    
    $
    468.410.5% Senior Secured Notes, due October 2017
    
    
    292.6
    
    
    
    265.9
    
    
    
    292.3
    
    
    
    315.83.375% Convertible Senior Notes, due June 2038
    
    
    84.7
    
    
    
    70.0
    
    
    
    83.1
    
    
    
    76.87.375% Senior Notes, due April 2018
    
    
    3.5
    
    
    
    2.4
    
    
    
    3.5
    
    
    
    3.0
 Interest Rate Swaps and Derivatives
 Liquidity and Capital Resources
    44




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  New and proposed laws and regulations arising out of the Macondo blowout incident could prevent or
cause delays for our customers in obtaining drilling permits and lead to increased potential
liability and costs for us and our customers, which could adversely impact our operations and
profitability in the U.S. Gulf of Mexico.
 Deepwater Horizon
   45




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number ofShares Purchased
    
    
    MaximumTotal
    
    
    
    
    
    
    as Part of a
    
    
    Number of SharesNumber of
    
    
    
    
    
    
    Publicly
    
    
    That May Yet BeShares
    
    
    Average Price
    
    
    Announced Plan
    
    
    Purchased UnderPeriod
    
    Purchased (1)
    
    
    Paid per Share
    
    
    (2)
    
    
    Plan (2)April 1-30, 2010
    
    
    1,949
    
    
    $
    4.13
    
    
    
    N/A
    
    
    
    N/AMay 1-31, 2010
    
    
    594
    
    
    
    3.29
    
    
    
    N/A
    
    
    
    N/AJune 1-30, 2010
    
    
    1,251
    
    
    
    2.56
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    3,794
    
    
    
    3.48
    
    
    
    N/A
    
    
    
    N/A
 
 (1)
    
    Represents the surrender of shares of our Common Stock to satisfy tax withholding
obligations in connection with the vesting of restricted stock issued to employees under
our stockholder-approved long-term incentive plan.(2)
    
    We did not have at any time during the quarter, and currently do not have, a share
repurchase program in place. 
 ITEM 6. EXHIBITS
 10.1*
    
    Executive Employment Agreement
dated as of December 15, 2008, between Hercules and
Stephen M. Butz.10.2*
    
    Amendment to Executive Employment Agreement for Lisa W. Rodriguez, dated as of May 7, 2010.10.3*
    
    Amendment to Executive Employment Agreement for Stephen M. Butz, dated as of May 7, 2010.10.4*
    
    Amendment to Executive Employment Agreement for Troy L. Carson, dated as of May 7, 2010.31.1*
    
    Certification of Chief Executive Officer of Hercules pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer of Hercules pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of the Chief Executive Officer and the Chief Financial Officer of Hercules
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith 46




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##### Table of Contents



SIGNATURES
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 HERCULES OFFSHORE, INC.By:

/s/ John T. RyndJohn T. RyndChief Executive Officer and President
(Principal Executive Officer)By:

/s/ Stephen M. ButzStephen M. ButzSenior Vice President, Chief Financial Officer and Treasurer 
 (Principal Financial Officer)By:

/s/ Troy L. CarsonTroy L. CarsonChief Accounting Officer
(Principal Accounting Officer)  47