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 June 30, 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.)
1100 Brashear Ave., Suite 200
P.O. Box 790
Morgan City, Louisiana 70381
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (985) 702-0195
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 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 August 14, 2002, 7,233,454 shares of the registrant's Common Stock
were outstanding.
1
FORM 10-Q
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
Table of Contents
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets June 30, 2002 and December 31, 2001............ 3
Consolidated Statements of Operations Three and Six Months Ended
June 30, 2002 and 2001..................................................... 4
Consolidated Statements of Cash Flows Six Months Ended
June 30, 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................................................. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk................. 22
Part II. Other Information
Item 1. Legal Proceedings..................................................... 22
Item 2. Changes in Securities and Use of Proceeds............................. 22
Item 4. Submissions of Matters to a Vote of Security Holders.................. 23
Item 6. Exhibits and Reports on Form 8-K...................................... 23
Signature.............................................................................. 24
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. Additional risks associated with
the potential acquisition of assets of Swiftships include the risks that a
definitive agreement may not be executed and that conditions to closing the
agreement may not be met, that the Company may be unable to obtain financing on
acceptable terms, that the acquisition if consummated may not produce the
financial results the Company anticipates, and the credit risk associated with
the loan. 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)
June 30, December 31,
ASSETS 2002 2001
------ -------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 5,279 $ 6,909
Accounts receivable, net 5,726 2,353
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,174 2,952
Inventories 263 247
Other current assets 1,567 1,795
-------- --------
Total current assets 15,009 14,256
PROPERTY, PLANT AND EQUIPMENT, net 27,543 25,486
COST IN EXCESS OF NET ASSETS ACQUIRED 8,101 12,601
OTHER ASSETS 296 231
-------- --------
TOTAL ASSETS $ 50,949 $ 52,574
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,561 $ 859
Accrued employee costs 892 1,564
Accrued expenses 732 826
Current maturities of long-term debt 1,284 1,284
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,446 411
-------- --------
Total current liabilities 7,915 4,944
LONG-TERM DEBT, less current maturities 7,081 7,723
DEFERRED INCOME TAXES 2,983 3,211
-------- --------
Total liabilities 17,979 15,878
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
no shares issued -- --
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 (5) (21)
Treasury stock at cost, 40,483 shares in 2002 and 2001 (211) (211)
Retained earnings 4,121 7,863
-------- --------
Total shareholders' equity 32,970 36,696
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 50,949 $ 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 Six Months Ended
June 30, June 30,
------------------ -------------------
2002 2001 2002 2001
-------- -------- -------------------
REVENUE $ 10,427 $ 12,173 $ 21,012 $ 24,058
COST OF REVENUE 8,712 9,245 17,202 18,361
-------- -------- -------- --------
GROSS PROFIT 1,715 2,928 3,810 5,697
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,165 1,185 2,467 2,350
-------- -------- -------- --------
INCOME FROM OPERATIONS 550 1,743 1,343 3,347
INTEREST EXPENSE (81) (66) (162) (83)
OTHER INCOME, NET 5 54 15 83
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 474 1,731 1,196 3,347
PROVISION FOR INCOME TAXES 174 755 438 1,420
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 300 976 758 1,927
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- (4,500) --
-------- -------- -------- --------
NET INCOME (LOSS) $ 300 $ 976 $ (3,742) $ 1,927
======== ======== ======== ========
Basic and diluted earnings (loss) per share:
Income before cumulative effect of change in
accounting principle $ 0.04 $ 0.14 $ 0.10 $ 0.27
Cumulative effect of change in accounting principle -- -- (0.62) --
-------- -------- -------- --------
Net income (loss) $ 0.04 $ 0.14 $ (0.52) $ 0.27
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 7,228 7,071 7,228 7,071
======== ======== ======== ========
Diluted 7,239 7,115 7,228 7,107
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
4
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
-------------------
2002 2001
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(3,742) $ 1,927
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle 4,500 --
Depreciation and amortization 961 1,138
Deferred income tax (benefit) expense (228) 12
Changes in assets and liabilities:
Accounts receivable (3,373) (2,253)
Net change in billings related to cost and estimated
earnings on uncompleted contracts 2,813 (1,854)
Inventory and other assets (340) (193)
Accounts payable and accrued expenses 936 705
------- -------
Net cash provided by (used in) operating activities 1,527 (518)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment (2,971) (1,930)
Proceeds from repayment of executive notes receivable 456 --
------- -------
Net cash used in investing activities (2,515) (1,930)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of debt (642) (1,254)
Proceeds from line-of-credit -- 1,500
------- -------
Net cash (used in) provided by financing activities (642) 246
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,630) (2,202)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,909 3,513
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,279 $ 1,311
======= =======
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 162 $ 83
======= =======
Taxes paid $ -- $ 1,850
======= =======
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 and six-month periods ended
June 30, 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 June 30, 2002 and December 31,
2001 (in thousands):
2002 2001
------ ------
U.S. Government:
Amounts billed $1,930 $ 357
Unbilled costs and estimated earnings on uncompleted contracts 987 1,137
------ ------
2,917 1,494
Commercial:
Amounts billed 3,796 1,996
Unbilled costs and estimated earnings on uncompleted contracts 1,187 1,815
------ ------
Total $7,900 $5,305
====== ======
Included above in amounts billed is an allowance for doubtful accounts of
$85,000 and $20,000 at June 30, 2002 and December 31, 2001, respectively.
6
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 June
30, 2002, substantially all is expected to be collected within the next
twelve months.
Information with respect to uncompleted contracts as of June 30, 2002 and
December 31, 2001 is as follows (in thousands):
2002 2001
------ ------
Costs incurred on uncompleted contracts $ 33,562 $ 28,311
Estimated earnings 9,038 8,081
-------- --------
42,600 36,392
Less billings to date (42,872) (33,851)
-------- --------
$ (272) $ 2,541
======== ========
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 $ 2,174 $2,952
Billings in excess of cost and estimated earnings
on uncompleted contracts (2,446) (411)
------- ------
Total $ (272) $2,541
======= ======
3. LONG-TERM DEBT
The Company has a Loan Agreement with a commercial bank, which specifies
the terms of a Term Loan, Revolving Credit Facility, and Development Loan.
Interest accrues at LIBOR plus 1.75% until August 29, 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 June 30, 2002, the Company was in compliance with these
covenants.
The Term Loan has a maturity date of May 31, 2005 and is payable in 34
remaining monthly principal payments of $107,000 plus interest, with a
final payment of $4.7 million. At June 30, 2002, the Term Loan balance
outstanding was $8.4 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 June 30,
2002, no amounts were outstanding on the Revolving Credit Facility.
7
On July 18, 2002 the Company entered into the Development Loan which
provides financing totaling $6.7 million to fund the development of the
Amelia Deepwater facility. The facility includes 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 fifty-two monthly principal payments of $58,000 plus
interest with a final payment of $3.7 million due on May 31, 2007. As of
July 31, 2002, no amounts were outstanding on this credit facility.
4. SHAREHOLDERS' EQUITY
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 June 30, 2002 and 2001, respectively, and 7,228,454 and
7,071,056 for the six months ended June 30, 2002 and 2001, respectively.
The number of weighted average shares outstanding for "diluted" income per
share was 7,239,240 and 7,114,922 for the three months ended June 30, 2002
and 2001, respectively, and 7,228,454 and 7,106,991 for the six months
ended June 30, 2002 and 2001, respectively.
Stockholder Rights Plan
During May 2002, the Company adopted a rights plan. The rights plan is
intended to protect stockholder interests in the event the Company becomes
the subject of a takeover initiative that the Company's board of directors
believes could deny the Company's stockholders the full value of their
investment. The adoption of the rights plan is intended as a means to guard
against abusive takeover tactics and is not in response to any particular
proposal. The plan does not prohibit the board from considering any offer
that it considers advantageous to its stockholders.
Under the plan, the Company declared and paid a dividend on June 18, 2002
of one right for each share of common stock held by stockholders of record
on June 11, 2002. Each right initially entitles the Company's stockholders
to purchase one one-thousandth of a share of the Company's preferred stock
for $20 per one one-thousandth, subject to adjustment. However, if a person
acquires, or commences a tender offer that would result in ownership of, 15
percent or more of the Company's outstanding common stock while the plan
remains in place, then, unless the Company redeems the rights for $0.001
per right, the rights will become exercisable by all rights holders except
the acquiring person or group for shares of common stock or of the
acquiring person having a market value of twice the purchase price of the
rights.
The rights will expire on May 23, 2012, unless redeemed or exchanged by the
Company at an earlier date. The rights will initially trade with shares of
the Company's common stock and will have no impact on the way in which the
Company's shares are traded. There are currently no separate certificates
evidencing the rights, and there is no market for the rights.
8
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, ferries and offshore support vessels. The
Company 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.
9
Selected information as to the operations of the Company by segment is as
follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
2002 2001 2002 2001
------ ------ ------ ------
Revenue:
Vessel construction $ 7,895 $ 8,461 $ 14,648 $ 16,405
Repair and conversions 2,532 3,712 6,364 7,653
-------- -------- -------- --------
Total revenue 10,427 12,173 21,012 24,058
-------- -------- -------- --------
Cost of revenue:
Vessel construction 6,678 6,654 12,094 12,892
Repair and conversions 2,034 2,591 5,108 5,469
-------- -------- -------- --------
Total cost of revenue 8,712 9,245 17,202 18,361
-------- -------- -------- --------
Gross profit:
Vessel construction 1,217 1,807 2,554 3,513
Repair and conversions 498 1,121 1,256 2,184
-------- -------- -------- --------
Total gross profit 1,715 2,928 3,810 5,697
Selling, general and administrative expenses 1,165 1,185 2,467 2,350
-------- -------- -------- --------
Income from operations 550 1,743 1,343 3,347
Interest expense (81) (66) (162) (83)
Other income, net 5 54 15 83
-------- -------- -------- --------
Income before income taxes 474 1,731 1,196 3,347
Provision for income taxes 174 755 438 1,420
-------- -------- -------- --------
Income before cumulative effect of
change in accounting principle 300 976 758 1,927
Cumulative effect of change in
accounting principle -- -- (4,500) --
-------- -------- -------- --------
Net income (loss) $ 300 $ 976 $ (3,742) $ 1,927
======== ======== ======== ========
Certain other financial information of the Company by segment is as follows (in
thousands):
10
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
Depreciation and amortization expense:
Vessel construction $ 218 $ 204 $ 434 $ 406
Repair and conversions 165 152 318 259
Included in selling, general and
administrative expenses 84 240 209 473
------ ------ ------ ------
Total depreciation and amortization
expense $ 467 $ 596 $ 961 $1,138
====== ====== ====== ======
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
------ ------ ------ ------
Capital expenditures:
Vessel construction $ 253 $ 214 $ 402 $ 425
Repair and conversions 1,802 138 2,263 1,309
Other 218 140 306 196
------- ------- -------- ---------
Total capital expenditures $ 2,273 $ 492 $ 2,971 $ 1,930
======== ======= ======== =========
Total assets of the Company by segment is as follows as of June 30, 2002
and December 31, 2001 (in thousands):
2002 2001
-------------------------
Total assets:
Vessel construction $ 25,567 $ 27,336
Repair and conversions 15,529 11,720
Other 9,853 13,518
--------- ---------
Total assets $ 50,949 $ 52,574
========= =========
Certain assets, including cash and cash equivalents, 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
11
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 has employment agreements with certain
of its executive officers which provide for employment of the officers
through December 31, 2004, and provide for extensions at the end of the
term, subject to the parties' mutual agreement. The minimum annual total
compensation under these agreements is $570,000.
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 $9.0 million at June 30, 2002. At December
31, 2001, no such amounts were outstanding.
Swiftships Letter of Intent and Loan - On August 12, 2002, the Company
announced that it had executed a letter of intent for the purchase of the
assets of Swiftships Shipbuilders, LLC and Swiftships Technologies, LLC for
approximately $12.5 million in cash. The Swiftships companies would also be
eligible to receive an additional amount based on the performance of the
assets during a three-year period after the closing. The Swiftships
companies would use the proceeds of the asset sale to pay creditors. The
letter of intent is non-binding with respect to the proposed acquisition,
which is subject to the execution and closing of a definitive agreement.
The letter of intent contains a binding exclusivity agreement whereby the
Swiftships parties have agreed that before October 31, 2002 they will
negotiate exclusively with Conrad and not solicit any competing acquisition
proposal or enter into any agreement with respect to a competing
acquisition proposal. In addition, if prior to the end of the exclusivity
period or within 180 days thereafter, any of the Swiftships parties accepts
or enters into any agreement with respect to any competing acquisition
proposal, the Swiftships parties must pay Conrad a fee of $1 million
payable at the time the transaction contemplated by the competing
acquisition proposal is consummated.
In connection with the letter of intent, Conrad has entered into a loan
agreement pursuant to which it has agreed to lend on a secured basis up to
$500,000 from time to time to Swiftships Shipbuilders, LLC prior to the
execution of a definitive asset purchase agreement and up to an additional
$500,000 thereafter, for purposes approved by Conrad. The loan is due on
the earlier of September 30, 2002 or the closing of a definitive asset
purchase agreement.
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
12
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. In accordance with SFAS No. 142, the Company discontinued the
amortization of goodwill upon the adoption of this statement on January 1,
2002.
During the second quarter of 2002, the Company completed the two-step
process of the transitional goodwill impairment test prescribed in SFAS No.
142 with respect to existing goodwill. The first step of the transitional
goodwill impairment test involved a comparison of the fair value of each of
the Company's reporting units, as defined under SFAS No. 142, with its
carrying amount. If the carrying amount exceeded the fair value of a
reporting unit, the Company was required to perform the second step of the
transitional goodwill impairment test. As a result of the outcome of the
first step relative to the Orange Shipbuilding reporting unit, the Company
was required to perform the second step of the transitional goodwill
impairment test for this reporting unit. The second step involved comparing
the implied fair value of this reporting unit's goodwill to its carrying
value to measure the amount of impairment. The transitional goodwill
impairment test resulted in the Company recognizing a non-cash transitional
goodwill impairment charge of $4.5 million related entirely to the Orange
Shipbuilding reporting unit. As required by SFAS No. 142, the $4.5 million
charge is retroactively reflected as a cumulative effect of a change in
accounting principle in the Company's Consolidated Statement of Operations
for the six months ended June 30, 2002. There was no income tax effect on
the impairment charge as the charge related to non-deductible goodwill. The
fair value of the Orange Shipbuilding reporting unit was determined based
on the excess earnings return on assets (treasury) valuation method. The
circumstance leading to the goodwill impairment was a decline in market
conditions since the acquisition of this reporting unit. This circumstance
caused lower than expected operating profits and cash flows.
A reconciliation of previously reported net income and earnings per share
to the amounts adjusted for the exclusion of goodwill amortization follows
(in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2002 2001 2002 2001
------ ------ ------ ------
Reported income before cumulative effect of
change in accounting principle $ 300 $ 976 $ 758 $1,927
Add: Goodwill amortization - 196 - 392
----- ------ ------- ------
Adjusted income before cumulative effect of
change in accounting principle 300 1,172 758 2,319
Cumulative effect of change in accounting
principle - - (4,500) -
----- ------ ------- ------
Adjusted net income (loss) $ 300 $1,172 $(3,742) $2,319
===== ====== ======= ======
13
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2002 2001 2002 2001
------ ------ ------ ------
Reported basic and diluted earnings per share
before cumulative effect of change in accounting
principle $ 0.04 $ 0.14 $ 0.10 $ 0.27
Add: Goodwill amortization, per basic and
diluted share - 0.03 - 0.06
--------- --------- ---------- ---------
Adjusted basic and diluted earnings per share
before cumulative effect of change in accounting
principle 0.04 0.17 0.10 0.33
Cumulative effect of change in accounting
principle, per basic and diluted share - - (0.62) -
--------- --------- ---------- ---------
Adjusted basic and diluted earnings (loss) per share $ 0.04 $ 0.17 $ (0.52) $ 0.33
========= ========= ========== =========
The carrying amount of goodwill as of June 30, 2002 and December 31, 2001,
by segment is as follows (in thousands):
Vessel Repair and
Construction Conversions Total
------------ ----------- -----
Balance at December 31, 2001 $ 12,601 $ - $12,601
SFAS No. 142 impairment (4,500) - (4,500)
--------- ----- -------
Balance at June 30, 2002 $ 8,101 $ - $ 8,101
========= ===== =======
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
14
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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates SFAS No. 4 and as a result, gains and
losses form extinguishment of debt should be classified as extraordinary
items only if they meet the criteria in APB Opinion No. 30. SFAS No. 145
amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
updates and amends existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability
under changed conditions. The Company does not expect that the adoption of
SFAS No. 145 will have a material impact on its consolidated financial
position or results of operations.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for fiscal periods
after December 31, 2002. SFAS No. 146 requires companies to recognize costs
associated with restructurings, discontinued operations, plant closings, or
other exit or disposal activities, when incurred rather than at the date a
plan is committed to. The Company plans to adopt the standard as of the
effective date and will implement its provisions on a prospective basis.
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, ferries 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
15
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 an increase in demand for repair and
conversion services in the first quarter of 2002 due to seasonal workload
patterns. The Company experienced significant decreased demand for repair and
conversion services in the second quarter of 2002 as compared to the first
quarter due to higher seasonal demand in the first quarter The Company believes
that there is little or no visibility at this time into the repair market.
However, the Company believes that third quarter repair production-hours will be
similar to the second quarter and does not anticipate a significant increase in
activity in the repair and conversion segment until at least the fourth quarter
of 2002 or the first quarter of 2003. Bid activity in the vessel construction
segment has improved since the fourth quarter of 2001. The Company believes that
the effect of the increase in backlog from $11.3 million at March 31, 2002 to
$22.6 million at June 30, 2002 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, 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
Internal Expansion
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 three of the Company's drydocks (including its largest drydock) to
the facility which is estimated to be in service during the fourth quarter of
2002.
During July 2002, the Company completed the construction of another fabrication
building at the Morgan City yard at a cost of approximately $800,000, which
increased the Company's enclosed building space by approximately 15,000 square
feet and increased capabilities for pre-fabricated components and modular
construction techniques.
Stockholder Rights Plan
During May 2002, the Company adopted a rights plan. The rights plan is intended
to protect stockholder interests in the event the Company becomes the subject of
a takeover initiative that the Company's board of directors believes
16
could deny the Company's stockholders the full value of their investment. The
adoption of the rights plan is intended as a means to guard against abusive
takeover tactics and is not in response to any particular proposal. The plan
does not prohibit the board from considering any offer that it considers
advantageous to its stockholders.
Under the plan, the Company declared and paid a dividend on June 18, 2002 of one
right for each share of the Company's common stock held by stockholders of
record on June 11, 2002. Each right initially entitles the Company's
stockholders to purchase one one-thousandth of a share of the Company's
preferred stock for $20 per one one-thousandth, subject to adjustment. However,
if a person acquires, or commences a tender offer that would result in ownership
of, 15 percent or more of the Company's outstanding common stock while the plan
remains in place, then, unless the Company redeems the rights for $0.001 per
right, the rights will become exercisable by all rights holders except the
acquiring person or group for shares of the Company's common stock or of the
acquiring person having a market value of twice the purchase price of the
rights.
The rights will expire on May 23, 2012, unless redeemed or exchanged by the
Company at an earlier date. A description and the terms of the rights are set
forth in a rights agreement, dated May 23, 2002, between the Company and
American Stock Transfer & Trust Company, which was filed as Exhibit 1 to the
Company's registration statement on Form 8-A filed May 29, 2002. The rights will
initially trade with shares of the Company's common stock and will have no
impact on the way in which the Company's shares are traded. There are currently
no separate certificates evidencing the rights, and there is no market for the
rights.
Swiftships Letter of Intent and Loan
On August 12, 2002, the Company announced that it had executed a letter of
intent for the purchase of the assets of Swiftships Shipbuilders, LLC and
Swiftships Technologies, LLC for approximately $12.5 million in cash. The
Swiftships companies would also be eligible to receive an additional amount
based on the performance of the assets during a three-year period after the
closing. The Swiftships companies would use the proceeds of the asset sale to
pay creditors. The letter of intent is non-binding with respect to the proposed
acquisition, which is subject to the execution and closing of a definitive
agreement.
The letter of intent contains a binding exclusivity agreement whereby the
Swiftships parties have agreed that before October 31, 2002 they will negotiate
exclusively with Conrad and not solicit any competing acquisition proposal or
enter into any agreement with respect to a competing acquisition proposal. In
addition, if prior to the end of the exclusivity period or within 180 days
thereafter, any of the Swiftships parties accepts or enters into any agreement
with respect to any competing acquisition proposal, the Swiftships parties must
pay Conrad a fee of $1 million payable at the time the transaction contemplated
by the competing acquisition proposal is consummated.
In connection with the letter of intent, Conrad has entered into a loan
agreement pursuant to which it has agreed to lend on a secured basis up to
$500,000 from time to time to Swiftships Shipbuilders, LLC prior to the
execution of a definitive asset purchase agreement and up to an additional
$500,000 thereafter, for purposes approved by Conrad. The loan is due on the
earlier of September 30, 2002 or the closing of a definitive asset purchase
agreement.
Swiftships designs, builds, overhauls and repairs aluminum crew/supply boats,
aluminum patrol boats and other marine vessels at two shipyards in Morgan City,
Louisiana and employs approximately 130 people. During their over 30-year
history, Swiftships and its predecessors have designed and constructed over 530
vessels ranging in size from 30 feet to 225 feet in length for domestic and
foreign, commercial and government customers.
Conrad's management believes that Swiftships' aluminum crew/supply boats set the
design and operational standards in the Gulf of Mexico against which others are
measured. Conrad will be able to significantly enhance and expand its products,
services and customer base with the acquisition of Swiftships' assets and
experienced and dedicated workforce along with its designs and marketing
expertise. Conrad will also gain entrance into the international commercial and
government markets as Swiftships has successfully marketed and delivered
products to over 75 countries over the past 30 years. The acquisition affords
Conrad the opportunity for sustained growth in a different market segment than
it currently operates. Conrad is working with the Swiftships companies to
complete the acquisition process.
17
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 June 30, Six Months Ended June 30,
---------------------------------- ---------------------------------
2002 2001 2002 2001
------------- ------------- ------------ ------------
Financial Data:
Revenue
Vessel construction $7,895 75.7% $8,461 69.5% $14,648 69.7% $16,405 68.2%
Repair and conversions 2,532 24.3% 3,712 30.5% 6,364 30.3% 7,653 31.8%
------- ------- ------- -------
Total revenue 10,427 100.0% 12,173 100.0% 21,012 100.0% 24,058 100.0%
------- ------- ------- -------
Cost of revenue
Vessel construction 6,678 84.6% 6,654 78.6% 12,094 82.6% 12,892 78.6%
Repair and conversions 2,034 80.3% 2,591 69.8% 5,108 80.3% 5,469 71.5%
------- ------- ------- -------
Total cost of revenue 8,712 83.6% 9,245 75.9% 17,202 81.9% 18,361 76.3%
------- ------- ------- -------
Gross profit
Vessel construction 1,217 15.4% 1,807 21.4% 2,554 17.4% 3,513 21.4%
Repair and conversions 498 19.7% 1,121 30.2% 1,256 19.7% 2,184 28.5%
------- ------- ------- -------
Total gross profit 1,715 16.4% 2,928 24.1% 3,810 18.1% 5,697 23.7%
S G & A expenses 1,165 11.2% 1,185 9.7% 2,467 11.7% 2,350 9.8%
------- ------- ------- -------
Income from operations 550 5.3% 1,743 14.3% 1,343 6.4% 3,347 13.9%
------- ------- ------- -------
Interest expense 81 0.8% 66 0.5% 162 0.8% 83 0.3%
Other expenses (income), net (5) 0.0% (54) -0.4% (15) -0.1% (83) -0.3%
------- ------- ------- -------
Income before income taxes 474 4.5% 1,731 14.2% 1,196 5.7% 3,347 13.9%
Income taxes 174 1.7% 755 6.2% 438 2.1% 1,420 5.9%
Income before cumulative effect of change in
accounting principle 300 2.9% 976 8.0% 758 3.6% 1,927 8.0%
Cumulative effect of change in accounting
principle (2) - 0.0% - 0.0% (4,500) -21.4% - 0.0%
------- ------- ------- -------
Net income (loss) $ 300 2.9% $ 976 8.0% $(3,742) -17.8% $ 1,927 8.0%
======= ======= ======= =======
EBITDA (1) $ 1,017 9.8% $ 2,339 19.2% $ 2,304 11.0% $ 4,485 18.6%
======= ======= ======= =======
Operating Data: Labor hours 108 167 250 332
18
(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.
(2) The Company recorded a $4.5 million non-cash charge for the impairment of
goodwill resulting from the adoption of Statement of Financial Accounting
Standards Board No. 142, "Goodwill and Other Intangible Assets".
Three Months Ended June 30, 2002 Compared with Three Months Ended June 30, 2001.
During the three months ended June 30, 2002, the Company generated revenue of
$10.4 million, a decrease of approximately $1.7 million, or 14.3%, compared to
$12.2 million generated for the three months ended June 30, 2001. The decrease
was due to a $566,000 (6.7%) decrease in vessel construction revenue to $7.9
million for the three months ended June 30, 2002, compared to $8.5 million for
the three months ended June 30, 2001 and a decrease of $1.2 million (31.8%) in
repair and conversion revenue to $2.5 million for the three months ended June
30, 2002 compared to $3.7 million for the three months ended June 30, 2001. The
decrease in vessel construction revenue was attributable to the decrease in
vessel construction production hours which decreased by 28.6% during the three
months ended June 30, 2002 compared to the three months ended June 30, 2001. The
decrease in repair and conversion revenue during the three months ended June 30,
2002 compared to the three months ended June 30, 2001 was primarily attributable
to the decrease in repair and conversion production hours which decreased by
44.9% during the three months ended June 30, 2002 compared to the three months
ended June 30, 2001 primarily due to decreased offshore oil and gas activity.
Gross profit decreased $1.2 million, or 41.4% to $1.7 million (16.4% of revenue)
for the three months ended June 30, 2002 as compared to gross profit of $2.9
million (24.1% of revenue) for the three months ended June 30, 2001. Vessel
construction gross profit decreased $590,000 or 32.7% to $1.2 million for the
three months ended June 30, 2002 as compared to vessel construction gross profit
of $1.8 million for the three months ended June 30, 2001. Repair and conversion
gross profit decreased $623,000 or 55.6% to $498,000 for the three months ended
June 30, 2002 as compared to repair and conversion gross profit of $1.1 million
for the three months ended June 30, 2001. The decrease in vessel construction
gross profit was primarily due to the decrease in vessel production hours due to
less demand for vessel construction jobs. The decrease in repair and conversion
gross profit was primarily due to the decrease in repair and conversion repair
hours due to less demand for repair and conversion jobs during the three months
ended June 30, 2002 as compared to the three months ended June 30, 2001.
Repair and conversion gross profit margins decreased to 19.7% for the three
months ended June 30, 2002, compared to gross profit margins of 30.2% for the
three months ended June 30, 2001 primarily due to the factors discussed above.
Vessel construction gross profit margins decreased to 15.4% for the three months
ended June 30, 2002, compared to gross profit margins of 21.4% for the three
months ended June 30, 2001 primarily due the factors discussed above.
Selling, general and administrative expenses decreased $20,000, or 1.7%, to $1.2
million (11.2% of revenue) for the three months ended June 30, 2002, as compared
to $1.2 million (9.7% of revenue) for the three months ended June 30, 2001. This
decrease was primarily due to the elimination of $200,000 in goodwill
amortization expense due to
19
SFAS No. 142, as discussed in Note 7 to the financial statements. This decrease
was partially offset by an increase in salary related expenses, depreciation and
consulting expenses related to implementation of new enterprise business system
and an increase in legal and accounting expenses.
Income before income taxes decreased $1.3 million to $474,000 for the three
months ended June 30, 2002 as compared to income before income taxes of $1.7
million for the three months ended June 30, 2001, primarily due to the factors
listed above. The Company had income before cumulative effect of change in
accounting principle of $300,000 for the three months ended June 30, 2002 as
compared to $976,000 for the three months ended June 30, 2001.
Interest expense increased $15,000 to $81,000 for the three months ended June
30, 2002 as compared to interest expense of $66,000 for the three months ended
June 30, 2001 due to an increase in the average outstanding loan balance.
The Company had income tax expense of $174,000 (36.7% effective tax rate) for
the three months ended June 30, 2002, compared to income taxes of $755,000
(43.6% effective tax rate) for the three months ended June 30, 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.
Six Months Ended June 30, 2002 Compared with Six Months Ended June 30, 2001.
During the six months ended June 30, 2002, the Company generated revenue of
$21.0 million, a decrease of approximately $3.0 million, or 12.7%, compared to
$24.1 million generated for the six months ended June 30, 2001. The decrease was
due to a $1.8 million (10.7%) decrease in vessel construction revenue to $14.6
million for the six months ended June 30, 2002, compared to $16.4 million for
the six months ended June 30, 2001 and a decrease of $1.3 million (16.8%) in
repair and conversion revenue to $6.4 million for the six months ended June 30,
2002 compared to $7.7 million for the six months ended June 30, 2001. The
decrease in vessel construction revenue was attributable to the decrease in
vessel construction production hours which decreased by 28.2% during the six
months ended June 30, 2002 compared to the six months ended June 30, 2001. The
decrease in repair and conversion revenue during the six months ended June 30,
2002 compared to the six months ended June 30, 2001 was primarily attributable
to the decrease in repair and conversion production hours which decreased by
44.9% during the six months ended June 30, 2002, as compared to the six months
ended June 30, 2001 due to decreased offshore oil and gas activity.
Gross profit decreased $1.9 million, or 33.1% to $3.8 million (18.1% of revenue)
for the six months ended June 30, 2002 as compared to gross profit of $5.7
million (23.7% of revenue) for the six months ended June 30, 2001. Vessel
construction gross profit decreased $959,000 or 27.3% to $2.6 million for the
six months ended June 30, 2002 as compared to vessel construction gross profit
of $3.5 million for the six months ended June 30, 2001. Repair and conversion
gross profit decreased $928,000 or 42.5% to $1.3 million for the six months
ended June 30, 2002 as compared to repair and conversion gross profit of $2.2
million for the six months ended June 30, 2001. The decrease in vessel
construction gross profit was primarily due to the decrease in vessel production
hours due to less demand for vessel construction jobs. The decrease in repair
and conversion gross profit was primarily due to the decrease in repair and
conversion repair hours due to less demand for repair and conversion jobs during
the six months ended June 30, 2002 as compared to the six months ended June 30,
2001.
Repair and conversion gross profit margins decreased to 19.7% for the six months
ended June 30, 2002, compared to gross profit margins of 28.5% for the six
months ended June 30, 2001 primarily due to the factors discussed above. Vessel
construction gross profit margins decreased to 17.4% for the six months ended
June 30, 2002, compared to gross profit margins of 21.4% for the six months
ended June 30, 2001 primarily due to the factors discussed above.
Selling, general and administrative expenses increased $117,000, or 5.0%, to
$2.5 million (11.7% of revenue) for the six months ended June 30, 2002, as
compared to $2.4 million (9.8% of revenue) for the six months ended June 30,
20
2001. This increase was primarily due to an increase in the reserve for bad
debts, depreciation and consulting expenses related to implementation of new
enterprise business system, salaries, and an increase in legal and accounting
expenses. The increase was partially offset by the elimination of $400,000 in
goodwill amortization expense due to SFAS No. 142, as discussed in Note 7 to the
financial statements.
Income before income taxes decreased $2.2 million to $1.2 million for the six
months ended June 30, 2002 as compared to income before income taxes of $3.3
million for the six months ended June 30, 2001, primarily due to the factors
listed above. The Company had income before cumulative effect of change in
accounting principle of $758,000 for the six months ended June 30, 2002 as
compared to $1.9 million for the six months ended June 30, 2001.
During the second quarter of 2002, the Company completed the two-step process of
the transitional goodwill impairment test prescribed in SFAS No. 142 with
respect to existing goodwill as discussed in Note 7 to the financial statements.
The transitional goodwill impairment test resulted in the Company recognizing a
non-cash transitional goodwill impairment charge of $4.5 million related
entirely to the Orange Shipbuilding reporting unit. As required by SFAS No. 142,
the $4.5 million charge is retroactively reflected as a cumulative effect of a
change in accounting principle in the Company's Consolidated Statement of
Operations for the six months ended June 30, 2002. There was no income tax
effect on the impairment charge as the charge related to non-deductible
goodwill. The fair value of the Orange Shipbuilding reporting unit was
determined based on the excess earnings return on assets (treasury) valuation
method. The circumstance leading to the goodwill impairment was a decline in
market conditions since the acquisition of this reporting unit. This
circumstance caused lower than expected operating profits and cash flows. The
recording of this non-cash charge for the impairment of goodwill resulted in a
net loss of $3.7 million for the six months ended June 30, 2002.
Interest expense increased $79,000 to $162,000 for the six months ended June 30,
2002 as compared to interest expense of $83,000 for the six months ended June
30, 2001 due to an increase in the average outstanding loan balance.
The Company had income tax expense of $438,000 (36.6% effective tax rate) for
the six months ended June 30, 2002, compared to income taxes of $1.4 million
(42.4% effective tax rate) for the six months ended June 30, 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.
Liquidity and Capital Resources
Historically, the Company has funded its business through funds generated from
operations. Net cash provided by operations was $1.5 million for the six months
ended June 30, 2002 due to decreases in billings related to costs and estimated
earnings on uncompleted contracts and increases in accounts receivable and other
assets offset by an increase in accounts payable and accrued expenses. The
Company's working capital position was $7.1 million at June 30, 2002 compared to
$9.3 million at December 31, 2001. The decrease in the working capital position
was primarily due to $3.0 million in capital expenditures for plant and
equipment.
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 $2.5 million for the six months ended June 30, 2002
reflected $713,000 for the expansion of the Company's new construction
facilities in Morgan City, $734,000 in improvements to facilities and equipment,
$1.6 million for improvements to the 52 acres in Amelia 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
21
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 three of the Company's
drydocks (including its largest drydock) 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 placed in service during July 2002. The Company anticipates spending
$5.9 million during the second half of 2002 for approved capital expenditures.
Net cash used in financing activities was $642,000 for the six months ended June
30, 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 a Term Loan, Revolving Credit Facility and Development Loan. Interest
accrues at LIBOR plus 1.75% until August 29, 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 June 30, 2002, the Company was in
compliance with these covenants.
The Term Loan is payable in 34 remaining monthly principal payments of $107,000
plus interest, with a final payment of $4.7 million due on May 31, 2005. At June
30, 2002, the Term Loan balance outstanding was $8.4 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
June 30, 2002.
On July 18, 2002 the Company entered into the Development Loan which provides
financing totaling $6.7 million to fund the development of the Amelia Deepwater
facility discussed above. The facility includes a revolver that will convert to
a term loan. Payments under the revolver 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. As of July 31, 2002, no amounts wee outstanding on
this credit facility.
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 June 30, 2002, outstanding letters of
credit and bonds amounted to $9.0 million.
The Company's backlog was $22.6 million at June 30, 2002 as compared to $10.4
million at December 31, 2001 and $10.9 million at June 30, 2001.
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 is
currently negotiating with its financial institution to secure the necessary
financing for the
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acquisition of Swiftships assets. Management believes that borrowings should be
available on reasonable terms.
New Accounting Pronouncements
In June 2001, Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 eliminates SFAS No. 4 and as a result, gains and losses form
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB Opinion No. 30. SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also updates and amends existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
does not expect that the adoption of SFAS No. 145 will have a material impact on
its consolidated financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for fiscal periods after
December 31, 2002. SFAS No. 146 requires companies to recognize costs associated
with restructurings, discontinued operations, plant closings, or other exit or
disposal activities, when incurred rather than at the date a plan is committed
to. The Company plans to adopt the standard as of the effective date and will
implement its provisions on a prospective basis.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of changing interest rates. Interest on $8.4
million of the Company's long-term debt with an interest rate of 3.65% at June
30, 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 $84,000 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,
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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 2. Changes in Securities and Use of Proceeds
During May 2002, the Company adopted a stockholder rights plan. For a
description of the plan, see Part I Item 2. "Recent Events - Stockholder Rights
Plan" and Exhibit 4.4 to this Form 10-Q.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's 2002 annual meeting of stockholders was held on May 23, 2002. All
director nominees were elected. The voting tabulation was as follows: Cecil A.
Hernandez: 6,504,899 votes for, 310,877 votes withheld; Louis J. Michot, Jr.:
6,504,899 votes for, 310,877 votes withheld. The proposal to approve the 2002
Stock Plan was approved. The voting tabulation was as follows: 5,186,585 votes
for, 367,328 votes against and 5,087 abstentions.
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).
4.4 -- Rights Agreement dated May 23, 2002 between Conrad
Industries, Inc. and American Stock Transfer & Trust Company
(file as Exhibits 1, 2, 3 and 4 to the Company's
Registration Statement on Form 8-A filed May 29, 2002 and
incorporated by reference herein).
10.1 -- Amendment No. 2 to Employment Agreement between Conrad
Industries, Inc. and Conrad Shipyard, L.L.C. and J. Parker
Conrad dated March 31, 2002.
10.2 -- Amendment No. 2 to Employment Agreement between Conrad
Industries, Inc. and Conrad Shipyard, L.L.C. and John P.
Conrad, Jr. dated March 31, 2002.
10.3 -- Amendment No. 2 to Employment Agreement between Conrad
Industries, Inc. and Conrad Shipyard, L.L.C. and Cecil A.
Hernandez dated March 31, 2002.
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(b) Reports on Form 8-K
Form 8-K announcing the issuance of Rights, filed May 29, 2002.
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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: August 14, 2002
CONRAD INDUSTRIES, INC.
By: /s/ Cecil A. Hernandez
--------------------------------
Cecil A. Hernandez
Senior Vice President and
Chief Financial Officer
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