##### 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 September 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 October 21, 2010114,784,098




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##### 



HERCULES OFFSHORE, INC.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three and nine months ended September 30,
2010, and September 30, 2009
    
    
    4Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and
September 30, 2009
    
    
    5Consolidated Statements of Comprehensive Loss for the three and nine months ended
September 30, 2010 and September 30, 2009
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    43Item 4. Controls and Procedures
    
    
    44PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    44Item 1A. Risk Factors
    
    
    44Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 6. Exhibits
    
    
    45Signatures
    
    
    46EX-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)
 September 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    134,644
    
    
    $
    140,828Restricted Cash
    
    
    13,124
    
    
    
    3,658Accounts Receivable, Net of Allowance for Doubtful Accounts of $31,359 and
$38,522 as of September 30, 2010 and December 31, 2009, Respectively
    
    
    144,423
    
    
    
    133,662Prepaids
    
    
    24,157
    
    
    
    13,706Current Deferred Tax Asset
    
    
    11,246
    
    
    
    22,885Other
    
    
    20,349
    
    
    
    6,675347,943
    
    
    
    321,414Property and Equipment, Net
    
    
    1,799,884
    
    
    
    1,923,603Other Assets, Net
    
    
    29,489
    
    
    
    32,459$
    2,177,316
    
    
    $
    2,277,476LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term Debt and Current Portion of Long-term Debt
    
    $
    4,924
    
    
    $
    4,952Insurance Notes Payable
    
    
    16,386
    
    
    
    5,484Accounts Payable
    
    
    49,057
    
    
    
    51,868Accrued Liabilities
    
    
    61,999
    
    
    
    67,773Interest Payable
    
    
    23,625
    
    
    
    6,624Taxes Payable
    
    
    
    
    
    
    5,671Other Current Liabilities
    
    
    25,160
    
    
    
    34,229181,151
    
    
    
    176,601Long-term Debt, Net of Current Portion
    
    
    854,590
    
    
    
    856,755Other Liabilities
    
    
    6,548
    
    
    
    19,809Deferred Income Taxes
    
    
    198,941
    
    
    
    245,799Commitments and ContingenciesStockholders Equity:Common Stock, $0.01 Par Value; 200,000 Shares Authorized; 116,331 and 116,154 Shares
Issued, Respectively; 114,780 and 114,650 Shares Outstanding, Respectively
    
    
    1,163
    
    
    
    1,162Capital in Excess of Par Value
    
    
    1,923,018
    
    
    
    1,921,037Treasury Stock, at Cost, 1,551 Shares and 1,504 Shares, Respectively
    
    
    (50,331
    )
    
    
    (50,151
    )Accumulated Other Comprehensive Loss
    
    
    
    
    
    
    (5,773
    )Retained Deficit
    
    
    (937,764
    )
    
    
    (887,763
    )936,086
    
    
    
    978,512$
    2,177,316
    
    
    $
    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 September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    168,484
    
    
    $
    159,262
    
    
    $
    485,228
    
    
    $
    566,444Costs and Expenses:Operating Expenses
    
    
    109,230
    
    
    
    123,358
    
    
    
    326,187
    
    
    
    388,699Impairment of Property and Equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,882Depreciation and Amortization
    
    
    46,154
    
    
    
    51,802
    
    
    
    144,758
    
    
    
    151,739General and Administrative
    
    
    14,512
    
    
    
    16,814
    
    
    
    41,613
    
    
    
    48,556169,896
    
    
    
    191,974
    
    
    
    512,558
    
    
    
    615,876Operating Loss
    
    
    (1,412
    )
    
    
    (32,712
    )
    
    
    (27,330
    )
    
    
    (49,432
    )Other Income (Expense):Interest Expense
    
    
    (21,384
    )
    
    
    (24,131
    )
    
    
    (64,382
    )
    
    
    (54,481
    )Expense of Credit Agreement Fees
    
    
    
    
    
    
    (15,073
    )
    
    
    
    
    
    
    (15,073
    )Gain on Early Retirement of Debt, Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,747Other, Net
    
    
    (19
    )
    
    
    70
    
    
    
    3,150
    
    
    
    2,760Loss Before Income Taxes
    
    
    (22,815
    )
    
    
    (71,846
    )
    
    
    (88,562
    )
    
    
    (102,479
    )Income Tax Benefit
    
    
    7,754
    
    
    
    24,876
    
    
    
    38,561
    
    
    
    39,211Loss from Continuing Operations
    
    
    (15,061
    )
    
    
    (46,970
    )
    
    
    (50,001
    )
    
    
    (63,268
    )Loss from Discontinued Operation, Net of Taxes
    
    
    
    
    
    
    (1,290
    )
    
    
    
    
    
    
    (1,965
    )Net Loss
    
    $
    (15,061
    )
    
    $
    (48,260
    )
    
    $
    (50,001
    )
    
    $
    (65,233
    )Basic Loss Per Share:Loss from Continuing Operations
    
    $
    (0.13
    )
    
    $
    (0.48
    )
    
    $
    (0.44
    )
    
    $
    (0.69
    )Loss from Discontinued Operation
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Net Loss
    
    $
    (0.13
    )
    
    $
    (0.50
    )
    
    $
    (0.44
    )
    
    $
    (0.71
    )Diluted Loss Per Share:Loss from Continuing Operations
    
    $
    (0.13
    )
    
    $
    (0.48
    )
    
    $
    (0.44
    )
    
    $
    (0.69
    )Loss from Discontinued Operation
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Net Loss
    
    $
    (0.13
    )
    
    $
    (0.50
    )
    
    $
    (0.44
    )
    
    $
    (0.71
    )Weighted Average Shares Outstanding:Basic
    
    
    114,774
    
    
    
    97,159
    
    
    
    114,742
    
    
    
    91,298Diluted
    
    
    114,774
    
    
    
    97,159
    
    
    
    114,742
    
    
    
    91,298
  4




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months Ended September 30,2010
    
    
    2009Cash Flows from Operating Activities:Net Loss
    
    $
    (50,001
    )
    
    $
    (65,233
    )Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities:Depreciation and Amortization
    
    
    144,758
    
    
    
    151,739Stock-Based Compensation Expense
    
    
    2,799
    
    
    
    6,208Deferred Income Taxes
    
    
    (38,639
    )
    
    
    (64,535
    )Provision for Doubtful Accounts Receivable
    
    
    80
    
    
    
    4,468Amortization of Deferred Financing Fees
    
    
    2,493
    
    
    
    2,851Amortization of Original Issue Discount
    
    
    3,041
    
    
    
    3,196Non-Cash Loss on Derivatives
    
    
    1,987
    
    
    
    5,554Gain on Insurance Settlement
    
    
    
    
    
    
    (8,700
    )Gain on Disposal of Assets
    
    
    (10,180
    )
    
    
    (58
    )Expense of Credit Agreement Fees
    
    
    
    
    
    
    15,073Gain on Early Retirement of Debt, Net
    
    
    
    
    
    
    (13,747
    )Impairment of Property and Equipment
    
    
    
    
    
    
    26,882Excess Tax Benefits from Stock-Based Arrangements
    
    
    (381
    )
    
    
    (5,500
    )(Increase) Decrease in Operating Assets -Accounts Receivable
    
    
    (10,841
    )
    
    
    95,654Prepaid Expenses and Other
    
    
    16,563
    
    
    
    21,094Increase (Decrease) in Operating Liabilities -Accounts Payable
    
    
    (2,811
    )
    
    
    (32,815
    )Insurance Notes Payable
    
    
    (15,036
    )
    
    
    (19,612
    )Other Current Liabilities
    
    
    (10,011
    )
    
    
    4,192Other Liabilities
    
    
    (14,141
    )
    
    
    (6,763
    )Net Cash Provided by Operating Activities
    
    
    19,680
    
    
    
    119,948Cash Flows from Investing Activities:Additions of Property and Equipment
    
    
    (16,353
    )
    
    
    (71,395
    )Deferred Drydocking Expenditures
    
    
    (10,972
    )
    
    
    (13,719
    )Insurance Proceeds Received
    
    
    
    
    
    
    9,168Proceeds from Sale of Assets, Net
    
    
    15,764
    
    
    
    23,305Increase in Restricted Cash
    
    
    (9,466
    )
    
    
    (3,657
    )Net Cash Used in Investing Activities
    
    
    (21,027
    )
    
    
    (56,298
    )Cash Flows from Financing Activities:Short-term Debt Repayments
    
    
    
    
    
    
    (2,455
    )Long-term Debt Repayments
    
    
    (5,233
    )
    
    
    (20,555
    )Redemption of 3.375% Convertible Senior Notes
    
    
    
    
    
    
    (6,099
    )Common Stock Issuance
    
    
    
    
    
    
    83,344Excess Tax Benefits from Stock-Based Arrangements
    
    
    381
    
    
    
    5,500Payment of Debt Issuance Costs
    
    
    
    
    
    
    (9,931
    )Other
    
    
    15
    
    
    
    (11
    )Net Cash Provided by (Used in) Financing Activities
    
    
    (4,837
    )
    
    
    49,793Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (6,184
    )
    
    
    113,443Cash and Cash Equivalents at Beginning of Period
    
    
    140,828
    
    
    
    106,455Cash and Cash Equivalents at End of Period
    
    $
    134,644
    
    
    $
    219,898
  5




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 (In thousands)

(Unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net Loss
    
    $
    (15,061
    )
    
    $
    (48,260
    )
    
    $
    (50,001
    )
    
    $
    (65,233
    )Other Comprehensive Income, Net of Taxes:Changes Related to Hedge Transactions
    
    
    1,762
    
    
    
    5,085
    
    
    
    5,773
    
    
    
    6,667Comprehensive Loss
    
    $
    (13,299
    )
    
    $
    (43,175
    )
    
    $
    (44,228
    )
    
    $
    (58,566
    )
  6




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##### Table of Contents



HERCULES OFFSHORE, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 UNAUDITED
 1. General
     Reclassifications
  Common Stock Offering
  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 September 30,
    
    Nine Months Ended September 30,2010
    
    2009
    
    2010
    
    2009Mobilization revenue deferred
    
    $
    
    
    
    $
    130
    
    
    $
    600
    
    
    $
    12,130Mobilization expense deferred
    
    
    
    
    
    
    671
    
    
    
    
    
    
    
    2,014Mobilization revenue recognized
    
    
    3,716
    
    
    
    4,371
    
    
    
    11,627
    
    
    
    12,520Mobilization expense recognized
    
    
    193
    
    
    
    1,295
    
    
    
    1,786
    
    
    
    2,688
   As of
    
    As ofBalance Sheet
    
    September 30,
    
    December 31,Classification
    
    2010
    
    2009Assets:Deferred Mobilization and Contract Preparation Expense-Current Portion
    
    Other
    
    $
    706
    
    
    $
    1,092Deferred Mobilization and Contract Preparation Expense-Non-Current Portion
    
    Other Assets, Net
    
    
    
    
    
    
    1,651Liabilities:Deferred Mobilization Revenue-Current Portion
    
    Other Current Liabilities
    
    
    17,520
    
    
    
    19,406Deferred Mobilization Revenue-Non-Current Portion
    
    Other Liabilities
    
    
    
    
    
    
    12,628
 Accounts Receivable and Allowance for Doubtful Accounts
  Other Assets
   8




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##### Table of Contents



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
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
  September 30,
    
    
    December 31,2010
    
    
    2009Term Loan Facility, due July 2013
    
    $
    477,618
    
    
    $
    482,85210.5% Senior Secured Notes, due October 2017
    
    
    292,762
    
    
    
    292,2723.375% Convertible Senior Notes, due June 2038
    
    
    85,623
    
    
    
    83,0717.375% Senior Notes, due April 2018
    
    
    3,511
    
    
    
    3,512Total Debt
    
    
    859,514
    
    
    
    861,707Less Short-term Debt and Current Portion of Long-term Debt
    
    
    4,924
    
    
    
    4,952Total Long-term Debt, Net of Current Portion
    
    $
    854,590
    
    
    $
    856,755
 Senior secured credit facility
  
    
    Maintain a maximum total leverage ratio for any test period 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 September 30, 2010, the Companys total leverage ratio was 6.67 to 1.00.
 
    
    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 September 30,
2010, as calculated pursuant to the Credit Agreement, the Companys total liquidity was
$298.6 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 adjusted by an amount not to exceed $110.0 million during the term of the
credit facility to be deducted from capital expenditures, all as defined in the Credit
Agreement. As of September 30, 2010, the Companys fixed charge coverage ratio was
1.26 to 1.00.
 
    
    Make 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
  September 30, 2010
    
    December 31, 2009Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    Value(in millions)Term Loan Facility, due July 2013
    
    $
    477.6
    
    
    $
    413.1
    
    
    $
    482.9
    
    
    $
    468.410.5% Senior Secured Notes, due October 2017
    
    
    292.8
    
    
    
    242.6
    
    
    
    292.3
    
    
    
    315.83.375% Convertible Senior Notes, due June 2038
    
    
    85.6
    
    
    
    66.7
    
    
    
    83.1
    
    
    
    76.87.375% Senior Notes, due April 2018
    
    
    3.5
    
    
    
    2.3
    
    
    
    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
       September 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
    
    $
    3,417
    
    
    Other Current Liabilities
    
    $
    10,312Other Liabilities
    
    
    
    
    
    Other Liabilities
    
    
    Total Liability Derivatives
    
    $
    3,417
    
    
    Total Liability Derivatives
    
    $
    10,312
 
 (a)
    
    These interest rate contracts were designated as cash flow hedges through July 27, 2009. 14




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  Three Months Ended September 30,2010
    
    2009
    
    
    
    2010
    
    2009
    
    
    
    2010
    
    2009Derivatives(a)
    
    I.
    
    II.
    
    III.
    
    IV.
    
    V.Interest rate contracts
    
    $
    
    
    
    $
    2,226
    
    
    Interest Expense
    
    $
    (2,711
    )
    
    $
    (4,398
    )
    
    Interest Expense
    
    $
    (5
    )
    
    $
    (1,156
    )
 Nine Months Ended September 30,2010
    
    2009
    
    
    
    2010
    
    2009
    
    
    
    2010
    
    2009Derivatives(a)
    
    I.
    
    II.
    
    III.
    
    IV.
    
    V.Interest rate contracts
    
    $
    
    
    
    $
    (1,654
    )
    
    Interest Expense
    
    $
    (8,881
    )
    
    $
    (12,801
    )
    
    Interest Expense
    
    $
    (264
    )
    
    $
    (1,156
    )
 
 (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 $3,108
    
    
    5,773Cumulative unrealized loss, net of tax, as of September 30, 2010
    
    $
    
 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
 15




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
 (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
    
    ValuationSeptember 30, 2010
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    TechniqueInterest Rate Contracts
    
    $
    3,417
    
    
    $
    
    
    
    $
    3,417
    
    
    $
    
    
    
    
    A
  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
  16




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
   8. Supplemental Cash Flow Information
  Nine Months Ended September 30,2010
    
    2009(In thousands)Cash paid during the period for:Interest, net of capitalized interest
    
    $
    40,210
    
    
    $
    28,814Income taxes
    
    
    19,364
    
    
    
    19,565
 9. Income Tax
    17




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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
  18




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HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
UNAUDITED
  Three Months Ended September 30, 2010
    
    
    Nine Months Ended September 30, 2010Income (Loss)
    
    
    Depreciation
    
    
    
    
    
    
    Income (Loss)
    
    
    Depreciationfrom
    
    
    &
    
    
    
    
    
    
    from
    
    
    &Revenue
    
    
    Operations
    
    
    Amortization
    
    
    Revenue
    
    
    Operations
    
    
    AmortizationDomestic Offshore
    
    $
    25,058
    
    
    $
    (32,066
    )
    
    $
    17,277
    
    
    $
    88,163
    
    
    $
    (82,712
    )
    
    $
    50,986International Offshore
    
    
    74,429
    
    
    
    26,893
    
    
    
    14,404
    
    
    
    221,364
    
    
    
    73,616
    
    
    
    43,808Inland
    
    
    5,745
    
    
    
    (8,628
    )
    
    
    4,991
    
    
    
    15,676
    
    
    
    (21,663
    )
    
    
    18,736Domestic Liftboats
    
    
    24,612
    
    
    
    9,424
    
    
    
    3,314
    
    
    
    53,950
    
    
    
    9,851
    
    
    
    11,182International Liftboats
    
    
    27,765
    
    
    
    9,431
    
    
    
    4,199
    
    
    
    80,914
    
    
    
    21,227
    
    
    
    13,258Delta Towing
    
    
    10,875
    
    
    
    2,429
    
    
    
    1,172
    
    
    
    25,161
    
    
    
    1,206
    
    
    
    4,376168,484
    
    
    
    7,483
    
    
    
    45,357
    
    
    
    485,228
    
    
    
    1,525
    
    
    
    142,346Corporate
    
    
    
    
    
    
    (8,895
    )
    
    
    797
    
    
    
    
    
    
    
    (28,855
    )
    
    
    2,412Total Company
    
    $
    168,484
    
    
    $
    (1,412
    )
    
    $
    46,154
    
    
    $
    485,228
    
    
    $
    (27,330
    )
    
    $
    144,758
 Three Months Ended September 30, 2009
    
    
    Nine Months Ended September 30, 2009Income (Loss)
    
    
    Depreciation
    
    
    
    
    
    
    Income (Loss)
    
    
    Depreciationfrom
    
    
    &
    
    
    
    
    
    
    from
    
    
    &Revenue
    
    
    Operations
    
    
    Amortization
    
    
    Revenue
    
    
    Operations
    
    
    AmortizationDomestic Offshore
    
    $
    18,959
    
    
    $
    (35,250
    )
    
    $
    15,118
    
    
    $
    115,110
    
    
    $
    (67,370
    )
    
    $
    45,250International Offshore (a)
    
    
    90,041
    
    
    
    26,746
    
    
    
    16,769
    
    
    
    295,250
    
    
    
    86,806
    
    
    
    48,702Inland
    
    
    2,437
    
    
    
    (13,531
    )
    
    
    8,166
    
    
    
    15,446
    
    
    
    (47,147
    )
    
    
    24,442Domestic Liftboats
    
    
    19,268
    
    
    
    956
    
    
    
    5,048
    
    
    
    60,762
    
    
    
    4,187
    
    
    
    15,844International Liftboats
    
    
    22,320
    
    
    
    2,574
    
    
    
    4,010
    
    
    
    61,709
    
    
    
    17,812
    
    
    
    8,672Delta Towing
    
    
    6,237
    
    
    
    (3,922
    )
    
    
    1,892
    
    
    
    18,167
    
    
    
    (11,244
    )
    
    
    6,318159,262
    
    
    
    (22,427
    )
    
    
    51,003
    
    
    
    566,444
    
    
    
    (16,956
    )
    
    
    149,228Corporate
    
    
    
    
    
    
    (10,285
    )
    
    
    799
    
    
    
    
    
    
    
    (32,476
    )
    
    
    2,511Total Company
    
    $
    159,262
    
    
    $
    (32,712
    )
    
    $
    51,802
    
    
    $
    566,444
    
    
    $
    (49,432
    )
    
    $
    151,739
 
 (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 nine months ended September 30, 2009. Total AssetsSeptember 30,
    
    
    December 31,2010
    
    
    2009Domestic Offshore
    
    $
    859,846
    
    
    $
    870,723International Offshore
    
    
    780,360
    
    
    
    860,252Inland
    
    
    144,607
    
    
    
    160,354Domestic Liftboats
    
    
    91,269
    
    
    
    88,942International Liftboats
    
    
    163,884
    
    
    
    164,221Delta Towing
    
    
    61,483
    
    
    
    62,563Corporate
    
    
    75,867
    
    
    
    70,421Total Company
    
    $
    2,177,316
    
    
    $
    2,277,476
 19




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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
   20




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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
   Sales Tax Audits
  12. Accounting Pronouncements
  21




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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 Hercules
191 Hercules 255 Hercules 155
  Domestic Offshore
 International Offshore
 Inland
 Domestic Liftboats
 International Liftboats
 Delta Towing
 22




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23




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RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)Domestic Offshore:Number of rigs (as of end of period)
    
    
    25
    
    
    
    23
    
    
    
    25
    
    
    
    23Revenues
    
    $
    25,058
    
    
    $
    18,959
    
    
    $
    88,163
    
    
    $
    115,110Operating expenses
    
    
    38,701
    
    
    
    36,476
    
    
    
    115,082
    
    
    
    131,635Depreciation and amortization expense
    
    
    17,277
    
    
    
    15,118
    
    
    
    50,986
    
    
    
    45,250General and administrative expenses
    
    
    1,146
    
    
    
    2,615
    
    
    
    4,807
    
    
    
    5,595Operating loss
    
    $
    (32,066
    )
    
    $
    (35,250
    )
    
    $
    (82,712
    )
    
    $
    (67,370
    )International Offshore:Number of rigs (as of end of period)
    
    
    9
    
    
    
    11
    
    
    
    9
    
    
    
    11Revenues
    
    $
    74,429
    
    
    $
    90,041
    
    
    $
    221,364
    
    
    $
    295,250Operating expenses
    
    
    31,065
    
    
    
    44,209
    
    
    
    98,394
    
    
    
    127,478Impairment of property and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,882Depreciation and amortization expense
    
    
    14,404
    
    
    
    16,769
    
    
    
    43,808
    
    
    
    48,702General and administrative expenses
    
    
    2,067
    
    
    
    2,317
    
    
    
    5,546
    
    
    
    5,382Operating income
    
    $
    26,893
    
    
    $
    26,746
    
    
    $
    73,616
    
    
    $
    86,806Inland:Number of barges (as of end of period)
    
    
    17
    
    
    
    17
    
    
    
    17
    
    
    
    17Revenues
    
    $
    5,745
    
    
    $
    2,437
    
    
    $
    15,676
    
    
    $
    15,446Operating expenses
    
    
    8,279
    
    
    
    7,442
    
    
    
    20,359
    
    
    
    36,563Depreciation and amortization expense
    
    
    4,991
    
    
    
    8,166
    
    
    
    18,736
    
    
    
    24,442General and administrative expenses
    
    
    1,103
    
    
    
    360
    
    
    
    (1,756
    )
    
    
    1,588Operating loss
    
    $
    (8,628
    )
    
    $
    (13,531
    )
    
    $
    (21,663
    )
    
    $
    (47,147
    )Domestic Liftboats:Number of liftboats (as of end of period) (a)
    
    
    41
    
    
    
    41
    
    
    
    41
    
    
    
    41Revenues
    
    $
    24,612
    
    
    $
    19,268
    
    
    $
    53,950
    
    
    $
    60,762Operating expenses
    
    
    11,314
    
    
    
    12,725
    
    
    
    31,481
    
    
    
    39,277Depreciation and amortization expense
    
    
    3,314
    
    
    
    5,048
    
    
    
    11,182
    
    
    
    15,844General and administrative expenses
    
    
    560
    
    
    
    539
    
    
    
    1,436
    
    
    
    1,454Operating income
    
    $
    9,424
    
    
    $
    956
    
    
    $
    9,851
    
    
    $
    4,187International Liftboats:Number of liftboats (as of end of period) (a)
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    24Revenues
    
    $
    27,765
    
    
    $
    22,320
    
    
    $
    80,914
    
    
    $
    61,709Operating expenses
    
    
    12,951
    
    
    
    14,457
    
    
    
    42,310
    
    
    
    31,677Depreciation and amortization expense
    
    
    4,199
    
    
    
    4,010
    
    
    
    13,258
    
    
    
    8,672General and administrative expenses
    
    
    1,184
    
    
    
    1,279
    
    
    
    4,119
    
    
    
    3,548Operating income
    
    $
    9,431
    
    
    $
    2,574
    
    
    $
    21,227
    
    
    $
    17,812
 (a)
    
    The number of liftboats as of September 30, 2009 reflects the transfer of four liftboats from
our Domestic Liftboats segment to our International Liftboats segment. Although the four vessels mobilized
to West Africa during the fourth quarter of 2009, they were being managed by the
International Liftboats segment for a portion of the third quarter of 2009 pending their ultimate
transfer. Therefore, the financial results of these four vessels are
reflected in the International Liftboats segment for a portion of the third quarter of 2009.
 24




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)Delta Towing:Revenues
    
    $
    10,875
    
    
    $
    6,237
    
    
    $
    25,161
    
    
    $
    18,167Operating expenses
    
    
    6,920
    
    
    
    8,049
    
    
    
    18,561
    
    
    
    22,069Depreciation and amortization expense
    
    
    1,172
    
    
    
    1,892
    
    
    
    4,376
    
    
    
    6,318General and administrative expenses
    
    
    354
    
    
    
    218
    
    
    
    1,018
    
    
    
    1,024Operating income (loss)
    
    $
    2,429
    
    
    $
    (3,922
    )
    
    $
    1,206
    
    
    $
    (11,244
    )Total Company:Revenues
    
    $
    168,484
    
    
    $
    159,262
    
    
    $
    485,228
    
    
    $
    566,444Operating expenses
    
    
    109,230
    
    
    
    123,358
    
    
    
    326,187
    
    
    
    388,699Impairment of property and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,882Depreciation and amortization
    
    
    46,154
    
    
    
    51,802
    
    
    
    144,758
    
    
    
    151,739General and administrative
    
    
    14,512
    
    
    
    16,814
    
    
    
    41,613
    
    
    
    48,556Operating loss
    
    
    (1,412
    )
    
    
    (32,712
    )
    
    
    (27,330
    )
    
    
    (49,432
    )Interest expense
    
    
    (21,384
    )
    
    
    (24,131
    )
    
    
    (64,382
    )
    
    
    (54,481
    )Expense of credit agreement fees
    
    
    
    
    
    
    (15,073
    )
    
    
    
    
    
    
    (15,073
    )Gain on early retirement of debt, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,747Other, net
    
    
    (19
    )
    
    
    70
    
    
    
    3,150
    
    
    
    2,760Loss before income taxes
    
    
    (22,815
    )
    
    
    (71,846
    )
    
    
    (88,562
    )
    
    
    (102,479
    )Income tax benefit
    
    
    7,754
    
    
    
    24,876
    
    
    
    38,561
    
    
    
    39,211Loss from continuing operations
    
    
    (15,061
    )
    
    
    (46,970
    )
    
    
    (50,001
    )
    
    
    (63,268
    )Loss from discontinued operation, net of taxes
    
    
    
    
    
    
    (1,290
    )
    
    
    
    
    
    
    (1,965
    )Net loss
    
    $
    (15,061
    )
    
    $
    (48,260
    )
    
    $
    (50,001
    )
    
    $
    (65,233
    )
  Three Months Ended September 30, 2010AverageAverage
    
    
    OperatingOperating
    
    
    Available
    
    
    
    
    
    
    Revenue
    
    
    ExpenseDays
    
    
    Days
    
    
    Utilization (1)
    
    
    per Day (2)
    
    
    per Day (3)Domestic Offshore
    
    
    637
    
    
    
    1,012
    
    
    
    62.9
    %
    
    $
    39,338
    
    
    $
    38,242International Offshore
    
    
    538
    
    
    
    828
    
    
    
    65.0
    %
    
    
    138,344
    
    
    
    37,518Inland
    
    
    269
    
    
    
    276
    
    
    
    97.5
    %
    
    
    21,357
    
    
    
    29,996Domestic Liftboats
    
    
    3,203
    
    
    
    3,496
    
    
    
    91.6
    %
    
    
    7,684
    
    
    
    3,236International Liftboats
    
    
    1,198
    
    
    
    2,116
    
    
    
    56.6
    %
    
    
    23,176
    
    
    
    6,121
 Three Months Ended September 30, 2009AverageAverage
    
    
    OperatingOperating
    
    
    Available
    
    
    
    
    
    
    Revenue
    
    
    ExpenseDays
    
    
    Days
    
    
    Utilization (1)
    
    
    per Day (2)
    
    
    per Day (3)Domestic Offshore
    
    
    424
    
    
    
    1,012
    
    
    
    41.9
    %
    
    $
    44,715
    
    
    $
    36,043International Offshore
    
    
    768
    
    
    
    1,006
    
    
    
    76.3
    %
    
    
    117,241
    
    
    
    43,945Inland
    
    
    116
    
    
    
    276
    
    
    
    42.0
    %
    
    
    21,009
    
    
    
    26,964Domestic Liftboats
    
    
    2,466
    
    
    
    3,596
    
    
    
    68.6
    %
    
    
    7,813
    
    
    
    3,539International Liftboats
    
    
    1,149
    
    
    
    1,840
    
    
    
    62.4
    %
    
    
    19,426
    
    
    
    7,857
 25




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##### Table of Contents



Nine Months Ended September 30, 2010AverageAverage
    
    
    OperatingOperating
    
    
    Available
    
    
    
    
    
    
    Revenue
    
    
    ExpenseDays
    
    
    Days
    
    
    Utilization (1)
    
    
    per Day (2)
    
    
    per Day (3)Domestic Offshore
    
    
    2,426
    
    
    
    3,074
    
    
    
    78.9
    %
    
    $
    36,341
    
    
    $
    37,437International Offshore
    
    
    1,598
    
    
    
    2,516
    
    
    
    63.5
    %
    
    
    138,526
    
    
    
    39,107Inland
    
    
    759
    
    
    
    819
    
    
    
    92.7
    %
    
    
    20,653
    
    
    
    24,858Domestic Liftboats
    
    
    7,433
    
    
    
    10,374
    
    
    
    71.7
    %
    
    
    7,258
    
    
    
    3,035International Liftboats
    
    
    3,596
    
    
    
    6,430
    
    
    
    55.9
    %
    
    
    22,501
    
    
    
    6,580
 Nine Months Ended September 30, 2009AverageAverage
    
    
    OperatingOperating
    
    
    Available
    
    
    
    
    
    
    Revenue
    
    
    ExpenseDays
    
    
    Days
    
    
    Utilization (1)
    
    
    per Day (2)
    
    
    per Day (3)Domestic Offshore
    
    
    1,994
    
    
    
    3,532
    
    
    
    56.5
    %
    
    $
    57,728
    
    
    $
    37,269International Offshore
    
    
    2,351
    
    
    
    2,763
    
    
    
    85.1
    %
    
    
    125,585
    
    
    
    46,138Inland
    
    
    414
    
    
    
    1,302
    
    
    
    31.8
    %
    
    
    37,309
    
    
    
    28,082Domestic Liftboats
    
    
    7,349
    
    
    
    11,308
    
    
    
    65.0
    %
    
    
    8,268
    
    
    
    3,473International Liftboats
    
    
    3,072
    
    
    
    5,279
    
    
    
    58.2
    %
    
    
    20,088
    
    
    
    6,001
 (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 $11.0 million related to amortization of deferred
mobilization revenue for the three and nine months ended September 30, 2010, respectively,
and $4.3 million and $12.3 million for the three and nine months ended September 30, 2009,
respectively. Included in International Liftboats revenue is a total of $0.6 million
related to amortization of deferred mobilization revenue for the nine months ended
September 30, 2010 and $0.1 million and $0.2 million for the three and nine months ended
September 30, 2009, respectively. There was no such revenue in the three months ended
September 30, 2010 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 $0.2 million and $0.6 million related to amortization of
deferred mobilization expenses for the three and nine months ended September 30, 2010,
respectively, and $1.3 million and $2.7 million for the three and nine months ended
September 30, 2009, respectively. Included in International Liftboats operating expense is
a total of $1.2 million related to amortization of deferred mobilization expenses for the
nine months ended September 30, 2010. There was no such operating expense for the three
months ended September 30, 2010, nor the three and nine months ended September 30, 2009 for
International Liftboats.
 For the Three Months Ended September 30, 2010 and 2009
 Revenues
 Consolidated.
 26




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##### Table of Contents



Domestic Offshore .
 International Offshore . Hercules 185 Hercules 170 Hercules 205 Hercules 206 Hercules 260
 Inland.
 Domestic Liftboats.
 International Liftboats.
 Delta Towing.
 Operating Expenses
 Consolidated .
 Domestic Offshore . Hercules 205 Hercules 255
 International Offshore. Hercules 170 Hercules 205 Hercules 206 Hercules 185
 Inland.
 27




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##### Table of Contents



Domestic Liftboats.
 International Liftboats.
 Delta Towing.
 Depreciation and Amortization
  General and Administrative Expenses
  Interest Expense
  Expense of Credit Agreement Fees
  Income Tax Benefit
  For the Nine Months Ended September 30, 2010 and 2009
 Revenues
 Consolidated.
 28




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##### Table of Contents



Domestic Offshore .
 International Offshore . Hercules 156 Hercules
170 Hercules 205 Hercules 206 Hercules 185 Hercules 260
 Inland.
 Domestic Liftboats.
 International Liftboats.
 Delta Towing.
 Operating Expenses
 Consolidated .
 Domestic Offshore . Hercules 191 Hercules 255
 International Offshore. Hercules 156 Hercules 170 Hercules 205 Hercules 206
 29




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##### Table of Contents



Inland.
 Domestic Liftboats.
 International Liftboats. Whale Shark
 Delta Towing.
 Impairment of Property and Equipment
 Hercules 110
 Depreciation and Amortization
  General and Administrative Expenses
  Interest Expense
  Expense of Credit Agreement Fees
  30




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##### Table of Contents



Gain on Early Retirement of Debt, Net
  Income Tax Benefit
  Non-GAAP Financial Measures
 General Rules Regarding Disclosure of Non-GAAP Financial Measures
 31




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##### Table of Contents



For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Operating Loss
    
    $
    (1,412
    )
    
    $
    (32,712
    )
    
    $
    (27,330
    )
    
    $
    (49,432
    )Adjustments:Property and equipment impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,882Total adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,882Adjusted Operating Loss
    
    $
    (1,412
    )
    
    $
    (32,712
    )
    
    $
    (27,330
    )
    
    $
    (22,550
    )Loss from Continuing Operations
    
    $
    (15,061
    )
    
    $
    (46,970
    )
    
    $
    (50,001
    )
    
    $
    (63,268
    )Adjustments:Property and equipment impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,882Gain on early retirement of debt, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,747
    )Expense of credit agreement fees
    
    
    
    
    
    
    15,073
    
    
    
    
    
    
    
    15,073Tax impact of adjustments
    
    
    
    
    
    
    (5,276
    )
    
    
    
    
    
    
    (14,242
    )Total adjustments
    
    
    
    
    
    
    9,797
    
    
    
    
    
    
    
    13,966Adjusted Loss from Continuing Operations
    
    $
    (15,061
    )
    
    $
    (37,173
    )
    
    $
    (50,001
    )
    
    $
    (49,302
    )Diluted Loss per Share from Continuing Operations
    
    $
    (0.13
    )
    
    $
    (0.48
    )
    
    $
    (0.44
    )
    
    $
    (0.69
    )Adjustments:Property and equipment impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.29Gain on early retirement of debt, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.15
    )Expense of credit agreement fees
    
    
    
    
    
    
    0.16
    
    
    
    
    
    
    
    0.17Tax impact of adjustments
    
    
    
    
    
    
    (0.06
    )
    
    
    
    
    
    
    (0.16
    )Total adjustments
    
    
    
    
    
    
    0.10
    
    
    
    
    
    
    
    0.15Adjusted Diluted Loss per Share from Continuing
Operations
    
    $
    (0.13
    )
    
    $
    (0.38
    )
    
    $
    (0.44
    )
    
    $
    (0.54
    )Loss from Continuing Operations
    
    $
    (15,061
    )
    
    $
    (46,970
    )
    
    $
    (50,001
    )
    
    $
    (63,268
    )Interest expense
    
    
    21,384
    
    
    
    24,131
    
    
    
    64,382
    
    
    
    54,481Income tax benefit
    
    
    (7,754
    )
    
    
    (24,876
    )
    
    
    (38,561
    )
    
    
    (39,211
    )Depreciation and amortization
    
    
    46,154
    
    
    
    51,802
    
    
    
    144,758
    
    
    
    151,739EBITDA
    
    
    44,723
    
    
    
    4,087
    
    
    
    120,578
    
    
    
    103,741Adjustments:Property and equipment impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,882Gain on early retirement of debt, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,747
    )Expense of credit agreement fees
    
    
    
    
    
    
    15,073
    
    
    
    
    
    
    
    15,073Total adjustments
    
    
    
    
    
    
    15,073
    
    
    
    
    
    
    
    28,208Adjusted EBITDA
    
    $
    44,723
    
    
    $
    19,160
    
    
    $
    120,578
    
    
    $
    131,949
 CRITICAL ACCOUNTING POLICIES
   32




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##### Table of Contents



OUTLOOK
 Offshore
       33




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Inland
   Liftboats
   34




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Sources and Uses of Cash
  Net Cash Provided by Operating Activities
    
    $
    19.7Net Cash Provided by (Used in) Investing Activities:Additions of Property and Equipment
    
    
    (16.4
    )Deferred Drydocking Expenditures
    
    
    (11.0
    )Proceeds from Sale of Assets, Net
    
    
    15.8Increase in Restricted Cash
    
    
    (9.5
    )Total
    
    
    (21.1
    )Net Cash Provided by (Used in) Financing Activities:Long-term Debt Repayments
    
    
    (5.2
    )Excess Tax Benefits from Stock-Based Arrangements
    
    
    0.4Total
    
    
    (4.8
    )Net Decrease in Cash and Cash Equivalents
    
    $
    (6.2
    )
 Sources of Liquidity and Financing Arrangements
  35




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##### Table of Contents



Cash Requirements and Contractual Obligations
 Debt
     
    
    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 September 30, 2010, our total leverage ratio was 6.67 to 1.00.
 
    
    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 September 30, 2010, as calculated pursuant to our Credit
Agreement, our total liquidity was $298.6 million.
 36




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##### 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 adjusted by an amount not to exceed $110.0 million during
the term of the credit facility to be deducted from capital expenditures, all as
defined in the Credit Agreement. As of September 30, 2010, our fixed charge coverage
ratio was 1.26 to 1.00.
 
    
    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.
    37




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##### 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.
   38




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##### Table of Contents



Year
    
    Optional Redemption Price2013
    
    105.2500%2014
    
    102.6250%2015
    
    101.3125%2016 and thereafter
    
    100.0000%
       September 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value(in millions)Term Loan Facility, due July 2013
    
    $
    477.6
    
    
    $
    413.1
    
    
    $
    482.9
    
    
    $
    468.410.5% Senior Secured Notes, due October 2017
    
    
    292.8
    
    
    
    242.6
    
    
    
    292.3
    
    
    
    315.83.375% Convertible Senior Notes, due June 2038
    
    
    85.6
    
    
    
    66.7
    
    
    
    83.1
    
    
    
    76.87.375% Senior Notes, due April 2018
    
    
    3.5
    
    
    
    2.3
    
    
    
    3.5
    
    
    
    3.0
  39




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##### Table of Contents



Common Stock Offering
  Capital Expenditures
     40




---



##### Table of Contents



Off-Balance Sheet Arrangements
 Guarantees
  Bank Guarantees, Letters of Credit, and Surety Bonds
  Contractual Obligations
  
    
    Settled $5.5 million of insurance notes payable outstanding at December 31, 2009;
    
    Financed $25.9 million related to the renewal of certain of our insurance policies; and
    
    Settled $18.6 million of certain tax liabilities outstanding at December 31, 2009
related to Mexico for $11.2 million.
  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, at current dayrates when such contracts expire;
    
    demand for our rigs and our liftboats;
    
    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;
 41




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##### Table of Contents




    
    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 stacked;
    
    liabilities and restrictions under coastwise and other 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, our earnings, 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 for and supply of 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 well 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;
 42




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##### Table of Contents




    
    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
  Interest Rate Exposure
     September 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value(in millions)Term Loan Facility, due July 2013
    
    $
    477.6
    
    
    $
    413.1
    
    
    $
    482.9
    
    
    $
    468.410.5% Senior Secured Notes, due October 2017
    
    
    292.8
    
    
    
    242.6
    
    
    
    292.3
    
    
    
    315.83.375% Convertible Senior Notes, due June 2038
    
    
    85.6
    
    
    
    66.7
    
    
    
    83.1
    
    
    
    76.87.375% Senior Notes, due April 2018
    
    
    3.5
    
    
    
    2.3
    
    
    
    3.5
    
    
    
    3.0
 Interest Rate Swaps and Derivatives
  43




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Liquidity
and Capital Resources
   
 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 well blowout incident could
prevent or cause delays for our customers in obtaining approval to conduct drilling operations 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.
   44




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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)July 1-31, 2010
    
    
    2,647
    
    
    $
    2.56
    
    
    
    N/A
    
    
    
    N/AAugust 1-31, 2010
    
    
    1,401
    
    
    
    2.26
    
    
    
    N/A
    
    
    
    N/ASeptember 1-30, 2010
    
    
    493
    
    
    
    2.64
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    4,541
    
    
    
    2.48
    
    
    
    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
 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 45




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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. Rynd

John T. RyndChief Executive Officer and President(Principal Executive Officer)By:
    
    /s/ Stephen M. Butz

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

Troy L. CarsonChief Accounting Officer(Principal Accounting Officer)
  46