Deep Down Increases Third Quarter 2008 Revenues by 140%



Deep Down, Inc. has announced unaudited results for the three months and nine months ended September 30, 2008, on Form 10-Q filed with the U.S. Securities and Exchange Commission.

Revenue for the three months ended September 30, 2008 increased $6.8 million to $11.7 million, a 140% increase over the same three-month period in 2007. The increase in revenue included $8.5 million from the acquisitions of Mako and Flotation, while our historical service lines had an aggregate reduction in revenue of $1.7 million.

The reduction in revenue in historical service lines, compared to the same three-month period in 2007, was impacted by two major engineering and product development projects which were completed prior to the third quarter of 2008. These projects had very low margins, and as such, were discontinued during the third quarter of 2008. The remaining reduction of revenues was a result of customers' delaying many of their major projects due to the softening of the world oil price and the impact it had on anticipated cash flow of our customers.

Gross profit increased by $4.0 million to $5.3 million for the three months ended September 30, 2008 as compared to the same period last year. Gross margins for the same period improved from 25.8% to 45.5%. The inclusion of Mako and Flotation for the three months ended September 2008 increased the gross profit by $4.8 million while our historical service lines had an aggregate decrease of $0.8 million due to a reduction in revenue for this period as compared to the same period a year ago.

SG&A for the three months ended September 30, 2008 was $3.7 million compared to $0.9 million for the same period last year for an increase of $2.8 million. The acquisitions of Mako and Flotation represented $1.3 million of the increase. Bad debt increased by $0.2 million due to the write off of certain accounts. Personnel and related costs increased by $0.3 million primarily due to an expansion of our businesses requiring more personnel and the related requirements to administer a public company and comply with reporting requirements.

Additionally, we paid approximately $0.6 million more than the same period for the prior year in professional, accounting and legal fees to support our various initiatives during the quarter relating to the filing of a registration statement and to support the related acquisitions. Stock-based compensation related to employee stock options and restricted stock was approximately $170,160 in the current fiscal quarter compared to approximately $74,000 for the comparable prior period. Insurance costs increased by approximately $0.2 million, part of which is included in the acquisition related expenses noted above.

Interest expense for the three months ended September 30, 2008 was $24,704 compared to $0.2 million for the same prior year period. On June 12, 2008, we paid the balance due under the Credit Agreement, thus there were no related expenses for the current fiscal quarter. For the three months ended September 30, 2007, cash interest on the Credit Agreement totaled $139,500, and deferred financing and debt discount amortization approximated $69,000.

Net income for the three months ended September 30, 2008 was $1.6 million, compared to net income of $0.2 million for the same prior year period as discussed above.

Total revenue generated in the nine months ended September 30, 2008 was $25.9 million compared to $12.1 million for the same period last year, an increase of $13.8 million or 113%. This increase in revenue was primarily attributable to strong demand for equipment from our customers in the oil and gas industry and the impact of the inclusion of our acquisitions of Mako and Flotation, which accounted for $12.8 million of the increase.

Gross profit was $10.4 million for the nine months ended September 30, 2008 compared to $3.8 million for the same period in fiscal 2007, reflecting an overall improvement in gross profit margin from 31.6% to 40.2%. Gross profit margins were positively impacted by improved pricing of all product lines.

SG&A for the nine months ended September 30, 2008 was $9.4 million compared to $2.7 million for the same period last year for an increase of $6.7 million. The acquisitions of Mako and Flotation represented $2.8 million of the increase. Bad debt increased by $1.0 million due to the write off of certain accounts, one of which filed for bankruptcy protection. Personnel and related costs increased by $1.5 million due to expansion of our businesses requiring more personnel and the related requirements to administer a public company and comply with reporting requirements.

Additionally, we paid approximately $0.9 million more than the same period for the prior year in professional, accounting and legal fees to support our various initiatives during the nine-month period relating to the filing of a registration statement and to support the referenced acquisitions. Stock-based compensation related to employee stock options and restricted stock was approximately $0.4 million in the current fiscal year compared to approximately $0.1 million for the comparable prior year period.

Interest expense for the nine months ended September 30, 2008 was $3.5 million compared to $1.8 million for the same prior year period. In connection with the early payoff of the Credit Agreement in June 2008, we accelerated the remaining deferred financing costs totaling $0.7 million and recorded this charge to interest expense. Additionally, $1.5 million in debt discounts were accelerated and recorded to interest expense. We paid cash interest related to the Credit Agreement totaling $0.8 million for the nine months ended September 30, 2008 compared to $139,500 in the prior year. For the comparable period of the prior year, $1.4 million of the total interest related to accretion on the redemption of Series G and Series E Preferred Stock.

"I am pleased with the positive cash flow results of this quarter's report," commented Robert E. Chamberlain, Jr., Deep Down's Chairman. "Deep Down's financial position continues to show strong growth within our industry. Stockholders' equity remains strong and is now $54.6 million compared to $12.6 million on December 31, 2007. Moreover, with the Company now nearly debt free, we are poised to continue our business growth strategies and leverage the rising subsea, deepwater, and ultra-deepwater project opportunities currently forecast for installation."

"Deep Down's focus within the growing deepwater and ultra-deepwater market continues to position the Company for sustained growth," commented Ron Smith, Deep Downs' chief executive officer. "Moreover, equally as strong is our new Coretec buoyancy design that makes our riser solutions much more durable and advantageous for subsea drillers.

"In spite of certain segments of our industry experiencing delays and slowing growth due to global oil price fluctuations, credit, and cash flow issues, we continue to expect strong deepwater order activity," Smith concluded.
 


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