##### 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, 2009
 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
þ
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
o
 o þ
  Common Stock, par value $0.01 per share
    
    Outstanding as of July 21, 200995,825,615




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##### 



HERCULES OFFSHORE, INC.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the three and six months ended June 30, 2009, and
June 30, 2008
    
    
    4Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and June 30,
2008
    
    
    5Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended
June 30, 2009, and June 30, 2008
    
    
    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
    
    
    40Item 4. Controls and Procedures
    
    
    42PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    42Item 1A. Risk Factors
    
    
    42Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    53Item 4. Submission of Matters to a Vote of Security Holders
    
    
    54Item 6. Exhibits
    
    
    54Signatures
    
    
    55EX-4.1EX-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)
 (Unaudited)
 June 30,
    
    
    December 31,2009
    
    
    2008(As Adjusted)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    129,880
    
    
    $
    106,455Accounts Receivable, Net
    
    
    227,808
    
    
    
    293,089Prepaids
    
    
    34,492
    
    
    
    23,033Current Deferred Tax Asset
    
    
    16,527
    
    
    
    17,379Assets Held for Sale
    
    
    11,390
    
    
    
    39,623Other
    
    
    20,807
    
    
    
    19,946440,904
    
    
    
    499,525Property and Equipment, Net
    
    
    2,020,766
    
    
    
    2,049,030Other Assets, Net
    
    
    50,638
    
    
    
    42,340$
    2,512,308
    
    
    $
    2,590,895LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term Debt and Current Portion of Long-term Debt
    
    $
    9,000
    
    
    $
    11,455Insurance Note Payable
    
    
    19,330
    
    
    
    11,126Accounts Payable
    
    
    68,745
    
    
    
    99,823Accrued Liabilities
    
    
    71,224
    
    
    
    83,424Taxes Payable
    
    
    34,337
    
    
    
    32,440Other Current Liabilities
    
    
    53,120
    
    
    
    36,472255,756
    
    
    
    274,740Long-term Debt, Net of Current Portion
    
    
    960,222
    
    
    
    1,015,764Other Liabilities
    
    
    29,036
    
    
    
    35,529Deferred Income Taxes
    
    
    315,138
    
    
    
    339,547Commitments and ContingenciesStockholders Equity:Common Stock, $0.01 Par Value; 200,000 Shares Authorized; 97,314 and 89,459 Shares
Issued, Respectively; 95,815 and 87,976 Shares Outstanding, Respectively
    
    
    973
    
    
    
    895Capital in Excess of Par Value
    
    
    1,827,663
    
    
    
    1,785,462Treasury Stock, at Cost, 1,499 Shares and 1,483 Shares, Respectively
    
    
    (50,128
    )
    
    
    (50,081
    )Accumulated Other Comprehensive Loss
    
    
    (13,350
    )
    
    
    (14,932
    )Retained Deficit
    
    
    (813,002
    )
    
    
    (796,029
    )952,156
    
    
    
    925,315$
    2,512,308
    
    
    $
    2,590,895
  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 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(As Adjusted)
    
    
    
    
    
    
    (As Adjusted)Revenues
    
    $
    183,691
    
    
    $
    270,106
    
    
    $
    407,182
    
    
    $
    482,600Costs and Expenses:Operating Expenses
    
    
    116,097
    
    
    
    158,014
    
    
    
    265,341
    
    
    
    289,160Impairment of Property and Equipment
    
    
    26,882
    
    
    
    
    
    
    
    26,882
    
    
    
    Depreciation and Amortization
    
    
    51,091
    
    
    
    47,274
    
    
    
    99,937
    
    
    
    90,894General and Administrative
    
    
    15,450
    
    
    
    23,966
    
    
    
    31,742
    
    
    
    40,330209,520
    
    
    
    229,254
    
    
    
    423,902
    
    
    
    420,384Operating Income (Loss)
    
    
    (25,829
    )
    
    
    40,852
    
    
    
    (16,720
    )
    
    
    62,216Other Income (Expense):Interest Expense
    
    
    (14,561
    )
    
    
    (15,222
    )
    
    
    (30,350
    )
    
    
    (31,178
    )Gain on Early Retirement of Debt, Net
    
    
    13,747
    
    
    
    
    
    
    
    13,747
    
    
    
    Other, Net
    
    
    3,346
    
    
    
    250
    
    
    
    2,690
    
    
    
    2,275Income (Loss) Before Income Taxes
    
    
    (23,297
    )
    
    
    25,880
    
    
    
    (30,633
    )
    
    
    33,313Income Tax Benefit (Provision)
    
    
    11,510
    
    
    
    (9,492
    )
    
    
    14,335
    
    
    
    (12,050
    )Income (Loss) from Continuing Operations
    
    
    (11,787
    )
    
    
    16,388
    
    
    
    (16,298
    )
    
    
    21,263Loss from Discontinued Operation, Net of Taxes
    
    
    (242
    )
    
    
    (209
    )
    
    
    (675
    )
    
    
    (598
    )Net Income (Loss)
    
    $
    (12,029
    )
    
    $
    16,179
    
    
    $
    (16,973
    )
    
    $
    20,665Basic Earnings (Loss) Per Share:Income (Loss) from Continuing Operations
    
    $
    (0.13
    )
    
    $
    0.18
    
    
    $
    (0.18
    )
    
    $
    0.24Loss from Discontinued Operation
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.01
    )Net Income (Loss)
    
    $
    (0.14
    )
    
    $
    0.18
    
    
    $
    (0.19
    )
    
    $
    0.23Diluted Earnings (Loss) Per Share:Income (Loss) from Continuing Operations
    
    $
    (0.13
    )
    
    $
    0.18
    
    
    $
    (0.18
    )
    
    $
    0.24Loss from Discontinued Operation
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.01
    )Net Income (Loss)
    
    $
    (0.14
    )
    
    $
    0.18
    
    
    $
    (0.19
    )
    
    $
    0.23Weighted Average Shares Outstanding:Basic
    
    
    88,733
    
    
    
    88,625
    
    
    
    88,368
    
    
    
    88,742Diluted
    
    
    88,733
    
    
    
    89,461
    
    
    
    88,368
    
    
    
    89,516
  4




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months Ended June 30,2009
    
    
    2008(As Adjusted)Cash Flows from Operating Activities:Net Income (Loss)
    
    $
    (16,973
    )
    
    $
    20,665Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating
Activities:Depreciation and Amortization
    
    
    99,937
    
    
    
    90,906Stock-Based Compensation Expense
    
    
    4,115
    
    
    
    7,932Deferred Income Taxes
    
    
    (25,063
    )
    
    
    5,864Provision for Doubtful Accounts Receivable
    
    
    543
    
    
    
    181Amortization of Deferred Financing Fees
    
    
    2,096
    
    
    
    1,712Amortization of Original Issue Discount
    
    
    2,386
    
    
    
    643Gain on Insurance Settlement
    
    
    (8,700
    )
    
    
    Gain on Disposal of Assets
    
    
    (332
    )
    
    
    (1,911
    )Gain on Early Retirement of Debt, Net
    
    
    (13,747
    )
    
    
    Impairment of Property and Equipment
    
    
    26,882
    
    
    
    Excess Tax Benefit from Stock-Based Arrangements
    
    
    (4,209
    )
    
    
    (5,447
    )(Increase) Decrease in Operating Assets -Accounts Receivable
    
    
    64,738
    
    
    
    (41,936
    )Insurance Claims Receivable
    
    
    (621
    )
    
    
    (142
    )Prepaid Expenses and Other
    
    
    9,004
    
    
    
    14,069Increase (Decrease) in Operating Liabilities -Accounts Payable
    
    
    (31,542
    )
    
    
    (885
    )Insurance Note Payable
    
    
    (13,236
    )
    
    
    (21,077
    )Other Current Liabilities
    
    
    (5,010
    )
    
    
    (4,846
    )Other Liabilities
    
    
    (1,946
    )
    
    
    3,126Net Cash Provided by Operating Activities
    
    
    88,322
    
    
    
    68,854Cash Flows from Investing Activities:Acquisition of Assets
    
    
    
    
    
    
    (320,839
    )Additions of Property and Equipment
    
    
    (62,068
    )
    
    
    (130,528
    )Deferred Drydocking Expenditures
    
    
    (9,662
    )
    
    
    (9,151
    )Proceeds from Sale of Marketable Securities
    
    
    
    
    
    
    39,300Insurance Proceeds Received
    
    
    8,717
    
    
    
    25,332Proceeds from Sale of Assets, Net
    
    
    4,722
    
    
    
    12,649Net Cash Used in Investing Activities
    
    
    (58,291
    )
    
    
    (383,237
    )Cash Flows from Financing Activities:Short-term Debt Borrowings (Repayments), Net
    
    
    (2,455
    )
    
    
    1,086Long-term Debt Borrowings
    
    
    
    
    
    
    350,000Long-term Debt Repayments
    
    
    (2,250
    )
    
    
    (104,470
    )Redemption of 3.375% Convertible Senior Notes
    
    
    (6,099
    )
    
    
    Common Stock Repurchases
    
    
    
    
    
    
    (49,228
    )Proceeds from Exercise of Stock Options
    
    
    
    
    
    
    5,127Excess Tax Benefit from Stock-Based Arrangements
    
    
    4,209
    
    
    
    5,447Payment of Debt Issuance Costs
    
    
    
    
    
    
    (8,005
    )Other
    
    
    (11
    )
    
    
    Net Cash Provided by (Used in) Financing Activities
    
    
    (6,606
    )
    
    
    199,957Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    23,425
    
    
    
    (114,426
    )Cash and Cash Equivalents at Beginning of Period
    
    
    106,455
    
    
    
    212,452Cash and Cash Equivalents at End of Period
    
    $
    129,880
    
    
    $
    98,026
  5




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##### Table of Contents



HERCULES OFFSHORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (In thousands)
 (Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(As Adjusted)
    
    
    
    
    
    
    (As Adjusted)Net Income (Loss)
    
    $
    (12,029
    )
    
    $
    16,179
    
    
    $
    (16,973
    )
    
    $
    20,665Other Comprehensive Income (Loss), Net of Taxes:Changes Related to Hedge Transactions
    
    
    1,988
    
    
    
    5,352
    
    
    
    1,582
    
    
    
    (1,674
    )Comprehensive Income (Loss)
    
    $
    (10,041
    )
    
    $
    21,531
    
    
    $
    (15,391
    )
    
    $
    18,991
  6




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##### Table of Contents



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 30,2009
    
    2008
    
    2009
    
    2008Mobilization revenue deferred
    
    $
    
    
    
    $
    4,450
    
    
    $
    12,000
    
    
    $
    8,277Mobilization expense deferred
    
    
    
    
    
    
    
    
    
    
    132
    
    
    
    3,398Mobilization revenue recognized
    
    
    4,233
    
    
    
    4,206
    
    
    
    8,149
    
    
    
    6,176Mobilization expense recognized
    
    
    700
    
    
    
    2,142
    
    
    
    1,393
    
    
    
    2,956
   Other Assets
   Other Intangible Assets
   Remainder of 2009
    
    $
    1,7932010
    
    
    1,5902011
    
    
    6582012
    
    
    2013
    
    
    
 8




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##### Table of Contents



HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
 Cash and Cash Equivalents and Marketable Securities
   2. Earnings Per Share
  Three Months Ended June 30,
    
    Six Months Ended June 30,2009
    
    2008
    
    2009
    
    2008Denominator:Weighted average basic shares
    
    
    88,733
    
    
    
    88,625
    
    
    
    88,368
    
    
    
    88,742Add effect of stock equivalents
    
    
    
    
    
    
    836
    
    
    
    
    
    
    
    774Weighted average diluted shares
    
    
    88,733
    
    
    
    89,461
    
    
    
    88,368
    
    
    
    89,516
  3. Asset Acquisition
 Hercules 350 Hercules 261 Hercules 262
 4. Dispositions and Assets Held for Sale
 Hercules 100 Hercules 110 Hercules 100 Hercules 110 Hercules 100 Hercules 110 Hercules 110 Hercules 100 Hercules 110
 9




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##### Table of Contents



HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  June 30,
    
    December 31,2009
    
    2008Other
    
    $
    123
    
    
    $
    123Property and Equipment, Net
    
    
    11,267
    
    
    
    39,500Current Assets Held for Sale
    
    $
    11,390
    
    
    $
    39,623
 Hercules 256
 5. Debt
  June 30, 2009
    
    
    December 31, 2008(As Adjusted)Term Loan Facility, due July 2013
    
    $
    884,250
    
    
    $
    886,5003.375% Convertible Senior Notes due June 2038
    
    
    81,460
    
    
    
    134,7527.375% Senior Notes, due April 2018
    
    
    3,512
    
    
    
    3,512Foreign Overdraft Facility
    
    
    
    
    
    
    2,455Total Debt
    
    
    969,222
    
    
    
    1,027,219Less Short-term Debt and Current Portion of Long-term Debt
    
    
    9,000
    
    
    
    11,455Total Long-term Debt, Net of Current Portion
    
    $
    960,222
    
    
    $
    1,015,764
 Senior secured credit agreement
       10




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  Principal Amount Outstanding
    
    
    
    Margin Applicable to:Less than or
    
    
    
    
    
    
    
    Eurodollar
    
    ABRequal to:
    
    Greater than:
    
    
    
    Loans
    
    Loans$
    882.0
    
    
    $
    684.25
    
    
    
    
    
    6.50
    %
    
    
    5.50
    %684.25
    
    
    
    484.25
    
    
    
    
    
    5.00
    %
    
    
    4.00
    %484.25
    
    
    
    
    
    
    
    
    
    4.00
    %
    
    
    3.00
    %
  
    
    Eliminate the requirement that the Company comply with the total leverage ratio
financial covenant for the nine month period commencing October 1, 2009 and ending on June
30, 2010 and amend the maximum total leverage ratio following the expiration of the nine
month period to be more favorable to the Company;
    
    Require maintenance of 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;
    
    Revise the fixed charge coverage ratio definition and reduce the minimum fixed charge
coverage ratio that the Company must maintain in a manner that is more favorable to the Company;
    
    Require mandatory prepayments of debt outstanding under the Credit Agreement with 100%
of excess cash flow for the fiscal year ending December 31, 2009 and 50% of excess cash
flow thereafter and with proceeds from:
 §
    
    unsecured debt issuances, with the exception of refinancing, through June 30,
2010;§
    
    secured debt issuances; and§
    
    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.
 
    
    The availability under the $175.0 million
revolving credit facility must be used for working capital, capital expenditures and other
general corporate purposes and cannot be used to prepay the term loan.
 Senior notes and other debt
 Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement)
   11




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
      June 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    Value(in millions)Term Loan Facility, due July 2013
    
    $
    884.3
    
    
    $
    769.3
    
    
    $
    886.5
    
    
    $
    571.83.375% Convertible Senior Notes due June 2038
    
    
    81.5
    
    
    
    58.1
    
    
    
    134.8
    
    
    
    77.27.375% Senior Notes, due April 2018 (a)
    
    
    3.5
    
    
    
    n/a
    
    
    
    3.5
    
    
    
    n/a
 
 (a)
    
    The 7.375% Senior Notes have not been traded in recent periods and the Company believes that
the fair value would not materially differ from the carrying value. 6. Derivative Instruments and Hedging
 Accounting for Derivative
Instruments and Hedging Activities, as amended
   12




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  13




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
   July 1, 2009-September 30, 2009
    
    $
    175,000October 1, 2009-December 30, 2009
    
    
    75,000
  As of June 30,
    
    
    As of December 31,2009
    
    
    2008Balance Sheet
    
    Fair
    
    
    Balance Sheet
    
    FairClassification
    
    Value
    
    
    Classification
    
    ValueDerivatives designated as hedging:Interest rate contracts:Other
    
    $
    41
    
    
    Other
    
    $
    21Total Asset Derivatives
    
    $
    41
    
    
    Total Asset Derivatives
    
    $
    21Other Current Liabilities
    
    $
    17,976
    
    
    Other Current Liabilities
    
    $
    15,669Other Liabilities
    
    
    2,603
    
    
    Other Liabilities
    
    
    7,324Total Liability Derivatives
    
    $
    20,579
    
    
    Total Liability Derivatives
    
    $
    22,993
 14




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  Derivatives in
    
    I.
    
    
    
    III.Statement 133
    
    Three Months Ended
    
    
    
    Three Months EndedCash Flow
    
    June 30,
    
    
    
    June 30,Hedging Relationships
    
    2009
    
    2008
    
    II.
    
    2009
    
    2008Interest rate contracts
    
    $
    (605
    )
    
    $
    2,936
    
    
    Interest Expense
    
    $
    (3,989
    )
    
    $
    (3,717
    )Derivatives in
    
    I.
    
    
    
    III.Statement 133
    
    Six Months Ended
    
    
    
    Six Months EndedCash Flow
    
    June 30,
    
    
    
    June 30,Hedging Relationships
    
    2009
    
    2008
    
    II.
    
    2009
    
    2008Interest rate contracts
    
    $
    (3,880
    )
    
    $
    (4,448
    )
    
    Interest Expense
    
    $
    (8,403
    )
    
    $
    (4,267
    )
 
 I.
    
    Amount of Gain (Loss), Net of Taxes Recognized in Other Comprehensive Income on Derivative
(Effective Portion)II.
    
    Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into
Income (Effective Portion)III.
    
    Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
(Effective Portion)  Cumulative unrealized loss, net of tax of $8,040, as of December 31, 2008
    
    $
    (14,932
    )Reclassification of losses into net income, net of tax of $2,941
    
    
    5,462Other comprehensive losses, net of tax of $2,089
    
    
    (3,880
    )Cumulative unrealized loss, net of tax of $7,188, as of June 30, 2009
    
    $
    (13,350
    )
 7. Fair Value Measurements
 Effective Date of FASB Statement No. 157
 Determining Fair Value When the Volume and
Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly
  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.
 15




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
 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)
  Quoted Prices inTotal
    
    Active Markets forFair Value
    
    Identical Asset or
    
    Significant Other
    
    SignificantMeasurement
    
    Liability
    
    Observable Inputs
    
    Unobservable Inputs
    
    ValuationJune 30, 2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    TechniqueDerivative Assets
    
    $
    41
    
    
    $
    
    
    
    $
    41
    
    
    $
    
    
    
    
    ADerivative Liabilities
    
    
    20,579
    
    
    
    
    
    
    
    20,579
    
    
    
    
    
    
    
    A
  Quoted Prices in
    
    SignificantTotal
    
    Active Markets for
    
    Other
    
    SignificantFair Value
    
    Identical Asset or
    
    Observable
    
    UnobservableMeasurement
    
    Liability
    
    Inputs
    
    Inputs
    
    Valuation
    
    TotalJune 30, 2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    Technique
    
    Gain (Loss)Assets Held for Sale
    
    $
    10,000
    
    
    $
    
    
    
    $
    10,000
    
    
    $
    
    
    
    
    A
    
    
    $
    (26,882
    )
 Hercules 110
 8. Stock-based Compensation
     16




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  9. Supplemental Cash Flow Information
  Six Months Ended June 30,2009
    
    2008(In thousands)Cash paid during the period for:Interest, net of capitalized interest of $333 and $2,675, respectively
    
    $
    14,982
    
    
    $
    13,538Income taxes
    
    
    12,038
    
    
    
    32,994
 10. Income Tax
 Accounting for the Income Taxes Share Based Payment
   17




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
   11. Segments
   Domestic Offshore
 International Offshore Hercules 110,
 Inland
 Domestic Liftboats
 International Liftboats
 Delta Towing
  18




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  Three Months Ended June 30, 2009
    
    
    Six Months Ended June 30, 2009Income (Loss)
    
    
    
    
    
    
    
    
    
    
    Income (Loss)
    
    
    Depreciationfrom
    
    
    Depreciation &
    
    
    
    
    
    
    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. Three Months Ended June 30, 2008
    
    
    Six Months Ended June 30, 2008Income (Loss)
    
    
    
    
    
    
    
    
    
    
    Income (Loss)
    
    
    Depreciationfrom
    
    
    Depreciation &
    
    
    
    
    
    
    from
    
    
    &Revenue
    
    
    Operations
    
    
    Amortization
    
    
    Revenue
    
    
    Operations
    
    
    AmortizationDomestic Offshore
    
    $
    97,438
    
    
    $
    23,577
    
    
    $
    16,204
    
    
    $
    159,885
    
    
    $
    21,687
    
    
    $
    31,539International Offshore
    
    
    74,187
    
    
    
    27,424
    
    
    
    9,310
    
    
    
    139,530
    
    
    
    61,774
    
    
    
    16,896Inland
    
    
    40,262
    
    
    
    (2,914
    )
    
    
    10,520
    
    
    
    80,530
    
    
    
    (4,854
    )
    
    
    20,180Domestic Liftboats
    
    
    22,269
    
    
    
    2,973
    
    
    
    5,382
    
    
    
    38,213
    
    
    
    (1,578
    )
    
    
    11,334International Liftboats
    
    
    20,305
    
    
    
    6,752
    
    
    
    2,368
    
    
    
    38,596
    
    
    
    14,900
    
    
    
    4,352Delta Towing
    
    
    15,645
    
    
    
    2,453
    
    
    
    2,706
    
    
    
    25,846
    
    
    
    1,961
    
    
    
    5,275270,106
    
    
    
    60,265
    
    
    
    46,490
    
    
    
    482,600
    
    
    
    93,890
    
    
    
    89,576Corporate
    
    
    
    
    
    
    (19,413
    )
    
    
    784
    
    
    
    
    
    
    
    (31,674
    )
    
    
    1,318Total Company
    
    $
    270,106
    
    
    $
    40,852
    
    
    $
    47,274
    
    
    $
    482,600
    
    
    $
    62,216
    
    
    $
    90,894Total AssetsJune 30,
    
    
    December 31,2009
    
    
    2008Domestic Offshore
    
    $
    899,389
    
    
    $
    930,988International Offshore (a)
    
    
    1,015,601
    
    
    
    955,911Inland
    
    
    175,941
    
    
    
    217,477Domestic Liftboats
    
    
    140,722
    
    
    
    148,307International Liftboats
    
    
    127,160
    
    
    
    168,356Delta Towing
    
    
    72,396
    
    
    
    92,371Corporate
    
    
    81,099
    
    
    
    77,485Total Company
    
    $
    2,512,308
    
    
    $
    2,590,895
 
 (a)
    
    Total Assets as of June 30, 2009 for the Companys International Offshore
Segment reflect a $26.9 million impairment of
property and equipment. Included in Total Assets is $9.8 million and $37.8
million in Assets Held for Sale as of June 30, 2009
and December 31, 2008, respectively. 19




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##### Table of Contents



HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  12. Commitments and Contingencies
 Legal Proceedings
 Accounting for Contingencies
   Robert E. Aaron et al. vs. Phillips 66 Company et al. Circuit Court, Second Judicial District,
Jones County, Mississippi.
   Insurance
  20




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
    Surety Bonds and Unsecured Letters of Credit
   13. Accounting Pronouncements
 Subsequent Events
 Interim Disclosures about Fair
Value of Financial Instruments Disclosures about Fair Value of Financial Instruments Interim
Financial reporting
 Determining Fair Value When the Volume and
Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly
  21




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  Disclosures about Derivative Instruments and
Hedging Activities Accounting for Derivative
Instruments and Hedging Activities
 Effective Date of FASB Statement No. 157
 14. Subsequent Events
  22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
    Domestic Offshore
 International Offshore Hercules 110
 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 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands)(As Adjusted)
    
    
    
    
    
    
    (As Adjusted)Domestic Offshore:Number of rigs (as of end of period) (a)
    
    
    23
    
    
    
    27
    
    
    
    23
    
    
    
    27Revenues
    
    $
    36,970
    
    
    $
    97,438
    
    
    $
    96,151
    
    
    $
    159,885Operating expenses
    
    
    40,746
    
    
    
    56,275
    
    
    
    95,159
    
    
    
    104,047Depreciation and amortization expense
    
    
    15,092
    
    
    
    16,204
    
    
    
    30,132
    
    
    
    31,539General and administrative expenses
    
    
    1,312
    
    
    
    1,382
    
    
    
    2,980
    
    
    
    2,612Operating income (loss)
    
    $
    (20,180
    )
    
    $
    23,577
    
    
    $
    (32,120
    )
    
    $
    21,687International Offshore:Number of rigs (as of end of period) (b)
    
    
    12
    
    
    
    12
    
    
    
    12
    
    
    
    12Revenues
    
    $
    101,757
    
    
    $
    74,187
    
    
    $
    205,209
    
    
    $
    139,530Operating expenses
    
    
    39,128
    
    
    
    37,308
    
    
    
    83,269
    
    
    
    60,100Impairment of property and equipment
    
    
    26,882
    
    
    
    
    
    
    
    26,882
    
    
    
    Depreciation and amortization expense
    
    
    16,749
    
    
    
    9,310
    
    
    
    31,933
    
    
    
    16,896General and administrative expenses
    
    
    1,823
    
    
    
    145
    
    
    
    3,065
    
    
    
    760Operating income
    
    $
    17,175
    
    
    $
    27,424
    
    
    $
    60,060
    
    
    $
    61,774Inland:Number of barges (as of end of period) (a)
    
    
    17
    
    
    
    27
    
    
    
    17
    
    
    
    27Revenues
    
    $
    96
    
    
    $
    40,262
    
    
    $
    13,009
    
    
    $
    80,530Operating expenses
    
    
    8,857
    
    
    
    31,306
    
    
    
    29,121
    
    
    
    63,232Depreciation and amortization expense
    
    
    8,283
    
    
    
    10,520
    
    
    
    16,276
    
    
    
    20,180General and administrative expenses
    
    
    328
    
    
    
    1,350
    
    
    
    1,228
    
    
    
    1,972Operating loss
    
    $
    (17,372
    )
    
    $
    (2,914
    )
    
    $
    (33,616
    )
    
    $
    (4,854
    )Domestic Liftboats:Number of liftboats (as of end of period)
    
    
    45
    
    
    
    45
    
    
    
    45
    
    
    
    45Revenues
    
    $
    18,884
    
    
    $
    22,269
    
    
    $
    41,494
    
    
    $
    38,213Operating expenses
    
    
    12,418
    
    
    
    13,446
    
    
    
    26,552
    
    
    
    27,340Depreciation and amortization expense
    
    
    5,747
    
    
    
    5,382
    
    
    
    10,796
    
    
    
    11,334General and administrative expenses
    
    
    507
    
    
    
    468
    
    
    
    915
    
    
    
    1,117Operating income (loss)
    
    $
    212
    
    
    $
    2,973
    
    
    $
    3,231
    
    
    $
    (1,578
    )International Liftboats:Number of liftboats (as of end of period)
    
    
    20
    
    
    
    20
    
    
    
    20
    
    
    
    20Revenues
    
    $
    20,747
    
    
    $
    20,305
    
    
    $
    39,389
    
    
    $
    38,596Operating expenses
    
    
    9,113
    
    
    
    9,896
    
    
    
    17,220
    
    
    
    17,116Depreciation and amortization expense
    
    
    2,278
    
    
    
    2,368
    
    
    
    4,662
    
    
    
    4,352General and administrative expenses
    
    
    978
    
    
    
    1,289
    
    
    
    2,269
    
    
    
    2,228Operating income
    
    $
    8,378
    
    
    $
    6,752
    
    
    $
    15,238
    
    
    $
    14,900
 
 (a)
    
    In January 2009, we retired four Domestic Offshore rigs and ten Inland barges.(b)
    
    In June 2009, we entered into an agreement to sell Hercules 110which is cold stacked
in Trinidad. 
 25




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands)(As Adjusted)
    
    
    
    
    
    
    (As Adjusted)Delta Towing:Revenues
    
    $
    5,237
    
    
    $
    15,645
    
    
    $
    11,930
    
    
    $
    25,846Operating expenses
    
    
    5,835
    
    
    
    9,783
    
    
    
    14,020
    
    
    
    17,325Depreciation and amortization expense
    
    
    2,142
    
    
    
    2,706
    
    
    
    4,426
    
    
    
    5,275General and administrative expenses
    
    
    325
    
    
    
    703
    
    
    
    806
    
    
    
    1,285Operating income (loss)
    
    $
    (3,065
    )
    
    $
    2,453
    
    
    $
    (7,322
    )
    
    $
    1,961Total Company:Revenues
    
    $
    183,691
    
    
    $
    270,106
    
    
    $
    407,182
    
    
    $
    482,600Operating expenses
    
    
    116,097
    
    
    
    158,014
    
    
    
    265,341
    
    
    
    289,160Impairment of property and equipment
    
    
    26,882
    
    
    
    
    
    
    
    26,882
    
    
    
    Depreciation and amortization expense
    
    
    51,091
    
    
    
    47,274
    
    
    
    99,937
    
    
    
    90,894General and administrative expenses
    
    
    15,450
    
    
    
    23,966
    
    
    
    31,742
    
    
    
    40,330Operating income (loss)
    
    
    (25,829
    )
    
    
    40,852
    
    
    
    (16,720
    )
    
    
    62,216Interest expense
    
    
    (14,561
    )
    
    
    (15,222
    )
    
    
    (30,350
    )
    
    
    (31,178
    )Gain on early retirement of debt, net
    
    
    13,747
    
    
    
    
    
    
    
    13,747
    
    
    
    Other, net
    
    
    3,346
    
    
    
    250
    
    
    
    2,690
    
    
    
    2,275Income (loss) before income taxes
    
    
    (23,297
    )
    
    
    25,880
    
    
    
    (30,633
    )
    
    
    33,313Income tax benefit (provision)
    
    
    11,510
    
    
    
    (9,492
    )
    
    
    14,335
    
    
    
    (12,050
    )Income (loss) from continuing operations
    
    
    (11,787
    )
    
    
    16,388
    
    
    
    (16,298
    )
    
    
    21,263Loss from discontinued operation, net of taxes
    
    
    (242
    )
    
    
    (209
    )
    
    
    (675
    )
    
    
    (598
    )Net income (loss)
    
    $
    (12,029
    )
    
    $
    16,179
    
    
    $
    (16,973
    )
    
    $
    20,665
  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
 Three
Months Ended June 30, 2008AverageAverage
    
    OperatingOperating
    
    Available
    
    
    
    
    
    Revenue
    
    ExpenseDays
    
    Days
    
    Utilization (1)
    
    per Day (2)
    
    per Day (3)Domestic Offshore
    
    
    1,612
    
    
    
    2,024
    
    
    
    79.6
    %
    
    $
    60,445
    
    
    $
    27,804International Offshore
    
    
    642
    
    
    
    732
    
    
    
    87.7
    %
    
    
    115,556
    
    
    
    50,967Inland
    
    
    1,017
    
    
    
    1,486
    
    
    
    68.4
    %
    
    
    39,589
    
    
    
    21,067Domestic Liftboats
    
    
    2,466
    
    
    
    3,871
    
    
    
    63.7
    %
    
    
    9,030
    
    
    
    3,474International Liftboats
    
    
    1,331
    
    
    
    1,590
    
    
    
    83.7
    %
    
    
    15,255
    
    
    
    6,224
 26




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##### Table of Contents



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
 Six
Months Ended June 30, 2008AverageAverage
    
    OperatingOperating
    
    Available
    
    
    
    
    
    Revenue
    
    ExpenseDays
    
    Days
    
    Utilization (1)
    
    per Day (2)
    
    per Day (3)Domestic Offshore
    
    
    2,710
    
    
    
    4,026
    
    
    
    67.3
    %
    
    $
    58,998
    
    
    $
    25,844International Offshore
    
    
    1,296
    
    
    
    1,441
    
    
    
    89.9
    %
    
    
    107,662
    
    
    
    41,707Inland
    
    
    1,955
    
    
    
    3,033
    
    
    
    64.5
    %
    
    
    41,192
    
    
    
    20,848Domestic Liftboats
    
    
    4,066
    
    
    
    8,057
    
    
    
    50.5
    %
    
    
    9,398
    
    
    
    3,393International Liftboats
    
    
    2,548
    
    
    
    3,137
    
    
    
    81.2
    %
    
    
    15,148
    
    
    
    5,456
 
 (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 $4.2 million and $8.0 million related to amortization of deferred
mobilization revenue and contract specific capital expenditures reimbursed by the customer
for the three and six months ended June 30, 2009, respectively and $4.2 million and $6.2
million for the three and six months ended June 30, 2008, respectively. Included in
International Liftboats revenue is a total of $0.1 million related to amortization of
deferred mobilization revenue for the six months ended June 30, 2009. There was no such
revenue in the three months ended June 30, 2009, nor the three and six months ended June
30, 2008 for International Liftboats.(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 $0.7 million and $1.4 million related to amortization of
deferred mobilization expenses for the three and six months ended June 30, 2009,
respectively and $2.1 million and $3.0 million for the three and six months ended June 30,
2008, respectively. For the Three Months Ended June 30, 2009 and 2008
 Revenues
 Consolidated.
 Domestic Offshore .
 27




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International Offshore . Hercules 260 Hercules 258 Hercules 208 Hercules 261 Hercules 262 Hercules
185 Hercules 156 Hercules 110 Hercules 260, Hercules 208, Hercules 261 Hercules 262
 Inland.
 Domestic Liftboats.
 International Liftboats.
 Delta Towing.
 Operating Expenses
 Consolidated .
 Domestic Offshore .
 International Offshore. Hercules 156
 Inland.
 28




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##### Table of Contents



Domestic Liftboats.
 International Liftboats.
 Delta Towing.
 Impairment of Property and Equipment
 Hercules 110
 Depreciation and Amortization
 Hercules 260 Hercules 350 Hercules 208 Hercules 261 Hercules 262
 General and Administrative Expenses
  Gain on Early Retirement of Debt
  Other, Net
  Income Tax Benefit (Provision)
  29




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##### Table of Contents



For the Six Months Ended June 30, 2009 and 2008
 Revenues
 Consolidated.
 Domestic Offshore .
 International Offshore . Hercules 260 Hercules 258 Hercules 208 Hercules 261 Hercules 262 Hercules 185 Hercules 156 Hercules 110 Hercules
260 Hercules 258, Hercules 208, Hercules 261 Hercules 262
 Inland.
 Domestic Liftboats.
 International Liftboats.
 Delta Towing.
 Operating Expenses
 Consolidated .
 Domestic Offshore .
 30




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##### Table of Contents



International Offshore. Hercules 258 Hercules 260
 Inland.
 Domestic Liftboats.
 International Liftboats.
 Delta Towing.
 Impairment of Property and Equipment
 Hercules 110
 Depreciation and Amortization
 Hercules 260 Hercules 350 Hercules 208 Hercules 261 Hercules 262
 General and Administrative Expenses
  Gain on Early Retirement of Debt
  31




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##### Table of Contents



Other, Net
  Income Tax Benefit (Provision)
  CRITICAL ACCOUNTING POLICIES
    OUTLOOK
 Offshore
     32




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##### Table of Contents



Inland
  33




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##### Table of Contents



Liftboats
      LIQUIDITY AND CAPITAL RESOURCES
 Recent Developments
   Principal Amount Outstanding
    
    Margin Applicable to:Less than or
    
    Greater
    
    Eurodollar
    
    ABRequal to:
    
    than:
    
    Loans
    
    Loans$882.0
    
    $684.25
    
    6.50%
    
    5.50%684.25
    
    484.25
    
    5.00%
    
    4.00%484.25
    
    
    
    4.00%
    
    3.00%
 34




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##### Table of Contents




    
    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
and amend the maximum total leverage ratio that we must comply with following the
expiration of the nine month period to be more favorable to us;
    
    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;
    
    Revise the fixed charge coverage ratio definition and reduce the minimum fixed charge
coverage ratio that we must maintain in a manner that is more favorable to us;
    
    Require mandatory prepayments of debt outstanding under the Credit Agreement with 100%
of excess cash flow for the fiscal year ending December 31, 2009 and 50% of excess cash
flow thereafter and with proceeds from:
 §
    
    unsecured debt issuances, with the exception of refinancing, through June 30,
2010;§
    
    secured debt issuances; and§
    
    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.
 Hercules 100 Hercules 110 Hercules 100 Hercules 110 Hercules 100 Hercules 110
 35




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##### Table of Contents



Sources and Uses of Cash
  Net Cash Provided by Operating Activities
    
    $
    88.3Net Cash Provided by (Used in) Investing Activities:Additions of Property and Equipment
    
    
    (62.0
    )Deferred Drydocking Expenditures
    
    
    (9.7
    )Insurance Proceeds Received
    
    
    8.7Proceeds from Sale of Assets, Net
    
    
    4.7Total
    
    
    (58.3
    )Net Cash Provided by (Used in) Financing Activities:Debt Repayments, Net
    
    
    (4.7
    )Redemption of 3.375% Convertible Senior Notes
    
    
    (6.1
    )Excess Tax Benefit from Stock-Based Arrangements
    
    
    4.2Total
    
    
    (6.6
    )Net Increase in Cash and Cash Equivalents
    
    $
    23.4
 Sources of Liquidity and Financing Arrangements
   36




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Cash Requirements and Contractual Obligations
 Debt
         37




---



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June 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    Value(in millions)Term Loan Facility, due July 2013
    
    $
    884.3
    
    
    $
    769.3
    
    
    $
    886.5
    
    
    $
    571.83.375% Convertible Senior Notes due June 2038
    
    
    81.5
    
    
    
    58.1
    
    
    
    134.8
    
    
    
    77.27.375% Senior Notes, due April 2018 (a)
    
    
    3.5
    
    
    
    n/a
    
    
    
    3.5
    
    
    
    n/a
 
 (a)
    
    The 7.375% Senior Notes have not been traded in recent periods and we believe that the fair
value would not materially differ from the carrying value.   Capital Expenditures
     38




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Off-Balance Sheet Arrangements
 Guarantees
  Letters of Credit and Surety Bonds
  Contractual Obligations
 Accounting for Uncertainty in Income Taxes
 
    
    Retired $65.8 million aggregate principal amount of the 3.375% Convertible Senior Notes;
    
    Settled the $11.1 million insurance note payable outstanding at December 31, 2008; and
    
    Financed $21.4 million related to the renewal of certain of our insurance policies.
  Accounting Pronouncements
  FORWARD-LOOKING STATEMENTS
  
    
    our ability to enter into new contracts for our rigs and liftboats and future
utilization rates and dayrates for the units;
    
    demand for our rigs and our liftboats and our earnings;
    
    activity levels of our customers and their expectations of future energy prices;
    
    sufficiency and availability of funds for required capital expenditures, working capital
and debt service;
    
    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, repair and upgrade costs;
    
    our ability to effectively reactivate rigs that we have recently stacked;
    
    liabilities under laws 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.
 39




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##### Table of Contents



:
 
    
    oil and natural gas prices and industry expectations about future prices;
    
    demand for offshore jackup rigs, inland barge 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;
    
    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.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  40




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Interest Rate Exposure
     June 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    Value(in millions)Term Loan Facility, due July 2013
    
    $
    884.3
    
    
    $
    769.3
    
    
    $
    886.5
    
    
    $
    571.83.375% Convertible Senior Notes due June 2038
    
    
    81.5
    
    
    
    58.1
    
    
    
    134.8
    
    
    
    77.27.375% Senior Notes, due April 2018 (a)
    
    
    3.5
    
    
    
    n/a
    
    
    
    3.5
    
    
    
    n/a
 
 (a)
    
    The 7.375% Senior Notes have not been traded in recent periods and we believe that the fair
value would not materially differ from the carrying value. Interest Rate Swaps and Derivatives
 Liquidity and Capital Resources
   July 1, 2009-September 30, 2009
    
    $
    175,000October 1, 2009-December 30, 2009
    
    
    75,000
 41




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Our business depends on the level of activity in the oil and natural gas industry, which is
significantly affected by volatile oil and natural gas prices.
  
    
    the demand for oil and natural gas in the United States and elsewhere;
    
    the cost of exploring for, developing, producing and delivering oil and natural gas,
and the relative cost of onshore production or importation of natural gas;
    
    political, economic and weather conditions in the United States and elsewhere;
    
    imports of liquefied natural gas;
    
    expectations regarding future commodity prices;
    
    advances in exploration, development and production technology;
    
    the ability of the Organization of Petroleum Exporting Countries, commonly called
OPEC, to set and maintain production levels and pricing;
    
    the level of production in non-OPEC countries;
 42




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##### Table of Contents




    
    domestic and international tax policies and governmental regulations;
    
    the development and exploitation of alternative fuels, and the competitive, social and
political position of natural gas as a source of energy compared with other energy
sources;
    
    the policies of various governments regarding exploration and development of their oil
and natural gas reserves;
    
    the worldwide military and political environment and uncertainty or instability
resulting from an escalation or additional outbreak of armed hostilities or other crises
in the Middle East, West Africa and other significant oil and natural gas producing
regions; and
    
    acts of terrorism or piracy that affect our areas of operations, especially in Nigeria,
where armed conflict, civil unrest and acts of terrorism have recently increased.
  The offshore service industry is highly cyclical and is currently experiencing low demand and low
dayrates. The volatility of the industry, coupled with our short-term contracts, could result in
sharp declines in our profitability.
  Maintaining idle rigs or the sale of assets below their then carrying value may cause us to
experience losses and may result in impairment charges.
  Our industry is highly competitive, with intense price competition. Our inability to compete
successfully may reduce our profitability.
   We have a significant level of debt, and could incur additional debt in the future. Our debt could
have significant consequences for our business and future prospects.
  43




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##### Table of Contents




    
    we may not be able to obtain necessary financing in the future for working capital,
capital expenditures, acquisitions, debt service requirements or other purposes and we may
be required under the terms of the amendment to our credit facility to use the proceeds of
any financing we obtain to repay or prepay existing debt;
    
    we will be required to dedicate a substantial portion of our cash flow from operations
to payments of principal and interest on our debt;
    
    we may be exposed to risks inherent in interest rate fluctuations because our
borrowings generally are at variable rates of interest, which will result in higher
interest expense to the extent that we do not hedge such risk in the event of increases in
interest rates;
    
    we could be more vulnerable during downturns in our business and be less able to take
advantage of significant business opportunities and to react to changes in our business
and in market or industry conditions; and
    
    we may have a competitive disadvantage relative to our competitors that have less debt.
  Our amended Credit Agreement imposes significant additional costs and operating and financial
restrictions on us, which may prevent us from capitalizing on business opportunities and taking
certain actions.
  
    
    make certain types of loans and investments;
    
    pay dividends, redeem or repurchase stock, prepay, redeem or repurchase other debt or
make other restricted payments;
    
    incur or guarantee additional indebtedness;
    
    use proceeds from asset sales, new indebtedness or equity issuances for general
corporate purposes or investment into our current business;
    
    invest in new joint ventures;
    
    create or incur liens;
    
    place restrictions on our subsidiaries ability to make dividends or other payments to
us;
    
    sell our assets or consolidate or merge with or into other companies;
    
    engage in transactions with affiliates; and
    
    enter into new lines of business.
  44




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##### Table of Contents



If we are unable to comply with the restrictions and covenants in our amended Credit Agreement,
there could be a default, which could result in an acceleration of repayment of funds that we have
borrowed.
  The continuing worldwide economic recession is materially reducing our revenue, profitability and
cash flows.
  We may require additional capital in the future, which may not be available to us or may be at a
cost which reduces our cash flow and profitability.
  Asset sales are currently an important component of our business strategy for the purpose of
reducing our debt. We may be unable to identify appropriate buyers with access to financing or to
complete any sales on acceptable terms.
  Our contracts are generally short term, and we will experience reduced profitability if our
customers reduce activity levels or terminate or seek to renegotiate our drilling or liftboat
contracts or if we experience downtime, operational difficulties, or safety-related issues.
    45




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##### Table of Contents



An increase in supply of rigs or liftboats could adversely affect our financial condition and
results of operations.
   Our business involves numerous operating hazards, and our insurance may not be adequate to cover
our losses.
    A significant portion of our business is conducted in shallow-water areas of the U.S. Gulf of
Mexico. The mature nature of this region could result in less drilling activity in the area,
thereby reducing demand for our services.
  46




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##### Table of Contents



We can provide no assurance that our current backlog of contract drilling revenue will be
ultimately realized.
  47




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##### Table of Contents



Our insurance coverage has become more expensive, may become unavailable in the future, and may be
inadequate to cover our losses.
    Our customers may be unable or unwilling to indemnify us.
  Our international operations are subject to additional political, economic, and other uncertainties
not generally associated with domestic operations.
  
    
    political, social and economic instability, war and acts of terrorism;
    
    potential seizure, expropriation or nationalization of assets;
    
    damage to our equipment or violence directed at our employees, including kidnappings
and piracy;
    
    increased operating costs;
    
    complications associated with repairing and replacing equipment in remote locations;
    
    repudiation, modification or renegotiation of contracts, disputes and legal proceedings
in international jurisdictions;
    
    limitations on insurance coverage, such as war risk coverage in certain areas;
    
    import-export quotas;
    
    confiscatory taxation;
    
    work stoppages or strikes, particularly in the West African and Mexican labor
environments;
 48




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##### Table of Contents




    
    unexpected changes in regulatory requirements;
    
    wage and price controls;
    
    imposition of trade barriers;
    
    imposition or changes in enforcement of local content laws;
    
    restrictions on currency or capital repatriations;
    
    currency fluctuations and devaluations; and
    
    other forms of government regulation and economic conditions that are beyond our
control.
     A few customers account
for a significant portion of our revenues, and the loss of one or more of these customers
could adversely affect our financial condition and results of operations.
  Our jackup rigs are at a relative disadvantage to higher specification rigs, which may be more
likely to obtain contracts than lower specification jackup rigs such as ours.
  49




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##### Table of Contents



We may consider future acquisitions and may be unable to complete and finance future acquisitions
on acceptable terms. In addition, we may fail to successfully integrate acquired assets or
businesses we acquire or incorrectly predict operating results.
    
    
    the risk of incorrect assumptions regarding the future results of acquired operations
or assets or expected cost reductions or other synergies expected to be realized as a
result of acquiring operations or assets;
    
    the risk of failing to integrate the operations or management of any acquired
operations or assets successfully and timely; and
    
    the risk of diversion of managements attention from existing operations or other
priorities.
  Governmental laws and regulations may add to our costs or limit drilling activity and liftboat
operations.
   Compliance with or a breach of environmental laws can be costly and could limit our operations.
  50




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##### Table of Contents



We may not be able to maintain or replace our rigs and liftboats as they age.
  Our operating and maintenance costs with respect to our rigs include fixed costs that will not
decline in proportion to decreases in dayrates.
  Upgrade, refurbishment and repair projects are subject to risks, including delays and cost
overruns, which could have an adverse impact on our available cash resources and results of
operations.
  
    
    unexpectedly long delivery times for, or shortages of, key equipment, parts and
materials;
    
    shortages of skilled labor and other shipyard personnel necessary to perform the work;
    
    unforeseen increases in the cost of equipment, labor and raw materials, particularly
steel;
    
    unforeseen design and engineering problems;
    
    latent damages to or deterioration of hull, equipment and machinery in excess of
engineering estimates and assumptions;
    
    unanticipated actual or purported change orders;
    
    work stoppages;
    
    failure or delay of third-party service providers and labor disputes;
    
    disputes with shipyards and suppliers;
    
    delays and unexpected costs of incorporating parts and materials needed for the
completion of projects;
    
    failure or delay in obtaining acceptance of the rig from our customer;
    
    financial or other difficulties at shipyards;
    
    adverse weather conditions; and
    
    inability or delay in obtaining customer acceptance or flag-state, classification
society, certificate of inspection, or regulatory approvals.
  51




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##### Table of Contents



We are subject to litigation that could have an adverse effect on us.
  TODCOs tax sharing agreement with Transocean may require continuing substantial payments.
  Changes in effective tax rates, taxation of our foreign subsidiaries, limitations on utilization of
our net operating losses or adverse outcomes resulting from examination of our tax returns could
adversely affect our operating results and financial results.
   Our business would be adversely affected if we failed to comply with the provisions of U.S. law on
coastwise trade, or if those provisions were modified, repealed or waived.
   Our liquidity depends upon cash on hand, cash from operations and availability under our revolving
credit facility.
  52




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We are a holding company, and we are dependent upon cash flow from subsidiaries to meet our
obligations.
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   Total Number ofShares Purchased
    
    Maximum Numberas Part of a
    
    of Shares ThatTotal Number
    
    
    
    
    
    Publicly
    
    May Yet Beof Shares
    
    Average Price
    
    Announced Plan
    
    Purchased UnderPeriod
    
    Purchased(1)
    
    Paid per Share
    
    (2)
    
    Plan (2)April 1-30, 2009
    
    
    415
    
    
    $
    3.12
    
    
    
    N/A
    
    
    
    N/AMay 1-31, 2009
    
    
    314
    
    
    
    4.14
    
    
    
    N/A
    
    
    
    N/AJune 1-30, 2009
    
    
    872
    
    
    
    4.82
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    1,601
    
    
    
    4.25
    
    
    
    N/A
    
    
    
    N/A
 
 (1)
    
    Represents the surrender of shares of 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. 53




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Name
    
    For
    
    WithheldThomas N. Amonett
    
    
    69,577,480
    
    
    
    8,774,833John T. Rynd
    
    
    69,779,660
    
    
    
    8,572,653Steven A. Webster
    
    
    60,361,057
    
    
    
    17,991,256
   For
    
    
    77,722,300Against
    
    
    265,243Abstain
    
    
    355,864Broker Non-Vote
    
    
    8,906
 
 ITEM 6. EXHIBITS
 4.1*
    
    Amendment No. 2 dated as of July 23, 2009, to the Credit Agreement dated July 11, 2007,
among Hercules Offshore, Inc., as borrower, its subsidiaries party thereto, as guarantors, and
UBS AG, Stamford Branch, as issuing bank, administrative agent and collateral agent, and the
lenders party thereto.10.1
    
    Waiver of Executive Employment Agreement between the Company and John T. Rynd, dated
April 27, 2009 (incorporated by reference to Exhibit 10.1 to Hercules Current Report on Form
8-K dated April 28, 2009).10.2
    
    Waiver of Executive Employment Agreement between the Company and Lisa W. Rodriguez, dated
April 27, 2009 (incorporated by reference to Exhibit 10.2 to Hercules Current Report on Form
8-K dated April 28, 2009).10.3
    
    Waiver of Executive Employment Agreement between the Company and James W. Noe, dated
April 27, 2009 (incorporated by reference to Exhibit 10.3 to Hercules Current Report on Form
8-K dated April 28, 2009).10.4
    
    Waiver of Executive Employment Agreement between the Company and Terrell L. Carr, dated
April 27, 2009 (incorporated by reference to Exhibit 10.4 to Hercules Current Report on Form
8-K dated April 28, 2009).10.5
    
    Waiver of Executive Employment Agreement between the Company and Todd A. Pellegrin, dated
April 27, 2009 (incorporated by reference to Exhibit 10.5 to Hercules Current Report on Form
8-K dated April 28, 2009).10.6
    
    Basic Form of Exchange Agreement between the Company and certain holders of our 3.375%
Convertible Senior Notes due 2038 (incorporated by reference to Exhibit 10.1 to Hercules
Current Report on Form 8-K dated June 18, 2009).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 54




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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/ Lisa W. RodriguezLisa W. RodriguezSenior Vice President and Chief Financial Officer(Principal Financial Officer)By:
    
    /s/ Troy L. CarsonTroy L. CarsonVice President and Corporate Controller(Principal Accounting Officer)
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