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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 333-69826
HORNBECK OFFSHORE SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 72-1375844
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
414 NORTH CAUSEWAY BLVD
MANDEVILLE, LA 70448
(Address of Principal Executive Offices) (Zip Code)
(985) 727-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The total number of shares of common stock, par value $.01 per share,
outstanding as of August 11, 2003 was 36,317,036.
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION.................................................... 1
Item 1 - Financial Statements............................................... 1
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 10
General.............................................................. 10
Critical Accounting Policies......................................... 11
Results of Operations................................................ 11
Three Months Ended June 30, 2003 Compared to Three Months Ended
June 30, 2002...................................................... 13
Six Months Ended June 30, 2003 Compared to Six Months Ended June
30, 2002........................................................... 14
Liquidity and Capital Resources...................................... 16
Contractual Obligations and Commercial Commitments................... 17
Inflation............................................................ 18
Forward Looking Statements........................................... 18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk........ 19
Item 4 - Controls and Procedures........................................... 19
PART II - OTHER INFORMATION...................................................... 20
Item 1 - Legal Proceedings................................................. 20
Item 2 - Changes in Securities and Use of Proceeds......................... 20
Item 3 - Defaults Upon Senior Securities................................... 20
Item 4 - Submission of Matters to a Vote of Security Holders............... 20
Item 5 - Other Information................................................. 21
Item 6 - Exhibits and Reports on Form 8-K.................................. 21
SIGNATURE........................................................................ 24
i
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2003 2002
----------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 14,747 $ 22,228
Accounts receivable, net of allowance for doubtful
accounts of $440 and $469, respectively 15,253 14,616
Stock subscriptions receivable 10,975 --
Prepaid insurance 1,644 569
Other current assets 1,558 1,877
-------- --------
Total current assets 44,177 39,290
Property, plant, and equipment, net 297,965 226,232
Goodwill 2,628 2,628
Deferred charges, net 11,295 10,113
Other assets 27 27
-------- --------
Total assets $356,092 $278,290
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,589 $ 5,350
Accrued interest 7,786 7,747
Accrued payroll and benefits 2,353 3,740
Other accrued liabilities 237 188
-------- --------
Total current liabilities 16,965 17,025
Revolving credit facility 39,000 --
Long-term debt, net of original issue discount of
$2,514 and $2,694, respectively 172,486 172,306
Deferred tax liabilities, net 20,972 16,709
Other long-term liabilities 313 374
-------- --------
Total liabilities 249,736 206,414
Stockholders' equity:
Preferred stock: $0.01 par value; 5,000 shares
authorized, no shares issued and outstanding -- --
Common stock: $0.01 par value; 100,000 shares
authorized, 35,812 shares and 30,305 issued and
outstanding, respectively 358 303
Additional paid-in capital 88,342 60,880
Retained earnings 17,656 10,693
-------- --------
Total stockholders' equity 106,356 71,876
-------- --------
Total liabilities and stockholders' equity $356,092 $278,290
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
------------------- ---------------------
(UNAUDITED) (UNAUDITED)
Revenue $ 26,010 $ 21,315 $ 53,357 $ 44,058
Costs and expenses:
Operating expenses 14,571 10,875 28,666 21,448
General and administrative expenses 2,819 2,205 5,713 5,053
-------- -------- -------- --------
17,390 13,080 34,379 26,501
-------- -------- -------- --------
Operating income 8,620 8,235 18,978 17,557
Interest expense (4,357) (3,855) (8,574) (7,796)
Interest income 43 202 115 448
Other income, net -- -- 707 --
-------- -------- -------- --------
Income before income taxes 4,306 4,582 11,226 10,209
Income tax expense (1,633) (1,741) (4,263) (3,879)
-------- -------- -------- --------
Net income $ 2,673 $ 2,841 $ 6,963 $ 6,330
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30,
2003 2002
---------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,963 $ 6,330
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 6,358 4,551
Amortization 1,259 805
Provision for bad debts (15) 322
Deferred income taxes 4,263 3,815
Amortization of financing costs 744 764
Gain on sale of asset (713) --
Changes in operating assets and liabilities:
Accounts receivable (622) 941
Prepaid insurance and other current assets (756) 138
Deferred charges and other assets (2,941) (1,759)
Accounts payable 247 1,015
Accrued interest 39 389
Accrued and other liabilities (1,421) (2,039)
-------- ------
Net cash provided by operating activities 13,405 15,272
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of offshore supply vessels (22,445) (26,637)
Purchase of offshore supply vessels (39,000) --
Purchase of tank barge (7,400) --
Proceeds from the sale of vessel 1,650 --
Capital expenditures (4,181) (4,841)
-------- ------
Net cash used in investing activities (71,376) (31,478)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under debt agreements 1,545 54
Payments on borrowings under debt agreements (533) (434)
Net proceeds from borrowings under revolving credit
facility 39,000 --
Repurchase of common stock -- (50)
Deferred financing costs (62) (159)
Proceeds from common stock issued 10,540 413
-------- ------
Net cash provided by (used in) financing activities 50,490 (176)
-------- ------
Net decrease in cash and cash equivalents (7,481) (16,382)
Cash and cash equivalents at beginning of period 22,228 53,203
------- -------
Cash and cash equivalents at end of period $ 14,747 $ 36,821
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
Interest paid $ 9,440 $ 9,658
======== ========
Income taxes paid $ -- $ --
======== ========
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock to partially fund the purchase
of offshore supply vessels $ 6,000 $ --
======== ========
Stock subscriptions receivable $ 10,975 $ --
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS AND SHARES IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements do not
include certain information and footnote disclosures required by accounting
principles generally accepted in the United States. The interim financial
statements and notes are presented as permitted by instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, all adjustments
necessary for a fair presentation of the interim financial statements have been
included and consist only of normal recurring items. The financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Annual Report on Form 10-K for the year ended December 31, 2002
of Hornbeck Offshore Services, Inc. (together with its subsidiaries, the
"Company"). The results of operations for the three month and six month periods
ended June 30, 2003 and 2002, respectively, are not necessarily indicative of
the results that may be expected for the year ended December 31, 2003. Certain
amounts reported in prior periods have been reclassified to conform to the 2003
presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
FIN 46, "Consolidation of Variable Interest Entities," which clarifies the
application of Accounting Research Bulletin ("ARB") 51, "Consolidated Financial
Statements," to certain entities (called variable interest entities) in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The disclosure requirements of this Interpretation are effective for all
financial statements issued after January 31, 2003. The consolidation
requirements apply to all variable interest entities created after January 31,
2003. In addition, public companies must apply the consolidation requirements to
variable interest entities that existed prior to February 1, 2003 and remain in
existence as of the beginning of annual or interim periods beginning after June
15, 2003. FIN 46 did not have a material impact on the Company's financial
position or results of operations as of and for the period ended June 30, 2003.
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, to clarify under what circumstances a contract with an initial net
investment meets the characteristics of a derivative, to clarify when a
derivative contains a financing component, to amend the definition of an
"underlying" to conform it to language in FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and to amend certain other
existing pronouncements. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, and is to be applied prospectively. Implementation
of SFAS No. 149 did not have a material effect on the Company's financial
position or results of operations as of and for the period ended June 30, 2003,
as it did not have any derivative instruments or hedging arrangements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 requires that certain financial instruments issued in the form of shares
that are mandatorily redeemable, as well as certain other financial instruments,
be classified as liabilities in the financial statements. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective beginning with the Company's second quarter of 2004.
The provisions of this statement did not have a material impact on the Company's
financial position or results of operations as of and for the period ended June
30, 2003.
3. ACQUISITION OF OFFSHORE SUPPLY VESSELS
On June 26, 2003, the Company acquired five 220-foot deepwater offshore
supply vessels and their related business from Candy Marine Investment
Corporation, an affiliate of Candy Fleet Corporation, (collectively, "Candy
Fleet") for $45.0 million, comprised of $39.0 million in cash and of $6.0
million of
4
common stock, for the purpose of diversifying its offshore supply vessel fleet
and expanding its service offerings. Candy Fleet is a privately held marine
vessel operator in the Gulf of Mexico. The Company funded the cash portion of
the purchase price with a combination of borrowings under the Company's
Revolving Credit Facility as discussed in Note 5, and with part of the cash
proceeds generated by the private equity offering discussed in Note 4. The new
vessel names are the HOS Explorer, HOS Express, HOS Pioneer, HOS Trader, and HOS
Voyager.
The purchase method was used to account for the acquisition of the five
deepwater offshore supply vessels from Candy Fleet. The purchase price
allocation is currently being evaluated and the final calculation is expected to
be completed no later than June 26, 2004. There were no intangible assets or
goodwill recorded as a result of the acquisition. As of June 26, 2003, the
purchase price was allocated to the acquired assets based on the estimated fair
values as follows (in thousands):
Property, plant and equipment... $ 44,957
Inventory....................... 43
--------
Purchase price.................. $ 45,000
========
4. PRIVATE OFFERING OF COMMON STOCK AND RIGHTS DIVIDEND
In May 2003, the Company commenced a private offering of its common stock
to accredited investors to raise gross proceeds of $30.0 million, including $6
million of common stock, or 1.2 million shares, issued to Candy Fleet as partial
consideration for the June 26, 2003 acquisition of five deepwater offshore
supply vessels. The Company received payments or irrevocable, unconditional and
binding stock subscriptions for 4.3 million shares resulting in $10.5 million of
cash proceeds and subscriptions receivable of approximately $11.0 million as of
June 30, 2003. All stock subscriptions receivables recorded during June 2003
were collected in full during July 2003. The private offering was completed in
July 2003 with $2.5 million of additional proceeds received from July 2003
subscriptions for 0.5 million shares.
On June 18, 2003, the Board of Directors declared a dividend on each
outstanding share of common stock of one right to purchase Series A Junior
Participating Preferred Stock, par value $.01 per share ("the Right"). The
dividend was payable to shareholders of record on June 18, 2003.
5. LONG-TERM DEBT
On July 24, 2001, the Company issued $175,000 in principal amount of 10
5/8% Senior Notes (Senior Notes). The Company realized net proceeds of
approximately $165,000, a substantial portion of which was used to repay and
fully extinguish all of the then existing credit facilities. The Senior Notes
mature on August 1, 2008 and require semi-annual interest payments at an annual
rate of 10 5/8% on February 1 and August 1 of each year until maturity, with the
first payment due on February 1, 2002. The effective interest rate on the Senior
Notes is 11.18%. No principal payments are due until maturity. The Senior Notes
are unsecured senior obligations and rank equally in right of payment with other
existing and future senior indebtedness and are senior in right of payment to
any subordinated indebtedness incurred by the Company in the future. The Senior
Notes are guaranteed by all of the Company's subsidiaries. The Company may, at
its option, redeem all or part of the Senior Notes from time to time at
specified redemption prices and subject to certain conditions required by the
Indenture governing the Senior Notes ("the Indenture"). The Company is permitted
under the terms of the Indenture to incur additional indebtedness, provided that
certain financial conditions set forth in the Indenture are satisfied by the
Company.
Effective December 31, 2001, the Company entered into a senior secured
revolving line of credit for $50.0 million ("Revolving Credit Facility").
Borrowings under the Revolving Credit Facility with three banks accrue interest,
at our option, at either (i) the prime rate announced by Citibank, N.A. in New
York, plus a margin of 0% to 1%, or (ii) the London Interbank Offered Rate, plus
a margin of 1.75% to 3.0%. The Company is also required to pay a commitment fee
on available but unused amounts ranging from 0.25% to 0.375%. The interest rate
margin and commitment fee are based on our leverage ratio, as
5
defined in the Revolving Credit Facility. The Company can use the amounts it
borrows under the Revolving Credit Facility for working capital purposes and,
under certain circumstances, for acquisitions and vessel construction. The
Revolving Credit Facility expires on December 31, 2004.
On June 26, 2003, concurrent with the acquisition of the five deepwater
offshore supply vessels from Candy Fleet, the Company amended the Revolving
Credit Facility to increase its borrowing base from $25 million to $50 million.
In connection with this amendment, the Company pledged an additional two
offshore supply vessels. As of June 30, 2003, six offshore supply vessels and
four ocean-going tugs collateralize the Revolving Credit Facility with an
aggregate orderly liquidation value of at least $100.0 million. As of June 30,
2003, the Company had $39.0 million outstanding under its Revolving Credit
Facility, which amount was drawn to fund the acquisition of a tank barge and a
portion of the acquisition cost of five deepwater offshore supply vessels, and
had $11.0 million of additional credit immediately available under the Revolving
Credit Facility.
The Revolving Credit Facility and the Indenture impose operating and
financial restrictions on the Company. Such restrictions affect, and in many
cases limit or prohibit, among other things, the Company's ability to incur
additional indebtedness, make capital expenditures, redeem equity, create liens,
sell assets and make dividends or other restricted payments.
Interest expense excludes capitalized interest primarily related to new
construction of deepwater offshore supply vessels of $0.8 million in the second
quarter of 2003 and $1.2 million in the second quarter of 2002.
6. STOCK OPTION PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation," established
financial accounting and reporting standards for stock-based compensation plans.
The Company's plan includes all arrangements by which employees and directors
receive shares of stock or other equity instruments of the Company, or the
Company incurs liabilities to employees or directors in amounts based on the
price of the stock. SFAS No. 123 defines a fair-value-based method of accounting
for stock-based compensation. However, SFAS No. 123 also allows an entity to
continue to measure stock-based compensation cost using the intrinsic value
method of APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25). Entities electing to retain the accounting prescribed in APB No. 25
must make pro forma disclosures of net income assuming dilution as if the
fair-value-based method of accounting defined in SFAS No. 123 had been applied.
The Company retained the provisions of APB No. 25 for expense recognition
purposes. Under APB No. 25, when the exercise price of the Company's stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense in recognized.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- An Amendment of SFAS
No. 123." This pronouncement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. Under the fair value based method, compensation cost for
stock options is measured when options are issued. In addition, SFAS No.148
amends the disclosure requirements of SFAS No. 123 to require more prominent and
frequent disclosures in financial statements for the effects of stock-based
compensation.
The transition guidance and annual disclosure provisions of SFAS No.148
were effective for fiscal years ending after December 15, 2002. As of December
31, 2002, the Company adopted SFAS No. 148 through continued application of the
intrinsic value method of accounting under APB No. 25, and enhanced financial
statement disclosures for the effect on net income had the fair value provisions
of SFAS No. 148 been applied.
6
Had compensation cost for the Company's stock options been determined
based on the fair value at the grant date consistent with the method under SFAS
No. 123, the Company's income available to common stockholders for the
six-months ended June 30, 2003 and 2002 would have been as indicated below:
SIX MONTHS
ENDED JUNE 30,
2003 2002
---------------
INCOME AVAILABLE TO COMMON STOCKHOLDERS:
As reported $6,963 $6,330
Deduct: stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effect 194 193
------ ------
Pro forma $6,769 $6,137
====== ======
7. COMMITMENTS AND CONTINGENCIES
In April 2002, the Company's Board of Directors approved the third
newbuild program for the Company to build eight deepwater offshore supply
vessels. On May 1, 2002, following a competitive bidding process, a definitive
agreement was signed with LEEVAC Industries, LLC for the construction of the
first four vessels of this program, each of which has been designed as a 240'
ED-class vessel. LEEVAC Industries, LLC is affiliated with one of the Company's
directors who is also the former Chairman of the Board and former Chief
Executive Officer of the Company. The Company received a favorable fairness
opinion from an independent appraiser with respect to the terms of the contract.
The contract provides for the delivery of all four vessels during 2003.
Aggregate construction costs for the first four vessels, before allocation of
construction period interest, are expected to be approximately $53.0 million,
including $18.4 million that was incurred with respect to such vessels during
2002. The Company took delivery of the HOS Bluewater on March 17, 2003 and the
HOS Gemstone on June 19, 2003. As of June 30, 2003, the amount expected to be
expended to complete construction of the two remaining vessels was approximately
$12.2 million, which becomes due at various dates during the remainder of 2003.
The Company is obligated under the terms of the foregoing contract to remit
funds to the shipyard based on vessel construction milestones, the timing of
which are subject to change during vessel construction. Construction bids
submitted by several shipyards for the last four vessels of this newbuild
program are currently being evaluated. Demand for deepwater offshore supply
vessels in the Gulf of Mexico and foreign markets will be a key determinant of
when the four additional offshore supply vessels will be constructed.
In the normal course of business, the Company becomes involved in various
claims and legal proceedings in which monetary damages are sought. It is
management's opinion that the Company's liability, if any, under existing claims
or proceedings would not materially affect its financial position or results of
operations.
8. SEGMENT INFORMATION
The Company provides marine transportation services through two business
segments. The Company operates newly constructed deepwater offshore supply
vessels primarily in the Gulf of Mexico through its offshore supply vessel
segment. The offshore supply vessels principally support offshore drilling and
production operations in the deepwater regions of the U.S. Gulf of Mexico,
Trinidad & Tobago and in Mexico, by transporting cargo to offshore drilling rigs
and production facilities and providing support for specialty services. The tug
and tank barge segment operates ocean-going tugs and tank barges in the
northeastern United States and in Puerto Rico. The ocean-going tugs and tank
barges provide coastwise transportation of refined and bunker grade petroleum
products from one port to another. The following table shows reportable segment
information prepared on the same basis as the Company's consolidated financial
statements.
7
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
-------------------------------------
OPERATING REVENUE:
Offshore supply vessels $14,596 $10,317 $27,767 $20,093
Tugs and tank barges 11,414 10,998 25,590 23,965
------- ------- ------- -------
Total $26,010 $21,315 $53,357 $44,058
======= ======= ======= =======
OPERATING EXPENSES:
Offshore supply vessels $ 7,073 $ 4,526 $12,990 $ 8,230
Tugs and tank barges 7,498 6,349 15,676 13,218
------- ------- ------- -------
Total $14,571 $10,875 $28,666 $21,448
======= ======= ======= =======
GENERAL AND ADMINISTRATIVE
EXPENSES:
Offshore supply vessels $ 1,326 $ 845 $ 2,530 $ 1,896
Tugs and tank barges 1,493 1,360 3,183 3,157
------- ------- ------- -------
Total $ 2,819 $ 2,205 $ 5,713 $ 5,053
======= ======= ======= =======
OPERATING INCOME:
Offshore supply vessels $ 6,197 $ 4,946 $12,247 $ 9,966
Tugs and tank barges 2,423 3,289 6,731 7,591
------- ------- ------- -------
Total $ 8,620 $ 8,235 $18,978 $17,557
======= ======= ======= =======
CAPITAL EXPENDITURES:
Offshore supply vessels $56,325 $17,568 $70,500 $28,567
Tugs and tank barges 236 1,977 8,081 2,679
Corporate 379 156 446 232
------- ------- ------- -------
Total $56,940 $19,701 $79,027 $31,478
======= ======= ======= =======
DEPRECIATION AND AMORTIZATION:
Offshore supply vessels $ 2,066 $ 1,361 $ 3,926 $ 2,477
Tugs and tank barges 1,930 1,453 3,691 2,879
------- ------- ------- -------
Total $ 3,996 $ 2,814 $ 7,617 $ 5,356
======= ======= ======= =======
AS OF AS OF
JUNE 30, DECEMBER 31,
2003 2002
---------------------
IDENTIFIABLE ASSETS:
Offshore supply vessels $257,967 $196,068
Tugs and tank barges 87,649 74,036
Corporate 10,476 8,186
-------- --------
Total $356,092 $278,290
======== ========
LONG-LIVED ASSETS:
Offshore supply vessels $241,582 $174,676
Tugs and tank barges 55,317 50,797
Corporate 1,066 759
-------- --------
Total $297,965 $226,232
======== ========
8
9. SUBSEQUENT EVENT
On August 6, 2003, the Company completed the acquisition of an additional
220-foot deepwater offshore supply vessel from Candy Fleet. The closing of the
transaction was effected after satisfying certain conditions precedent to
closing including, among other things, receipt during July 2003 of $13.5 million
in proceeds relating to the previously announced $30.0 million private equity
offering and the satisfactory completion of a drydocking and survey of the
vessel in early August. The purchase price of $9.0 million was negotiated by the
parties on an arms-length basis. The Company plans to continue operating the
acquired vessel, which was renamed the HOS Mariner, in the deepwater Gulf of
Mexico. In connection with the acquisition, the Company was also granted options
to purchase three 180-ft offshore supply vessels from Candy Fleet for an
aggregate exercise price of $4.5 million. These options expire on August 6,
2004.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations should be read together with our unaudited
consolidated financial statements and notes to unaudited consolidated financial
statements and our Annual Report on Form 10-K for the year ended December 31,
2002. In this Form 10-Q, "company," "we," "us," and "our" refer to Hornbeck
Offshore Services, Inc. and its subsidiaries, except as otherwise indicated.
GENERAL
We own and operate deepwater offshore supply vessels in the U.S. Gulf of
Mexico, Trinidad & Tobago and in Mexico, and ocean-going tugs and tank barges in
the northeastern United States, primarily New York Harbor, and in Puerto Rico.
We charter our offshore supply vessels on a dayrate basis, under which the
customer pays us a specified dollar amount for each day during the term of the
contract, pursuant to either fixed time charters or spot market charters.
All of our offshore supply vessels operate under time charters, including
five that are chartered under contracts with expiration dates ranging from June
2004 through November 2006. Our long-term contracts for use of our offshore
supply vessels are consistent with those used in the industry and are either
fixed for a term of months or years or are tied to the duration of a long-term
contract for a drilling rig for which the vessel provides services. These
contracts generally contain, among others, provisions governing insurance,
reciprocal indemnifications, performance requirements and, in certain instances,
dayrate escalation terms and renewal options.
While offshore supply vessels service existing oil and gas production
platforms, as well as exploration and development activities, incremental
offshore supply vessel demand depends primarily upon the level of drilling
activity, which can be influenced by a number of factors, including oil and
natural gas prices and the drilling budgets of exploration and production
companies. As a result, utilization and dayrates have historically been tied to
oil and natural gas prices and drilling activity, although the greater
investment of time and expense associated with deepwater production and the
consequent long-term nature of deepwater offshore supply vessel contracts have
diminished the significance of this relationship.
Although commodity prices remained strong during the second quarter of
2003, we believe that an uncertain economic environment has contributed to the
operators' unwillingness to commit significant capital expenditures to new
exploration programs. Our deepwater offshore supply vessel market niche
continued to show weakness as the deepwater drilling rig count in the Gulf of
Mexico, which was at 29 rigs during the first quarter of 2003 remained
relatively constant at 27 to 29 rigs for the second quarter of 2003. We believe
that if the deepwater drilling rig count in the Gulf of Mexico remains flat, and
domestic deepwater offshore supply vessels do not obtain charters outside the
U.S. Gulf of Mexico, deepwater offshore supply vessel rates will continue to be
negatively impacted as another 12 deepwater offshore supply vessels are expected
to be delivered to the U.S. Gulf of Mexico by December 31, 2003. The current
U.S. deepwater offshore supply vessel market appears to be oversupplied by
approximately 10 vessels. However, we have seen a number of deepwater oil and
gas properties change ownership and noted that several exploration and
production companies have recently announced upward revisions to their
exploration budgets for the remainder of 2003. In addition, increased activity
in Mexico through the contracting of jack-up and semi-submersible drilling rigs
has increased the demand for deepwater offshore supply vessels, all of which to
date have been contracted from U.S. operators. We anticipate that there will be
additional new generation offshore supply vessels working in Mexico in the near
term as more contracted drilling rigs are expected to be delivered during 2003.
Generally, we operate an ocean-going tug and tank barge together as a
"tow" to transport petroleum products between U.S. ports and along the coast of
Puerto Rico. We operate our tugs and tank barges under fixed time charters, spot
market charters, contracts of affreightment and consecutive voyage contracts.
10
The primary demand drivers for our tug and tank barge services are the
strength of the United States economy, changes in weather patterns and
population growth, all of which affect consumption of heating oil and gasoline.
The tug and tank barge market, in general, is marked by steady demand over time.
Our second quarter 2003 results for our tug and tank barge segment were down
from the first quarter of 2003, as expected, due to normal seasonal weather
patterns that typically result in a drop-off of activity during the second and
third quarters. We generally take advantage of this seasonality to prepare the
tug and tank barge fleet for peak demand periods by performing our regulatory
drydocking and maintenance programs during these off-peak periods. During the
second quarter of 2003, we had higher than anticipated drydockings as we
accelerated the planned drydockings of two vessels based on an evaluation of
customer needs and scheduling opportunities during the second half of the year.
Favorable trends are developing in this business segment including premium
pricing for our double-hull equipment in black oil service. In addition, at the
end of the second quarter of 2003, we noticed an increase in clean oil movements
primarily related to the increased demand for gasoline during the summer driving
season.
CRITICAL ACCOUNTING POLICIES
This Management's Discussion and Analysis of Financial Condition and
Results of Operations discusses our unaudited consolidated financial statements
included in this Form 10-Q. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles. In other circumstances, we are required to make estimates, judgments
and assumptions that we believe are reasonable based upon information available.
We base our estimates and judgments on historical experience and various other
factors that we believe to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions and conditions. Our
significant accounting policies are discussed in Note 2 to our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2002. There were no significant changes to our critical
accounting policies as reported in our Form 10-K during the six months ended
June 30, 2003.
RESULTS OF OPERATIONS
The table below sets forth, by segment, the average dayrates and
utilization rates for our vessels and the average number of vessels owned during
the periods indicated. These offshore supply vessels and tugs and tank barges
generate substantially all of our revenues and operating profit.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
-------------------------------------------------------
OFFSHORE SUPPLY VESSELS:
Average number of vessels 14.2 10.2 13.7 9.8
Average utilization rate (1) 92.3% 95.9% 91.0% 95.9%
Average dayrate (2) $ 12,062 $ 11,597 $ 12,220 $ 11,795
TUGS AND TANK BARGES:
Average number of tank barges (3) 16.0 16.0 15.8 16.0
Average fleet capacity (barrels)
(3) 1,156,330 1,130,727 1,133,797 1,130,727
Average barge capacity (barrels)
(3) 72,271 70,670 71,893 70,670
Average utilization rate (1) 67.8% 73.9% 75.4% 80.4%
Average dayrate (4) $ 10,999 $ 9,511 $ 11,239 $ 9,505
- ----------
(1) Utilization rates are average rates based on a 365-day year. Vessels are
considered utilized when they are generating revenues.
(2) Average dayrates represent average revenue per day, which includes charter
hire and brokerage revenue, based on the number of days during the period
that the offshore supply vessels generated revenue.
11
(3) These averages give effect to our sale of the Energy 5502 on January 28,
2003, and our acquisition of the Energy 8001 on February 28, 2003. For the
quarter ended June 30, 2003, our tank barge fleet was comprised of 16
vessels.
(4) Average dayrates represent average revenue per day, including time
charters, brokerage revenue, revenues generated on a
per-barrel-transported basis, demurrage, shipdocking and fuel surcharge
revenue, based on the number of days during the period that the tank
barges generated revenue. For purposes of brokerage arrangements, this
calculation excludes that portion of revenue that is equal to the cost of
in-chartering third party equipment paid by customers.
Following is a reconciliation of EBITDA, which is a non-GAAP financial
measure, to net income for each of our business segments, and in the aggregate,
for the three months and six months ended June 30, 2003 and 2002, respectively.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
-------------------------------------------
EBITDA: (1)
Offshore supply vessels:
Net income $ 1,761 $ 1,283 $ 3,424 $ 2,588
Plus:
Interest expense 3,389 3,025 6,781 6,133
Income tax expense 1,074 786 2,094 1,586
Depreciation and amortization 2,066 1,358 3,926 2,475
Other expense, net (2) -- -- 5 --
-------- -------- -------- --------
EBITDA (1) $ 8,290 $ 6,452 $ 16,230 $ 12,782
======== ======== ======== ========
Tugs and tank barges:
Net income $ 912 $ 1,558 $ 3,539 $ 3,742
Plus (minus):
Interest expense 968 830 1,793 1,663
Income tax expense 559 955 2,169 2,293
Depreciation and amortization 1,930 1,453 3,691 2,877
Other income, net (2) -- -- (712) --
-------- -------- -------- --------
EBITDA (1) $ 4,369 $ 4,796 $ 10,480 $ 10,575
======== ======== ======== ========
Total:
Net income $ 2,673 $ 2,841 $ 6,963 $ 6,330
Plus (minus):
Interest expense 4,357 3,855 8,574 7,796
Income tax expense 1,633 1,741 4,263 3,879
Depreciation and amortization 3,996 2,811 7,617 5,352
Other income, net (2) -- -- (707) --
-------- -------- -------- --------
EBITDA (1) $ 12,659 $ 11,248 $ 26,710 $ 23,357
======== ======== ======== ========
- ----------
(1) Earnings (net income) before interest expense, provision for income
taxes, depreciation and amortization ("EBITDA") is an important financial
performance measure that is used by ratings agencies, our lenders and most
of our investors, particularly those who invest in our Senior Notes, as
well as investment banks that issue high yield debt research on our
Company. In addition, EBITDA is used in the financial ratios and covenants
included in our Revolving Credit Facility and our Indenture. This table
reflects the calculation of EBITDA for each of our business segments, and
in the aggregate. EBITDA is presented as it is commonly used by certain
investors to analyze and compare operating performance and to determine a
company's ability to service or incur debt. EBITDA should
12
not be considered in isolation or as a substitute for net income, cash
flow or other income or cash flow data or as a measure of a company's
profitability or liquidity and is not a measure calculated in accordance
with accounting principles generally accepted in the United States. EBITDA
is not necessarily comparable with similarly titled measures reported by
other companies. In determining our EBITDA, other income or expense is
excluded, except for equity in income from investments.
(2) Represents other income and expenses, including gains or losses on
disposition of assets, foreign currency exchange gains or losses and
minority interests in income or loss from unconsolidated entities.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Revenues. Revenues were $26.0 million for the three months ended June 30,
2003, compared to $21.3 million for the same period in 2002, an increase of $4.7
million or 22.1%. The increase in revenues is primarily the result of the
increase in the size of our offshore supply vessel fleet by an average of four
vessels since June 2002 and the addition of one double-hulled tank barge in
February 2003. The additional revenues generated by these new vessels accounted
for a $6.0 million increase in revenues which was offset by a $1.3 million
decrease in revenue related to vessels that were in service during each of the
three months ended June 30, 2003 and 2002, as well as the Energy 5502, which was
not in service during the second quarter of 2003.
Revenues from our offshore supply vessel segment totaled $14.6 million for
the three months ended June 30, 2003, compared to $10.3 million for the same
period in 2002, an increase of $4.3 million or 41.7%. The net increase in
segment revenue is due to the addition of ten deepwater offshore supply vessels
since June 2002, resulting in a quarter-over-quarter average increase of four
vessels. Our utilization rate was 92.3% for the three months ended June 30,
2003, which was slightly lower than the 95.9% we achieved in the same period of
2002. Our offshore supply vessel average dayrate increased slightly to $12,062
in the second quarter of 2003 compared to $11,597 in the same period of 2002, an
increase of $465 or 4.0%. Higher dayrates were driven by the delivery of larger
class vessels, which increased the vessel count for our 240'ED and 265' classes
during the last 12 months. However, these higher dayrates were offset by weak
spot market conditions that primarily impacted our 200' class vessels. Spot
market contracts are more susceptible to fluctuations in utilization and day
rates, particularly in soft market conditions, which we are currently
experiencing. In the second quarter of 2002, we had more offshore supply vessels
operating under long-term time charter agreements compared to the second quarter
of 2003.
Revenues from our tug and tank barge segment totaled $11.4 million for the
three months ended June 30, 2003 compared to $11.0 million for the same period
in 2002, an increase of $0.4 million or 3.6%. The segment revenue increase is
primarily due to an increase in our average barge size and a change in our
contract mix. Revenues for the three months ended June 30, 2003 included $0.7
million that was equal to the cost of in-chartering third-party equipment paid
by customers compared to $0.9 million in the prior year quarter. Our utilization
rate decreased to 67.8% for the three months ended June 30, 2003 compared to
73.9% for the same period in 2002. The decrease in utilization was primarily the
result of a change in contract mix from time charters to contracts of
affreightment and greater drydocking and repair activities in the second quarter
of 2003. Our average dayrate increased to $10,999 for the three months ended
June 30, 2003 compared to $9,511 for the same period of 2002. The $1,488 or
15.6% increase in dayrates since the second quarter of 2002 was driven primarily
by the sale of the Energy 5502 in January 2003 and the purchase of the Energy
8001 in February 2003. The Energy 5502 was generating bareboat charter revenue
during the second quarter of 2002 that was substantially below our fleet average
dayrate. However, the Energy 8001, a larger capacity double-hull vessel was
operating under a time charter arrangement at a dayrate higher than our fleet
average for the year-ago quarter.
Operating Expense. Our operating expense, including depreciation and
amortization, increased to $14.6 million for the quarter ended June 30, 2003
compared to $10.9 million in the same period in 2002, an increase of $3.7
million or 33.9%. The increase in operating expense resulted primarily from the
increase in size of our offshore supply vessel and tank barge fleets since June
2002 as discussed above.
13
Operating expense for our offshore supply vessel segment increased to $7.1
million in the second quarter of 2003 compared to $4.5 million in the same
period of 2002, an increase of $2.6 million or 57.8%. This increase was
primarily the result of the HOS Brimstone, HOS Stormridge, HOS Sandstorm, HOS
Bluewater and HOS Gemstone, all of which are 240'ED or 265' class offshore
supply vessels, being in service for substantially more days during the second
quarter of 2003 compared to the second quarter of 2002. Average daily operating
costs per vessel for the second quarter of 2003 increased over the same period
of 2002, primarily due to the higher costs of operating larger class vessels,
including increased manning requirements.
Operating expense for our tug and tank barge segment was $7.5 million for
the three months ended June 30, 2003 compared to $6.3 million for the same
period of 2002, an increase of $1.2 million or 19.0%. The operating expense
increase is primarily the result of the sale of the Energy 5502 and the purchase
of the Energy 8001. The Energy 5502 was operating under a bareboat charter and,
therefore, incurred no operating costs, while the Energy 8001 is being operated
under a time charter which does incur operating costs. Operating expense for the
second quarter of 2003 included $0.5 million of the cost of in-chartering
third-party equipment paid by customers compared to $0.8 million in the year-ago
quarter. Average daily operating costs per vessel, excluding in-chartering
expenses, for the second quarter of 2003 remained fairly consistent with the
same period of 2002.
General and Administrative Expense. Second-quarter 2003 general and
administrative expenses of $2.8 million were $0.6 million or 27.3% higher than
the $2.2 million reported in the 2002 quarter. We expect these costs to increase
for the remainder of 2003 to accommodate our continued growth, including our
recent acquisition of six deepwater offshore supply vessels, and increased
reporting obligations under federal securities laws.
Interest Expense. Interest expense was $4.4 million for the second quarter
of 2003 compared to $3.9 million in the same period of 2002, an increase of $0.5
million or 12.8%. Capitalization of interest costs relating to new construction
of offshore supply vessels was approximately $0.8 million for the three months
ended June 30, 2003 compared to $1.2 million for the same period in 2002.
Interest Income. Interest income of $0.1 million for the second quarter of
2003 was slightly less than the $0.2 million earned for the same period of 2002.
Income Tax Expense. Our effective tax rate for the three months ended June
30, 2003 and 2002, respectively, was 38.0%. Our income tax expense primarily
consists of deferred taxes due to our federal net operating loss carryforwards.
Our income tax rate is higher than the federal statutory rate due primarily to
expected state and foreign tax liabilities and items not deductible for federal
income tax purposes.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Revenues. Revenues were $53.4 million for the six months ended June 30,
2003, compared to $44.1 million for the same period in 2002, an increase of $9.3
million or 21.1%. This increase in revenue is primarily the result of the growth
of our fleet since June 2002. Our operating fleet grew from 40 vessels at the
end of the second quarter of 2002 to 48 vessels at the end of the second quarter
of 2003. The additional revenues generated by the incremental new vessels
accounted for a $10.9 million increase in revenue, which was offset by a $1.6
million decrease in revenues from our vessels that were in service during each
of the six months ended June 30, 2003 and 2002.
Revenues from our offshore supply vessel segment increased to $27.8
million in the first six months of 2003 compared to $20.1 million in the first
six months of 2002, an increase of $7.7 million or 38.3%. Our utilization rate
was 91.0% for the first six months of 2003 compared to 95.9% in the same period
of 2002. The decrease in utilization was impacted by having fewer long-term
contracts and more vessels operating in the spot market, which is more
susceptible to market fluctuations. Our offshore supply vessel average dayrate
was $12,220 for the first six months of 2003 compared to $11,795 for the same
period in 2002, an increase of $425 or 3.6%. The increase in average dayrates
primarily reflects the addition of larger, newly constructed 240'ED and 265'
class vessels, which typically earn higher dayrates than our
14
200' class vessels. However, these higher dayrates were offset by weak spot
market conditions that primarily impacted our 200' class vessels.
Revenues from our tug and tank barge segment totaled $25.6 million for the
first six months of 2003 compared to $24.0 million for the same period in 2002,
an increase of $1.6 million or 6.7%. The segment revenue increase is primarily
due to the acquisition of one double-hulled 80,000-barrel tank barge on February
28, 2003, and a change in contract mix. Our utilization rate decreased to 75.4%
for the first six months of 2003 compared to 80.4% for the same period in 2002
primarily due to an increase in vessels operating under contracts of
affreightment during the 2003 period, which was adversely impacted by weak
economic conditions and more drydocking days occurring in the second quarter of
2003 compared to the second quarter of 2002. Our average dayrate increased to
$11,239 for the six months ended June 30, 2003 compared to $9,505 for the same
period of 2002, an increase of $1,734 or 18.2%. The increase in average dayrate
was primarily driven by the sale of the Energy 5502, which was operating on a
bareboat charter, and the purchase of the Energy 8001, which is being operated
on a time charter. Time charters command higher dayrates than bareboat charters
due to the difference in treatment of operating expenses under each type of
contract.
Operating Expense. Our operating expense, including depreciation and
amortization, increased to $28.7 million for the first six months of 2003
compared to $21.4 million in the same period of 2002, an increase of $7.3
million or 34.1%. The increase in operating expense is primarily the result of
more vessels being in service during the first six months of 2003 compared to
the year ago six-month period.
Operating expense for our offshore supply vessel segment increased $4.8
million or 58.5% in the first six months of 2003 to $13.0 million compared to
$8.2 million for the first six months of 2002. This increase was primarily the
result of five new 240'ED or 265' class offshore supply vessels being in service
for substantially more days during the first six months of 2003 compared to the
first six months of 2002. Average daily operating costs per vessel for the first
six months of 2003 increased over the same period of 2002, primarily due to the
higher costs of operating larger class vessels, including increased manning
requirements.
Operating expense for our tug and tank barge segment was $15.7 million for
the first six months of 2003 compared to $13.2 million for the same period in
2002, an increase of $2.5 million or 18.9%. The operating expense increase is
primarily due to the acquisition of the Energy 8001 in February 2003. Average
daily operating expenses per vessel in the tug and tank barge segment remained
fairly constant.
General and Administrative Expense. Our general and administrative expense
was $5.7 million for the first six months of 2003 compared to $5.1 million for
the same period of 2002, an increase of $0.6 million or 11.8%. This increase
primarily resulted from increased overhead relating to the costs associated with
the expansion of our fleet, and costs related to increased reporting obligations
under the federal securities laws that were incurred during 2003 but not in the
first six months of 2002.
Interest Expense. Interest expense was $8.6 million in the first six
months of 2003 compared to $7.8 million in the first six months of 2002, an
increase of $0.8 million or 10.3%. The increase in interest expense resulted
from lower capitalized interest in 2003 related to the construction in progress
of four vessels compared to the construction in progress of eight vessels during
the 2002 period. This increase was offset in part by the capitalization of
interest costs of $1.6 million and $2.2 million for the six months ended June
30, 2003 and 2002, respectively.
Interest Income. Interest income was $0.1 million in the first six months
of 2003 compared to $0.4 million in the first six months of 2002, a decrease of
$0.3 million or 75.0%. Average cash balances were $18.5 million and $45.0
million for the six months ended June 30, 2003 and 2002, respectively, which
substantially contributed to the decrease in interest income earned during the
six months ended June 30, 2003.
Income Tax Expense: Our effective tax rate was 38.0% for the first six
months of 2003 and 2002, respectively. Our income tax expense primarily consists
of deferred taxes due to our federal net
15
operating loss carryforwards. Our income tax rate is higher than the federal
statutory rate due primarily to expected state and foreign tax liabilities and
items not deductible for federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
We require capital to fund ongoing operations, the construction of new
vessels, acquisitions and debt service. We have historically financed our
capital requirements with cash flow from operations, issuances of equity and
debt securities, and borrowings under our Revolving Credit Facility.
Net cash provided by operating activities was $13.4 million for the six
months ended June 30, 2003 compared to $15.3 million for the six months ended
June 30, 2002. Changes in cash flow from operating activities are principally
the result of higher income from operations after considering increases in
depreciation and amortization due to the significant expansion of our vessel
fleet, offset by changes in our net working capital.
Net cash provided by investing activities was $71.4 million for the six
months ended June 30, 2003 compared to $31.5 million for the six months ended
June 30, 2002. Net cash used in investing activities for each period included
the cost of new vessel construction and, for the period ended June 30, 2003,
also included the cost of the acquisition of the Energy 8001 and five deepwater
offshore supply vessels, partially offset by proceeds from the sale of the
Energy 5502.
Net cash provided by financing activities was $50.5 million for the six
months ended June 30, 2003, comprised primarily of $39.0 million from borrowings
under our Revolving Credit Facility and $10.5 million of proceeds from a private
offering of our common stock. For the six months ended June 30, 2002, net cash
used in financing activities was composed of $0.2 million, including the
issuance of additional common stock, which was partially offset by payments on
borrowings under debt agreements.
We have a senior secured revolving line of credit with three banks for
$50.0 million ("Revolving Credit Facility"). Borrowings under the Revolving
Credit Facility accrue interest, at our option, at either (i) the prime rate
announced by Citibank, N.A. in New York, plus a margin of 0% to 1%, or (ii) the
London Interbank Offered Rate, plus a margin of 1.75% to 3.0%. We are also
required to pay a commitment fee on available but unused amounts ranging from
0.25% to 0.375%. The interest rate margin and commitment fee are based on our
leverage ratio, as defined in the Revolving Credit Facility. We can use the
amounts we borrow under the Revolving Credit Facility for working capital
purposes and, in certain instances, for acquisitions and vessel construction.
On June 26, 2003, concurrent with the acquisition of five deepwater
offshore supply vessels, we amended the Revolving Credit Facility to increase
its borrowing base from $25.0 million to $50.0 million. In connection with this
amendment, we pledged an additional two offshore supply vessels. As of June 30,
2003, six offshore supply vessels and four ocean-going tugs collateralize the
Revolving Credit Facility with an aggregate orderly liquidation value of at
least $100.0 million. The Revolving Credit Facility expires on December 31,
2004; however, we believe that it will be renewed prior to that time. As of June
30, 2003, we had outstanding $39.0 million on our Revolving Credit Facility,
which amount was drawn to fund our acquisition of an 80,000-barrel double-hulled
tank barge, and a portion of the acquisition cost of five offshore supply
vessels, which resulted in $11.0 million of additional credit immediately
available under the Revolving Credit Facility.
As of June 30, 2003, we had outstanding debt of $172.5 million, net of
original issue discount, under our Senior Notes. Interest on the Senior Notes is
payable semiannually each February 1 and August 1. The Senior Notes do not
require scheduled payments of principal prior to their stated maturity on August
1, 2008. Pursuant to the Indenture under which the Senior Notes are issued
("Indenture"), however, we are required to make offers to purchase the Senior
Notes upon the occurrence of specified events, such as certain asset sales or a
change in control.
The Revolving Credit Facility and the Indenture impose operating and
financial restrictions on us. Such restrictions affect, and in many cases limit
or prohibit, among other things, our ability to incur
16
additional indebtedness, make capital expenditures, redeem equity, create liens,
sell assets and make dividends or other restricted payments.
As of June 30, 2003, we had cash of approximately $14.7 million and
working capital of approximately $27.2 million. During the six months ended June
30, 2003, we expended $22.4 million for new vessel construction, before
allocation of construction period interest. As of June 30, 2003, we were
committed under vessel construction contracts to complete construction of two
offshore supply vessels, which are part of our current eight-vessel newbuild
program. We are currently evaluating construction bids from shipyards for the
last four vessels of this program, in addition to market demand for such vessels
in the deepwater Gulf of Mexico and foreign markets. Aggregate construction
costs for the first four vessels, before allocation of construction period
interest, are expected to be approximately $53.0 million, including $18.4
million that was incurred with respect to such vessels during 2002. We took
delivery of the HOS Bluewater on March 17, 2003 and the HOS Gemstone on June 19,
2003. As of June 30, 2003, the amount expected to be expended to complete
construction of the remaining two of the first four vessels was approximately
$12.2 million, which becomes due at various dates during the remainder of 2003.
During the six months ended June 30, 2003 we expended approximately $3.9 million
for drydocking-related expenses for vessels, of which $2.8 million was accounted
for as deferred charges and $1.1 million for other vessel capital improvements.
Under our accounting policy, we generally capitalize drydocking expenditures
related to vessel recertification to deferred charges and amortize the amount
over 30 to 60 months. During the six months ended June 30, 2003, we also
expended approximately $1.1 million for miscellaneous other additions to
property, plant and equipment.
As of December 31, 2002, we had federal net operating loss carryforwards
of approximately $21.5 million available through 2018 to offset future taxable
income. In addition, we expect to generate federal tax benefits due to our use
of accelerated tax depreciation with respect to new vessels. Our use of these
net operating losses and additional tax benefits may be limited due to U.S. tax
laws. Based on the age and composition of our current fleet, however, we expect
a pay lower than normal amount of federal income taxes over the near term.
We believe that cash on hand and cash generated from operations will
provide sufficient funds to complete construction of the two offshore supply
vessels currently under construction in our newbuild program discussed above,
and to satisfy debt service and working capital requirements. However, we have
made, and may make additional, short-term draws on our Revolving Credit Facility
from time to time during peak demands on our cash that occur as a result of
scheduled capital expenditure commitments. Any excess liquidity will be
available to finance our strategy, which includes expanding our fleet through
the construction or acquisition of additional, or the retrofit of existing,
offshore supply vessels, tugs and tank barges as needed to take advantage of the
demand for such vessels. Depending on the market demand for offshore supply
vessels, tugs and tank barges and consolidation opportunities that may arise, we
may require additional debt or equity financing, including to fund the
construction of the last four vessels in our current newbuild program.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth an aggregation of our contractual
obligations and commercial commitments as of June 30, 2003, in thousands of
dollars.
LESS THREE
THAN ONE TO TO
ONE THREE FIVE
TOTAL YEAR YEARS YEARS THEREAFTER
-----------------------------------------------------
Long-term debt (1) $175,000 $ -- $ -- $ -- $175,000
Revolving Credit Facility 39,000 -- 39,000 -- --
Operating leases (2) 3,679 718 2,357 604 --
Construction commitments (3) 12,230 12,230 -- -- --
-------- -------- -------- -------- --------
Total $229,909 $ 12,948 $ 41,357 $ 604 $175,000
======== ======== ======== ======== ========
17
- ----------
(1) Includes original issue discount of $2,514.
(2) Included in operating leases are commitments for office space, vessel
rentals, office equipment, and vehicles. On June 30, 2003, we entered into
a lease for our new principal executive offices in Covington, Louisiana.
The lease covers 23,756 sq. ft. and is for an initial term of five years
with two optional five-year renewal periods. We expect to move into our
new offices before the end of September 2003. The cost of this new
facility is included in the table.
(3) The timing of the incurrence of these costs is subject to change among
periods based on the achievement of shipyard milestones, but the amounts
are not expected to change materially in the aggregate.
INFLATION
To date, general inflationary trends have not had a material effect on our
operating revenues or expenses.
FORWARD LOOKING STATEMENTS
We make forward-looking statements in this Form 10-Q, including certain
information set forth in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." We have based these
forward-looking statements on our current views and assumptions about future
events and our future financial performance. You can generally identify
forward-looking statements by the appearance in such a statement of words like
"anticipate," "believe," "continue," "could," "estimate," "expect," "intend,"
"may," "plan," "potential," "predict," "project," "should," or "will" or other
comparable words or the negative of these words. When you consider our
forward-looking statements, you should keep in mind the risk factors we describe
and other cautionary statements we make in this Form 10-Q.
Among the risks, uncertainties and assumptions to which these
forward-looking statements may be subject are:
- changes in international economic and political conditions, and in
particular in oil and natural gas prices;
- our ability to manage costs effectively;
- our ability to finance our operations and construct new vessels on
acceptable terms;
- our ability to complete vessels under construction without
significant delays or cost overruns;
- the effects of competition;
- our ability to successfully integrate acquisitions;
- our ability to charter our vessels on acceptable terms;
- our ability to access the debt and equity markets to fund our
capital requirements, which may depend on general market conditions
and our financial condition at the time; and
- our success at managing these and other risks.
Our forward-looking statements are only predictions based on expectations
that we believe are reasonable. Actual events or results may differ materially
from those described in any forward-looking
18
statement. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
To the extent these risks, uncertainties and assumptions give rise to events
that vary from our expectations, the forward-looking events discussed in this
Form 10-Q may not occur.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not entered into any derivative financial instrument transactions
to manage or reduce market risk or for speculative purposes.
We are subject to interest rate risk on our long-term fixed interest rate
Senior Notes. In general, the fair market value of debt with a fixed interest
rate will increase as interest rates fall. Conversely, the fair market value of
debt will decrease as interest rates rise. The Senior Notes accrue interest at
the rate of 10 5/8% per annum and mature on August 1, 2008. There are no
scheduled principal payments under the Senior Notes prior to the maturity date.
Our Revolving Credit Facility has a variable interest rate and, therefore, is
not subject to interest rate risk.
Our operations are primarily conducted between U.S. ports, including along
the coast of Puerto Rico, and historically we have not been exposed to foreign
currency fluctuation. However, as we expand our operations to international
markets, we may become exposed to certain risks typically associated with
foreign currency fluctuation. We currently have fixed time charters for three of
our offshore supply vessels for service in Trinidad & Tobago. Although such
contracts are denominated and will be paid in U.S. Dollars, value added tax
("VAT") payments are paid in Trinidad dollars which creates an exchange risk
related to currency fluctuations. In addition, we are currently operating under
a fixed time charter with one of our other offshore supply vessels for service
in Mexico. Although we are paid in U.S. Dollars, there is an exchange risk to
foreign currency fluctuations related to the payment terms of such time charter.
To date, we have not hedged against any foreign currency rate fluctuations
associated with foreign currency VAT payments or other foreign currency
denominated transactions arising in the normal course of business. We
continually monitor the currency exchange risks associated with conducting
international operations. To date, gains or losses associated with such
fluctuations have not been material.
ITEM 4 - CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures were effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures.
INTERNAL CONTROL OVER FINANCIAL REPORTING
We also maintain a system of internal accounting controls that are
designed to provide reasonable assurance that our books and records accurately
reflect our transactions and that our policies and procedures are followed.
There have not been any changes in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
19
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings, although
we may from time to time be subject to various legal proceedings and claims that
arise in the ordinary course of business.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 3, 2003, we completed a private offering of our common stock to
certain of our existing stockholders and other accredited investors, as such
term is defined in Rule 501 of Regulation D promulgated under the Securities Act
of 1933, as amended (the "Securities Act"). The issuance of these shares of
common stock is exempt from registration under Section 4(2) of the Securities
Act in accordance with Rule 506 of Regulation D promulgated under the Securities
Act. As of July 31, 2003, we had received payment for the 6.0 million shares
issued in such offering, which resulted in gross proceeds of $30.0 million,
including $6.0 million of the Company's common stock that was issued to Candy
Marine Investment Corporation as partial consideration for the acquisition price
of five deepwater offshore supply vessels purchased on June 26, 2003.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 6, 2003, we held our Annual Meeting of Stockholders. At the
meeting, Richard W. Cryar, Larry D. Hornbeck and David A. Trice were elected to
serve on our board of directors as Class II directors until our 2006 Annual
Meeting of Stockholders or until their successors shall have been duly elected
and qualified or until their earlier resignation or removal. As to each of the
foregoing directors, the number of shares cast for or against their election, as
well as the number of abstentions, were as follows:
NAME FOR AGAINST ABSTENTIONS
---- --- ------- -----------
Richard W. Cryar 25,156,489 None 3,416,769
Larry D. Hornbeck 28,573,258 None None
David A. Trice 28,561,845 None 11,413
The other directors continuing in office after the meeting were Todd M.
Hornbeck, Bruce R. Hunt, Patricia B. Melcher, Bernie W. Stewart, Christian G.
Vaccari and Andrew L. Waite.
In addition, at the annual meeting, our stockholders authorized the board
of directors to select and appoint Ernst & Young LLP as our independent public
accountants and auditors for the year ending December 31, 2003. The number of
shares cast for or against this matter, as well as the number of abstentions,
were as follows:
FOR AGAINST ABSTENTIONS
--- ------- -----------
28,533,132 None None
20
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of the Company filed
with the Secretary of State of the State of Delaware on
December 13, 1997 (incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form S-4 dated
September 21, 2001, Registration No. 333-69826).
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of the State of Delaware on December 1, 1999 (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).
3.3 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of the State of Delaware on October 23, 2000 (incorporated by
reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).
3.4 Certificate of Correction to Certificate of Amendment of the
Restated Certificate of Incorporation of the Company filed
with the Secretary of State of the State of Delaware on
November 14, 2000 (incorporated by reference to Exhibit 3.4 of
the Company's Registration Statement on Form S-4 dated
September 21, 2001, Registration No. 333-69826).
3.5 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of Delaware on May 29, 2002 (incorporated by reference to
Exhibit 3.5 to the Company's Registration Statement on Form
S-1 filed July 22, 2001, Registration No. 333-96833).
3.6 Second Restated Bylaws of the Company adopted October 4, 2000
(incorporated by reference to Exhibit 3.5 of the Company's
Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
3.7 Amendment to Second Restated Bylaws of the Company adopted May
28, 2002 (incorporated by reference to Exhibit 3.8 to the
Company's Registration Statement on Form S-1 filed July 22,
2001, Registration No. 333-96833).
21
Exhibit
Number Description
4.1 Indenture dated as of July 24, 2001 between Wells Fargo Bank
Minnesota, National Association (as Trustee) and the Company,
including table of contents and cross-reference sheet
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
4.2 Supplemental Indenture dated as of December 17, 2001, between
Wells Fargo Bank Minnesota, National Association (as Trustee),
the Company, Hornbeck Offshore Services, LLC, (f.k.a. Hornbeck
Offshore Services, Inc.), HORNBECK-LEEVAC Marine Operators,
LLC, (f.k.a. HORNBECK-LEEVAC Marine Operators, Inc.), LEEVAC
Marine, LLC and Energy Services Puerto Rico, LLC, with
Notation of Subsidiary Guarantee by Hornbeck Offshore
Services, LLC, (f.k.a. Hornbeck Offshore Services, Inc.),
HORNBECK-LEEVAC Marine Operators, LLC, (f.k.a. HORNBECK-LEEVAC
Marine Operators, Inc.), LEEVAC Marine, LLC and Energy
Services Puerto Rico, LLC attached (incorporated by reference
to Exhibit 4.1.1 to Amendment No. 2 to the Company's
Registration Statement on Form S-4 dated December 19, 2001,
Registration No. 333-69826).
4.3 Specimen 10-5/8% Series B Note due 2008 (incorporated by
reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).
10.1 Asset Purchase Agreement dated as of June 20, 2003 by and
among HOS-IV, LLC, Candy Marine Investment Corporation, Candy
Fleet Corporation, and Kenneth I. Nelkin, and joined for
limited purposes by Hornbeck Offshore Services, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's
Current Report on Form 8-K furnished July 7, 2003).
10.2 Second Amendment to Credit Agreement dated as of June 18, 2003
by and among Hornbeck Offshore Services, Inc. and Hibernia
National Bank, as agent, and Hibernia National Bank, Fortis
Capital Corp. and Southwest Bank of Texas N.A., as lenders
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K furnished on July 7, 2003).
*31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
22
(b) Reports on Form 8-K.
On July 3, 2003, we furnished a report on Form 8-K announcing that we had
issued a press release that reported our adoption of a stockholder rights plan.
On July 7, 2003, we furnished a report on Form 8-K announcing that we had
issued a press release that reported our acquisition of five 220-foot deepwater
offshore supply vessels, an amendment to our revolving credit agreement and the
completion of a private offering of our common stock.
On August 7, 2003, we furnished a report on Form 8-K announcing that we
had issued a press release that reported second quarter 2003 results, the
delivery of the 240'ED class HOS Gemstone, expansion of our offshore supply
vessel operations into Mexico and the acquisition of an additional 220-foot
deepwater offshore supply vessel.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.
Hornbeck Offshore Services, Inc.
Date: August 14, 2003 /s/ JAMES O. HARP, JR.
------------------------------------
James O. Harp, Jr.
Vice President and Chief Financial Officer
24
EXHIBIT INDEX
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of the Company filed
with the Secretary of State of the State of Delaware on
December 13, 1997 (incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form S-4 dated
September 21, 2001, Registration No. 333-69826).
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of the State of Delaware on December 1, 1999 (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).
3.3 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of the State of Delaware on October 23, 2000 (incorporated by
reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).
3.4 Certificate of Correction to Certificate of Amendment of the
Restated Certificate of Incorporation of the Company filed
with the Secretary of State of the State of Delaware on
November 14, 2000 (incorporated by reference to Exhibit 3.4 of
the Company's Registration Statement on Form S-4 dated
September 21, 2001, Registration No. 333-69826).
3.5 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of Delaware on May 29, 2002 (incorporated by reference to
Exhibit 3.5 to the Company's Registration Statement on Form
S-1 filed July 22, 2001, Registration No. 333-96833).
3.6 Second Restated Bylaws of the Company adopted October 4, 2000
(incorporated by reference to Exhibit 3.5 of the Company's
Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
3.7 Amendment to Second Restated Bylaws of the Company adopted May
28, 2002 (incorporated by reference to Exhibit 3.8 to the
Company's Registration Statement on Form S-1 filed July 22,
2001, Registration No. 333-96833).
25
Exhibit
Number Description
4.1 Indenture dated as of July 24, 2001 between Wells Fargo Bank
Minnesota, National Association (as Trustee) and the Company,
including table of contents and cross-reference sheet
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
4.2 Supplemental Indenture dated as of December 17, 2001, between
Wells Fargo Bank Minnesota, National Association (as Trustee),
the Company, Hornbeck Offshore Services, LLC, (f.k.a. Hornbeck
Offshore Services, Inc.), HORNBECK-LEEVAC Marine Operators,
LLC, (f.k.a. HORNBECK-LEEVAC Marine Operators, Inc.), LEEVAC
Marine, LLC and Energy Services Puerto Rico, LLC, with
Notation of Subsidiary Guarantee by Hornbeck Offshore
Services, LLC, (f.k.a. Hornbeck Offshore Services, Inc.),
HORNBECK-LEEVAC Marine Operators, LLC, (f.k.a. HORNBECK-LEEVAC
Marine Operators, Inc.), LEEVAC Marine, LLC and Energy
Services Puerto Rico, LLC attached (incorporated by reference
to Exhibit 4.1.1 to Amendment No. 2 to the Company's
Registration Statement on Form S-4 dated December 19, 2001,
Registration No. 333-69826).
4.3 Specimen 10-5/8% Series B Note due 2008 (incorporated by
reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).
10.1 Asset Purchase Agreement dated as of June 20, 2003 by and
among HOS-IV, LLC, Candy Marine Investment Corporation, Candy
Fleet Corporation, and Kenneth I. Nelkin, and joined for
limited purposes by Hornbeck Offshore Services, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's
Current Report on Form 8-K furnished July 7, 2003).
10.2 Second Amendment to Credit Agreement dated as of June 18, 2003
by and among Hornbeck Offshore Services, Inc. and Hibernia
National Bank, as agent, and Hibernia National Bank, Fortis
Capital Corp. and Southwest Bank of Texas N.A., as lenders
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K furnished on July 7, 2003).
*31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith
26