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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended March 31, 2002
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 000-24263
CONRAD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-1416999
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 Front Street
P.O. Box 790 70381
Morgan City, Louisiana (Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code: (985) 384-3060
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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 [X] No [_]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of May 8, 2002, 7,233,454 shares of the registrant's Common Stock were
outstanding.
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FORM 10-Q
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets March 31, 2002 and December 31,
2001....................................................... 3
Consolidated Statements of Operations Three Months Ended
March 31, 2002 and 2001.................................... 4
Consolidated Statements of Cash Flows Three Months Ended
March 31, 2002 and 2001.................................... 5
Notes to the Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 18
Part II. Other Information
Item 1. Legal Proceedings........................................... 18
Item 6. Exhibits and Reports on Form 8-K............................ 18
Signature............................................................... 20
FORWARD-LOOKING-STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements contained herein other than statements of
historical fact are forward-looking statements. When used in this Form 10-Q,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions are intended to identify forward-looking statements. Such
statements reflect the Company's current views with respect to future events
and are subject to certain risks, uncertainties and assumptions, including the
Company's reliance on cyclical industries, the Company's reliance on principal
customers and government contracts, the Company's ability to perform contracts
at costs consistent with estimated costs utilized in bidding for the projects
covered by such contracts, variations in quarterly revenues and earnings
resulting from the percentage of completion accounting method, the possible
termination of contracts included in the Company's backlog at the option of
customers, operating risks, competition for marine vessel contracts, the
Company's ability to retain key management personnel and to continue to attract
and retain skilled workers, state and federal regulations, the availability and
cost of capital, and general industry and economic conditions. These and other
risks and assumptions are discussed in more detail in the Company's Form 10-K.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, believed, estimated or expected. The Company does not intend
to update these forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
no assurance can be given that such expectations will prove correct.
2
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, December 31,
2002 2001
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 3,848 $ 6,909
Accounts receivable, net.............................. 2,692 2,353
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 6,419 2,952
Inventories........................................... 269 247
Other current assets.................................. 1,464 1,795
------- -------
Total current assets................................ 14,692 14,256
PROPERTY, PLANT AND EQUIPMENT, net...................... 25,729 25,486
COST IN EXCESS OF NET ASSETS ACQUIRED................... 12,601 12,601
OTHER ASSETS............................................ 200 231
------- -------
TOTAL ASSETS............................................ $53,222 $52,574
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 2,012 $ 859
Accrued employee costs................................ 895 1,564
Accrued expenses...................................... 822 826
Current maturities of long-term debt.................. 1,284 1,284
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ 508 411
------- -------
Total current liabilities........................... 5,521 4,944
LONG-TERM DEBT, less current maturities................. 7,402 7,723
DEFERRED INCOME TAXES................................... 3,137 3,211
------- -------
Total liabilities................................... 16,060 15,878
------- -------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value 20,000,000 shares
authorized, 7,273,937 shares issued in 2002 and
2001................................................. 73 73
Additional paid-in capital............................ 28,992 28,992
Unearned stock compensation........................... (13) (21)
Treasury stock at cost, 40,483 shares in 2002 and
2001................................................. (211) (211)
Retained earnings..................................... 8,321 7,863
------- -------
Total shareholders' equity.......................... 37,162 36,696
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $53,222 $52,574
======= =======
See notes to unaudited consolidated financial statements.
3
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months
Ended March 31,
----------------
2002 2001
------- -------
REVENUE....................................................... $10,585 $11,885
COST OF REVENUE............................................... 8,490 9,116
------- -------
GROSS PROFIT.................................................. 2,095 2,769
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................. 1,302 1,165
------- -------
INCOME FROM OPERATIONS........................................ 793 1,604
INTEREST EXPENSE.............................................. (81) (17)
OTHER INCOME, NET............................................. 10 29
------- -------
INCOME BEFORE INCOME TAXES.................................... 722 1,616
PROVISION FOR INCOME TAXES.................................... 264 665
------- -------
NET INCOME.................................................... $ 458 $ 951
======= =======
Net income per common share:
Basic....................................................... $ 0.06 $ 0.13
======= =======
Diluted..................................................... $ 0.06 $ 0.13
======= =======
Weighted average common shares outstanding:
Basic....................................................... 7,228 7,071
======= =======
Diluted..................................................... 7,238 7,098
======= =======
See notes to unaudited consolidated financial statements.
4
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months
Ended March 31,
----------------
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 458 $ 951
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.............................. 494 542
Deferred income tax expense................................ (74) 223
Changes in assets and liabilities:
Accounts receivable....................................... (339) (5,453)
Net change in billings related to cost and estimated
earnings on uncompleted contracts........................ (3,370) 2,637
Inventory and other assets................................ (147) 141
Accounts payable and accrued expenses..................... 480 1,614
------- -------
Net cash (used in) provided by operating activities...... (2,498) 655
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment................ (698) (1,438)
Proceeds from repayment of executive notes receivable....... 456 --
------- -------
Net cash used in investing activities.................... (242) (1,438)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of debt................................ (321) (627)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................... (3,061) (1,410)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 6,909 3,513
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 3,848 $ 2,103
======= =======
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid, net of capitalized interest.................. $ 81 $ 17
======= =======
Taxes paid.................................................. $ -- $ 355
======= =======
See notes to unaudited consolidated financial statements.
5
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the
accounts of Conrad Industries, Inc. and its wholly-owned subsidiaries (the
"Company") which are primarily engaged in the construction, conversion and
repair of a variety of marine vessels for commercial and government customers.
The Company was incorporated in March 1998 to serve as the holding company for
Conrad Shipyard, L.L.C. ("Conrad") and Orange Shipbuilding Company, Inc.
("Orange Shipbuilding"). New construction work and some repair work is
performed on a fixed-price basis. The Company performs the majority of repair
work under cost-plus-fee agreements. All significant intercompany transactions
have been eliminated. In the opinion of the management of the Company, the
interim consolidated financial statements included herein have been prepared in
accordance with generally accepted accounting principles and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (such
adjustments consisting only of a normal recurring nature) considered necessary
for a fair presentation have been included in the interim consolidated
financial statements. These interim consolidated financial statements should be
read in conjunction with the Company's audited 2001 consolidated financial
statements and related notes filed on Form 10-K for the year ended December 31,
2001.
The results of operations for the three-month period ended March 31, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
2. RECEIVABLES
Receivables consisted of the following at March 31, 2002 and December 31,
2001 (in thousands):
2002 2001
------ ------
U.S. Government:
Amounts billed............................................. $ 668 $ 357
Unbilled costs and estimated earnings on uncompleted
contracts................................................. 1,350 1,137
------ ------
2,018 1,494
Commercial:
Amounts billed............................................. 2,024 1,996
Unbilled costs and estimated earnings on uncompleted
contracts................................................. 5,069 1,815
------ ------
Total.................................................... $9,111 $5,305
====== ======
Included above in amounts billed is an allowance for doubtful accounts of
$85,000 and $20,000 at March 31, 2002 and December 31, 2001, respectively.
Unbilled costs and estimated earnings on uncompleted contracts were not
billable to customers at the balance sheet dates under terms of the respective
contracts. Of the unbilled costs and estimated earnings at March 31, 2002,
substantially all is expected to be collected within the next twelve months.
Information with respect to uncompleted contracts as of March 31, 2002 and
December 31, 2001 is as follows (in thousands):
2002 2001
------- -------
Costs incurred on uncompleted contracts.................... $33,644 $28,311
Estimated earnings......................................... 9,454 8,081
------- -------
43,098 36,392
Less billings to date...................................... (37,187) (33,851)
------- -------
$ 5,911 $ 2,541
======= =======
6
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
2002 2001
------ ------
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $6,419 $2,952
Billings in excess of cost and estimated earnings on
uncompleted contracts.................................... (508) (411)
------ ------
Total................................................... $5,911 $2,541
====== ======
3. LONG-TERM DEBT
The Company has a Loan Agreement with a commercial bank, which specifies the
terms of the Term Loan and the Revolving Credit Facility. Interest accrues at
LIBOR plus 1.75% until May 31, 2002, and thereafter at the option of the
Company either at the lender's prime rate minus 0.5% or LIBOR plus 1.75%. The
Loan Agreement is secured by substantially all of the Company's assets,
contains customary restrictive covenants and requires the maintenance of
certain financial ratios, including a current ratio requirement of 1.25 to 1.0
that could limit the Company's use of available capacity under the Revolving
Credit Facility. In addition, the Loan Agreement prohibits the Company from
paying dividends without the consent of the lender and restricts the ability of
the Company to incur additional indebtedness. At March 31, 2002, the Company
was in compliance with these covenants.
The Term Loan has a maturity date of May 31, 2005 and is payable in thirty-
seven monthly principal payments of $107,000 plus interest, with a final
payment of $4.7 million. At March 31, 2002, the Term Loan balance outstanding
was $8.7 million.
The Revolving Credit Facility permits the Company to borrow up to $10.0
million for working capital and other general corporate purposes, including the
funding of acquisitions and matures on May 31, 2003. As of March 31, 2002, no
amounts were outstanding on the Revolving Credit Facility.
The Company has received a commitment letter from its lending institution to
provide a loan totaling $6.7 million to fund the development of the Amelia
facility discussed above. The credit facilities will include a revolver that
will convert to a term loan. Payments under the revolver will include interest
only until December 31, 2002, at which time it will convert to a term loan to
be repaid in 52 monthly principal payments of $58,000 plus interest with a
final payment of $3.7 million due on May 31, 2007.
4. INCOME PER SHARE
The calculation of basic earnings per share excludes any dilutive effect of
stock options, while diluted earnings per share includes the dilutive effect of
stock options. The number of weighted average shares outstanding for "basic"
income per share was 7,228,454 and 7,071,056 for the three months ended March
31, 2002 and 2001, respectively. The number of weighted average shares
outstanding for "diluted" income per share was 7,237,631 and 7,097,996 for the
three months ended March 31, 2002 and 2001, respectively.
5. SEGMENT AND RELATED INFORMATION
The Company classifies its business into two segments:
Vessel Construction
The Company constructs a variety of marine vessels, including large and
small deck barges, single and double hull tank barges, lift boats, push boats,
offshore tug boats and offshore support vessels. The Company
7
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
also fabricates components of offshore drilling rigs and floating production,
storage and offloading vessels including sponsons, stability columns, blisters,
pencil columns and other modular components.
Repair and Conversions
The Company's conversion projects primarily consist of lengthening the
midbodies of vessels, modifying vessels to permit their use for a different
type of activity and other modifications to increase the capacity or
functionality of a vessel. The Company also derives a significant amount of
revenue from repairs made as a result of periodic inspections required by the
U.S. Coast Guard, the American Bureau of Shipping and other regulatory
agencies.
The Company evaluates the performance of its segments based upon gross
profit. Selling, general and administrative expenses, interest expense, other
income, net, and income taxes are not allocated to the segments. Accounting
policies are the same as those described in Note 1, "Summary of Significant
Accounting Policies" in the Company's Form 10-K for the year ended December 31,
2001. Intersegment sales and transfers are not significant.
Selected information as to the operations of the Company by segment is as
follows (in thousands):
Three Months
Ended March 31,
----------------
2002 2001
------- -------
Revenue:
Vessel construction...................................... $ 6,753 $ 7,944
Repair and conversions................................... 3,832 3,941
------- -------
Total revenue.......................................... 10,585 11,885
------- -------
Cost of revenue:
Vessel construction...................................... 5,416 6,238
Repair and conversions................................... 3,074 2,878
------- -------
Total cost of revenue.................................. 8,490 9,116
------- -------
Gross profit:
Vessel construction...................................... 1,337 1,706
Repair and conversions................................... 758 1,063
------- -------
Total gross profit..................................... 2,095 2,769
Selling, general and administrative expenses............... 1,302 1,165
------- -------
Income from operations..................................... 793 1,604
Interest expense........................................... (81) (17)
Other income, net.......................................... 10 29
------- -------
Income before income taxes................................. 722 1,616
Provision for income taxes................................. 264 665
------- -------
Net income................................................. $ 458 $ 951
======= =======
8
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain other financial information of the Company by segment is as
follows (in thousands):
Three Months
Ended March 31,
---------------
2002 2001
------- -------
Depreciation and amortization expense:
Vessel construction...................................... $ 216 $ 202
Repair and conversions................................... 153 107
Included in selling, general and administrative
expenses................................................ 125 233
------- -------
Total depreciation and amortization expense............ $ 494 $ 542
======= =======
Three Months
Ended March 31,
---------------
2002 2001
------- -------
Capital expenditures:
Vessel construction...................................... $ 149 $ 211
Repair and conversions................................... 27 1,171
Other.................................................... 522 56
------- -------
Total capital expenditures............................. $ 698 $ 1,438
======= =======
Total assets of the Company by segment is as follows as of March 31, 2002
and December 31, 2001 (in thousands):
2002 2001
------- -------
Total assets:
Vessel construction...................................... $29,899 $27,336
Repair and conversions................................... 12,551 11,720
Other.................................................... 10,772 13,518
------- -------
Total assets........................................... $53,222 $52,574
======= =======
Certain assets and capital expenditures of the Company are allocated to
corporate and are included in the "Other" caption.
Revenues included in the consolidated financial statements of the Company
are derived from customers domiciled in the United States. All assets of the
Company are located in the United States.
6. COMMITMENTS AND CONTINGENCIES
Legal Matters--The Company is a party to various legal proceedings primarily
involving commercial claims and workers' compensation claims. While the outcome
of these claims and legal proceedings cannot be predicted with certainty,
management believes that the outcome of all such proceedings, even if
determined adversely, would not have a material adverse effect on the Company's
consolidated financial statements.
Employment Agreements--The Company had employment agreements with certain of
its executive officers which provided for employment of the officers through
March 31, 2002, and provided for annual extensions at the end of its term,
subject to the parties' mutual agreement. The minimum annual total compensation
of these agreements was $570,000. The executives and the Company are in the
process of discussing the terms of new or amended employment agreements.
9
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 2001, the Company entered into an employment agreement with its
President and Chief Executive Officer which provides for his employment through
December 31, 2004 and annual extensions thereafter, subject to the parties'
mutual agreement. The minimum annual total compensation under the agreement is
$230,000.
Letters of Credit and Bonds--In the normal course of its business, the
Company is required to provide letters of credit to secure the payment of
workers' compensation obligations. Additionally, under certain contracts the
Company may be required to provide letters of credit and bonds to secure
certain performance and payment obligations of the Company thereunder.
Outstanding letters of credit and bonds relating to these business activities
amounted to $1.7 million at March 31, 2002. At December 31, 2001, no such
amounts were outstanding.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations, ceases
upon adoption of this statement. As SFAS No. 142 allows, the Company will
complete the required impairment test in the second quarter of 2002. The
Company has not determined the impact that the impairment test will have on its
consolidated financial position or results of operations.
In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill upon the adoption of this statement on January 1, 2002. A
reconciliation of previously reported net income and earnings per share to the
amounts adjusted for the exclusion of goodwill amortization net of tax follows
(in thousands, except per share data):
Three Months
Ended March
31,
------------
2002 2001
----- ------
Reported net income............................................ $ 458 $ 951
Add: Goodwill amortization, net of tax......................... -- 196
----- ------
Adjusted net income.......................................... $ 458 $1,147
===== ======
Reported basic earnings per share.............................. $0.06 $ 0.13
Add: Goodwill amortization, net of tax per basic share......... -- 0.03
----- ------
Adjusted basic earnings per share............................ $0.06 $ 0.16
===== ======
Reported diluted earnings per share............................ $0.06 $ 0.13
Add: Goodwill amortization, net of tax per diluted share....... -- 0.03
----- ------
Adjusted diluted earnings per share.......................... $0.06 $ 0.16
===== ======
The carrying amount of goodwill as of March 31, 2002 and December 31, 2001,
by segment is as follows (in thousands):
2002 2001
------- -------
Vessel construction.......................................... $12,601 $12,601
Repair and conversions....................................... -- --
------- -------
Total...................................................... $12,601 $12,601
======= =======
10
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the recording of liabilities for all legal
obligations associated with the retirement of long-lived assets that result
from the normal operation of those assets. These liabilities are required to be
recorded at their fair values (which are likely to be the present values of the
estimated future cash flows) in the period in which they are incurred. SFAS No.
143 requires the associated asset retirement costs to be capitalized as part of
the carrying amount of the long-lived asset. The asset retirement obligation
will be accreted each year through a charge to expense. The amounts added to
the carrying amounts of the assets will be depreciated over the useful lives of
the assets. The Company is required to implement SFAS No. 143 on January 1,
2003, and it has not determined the impact that this statement will have on its
consolidated financial position or results of operations.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." SFAS No. 144 promulgates standards for
measuring and recording impairments of long-lived assets. Additionally, this
standard establishes requirements for classifying an asset as held for sale,
and changes existing accounting and reporting standards for discontinued
operations and exchanges for long-lived assets. The Company implemented SFAS
No. 144 on January 1, 2002, as required, and it did not have a material effect
on the Company's financial position or results of operations.
11
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Unaudited Consolidated Financial Statements and the Notes to Unaudited
Consolidated Financial Statements included elsewhere in this Form 10-Q as well
as the Company's annual report on Form 10-K for the year ended December 31,
2001.
Overview
The Company was incorporated in March 1998 to serve as the holding company
for Conrad Shipyard, Inc. ("Conrad") and Orange Shipbuilding Company, Inc.
("Orange Shipbuilding"). The Company completed an initial public offering in
June 1998 by issuing 2.1 million shares of common stock. Conrad has operated
since 1948 at its shipyard in Morgan City, Louisiana, and specializes in the
construction, conversion and repair of large and small deck barges, single and
double hull tank barges, lift boats, push boats, tow boats, offshore tug boats
and offshore supply vessels. In December 1997, Conrad acquired Orange
Shipbuilding to increase its capacity to serve Conrad's existing markets and to
expand its product capability into the construction of additional types of
marine vessels, including tug boats for the U.S. Army, offshore tug boats, push
boats and double hull barges, and the fabrication of modular components for
offshore drilling rigs and FPSOs. In February 1998, Conrad commenced operations
at a conversion and repair facility in Amelia, Louisiana, thereby expanding its
capacity to provide conversion and repair services for marine vessels. In 2000,
Conrad Shipyard, Inc. was converted into a Louisiana limited liability company
named Conrad Shipyard, L.L.C.
Demand for the Company's products and services is dependent upon a number of
factors, including the economic condition of the Company's customers and
markets, the age and state of repair of the vessels operated by the Company's
customers and the relative cost to construct a new vessel as compared with
repairing an older vessel. A significant portion of the Company's revenues
comes from customers in the offshore oil and gas industry. During the fourth
quarter of 2001, weakness in the economy in general and the offshore oil and
gas industry in particular resulted in decreased demand and negatively affected
the Company's financial performance. The Company experienced increased demand
for repair and conversion services and increased bid activity in the first
quarter of 2002. Market indicators, as well as seasonal workload patterns, lead
the Company to believe that the first quarter increase in repair activity was
due to seasonal demand and that second quarter repair production-hours will be
less than the first quarter. The Company believes that there is little or no
visibility at this time into the repair market. However, it does not anticipate
a significant increase in activity in the repair and conversion segment until
at least the third or fourth quarters of 2002. Bid activity in the vessel
construction segment has improved. As evidence of this fact, since the end of
the first quarter, the Company added $12.8 million to backlog which brings
total backlog at May 9, 2002 to $22.0 million, excluding options for tug boats
of $8 million. The Company believes that the effect of this additional backlog
should be more evident in the third quarter operating results.
The Company is engaged in various types of construction under contracts that
generally range from one month to 36 months in duration. The Company uses the
percentage-of-completion method of accounting and therefore takes into account
the estimated costs, estimated earnings and revenue to date on fixed- price
contracts not yet completed. The amount of revenue recognized is equal to the
portion of the total contract price that the labor hours incurred to date bears
to the estimated total labor hours, based on current estimates to complete.
This method is used because management considers expended labor hours to be the
best available measure of progress on these contracts. Revenues from cost-plus-
fee contracts are recognized on the basis of cost incurred during the period
plus the fee earned.
Most of the contracts entered into by the Company for new vessel
construction, whether commercial or governmental, are fixed-price contracts
under which the Company retains all cost savings on completed contracts but is
liable for all cost overruns. The Company develops its bids for a fixed price
project by estimating the amount of labor hours and the cost of materials
necessary to complete the project and then bids such projects in order to
achieve a sufficient profit margin to justify the allocation of its resources
to such project. The Company's revenues therefore may fluctuate from period to
period based on, among other things,
12
the aggregate amount of materials used in projects during a period and whether
the customer provides materials and equipment. The Company generally performs
conversion and repair services on the basis of cost-plus-fee arrangements
pursuant to which the customer pays a negotiated labor rate for labor hours
spent on the project as well as the cost of materials plus a margin on
materials purchased.
Recent Events
On October 23, 2000, the Company purchased 52 acres of land in Amelia,
Louisiana for $1.3 million. The land is strategically located on the
Intracoastal Waterway approximately 30 miles from the Gulf of Mexico and is
within one mile of the other existing Amelia facility. Work is currently in
progress to develop approximately 16 acres of the property as a repair and
conversion facility. The initial development included clearing land, grubbing
and dredging at a total cost of $0.9 million. The next phase of development
will include additional site preparation, installation of steel sheet-pile
bulkhead system, dry excavation and dredging, other infrastructure improvements
and outfitting with tools and equipment at an anticipated cost of approximately
$6.7 million. Current plans are to move the Company's two largest drydocks to
the facility which is estimated to be in service during the fourth quarter of
2002.
In addition, the Company is currently constructing another fabrication
building at the Morgan City yard at a cost of approximately $800,000, which
will increase the Company's enclosed building space by approximately 15,000
square feet and will increase capabilities for pre-fabricated components and
modular construction techniques.
13
Results of Operations
The following table sets forth certain historical data of the Company and
percentage of revenues for the periods presented (in thousands):
Conrad Industries, Inc. Summary Results of Operations
(In thousands)
Three Months Ended March
31,
----------------------------
2002 2001
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Financial Data:
Revenue
Revenue Vessel construction..................... $6,753 63.8% $7,944 66.8%
Repair and conversions.......................... 3,832 36.2% 3,941 33.2%
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Total revenue................................. 10,585 100.0% 11,885 100.0%
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Cost of revenue
Vessel construction............................. 5,416 80.2% 6,238 78.5%
Repair and conversions.......................... 3,074 80.2% 2,878 73.0%
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Total cost of revenue......................... 8,490 80.2% 9,116 76.7%
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Gross profit
Vessel construction............................. 1,337 19.8% 1,706 21.5%
Repair and conversions.......................... 758 19.8% 1,063 27.0%
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Total gross profit............................ 2,095 19.8% 2,769 23.3%
S G & A expenses.................................. 1,302 12.3% 1,165 9.8%
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Income from operations............................ 793 7.5% 1,604 13.5%
Interest expense.................................. 81 0.8% 17 0.1%
Other expenses (income), net...................... (10) -0.1% (29) -0.2%
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Income before income taxes........................ 722 6.8% 1,616 13.6%
Income taxes...................................... 264 2.5% 665 5.6%
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Net Income........................................ $ 458 4.3% $ 951 8.0%
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EBITDA (1)........................................ $1,287 12.2% $2,146 18.1%
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Operating Data: Labor hours....................... 142 165
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(1) Represents income from operations before deduction of depreciation,
amortization and non-cash compensation expense related to the issuance of
common stock and stock options to employees. EBITDA is not a measure of
cash flow, operating results or liquidity as determined by generally
accepted accounting principles. The Company has included information
concerning EBITDA as supplemental disclosure because management believes
that EBITDA provides meaningful information regarding a company's
historical ability to incur and service debt. EBITDA as defined and
measured by the Company may not be comparable to similarly titled measures
reported by other companies. EBITDA should not be considered in isolation
or as an alternative to, or more meaningful than, net income or cash flow
provided by operations as determined in accordance with generally accepted
accounting principles as an indicator of the Company's profitability or
liquidity.
Three Months Ended March 31, 2002 Compared with Three Months Ended March 31,
2001.
During the three months ended March 31, 2002, the Company generated revenue
of $10.6 million, a decrease of approximately $1.3 million, or 10.9%, compared
to $11.9 million generated for the three months ended March 31, 2001. The
decrease was due to a $1.2 million (15.0%) decrease in vessel construction
revenue to $6.8 million for the three months ended March 31, 2002, compared to
$7.9 million for the three months
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ended March 31, 2001 and a decrease of $109,000 (2.8%) in repair and conversion
revenue to $3.8 million for the three months ended March 31, 2002 compared to
$3.9 million for the three months ended March 31, 2001. The decrease in vessel
construction revenue was attributable to a reduction in vessel construction
production hours which decreased by 27.8% during the three months ended March
31, 2002 compared to the three months ended March 31, 2001. This decline was
due to weakness in the economy in general and the offshore oil and gas industry
in particular which resulted in decreased demand. The decrease in repair and
conversion revenue during the three months ended March 31, 2002 compared to the
three months ended March 31, 2001 was primarily attributable to two conversion
jobs in progress during the three months ended March 31, 2001, which required
more material and equipment as compared to projects completed or in progress
during the three months ended March 31, 2002. Repair and conversion hours
increased by 5.9% during the three months ended March 31, 2002 compared to the
three months ended March 31, 2001.
Gross profit decreased $674,000, or 24.3% to $2.1 million (19.8% of revenue)
for the three months ended March 31, 2002 as compared to gross profit of $2.8
million (23.3% of revenue) for the three months ended March 31, 2001. Vessel
construction gross profit decreased $369,000 or 21.6% to $1.3 million for the
three months ended March 31, 2002 as compared to vessel construction gross
profit of $1.7 million for the three months ended March 31, 2001. Repair and
conversion gross profit decreased $305,000 or 28.7% to $758,000 for the three
months ended March 31, 2002 as compared to repair and conversion gross profit
of $1.1 million for the three months ended March 31, 2001. The decrease in
vessel construction gross profit was primarily due to the decrease in vessel
production hours and the factors discussed above. The decrease in repair and
conversion gross profit was primarily due to more profitable jobs completed or
in progress during the three months ended March 31, 2001 as compared to the
three months ended March 31, 2002 due to higher cost and the inability of the
Company to increase pricing because of market conditions during 2002.
Vessel construction gross profit margins decreased to 19.8% for the three
months ended March 31, 2002, compared to gross profit margins of 21.5% for the
three months ended March 31, 2001. Repair and conversion gross profit margins
decreased to 19.8% for the three months ended March 31, 2002, compared to gross
profit margins of 27.0% for the three months ended March 31, 2001.
Selling, general and administrative expenses increased $137,000, or 11.8%,
to $1.3 million (12.3% of revenue) for the three months ended March 31, 2002,
as compared to $1.2 million (9.8% of revenue) for the three months ended March
31, 2001. This increase was primarily due to an increase in bad debt expense,
salary related expenses, depreciation and consulting expenses related to
implementation of new enterprise business system and an increase in legal and
accounting expenses. The increase was partially offset by the elimination of
$200,000 in goodwill amortization expense due to SFAS No. 142, as discussed in
Note 7 to the financial statements.
Income before income taxes decreased $894,000 to $722,000 for the three
months ended March 31, 2002 as compared to income before income taxes of $1.6
million for the three months ended March 31, 2001, primarily due to the factors
listed above.
The Company had net income of $458,000 for the three months ended March 31,
2002 as compared to net income of $951,000 for the three months ended March 31,
2001. Interest expense increased $64,000 to $81,000 for three months ended
March 31, 2002 as compared to interest expense of $17,000 for the three months
ended March 31, 2001 due to capitalization of interest related to the
construction of the drydock during the quarter ended March 31, 2001 and an
increase in average debt during the quarter ended March 31, 2002.
The Company had income tax expense of $264,000 (36.6% effective tax rate)
for the three months ended March 31, 2002, compared to income taxes of $665,000
(41.2% effective tax rate) for the three months ended March 31, 2001. The
Company's effective tax rate was higher in 2001 because its cost in excess of
net assets acquired was not amortized for tax purposes, but was amortized for
financial reporting purposes, in 2001. Effective January 1, 2002, as a result
of the implementation of SFAS No. 142, cost in excess of net assets acquired in
not amortized for financial reporting purposes.
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Liquidity and Capital Resources
Historically, the Company has funded its business through funds generated
from operations. Net cash used by operations was $2.5 million for the three
months ended March 31, 2002 due to increases in costs and estimated earnings on
uncompleted contracts and an increase in accounts receivable, partially offset
by an increase in accounts payable and accrued expenses. Increases in costs and
estimated earnings on uncompleted contracts was $3.4 million primarily as the
result of the timing of billings related to jobs in progress or recently
completed at March 31, 2002 most of which were billed during April 2002.
The Company has borrowed in the past to expand its facilities and to fund
the acquisition of Orange Shipbuilding in December 1997. The Company's working
capital position was $9.2 million at March 31, 2002 compared to $9.3 million at
December 31, 2001.
The Company's capital requirements historically have been primarily for
improvements to its facilities and equipment. The Company's net cash used in
investing activities of $242,000 for the three months ended March 31, 2002
reflected $698,000 in improvements to facilities and equipment offset by
$456,000 proceeds received from the repayment of executive notes receivable.
On October 23, 2000, the Company purchased 52 acres of land in Amelia,
Louisiana for $1.3 million. The land is strategically located on the
Intracoastal Waterway approximately 30 miles from the Gulf of Mexico. Work is
currently in progress to develop approximately 16 acres of the property as a
repair and conversion facility. The initial development included clearing land,
grubbing and dredging at a total cost of $0.9 million. The next phase of
development will include additional site preparation, installation of steel
sheet-pile bulkhead system, dry excavation and dredging, other infrastructure
improvements and outfitting with tools and equipment at an anticipated cost of
approximately $6.7 million. The Company has received a commitment letter from
its lending institution to finance the expansion. This project was
strategically slowed down in the fourth quarter of 2001 but, based on
anticipated demand for repair and conversion services, is now underway. Current
plans are to move the Company's two largest drydocks to the facility, which is
estimated to be in service during the fourth quarter of 2002.
In addition to the $6.7 million in capital expenditures relating to the
development of the Amelia property discussed above, for 2002 the Board of
Directors has approved $2.2 million in capital expenditures for the
maintenance, repair and upgrade of existing facilities. This includes $800,000
for the expansion of the Company's new construction facilities in Morgan City,
which the Company expects to complete during the third quarter of 2002.
Net cash used in financing activities was $321,000 for the three months
ended March 31, 2002 which was for the repayment of debt.
During December 2001, the Company borrowed $6.5 million in additional long-
term debt and refinanced the remaining $2.5 million balance on its term loan,
resulting in a total term loan of $9.0 million at December 31, 2001. The
additional borrowing was arranged to provide long-term financing on recent
capital additions, which included the $5.7 million drydock placed in service in
the first quarter of 2001.
The Company has a Loan Agreement with a commercial bank, which specifies the
terms of the Term Loan and the Revolving Credit Facility. Interest accrues at
LIBOR plus 1.75% until May 31, 2002, and thereafter at the option of the
Company either at the lender's prime rate minus 0.5% or LIBOR plus 1.75%. The
Loan Agreement is secured by substantially all of the Company's assets,
contains customary restrictive covenants and requires the maintenance of
certain financial ratios, including a current ratio requirement of 1.25 to 1.0
that
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could limit the Company's use of available capacity under the Revolving Credit
Facility. In addition, the Loan Agreement prohibits the Company from paying
dividends without the consent of the lender and restricts the ability of the
Company to incur additional indebtedness. At March 31, 2002, the Company was in
compliance with these covenants.
The Term Loan is payable in 37 monthly principal payments of $107,000 plus
interest, with a final payment of $4.7 million due on May 31, 2005. At March
31, 2002, the Term Loan balance outstanding was $8.7 million.
The Revolving Credit Facility permits the Company to borrow up to $10.0
million for working capital and other general corporate purposes, including the
funding of acquisitions, and matures on May 31, 2003. No draws were outstanding
as of March 31, 2002.
The Company has received a commitment letter from its lending institution to
provide a loan totaling $6.7 million to fund the development of the Amelia
facility discussed above. The credit facilities will include a revolver that
will convert to a term loan. Payments under the revolver will include interest
only until December 31, 2002, at which time it will convert to a term loan to
be repaid in 52 monthly principal payments of $58,000 plus interest with a
final payment of $3.7 million due on May 31, 2007.
In the normal course of its business, the Company is required to provide
letters of credit to secure the payment of workers' compensation obligations.
Additionally, under certain contracts the Company may be required to provide
letters of credit and bonds to secure certain performance and payment
obligations of the Company thereunder. At March 31, 2002, outstanding letters
of credit and bonds amounted to $1.7 million.
The Company's backlog was $11.3 million at March 31, 2002 as compared to
$10.4 million at December 31, 2001 and $13.2 million at March 31, 2001. As of
May 9, 2002, the Company had signed an additional $12.8 million in contracts
subsequent to March 31, 2002, resulting in backlog of $22.0 million as of May
9, 2002.
Management believes that the Company's existing working capital, cash flows
from operations and bank commitments will be adequate to meet its working
capital needs for operations and capital expenditures through 2002. The Company
may pursue acquisition opportunities it believes are attractive if and when
such opportunities arise. The timing, size or success of any acquisition effort
and the associated potential capital commitments cannot be predicted.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations, ceased
upon adoption of this statement on January 1, 2002. Amortization expense of
existing goodwill was approximately $0.2 million for the three months ended
March 31, 2001. As SFAS No. 142 allows, the Company will complete the required
impairment test in the second quarter of 2002. The Company has not determined
the impact that the impairment test will have on its consolidated financial
position or results of operations. See footnote 7 to the financial statements
for additional information.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the recording of liabilities for all legal
obligations associated with the retirement of long-lived assets that result
from the normal operation of those assets. These liabilities are required to be
recorded at their fair values (which are likely to be the present values of the
estimated future cash flows) in the period in which they are incurred. SFAS No.
143 requires the associated asset retirement costs to be capitalized as part of
the carrying amount of the long-lived asset. The asset retirement obligation
will be accreted each year through a charge to expense. The amounts added to
the carrying amounts of the assets will be depreciated over the useful
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lives of the assets. The Company is required to implement SFAS No. 143 on
January 1, 2003, and it has not determined the impact that this statement will
have on its consolidated financial position or results of operations.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." SFAS No. 144 promulgates standards for
measuring and recording impairments of long-lived assets. Additionally, this
standard establishes requirements for classifying an asset as held for sale,
and changes existing accounting and reporting standards for discontinued
operations and exchanges for long-lived assets. The Company implemented SFAS
No. 144 on January 1, 2002, as required, and it did not have a material effect
on the Company's financial position or results of operations.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of changing interest rates. Interest on
$8.7 million of the Company's long-term debt with an interest rate of 3.65% at
March 31, 2002 was variable based on short-term market rates. Thus a general
increase of 1.0% in short-term market interest rates would result in
additional interest cost of $87,000 per year if the Company were to maintain
the same debt level and structure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various routine legal proceedings primarily
involving commercial claims and workers' compensation claims. While the
outcome of these claims and legal proceedings cannot be predicted with
certainty, management believes that the outcome of such proceedings in the
aggregate, even if determined adversely, would not have a material adverse
effect on the Company's business or financial condition.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 --Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1
to the Company's Annual Report on Form 10-K for year ended December 31,
1998 and incorporated by reference herein).
3.2 --Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein).
4.1 --Specimen Common Stock Certificate (filed as Exhibit 4 to the Company's
Registration Statement on Form 8-A and incorporated by reference herein).
4.2 --Registration Rights Agreement by and among Conrad Industries, Inc., J.
Parker Conrad, John P. Conrad, Jr., Katherine C. Court, The John P.
Conrad, Jr. Trust, The Daniel T. Conrad Trust, The Glen Alan Conrad
Trust, The Kenneth C. Conrad Trust, The Katherine C. Court Trust, The
James P. Conrad Trust, William H. Hidalgo, and Cecil A. Hernandez (filed
as Exhibit 4.2 to the Company's Annual Report on Form 10-K for year ended
December 31, 1998 and incorporated by reference herein).
4.3 --Registration Rights Agreement between Conrad Industries, Inc. and Morgan
Keegan & Company, Inc (filed as Exhibit 4.3 to the Company's Annual
Report on Form 10-K for year ended December 31, 1998 and incorporated by
reference herein).
(b) Reports on Form 8-K
The Company has not filed any Current Reports on Form 8-K during the
quarter which this report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 9, 2002
CONRAD INDUSTRIES, INC.
/s/ Cecil A. Hernandez
By:__________________________________
Cecil A. Hernandez
Senior Vice President and
Chief Financial Officer
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