The primary reason for the higher revenues in the first quarter of 2004 compared to the first quarter of 2003 was the increase in the size of the Company's fleet by an average of nine new generation offshore supply vessels ("OSVs"). The incremental revenues from these nine new vessels were offset, in part, by a decrease in the average dayrate and utilization of the Company's other OSVs due to soft market conditions in the U.S. Gulf of Mexico and, to a lesser degree, a higher level of drydocking activity in the Company's OSV segment. Operating costs, including depreciation and amortization expense, increased by a combined $5.5 million, primarily related to the increase in the OSV fleet size compared with the same quarter a year ago. Net income was also impacted by higher net interest expense in the first quarter of 2004 because of lower capitalized interest resulting from having fewer vessels under construction and a higher average balance outstanding under the Company's revolving credit facility during the first quarter of 2004 compared to the first quarter of 2003. Capitalized interest related to new vessel construction was $0.4 million in the first quarter of 2004 compared to $0.9 million in the first quarter of 2003. During the first quarter of 2004, the Company expended $3.3 million for drydocking-related expenses for vessels and $5.9 million for new vessel construction, before allocation of construction period interest.
Todd Hornbeck, President and CEO, stated, "Our financial results for the first quarter reflect the complementary aspects of our two business segments. Although OSV dayrates and utilization in the U.S. Gulf of Mexico remained challenging for the quarter, the northeastern United States experienced one of its coldest winters since the late 1970s. The resulting strong seasonal upturn in our tug and tank barge segment produced a record high utilization rate for our barge fleet of 91%, which was the primary reason we were able to exceed the guidance that we gave on our last conference call. We believe that we are well positioned to capitalize on the exciting macro-fundamental trends that are affecting each of our business segments - increasing sources of demand for new generation OSVs and the effects of OPA '90."
OSV Segment. The Company placed its fourth newly constructed 240 ED class OSV in service on March 3, 2004. The increase in first quarter 2004 revenues over the prior year quarter was comprised primarily of incremental revenue from this new vessel plus nine other vessels that were constructed or acquired during calendar 2003. The increase in first quarter 2004 operating costs and depreciation expense for the OSV segment over the year-ago quarter was primarily related to the incremental contribution of such vessels.
Hornbeck continued, "While our OSV segment operating margins were down 7% from the fourth quarter of 2003 due primarily to soft market conditions, we continued to outperform the reported industry average utilization and day rates for new generation equipment. One other factor that impacted our OSV operating margins was a decline in utilization resulting from our accelerated drydock calendar in the first quarter of 2004. We did this to better position our fleet to take advantage of a potential recovery in market conditions later this year. We remain optimistic about the prospects for a tightening in the U.S. Gulf of Mexico new generation OSV market."
Tug and Tank Barge Segment. Revenues for the first quarter of 2004 were up 11% over the same period in 2003. The 5% decrease in the first quarter 2004 operating margin over the year-ago quarter resulted primarily from increased drydocking amortization related to vessels recertified during the last nine months of 2003. In addition, net income for this segment for the year-ago quarter included a pre-tax gain on disposition of the Energy 5502 of $0.7 million.
Hornbeck added, "In contrast to our OSV segment, our operating margins in our tug and tank barge segment were up 9% over the fourth quarter, largely on the strength of a full quarter of winter conditions that were much colder than average. Looking forward, we expect our tug and tank barge segment to revert back to normal seasonal levels, with reasonable optimism for a good summer driving season based on an improving U.S. economy."
Reverse Stock Split. On March 5, 2004, prior to the initial public offering ("IPO") of its common stock, the Company effected a 1-for-2.5 reverse stock split that caused the number of its outstanding shares of common stock to decrease from 36.3 million to 14.5 million. For all periods, the share amounts and per share data reflected throughout this press release have been adjusted to give effect to the reverse stock split.
Completion of IPO with Partial Exercise of "Greenshoe." On March 31, 2004, the Company completed its IPO of 6,000,000 shares of common stock, which generated gross proceeds of $78.0 million. In addition, on April 28, 2004, the Company issued an additional 126,400 shares of its common stock to its underwriters pursuant to a partial exercise of the IPO over-allotment option ("Greenshoe") to purchase additional shares, which resulted in incremental gross proceeds to the Company of approximately $1.6 million. Pending other uses described in the prospectus for the IPO, the aggregate net proceeds from the IPO of approximately $72.9 million were used, in part, to pay-off the outstanding balance of the Company's revolving credit facility at quarter-end. As of March 31, 2004, Hornbeck had cash of $42.7 million and long-term debt of $172.8 million. As of today, the Company's total basic shares and diluted shares outstanding are 20.8 and 21.3 million, respectively. Using the treasury method and the assumed price per share discussed below, the weighted average basic and diluted shares outstanding for the second quarter and full calendar year 2004 would be 20.7 million and 21.3 million, and 19.3 million and 19.8 million, respectively. All of the foregoing diluted share figures were calculated using the IPO price of $13.00 per share as an assumed constant price for all applicable periods. The actual amount of diluted shares for any given period will vary based on the weighted average fair market value per share of Hornbeck's common stock for such periods.
Construction of Additional Double-Hulled Tank Barge. On April 30, 2004, Hornbeck exercised the first of its three fixed-price shipyard options with Manitowoc Marine Group, L.L.C., a subsidiary of The Manitowoc Company, Inc. (NYSE:MTW), for the construction of one additional double-hulled tank barge. This will be the third vessel to be constructed under the Company's current tank barge newbuild program, which is based on a proprietary new design developed in-house by Hornbeck.
Hornbeck commented, "As expected, since we announced our double-hulled tank barge newbuild program in November of last year, we have seen a substantial increase in customer demand for new double-hulled tonnage for long-term contract opportunities at attractive economics. As we've discussed on prior calls, we are committed to meeting the evolving needs of our customers for new generation marine equipment in both of our business segments."
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