HOUSTON--(BUSINESS WIRE)--Nov. 5, 2003--Hanover Compressor Company
(NYSE:HC), a global market leader in full service natural gas
compression and a leading provider of service, fabrication and
equipment for oil and natural gas processing and transportation
applications, today reported financial results for the quarter ended
September 30, 2003.
Quarterly Results - Summary
Third quarter 2003 revenue was $275.2 million compared to third
quarter 2002 revenue of $249.4 million. The third quarter 2003 results
include $27.1 million of fabrication revenues from Belleli Energy
S.r.l. ("Belleli"), which Hanover began including in its consolidated
financial results in November 2002.
EBITDA (consolidated income from continuing operations before
interest expense, leasing expense, provision for income taxes, and
depreciation and amortization) for the third quarter was $68.2
million, compared to $80.4 million for the same period a year earlier.
Included in third quarter 2002 EBITDA were $7.9 million of earnings
related to renegotiated 2002 Argentina contracts.
Net loss for the third quarter 2003 was $110.0 million, or $1.35
per share compared with net income of $9.1 million, or $0.11 per fully
diluted share in the third quarter 2002. As detailed in the chart
below, included in the third quarter 2003 net loss was $164.4 million
in pre-tax charges ($107.3 million, net of tax) for the cumulative
effect of an accounting change, a rental fleet asset impairment, and
the write-down of discontinued operations.
Included in the net loss for the quarter were the following
charges:
Pre-tax After-tax Impact to EPS
Charge (Millions of U.S. Dollars) charge charge $/share
-------------------------------------- ------- --------- -------------
Rental fleet asset impairment $14.4 $9.8 $0.12
Cumulative effect of accounting change 133.7 86.9 1.07
Write-down of discontinued operations 16.3 10.6 0.13
------- --------- -------------
Total $164.4 $107.3 $1.32
-------------------------------------- ------- --------- -------------
"Our third quarter results were negatively impacted by several
charges and operational issues," said Chad Deaton, President and Chief
Executive Officer of Hanover. "We continue to press forward with our
original plan that called for 2003 to be a transition year in order to
position the company for 2004. To that end, we continue to focus on
our core businesses and have worked to expand our international
presence. As we move closer to 2004, we are beginning to see the
initial results of some of our efforts. Domestically, our rental
business is improving as revenues and utilization are up for the
quarter. Internationally, we brought online two gas processing plants,
both of which include compression, which will generate approximately
$900,000 per month in revenues. These two plants demonstrate our
capabilities to meet the total surface equipment needs of our
customers, and we believe that internationally, in particular, we have
significant growth opportunities for these types of projects. An area
where we are behind plan is fabrication. In the quarter we made
several changes to accelerate our emphasis on making this business
line more competitive. We have a much stronger and focused management
team today than six months ago and it is one that is motivated and
ready for 2004."
Summary of Business Segment Results
Domestic rental revenue increased 2% from the third quarter 2002
to $82.8 million while gross margin increased to 62%, from 61% a year
earlier. Domestic rental revenues were positively impacted during the
quarter by the annual billings of ad valorem taxes, an improvement in
utilization and continuation of selective price increases enacted
earlier in the year.
International rental revenue decreased by 8% from third quarter
2002 to $49.5 million while gross margin decreased to 64% from 74% a
year earlier. Included in the third quarter 2002 international rental
revenue was $7.9 million for renegotiated 2002 Argentina contracts.
International rental revenue for the third quarter 2003 was impacted
by operational disruptions for one of the company's plants in
Argentina, which led to an approximate $1.0 million reduction in
revenue for the quarter. Additionally, rental revenue was reduced by
the exercise of a purchase option for rental units in Venezuela by a
customer, which led to approximately $1.2 million revenue reduction
for the quarter, compared to the same period a year ago. Although the
customer purchased the equipment, Hanover will continue to provide
operations and maintenance services to the customer on the equipment.
Parts & service revenue for the third quarter declined 4% from the
third quarter 2002 to $45.6 million with gross margin declining to 23%
from 26% for the same period a year earlier. The reduced level of
parts and service revenue was due to lower activity by customers and
the loss of some customer alliance contracts in 2002 to competitors.
Included in parts & service revenue for the quarter was $15.7 million
in used gas plant and compression equipment sales and installation
revenues compared to $13.5 million for the third quarter 2002. Parts
and service gross margin for the quarter was negatively impacted by
the low margin from the exercise of a purchase option for rental
equipment by a customer in Venezuela.
Compression fabrication revenue increased 2% from the third
quarter 2002 to $27.3 million with gross margin declining to 9% from
13% a year earlier. Compressor fabrication gross margin was negatively
impacted during the quarter by strong pricing competition for new
orders.
Production and processing equipment fabrication revenue for the
quarter was $61.9 million compared to $35.0 million in revenue for the
same period in 2002. Included in production and processing equipment
fabrication revenue and expense for the third quarter 2003 was $27.1
million in revenue and $24.9 million in expense for Belleli. Gross
margin for production and processing equipment fabrication was 9% for
the third quarter of 2003, compared to 19% gross margin for the third
quarter 2002. Gross margin for production and processing equipment
fabrication was impacted by increased competition for the company's
high specification equipment lines. Additionally, both compression
fabrication and production and processing equipment results have been
negatively impacted by operational disruptions associated with the
company's consolidation efforts of its fabrication facilities.
Selling, general, and administrative expense ("SG&A") for the
third quarter 2003, as a percent of revenues, was 15%, flat with the
same period a year earlier. On a dollar basis, SG&A was $40.2 million,
compared to $36.8 million in the third quarter 2002. The dollar
increase in SG&A was primarily due to the inclusion of Belleli's SG&A
of $2.7 million.
Depreciation and amortization expense for the quarter increased to
$56.2 million, compared to $30.8 million for the same period a year
ago. Included in depreciation and amortization for the third quarter
2003 was a $14.4 million non-cash charge to write-down a portion of
the company's rental fleet. Additionally, depreciation and
amortization expense was higher in the third quarter 2003 compared to
the same period a year ago due primarily to: $4.2 million in
depreciation expense associated with compression equipment leases that
were consolidated into the company's financial statements for the
first time this quarter as discussed below; $1.2 million in
depreciation and amortization expense from the inclusion of Belleli;
and additions to the rental fleet, including maintenance capital,
placed in service during 2002 and the first nine months of 2003 that
is included in the company's depreciable asset base.
Write-down for Discontinued Operations
In the third quarter 2003, Hanover recorded a pre-tax charge of
$16.3 million ($10.6 million, net of tax) to write-down its investment
in discontinued operations to current estimated fair market values.
Discontinued operations that are being written down include the
company's used equipment business and certain power generation assets.
Consolidation of Compression Equipment Leases and Debt
As disclosed previously, Hanover leases compression equipment from
entities that, upon adoption of FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB
51" ("FIN 46"), are required to be consolidated in the company's
financial statements. These entities are required to be included in
the company's consolidated financial statements no later than December
31, 2003. Hanover adopted FIN 46, as it relates to its compression
equipment leases, as of July 1, 2003 which resulted in the addition of
$897 million in net compression equipment, and $1,140 million in debt
to its balance sheet and the reversal of $109 million of deferred
gains that were recorded on the company's balance sheet as a result of
the original sale and leaseback transactions entered into with these
entities. Hanover recorded, as a cumulative effect from this
accounting change, a $133.7 million non-cash pre-tax charge ($86.9
million, net of tax) in the third quarter 2003 to record depreciation
expense for prior periods. In the third quarter 2003, and going
forward, the company estimates its additional quarterly depreciation
expense will be approximately $4.2 million resulting from the adoption
of FIN 46.
Liquidity and Other
Hanover had capital expenditures of approximately $28 million in
the third quarter 2003, compared to approximately $40 million for the
same period last year. Additionally in the third quarter of 2003, the
company purchased the remaining interest in Belleli that it did not
already own for approximately $15 million. At September 30, 2003, the
company had approximately $172 million outstanding under its $350
million bank credit facility and approximately $33 million in cash on
its balance sheet.
"During the quarter we continued to stay focused on our plan to
reduce capital expenditures and reduce debt for the year," said John
Jackson, Senior Vice President and Chief Financial Officer of Hanover.
"Our capital expenditures for the period were below last year levels.
The outstanding balance under our bank credit facility was up from the
end of the third quarter due to the timing of our interest payments
and the purchase of the remaining interest in Belleli, but we
anticipate being able to reduce this balance during the fourth
quarter. We continue to focus on strictly limiting new capital
available for the domestic rental business until utilization and
returns reach attractive levels and anticipate capital expenditures
for 2003 being in the range of $150 million to $175 million, including
our additional investment in Belleli."
Total compression horsepower at September 30, 2003 was
approximately 3,508,000, including approximately 2,583,000 horsepower
deployed in the United States and approximately 925,000 horsepower
deployed internationally. Hanover's compression horsepower utilization
rate as of September 30, 2003, on a total horsepower basis, was
approximately 80%, an increase over utilization of approximately 79%
at June 30, 2003 and equal to utilization at September 30, 2002.
Domestic and international utilization at September 30, 2003 was
approximately 75% and 94%, respectively, compared to approximately 73%
and 94%, respectively at June 30, 2003, and approximately 75% and 95%,
respectively at September 30, 2002.
At September 30, 2003, Hanover's third-party fabrication backlog,
excluding Belleli, was approximately $61 million, a 14% decrease over
third quarter 2002 levels. Compared to the second quarter 2003, the
company's backlog decreased by approximately 27%. Backlog for Belleli
at September 30, 2003 was approximately $66 million, compared to
approximately $77 million at June 30, 2003.
Due to some of the operational issues experienced in the third
quarter 2003, Hanover now anticipates that EBITDA, excluding the
securities-related litigation settlement expenses, for 2003 will be in
the range of $280 million to $300 million.
Conference Call Details
Hanover will host a conference call at 11:00 a.m. Eastern Time,
November 5, 2003 to discuss financial results for the third quarter
2003, and other matters. To access the call, US and Canadian
participants should dial (800) 601-8584, international participants
should dial (706) 643-1959 at least ten minutes before the scheduled
start time. Please reference Hanover conference call number 3553855.
For those unable to participate, a replay will be available from 2:00
p.m. Eastern Time on November 5, 2003, until midnight on Wednesday,
November 12, 2003. To listen to the replay, please dial (800) 642-1687
in the United States and Canada, or (706) 645-9291 internationally,
access code 3553855. The company's conference call will also be
broadcast live over the Internet. To access the webcast, log onto the
company's web site (www.hanover-co.com), and click on the webcast link
located on the company's home page.
About Hanover Compressor
Hanover Compressor Company (www.hanover-co.com) is a global market
leader in full service natural gas compression and a leading provider
of service, fabrication and equipment for oil and natural gas
processing and transportation applications. Hanover sells and provides
this equipment on a rental, contract compression, maintenance and
acquisition leaseback basis to oil and natural gas production,
processing and transportation companies that are increasingly seeking
outsourcing solutions. Founded in 1990 and a public company since
1997, Hanover's customers include both major and premier independent
and major producers as well as national oil companies.
Certain matters discussed in this press release are
"forward-looking statements" intended to qualify for the safe harbors
from liability established by the Private Securities Litigation Reform
Act of 1995. These forward-looking statements can generally be
identified as such because of the context of the statement and may
include words such as "believes," "anticipates," "expects,"
"estimates," or words of similar import. Similarly, statements that
describe Hanover's future plans, objectives or goals are also
forward-looking statements. Such forward-looking statements are
subject to certain risks and uncertainties, which could cause actual
results to differ materially from those anticipated as of the date of
this press release. These risks and uncertainties include: our
inability to renew our short-term leases of equipment that are leased
to our customers so as to fully recoup our cost of the equipment; our
inability to generate sufficient cash, access capital markets or to
incur indebtedness to fund our business; a prolonged, substantial
reduction in oil and natural gas prices, which could cause a decline
in the demand for our compression and oil and natural gas production
equipment; changes in economic or political conditions in the
countries in which we do business; legislative changes in the
countries in which we do business; the loss of market share through
competition; the introduction of competing technology by other
companies; losses due to the inherent risks associated with our
operations, including equipment defects, malfunctions and failures and
natural disasters; war, social unrest, terrorists attacks, and/or the
responses thereto; government safety, health, environmental and other
regulations, which could require us to make significant capital
expenditures; our inability to comply with loan and compression
equipment lease covenants; the decreased financial flexibility
associated with our significant cash requirements and substantial debt
and compression equipment lease commitments; reduced profit margins
resulting from increased pricing pressure in our businesses; our
ability to successfully integrate acquired businesses; our inability
to retain key personnel; currency fluctuation; our inability to
execute our exit and sale strategy with respect to assets classified
as discontinued operations and held for sale; our inability to
conclude the agreed upon settlement of the securities-related
litigation and adverse results in other litigation brought by
plaintiffs that are not party to the settlement; fluctuations in our
net income attributable to changes in the fair value of our common
stock which will be used to fund the settlement of the
securities-related litigation; adverse results in the pending
investigation by the Securities and Exchange Commission; our inability
to properly implement new enterprise resource planning systems used
for integration of our businesses; and our inability to reduce debt
relative to our total capitalization. A discussion of these factors is
included in the Company's periodic reports filed with the Securities
and Exchange Commission. The forward-looking statements included in
this press release are only made as of the date of this press release,
and Hanover, except as required by law, undertakes no obligation to
publicly update such forward-looking statements to reflect subsequent
events or circumstances.
HANOVER COMPRESSOR COMPANY
CONSOLIDATED FINANCIAL DATA
AND EBITDA RECONCILIATION
(in thousands of dollars, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2003 2002 2003 2002
---------- -------- ---------- ---------
Revenues:
Domestic rentals $82,823 $80,818 $241,728 $249,276
International rentals 49,519 53,915 151,973 143,612
Parts, service and used
equipment 45,581 47,597 118,327 172,826
Compressor and accessory
fabrication 27,299 26,783 85,099 85,284
Production and processing
equipment fabrication 61,942 35,022 207,892 99,771
Equity in income of non-
consolidated affiliates 7,581 3,782 16,873 13,928
Other 452 1,450 3,356 2,416
---------- -------- ---------- ---------
275,197 249,367 825,248 767,113
Expenses:
Domestic rentals 31,833 31,130 94,043 89,358
International rentals 17,757 13,866 47,682 39,855
Parts, service and used
equipment 35,307 35,236 85,781 143,904
Compressor and accessory
fabrication 24,934 23,244 76,537 73,884
Production and processing
equipment fabrication 56,508 28,256 186,215 84,329
Selling, general and
administrative 40,164 36,769 119,658 107,644
Foreign currency
translation 1,536 461 1,336 13,339
Provision for estimated
cost of litigation
settlement (3,500) -- 40,253 --
Other 2,446 -- 2,951 14,837
---------- -------- ---------- ---------
206,985 168,962 654,456 567,150
---------- -------- ---------- ---------
EBITDA (1), (2) 68,212 80,405 170,792 199,963
Depreciation and
amortization 56,199 30,771 126,886 82,367
Goodwill impairment -- -- -- 47,500
Leasing expense -- 23,081 43,139 68,206
Interest expense 32,849 10,514 57,283 31,137
---------- -------- ---------- ---------
89,048 64,366 227,308 229,210
---------- -------- ---------- ---------
Income (loss) from continuing
operations before income
taxes (20,836) 16,039 (56,516) (29,247)
Provision for (benefit from)
income taxes (7,940) 6,180 (18,463) 7,412
---------- -------- ---------- ---------
Income (loss) from continuing
operations (12,896) 9,859 (38,053) (36,659)
Discontinued operations, net
of tax (10,147) (800) (11,382) (4,489)
Cumulative effect of
accounting change (86,910) -- (86,910) --
---------- -------- ---------- ---------
Net income (loss) $(109,953) $9,059 $(136,345) $(41,148)
========== ======== ========== =========
Basic income (loss) per
common share:
Income (loss) from
continuing operations $(0.16) $0.12 $(0.47) $(0.46)
Loss from discontinued
operations (0.12) (0.01) (0.15) (0.06)
Loss from cumulative
effect of accounting
change (1.07) -- (1.07) --
========== ======== ========== =========
Net income (loss) per common
share $(1.35) $0.11 $(1.69) $(0.52)
========== ======== ========== =========
Diluted income (loss) per
common share:
Income (loss) from
continuing operations $(0.16) $0.12 $(0.47) $(0.46)
Loss from discontinued
operations (0.12) (0.01) (0.15) (0.06)
Loss from cumulative
effect of accounting
change (1.07) -- (1.07) --
========== ======== ========== =========
Net income (loss) per common
share $(1.35) $0.11 $(1.69) $(0.52)
========== ======== ========== =========
Weighted average common and
equivalent shares
outstanding:
Basic 81,439 79,438 80,907 79,338
========== ======== ========== =========
Diluted 81,439 81,255 80,907 79,338
========== ======== ========== =========
Gross profit percentage:
Domestic rentals 62% 61% 61% 64%
International rentals 64% 74% 69% 72%
Parts, service and used
equipment 23% 26% 28% 17%
Compressor and accessory
fabrication 9% 13% 10% 13%
Production and processing
equipment fabrication 9% 19% 10% 15%
(1) EBITDA consists of consolidated income from continuing
operations before interest expense, leasing expense, provision for
income taxes, and depreciation and amortization. The company believes
that EBITDA is a commonly used measure of financial performance for
valuing companies in its industry. EBITDA should not be considered as
an alternative to measures prescribed by generally accepted accounting
principles and may not be comparably calculated from one company to
another. Forward-looking information concerning Hanover's 2003 net
income, which we believe is the most directly comparable GAAP
financial measure to Hanover's EBITDA before the provision for
estimated cost of litigation settlement, is unavailable because the
following items are significantly uncertain so as make a 2003
prediction inadvisable: the ultimate amount of the settlement charge
since the amount may fluctuate prior to the finalization of the
litigation settlement, interest expense, foreign currency translation,
taxes, depreciation, selling, general, and administrative expense and
net results from and proceeds of the sale of our discontinued
operations. The ultimate outcome of these uncertain items may have an
impact on our net income.
(2) Third quarter 2003 EBITDA included a $3.5 million reduction in
the estimate for the securities-related litigation settlement. The
nine-month 2003 EBITDA included a $40.3 million estimated charge for
the securities-related litigation settlement and the nine-month 2002
EBITDA included $13.3 million of foreign currency translation charges
primarily related to the Argentina financial crisis and $20.2 million
of asset write-downs for non-core assets and parts inventory.
CONTACT: Hanover Compressor Company, Houston
Investor Relations:
Lee Beckelman, 281-447-8787
SOURCE: Hanover Compressor Company