Horizon Provides 2Q Results and Update on Proposed Merger
Horizon Offshore (NasdaqGM:HOFF) today reported second quarter 2007 results. The Company's results for the second quarter of 2007 were negatively impacted by adverse conditions and project performance related issues on two significant projects in its Latin America geographic segment for Petroleos Mexicanos ("Pemex") offshore Mexico. The Company expects to complete these projects during the third quarter of 2007. The Company's operating results for the second quarter of 2007 were negatively impacted by the combined effect of the factors described below (dollars in millions).
Summary of Results (Unaudited) (In thousands, except per share data and percentages) Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 ---------------------------------------------- Contract revenues $ 117,351 $ 156,940 $ 204,066 $ 286,885 Gross profit 922 39,286 14,108 77,677 Margin 0.8% 25.0% 6.9% 27.1% Operating income (loss) (7,345) 26,063 (1,988) 56,196 Net income (loss) (6,235) 16,870 (3,966) 32,341 Diluted earnings (loss) per share (0.19) 0.55 (0.12) 1.06 Adjusted EBITDA (79) 20,840 11,761 59,323
* The Company experienced a number of operating inefficiencies including delays in mobilization of the Texas Horizon (due in large part to delays in certifications of diving subcontractor equipment), mechanical downtime and repair of a pipeline valve. These delays resulted in extended commitments to several existing subcontractors causing additional third party costs. Also, the Company's original scope of work under its second contract was reduced by the client during the second quarter of 2007. $(5.4) * Unusually adverse weather conditions during the summer construction season offshore Mexico in the Bay of Campeche prevented the Company from performing weather sensitive operations for much of the latter half of the quarter. These adverse weather conditions did not result in official port closures and do not qualify for weather- related downtime compensation. $(6.6) * Poor productivity of diving subcontractors and excessive mechanical downtime of a subcontracted diving support vessel have also caused substantial delays. The standby time incurred by the diving subcontractors that resulted in extended schedules and the standby time incurred by the Company's equipment spread while these subcontractors were delayed resulted in increased costs. Although the Company has not included any estimated recovery in its second quarter results, it intends to exercise its contractual rights against these subcontractors. $(8.4) * Pemex has evaluated certain extra work claims and disputed a verbally approved change order, resulting in reductions of revenue of $(5.5) million. The Company believes the disputed extra work claims are valid under the Pemex contract, and it intends to pursue collection from Pemex. Also, in July 2007, Pemex formally disputed several claims related to weather and interference delays, which the Company had recognized in prior periods. As a result, the Company revised its estimated recovery on these claims by $(6.0) million. The Company believes the claims are valid and intends to continue to pursue collection. Additionally, the Company is currently working outside the scheduled completion dates under its Pemex contracts and is potentially subject to late completion penalties unless contract extensions are obtained covering the out-of- contract periods. Although several formal extensions have been obtained and others are pending, the Company reduced its revenue by $(3.3) million to reserve for estimated potential penalties. Some penalties have already been assessed but could be recovered as a result of approved extensions. The Company believes that it will receive contract extensions and additional penalties will not be assessed.
In connection with these adjustments and the reduction to estimated revenues, the Company recognized a loss of approximately $(29.9) million during the second quarter of 2007 on its Pemex contracts. This includes provisions for a total loss of $(2.9) million on its first Pemex contract as of June 30, 2007. The Company's second and significantly larger contract remains profitable.
The Company's domestic revenues and gross profit for the second quarter of 2007 reflect the work which began in May 2007 on its significant project in the Northeastern U.S. to lay and bury 16 miles of 24" trunk line, two 18" lateral lines and associated tie-ins and to test the pipelines. These pipelines will service the Northeast Gateway Deepwater Port being constructed offshore Massachusetts with project completion expected in November 2007. However, the domestic geographic segment also reflects the more moderate levels of marine construction activity in the U.S. Gulf of Mexico under both fixed price and day-rate contracts. In 2006, work was performed under day-rate contracts that provided higher margins on the unprecedented amount of emergency hurricane-related repair work in the U.S. Gulf of Mexico.
For its West Africa geographic segment, the Company performed repair work on a large section of the West Africa Gas Pipeline that was damaged by a third party vessel during the first quarter of 2007. The extra work for this repair was recorded at no profit during the second quarter of 2007. Work also continues on the final phases of the shore approaches in Ghana under the original contract.
In the Company's Southeast Asia/Mediterranean geographic segment, the Sea Horizon was 100% utilized on a charter offshore Malaysia during the second quarter of 2007, which is expected to last through November 2007. The Sea Horizon was re-deployed to Southeast Asia during the second quarter of 2006.
Horizon Offshore's President and Chief Executive Officer, David W. Sharp stated, "Our results on the Pemex projects were negatively impacted by several disparate events that are not unusual in the marine construction industry, such as adverse weather conditions and equipment failures, as well as continuing problems we have experienced with diving subcontractor performance, all leading to delays in meeting contract schedules. Unfortunately, the cumulative effect of these risks all occurring in the second quarter of 2007 resulted in a net loss from operations. However, after addressing the effect of these events during the second quarter, we will maintain our focus on the completion of our Pemex projects and the collection of contractual amounts due us from Pemex." Mr. Sharp continued, "We had a backlog of approximately $200 million at the end of the second quarter, and we expect 2007 to be a very profitable year. We anticipate that our work on the Northeast Gateway project will be a significant component of our profitability for the remainder of 2007."
On June 11, 2007, the Company entered into a definitive agreement (the "Merger Agreement") with Cal Dive International, Inc. ("Cal Dive") under which Horizon has agreed to merge into Cal Dive Acquisition LLC, a wholly-owned subsidiary of Cal Dive, in exchange for cash and common stock of Cal Dive. As a result, Horizon will become a wholly-owned subsidiary of Cal Dive. Under the terms of the Merger Agreement, Horizon stockholders will receive 0.625 shares of Cal Dive common stock and $9.25 in cash for each share of Horizon common stock outstanding, plus additional cash for any fractional share.
The Company also announced that while the Merger Agreement included a "go-shop" provision that allowed Horizon, until July 27, 2007, to actively solicit alternative acquisition proposals from third parties, the Company had not received a superior proposal. It therefore expects to conclude the merger with Cal Dive in the fourth quarter of 2007.
The Company is also updating its full year 2007 financial guidance and revising expected net income, diluted earnings per share and adjusted EBITDA downward as a result of the losses on its Pemex projects during the second quarter of 2007. The Company did not revise its expected revenues for the full year of 2007. The Company expects net income to be between $32 million and $40 million, diluted earnings per share to be between $0.98 and $1.22, and adjusted EBITDA to be between $81 million and $94 million. The Company previously provided full year 2007 financial guidance of revenues between $440 million and $485 million, net income between $41 million and $54 million, diluted earnings per share between $1.27 and $1.67, and adjusted EBITDA between $90 million and $110 million.
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