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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 September 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
(State of other
jurisdiction of 72-1416999
incorporation or (I.R.S. Employer
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 [X] No [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [_] No [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of November 8, 2002, 7,235,954 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 September 30, 2002 and December 31, 2001........................ 3
Consolidated Statements of Operations Three and Nine Months Ended September 30, 2002
and 2001.................................................................................. 4
Consolidated Statements of Cash Flows Nine Months Ended September 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
Item 4. Controls and Procedures.................................................................. 22
Part II. Other Information
Item 1. Legal Proceedings........................................................................ 22
Item 6. Exhibits and Reports on Form 8-K......................................................... 23
Signature............................................................................................. 24
CEO Certification..................................................................................... 25
CFO Certification..................................................................................... 26
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
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 5,933 $ 6,909
Accounts receivable, net.................................................... 2,430 2,353
Costs and estimated earnings in excess of billings on uncompleted contracts. 1,410 2,952
Inventories................................................................. 670 247
Other current assets........................................................ 1,460 1,795
------- -------
Total current assets.................................................... 11,903 14,256
PROPERTY, PLANT AND EQUIPMENT, net............................................. 28,128 25,486
COST IN EXCESS OF NET ASSETS ACQUIRED.......................................... 8,101 12,601
OTHER ASSETS................................................................... 520 231
------- -------
TOTAL ASSETS............................................................ $48,652 $52,574
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................ $ 1,820 $ 859
Accrued employee costs...................................................... 969 1,564
Accrued expenses............................................................ 778 826
Current maturities of long-term debt........................................ 1,284 1,284
Billings in excess of costs and estimated earnings on uncompleted contracts. 1,293 411
------- -------
Total current liabilities............................................... 6,144 4,944
LONG-TERM DEBT, less current maturities........................................ 6,760 7,723
DEFERRED INCOME TAXES.......................................................... 3,037 3,211
------- -------
Total liabilities....................................................... 15,941 15,878
------- -------
COMMITMENTS AND CONTINGENCIES (Note 7)
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, 7,276,437 and
7,273,937 shares issued in 2002 and 2001, respectively.................... 73 73
Additional paid-in capital.................................................. 28,991 28,971
Treasury stock at cost, 40,483 shares in 2002 and 2001...................... (211) (211)
Retained earnings........................................................... 3,858 7,863
------- -------
Total shareholders' equity.............................................. 32,711 36,696
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................. $48,652 $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 Nine Months Ended
September 30, September 30,
----------------- ----------------
2002 2001 2002 2001
------ ------- ------- -------
REVENUE........................................................... $9,379 $12,941 $30,391 $36,999
COST OF REVENUE................................................... 8,280 10,122 25,482 28,483
------ ------- ------- -------
GROSS PROFIT...................................................... 1,099 2,819 4,909 8,516
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...................... 1,150 1,247 3,617 3,597
TERMINATED ACQUISITION COSTS...................................... 350 -- 350 --
EXECUTIVE COMPENSATION EXPENSE.................................... -- 2,613 -- 2,613
------ ------- ------- -------
(LOSS) INCOME FROM OPERATIONS..................................... (401) (1,041) 942 2,306
INTEREST EXPENSE.................................................. (38) (61) (200) (144)
OTHER INCOME, NET................................................. 9 24 24 107
------ ------- ------- -------
(LOSS) INCOME BEFORE INCOME TAXES................................. (430) (1,078) 766 2,269
(BENEFIT) PROVISION FOR INCOME TAXES.............................. (167) (335) 271 1,085
------ ------- ------- -------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE......................................... (263) (743) 495 1,184
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE....................................................... -- -- (4,500) --
------ ------- ------- -------
NET (LOSS) INCOME................................................. $ (263) $ (743) $(4,005) $ 1,184
====== ======= ======= =======
Basic and diluted (loss) income per share:
(Loss) income before cumulative effect of change in accounting
principle.................................................... $(0.04) $ (0.10) $ 0.07 $ 0.17
Cumulative effect of change in accounting principle............ -- -- (0.62) --
------ ------- ------- -------
Net (loss) income.......................................... $(0.04) $ (0.10) $ (0.55) $ 0.17
====== ======= ======= =======
Weighted average common shares outstanding:
Basic.......................................................... 7,230 7,143 7,229 7,095
====== ======= ======= =======
Diluted........................................................ 7,230 7,143 7,229 7,119
====== ======= ======= =======
See notes to unaudited consolidated financial statements.
4
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................................... $(4,005) $ 1,184
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Cumulative effect of change in accounting principle................................... 4,500 --
Depreciation and amortization......................................................... 1,419 1,733
Deferred income tax (benefit) expense................................................. (174) 148
Executive compensation expense........................................................ -- 1,547
Changes in assets and liabilities:
Accounts receivable................................................................. (77) (5,343)
Net change in billings related to cost and estimated earnings on uncompleted
contracts......................................................................... 2,424 937
Inventory and other assets.......................................................... (365) (420)
Accounts payable and accrued expenses............................................... 318 1,642
------- -------
Net cash provided by operating activities......................................... 4,040 1,428
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment............................................ (4,009) (2,923)
Issuance of note receivable--Swiftships................................................. (500) --
Payment (issuance) of executive notes receivable........................................ 456 (456)
------- -------
Net cash used in investing activities............................................. (4,053) (3,379)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of debt............................................................ (963) (1,881)
Net borrowings from line-of-credit...................................................... -- 1,500
Purchase of treasury stock.............................................................. -- (127)
------- -------
Net cash used in financing activities............................................. (963) (508)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................ (976) (2,459)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................... 6,909 3,513
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................. $ 5,933 $ 1,054
======= =======
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid, net of capitalized interest.............................................. $ 200 $ 144
======= =======
Taxes paid.............................................................................. $ -- $ 1,907
======= =======
NONCASH ACTIVITIES:
Issuance of stock to executives......................................................... $ -- $ 1,093
======= =======
Issuance of restricted stock to executive............................................... $ 9 $ 32
======= =======
Forgiveness of executive notes receivable and related interest.......................... $ -- $ 454
======= =======
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 nine-month periods ended
September 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 September 30, 2002 and December
31, 2001 (in thousands):
2002 2001
------ ------
U.S. Government:
Amounts billed................................................. $ 497 $ 357
Unbilled costs and estimated earnings on uncompleted contracts. 347 1,137
------ ------
844 1,494
Commercial:
Amounts billed................................................. 1,933 1,996
Unbilled costs and estimated earnings on uncompleted contracts. 1,063 1,815
------ ------
Total...................................................... $3,840 $5,305
====== ======
Included above in amounts billed is an allowance for doubtful accounts of
$85,000 and $20,000 at September 30, 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 September 30, 2002,
substantially all is expected to be collected within the next twelve months.
Information with respect to uncompleted contracts as of September 30, 2002
and December 31, 2001 is as follows (in thousands):
2002 2001
-------- --------
Costs incurred on uncompleted contracts $ 33,782 $ 28,311
Estimated earnings..................... 8,625 8,081
-------- --------
42,407 36,392
Less billings to date.................. (42,290) (33,851)
-------- --------
$ 117 $ 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 $ 1,410 $2,952
Billings in excess of cost and estimated earnings on uncompleted contracts. (1,293) (411)
------- ------
Total................................................................... $ 117 $2,541
======= ======
3. INVENTORIES
Inventories consist primarily of costs related to vessels in progress not
under customer contract. As of September 30, 2002, amounts related to these
vessels totaled $408,000. No such amounts were outstanding as of December 31,
2001. Remaining inventories consist of excess job related materials and
supplies. They are stated at the lower of cost or market. Cost is determined on
a first-in, first-out basis.
4. LONG-TERM DEBT
The Company has a Loan Agreement with a commercial bank, which specifies the
terms of the Term Loan, the Development Loan and the Revolving Credit Facility.
Interest accrues at LIBOR plus 1.75% until December 2, 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 September 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 31
remaining monthly principal payments of $107,000 plus interest, with a final
payment of $4.7 million. At September 30, 2002, the Term Loan balance
outstanding was $8.0 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 September 30, 2002,
no amounts were outstanding on the Revolving Credit Facility.
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 September 30, 2002, no
amounts were outstanding on this credit facility.
5. 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 7,230,356 and 7,142,912 for the three months ended
September 30,
7
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2002 and 2001, respectively, and 7,229,095 and 7,095,271 for the nine months
ended September 30, 2002 and 2001, respectively. The number of weighted average
shares outstanding for "diluted" income per share was 7,230,356 and 7,142,912
for the three months ended September 30, 2002 and 2001, respectively, and
7,229,095 and 7,119,364 for the nine months ended September 30, 2002 and 2001,
respectively.
Stockholders' 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 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.
6. SEGMENT AND RELATED INFORMATION
The Company classifies its business into two segments:
Vessel Construction
The Company constructs a variety of marine vessels, including tugboats,
ferries, liftboats, barges, offshore support vessels and other steel and
aluminum products for both commercial and government markets. 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.
8
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected information as to the operations of the Company by segment is as
follows (in thousands):
Three Months
Ended Nine Months Ended
September 30, September 30,
--------------- ----------------
2002 2001 2002 2001
------ ------- ------- -------
Revenue:
Vessel construction........................................ $7,618 $ 9,352 $22,266 $25,757
Repair and conversions..................................... 1,761 3,589 8,125 11,242
------ ------- ------- -------
Total revenue.......................................... 9,379 12,941 30,391 36,999
------ ------- ------- -------
Cost of revenue:
Vessel construction........................................ 6,383 7,241 18,477 20,133
Repair and conversions..................................... 1,897 2,881 7,005 8,350
------ ------- ------- -------
Total cost of revenue.................................. 8,280 10,122 25,482 28,483
------ ------- ------- -------
Gross profit:
Vessel construction........................................ 1,235 2,111 3,789 5,624
Repair and conversions..................................... (136) 708 1,120 2,892
------ ------- ------- -------
Total gross profit..................................... 1,099 2,819 4,909 8,516
Selling, general and administrative expenses.................. 1,150 1,247 3,617 3,597
Terminated acquisition costs.................................. 350 -- 350 --
Executive compensation expense................................ -- 2,613 -- 2,613
------ ------- ------- -------
(Loss) income from operations................................. (401) (1,041) 942 2,306
Interest expense.............................................. (38) (61) (200) (144)
Other income, net............................................. 9 24 24 107
------ ------- ------- -------
(Loss) income before income taxes............................. (430) (1,078) 766 2,269
(Benefit) provision for income taxes.......................... (167) (335) 271 1,085
------ ------- ------- -------
(Loss) income before cumulative effect of change in accounting
principle................................................... (263) (743) 495 1,184
Cumulative effect of change in accounting principle........... -- -- (4,500) --
------ ------- ------- -------
Net (loss) income............................................. $ (263) $ (743) $(4,005) $ 1,184
====== ======= ======= =======
Certain other financial information of the Company by segment is as
follows (in thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
------ ---- ------ ------
Depreciation and amortization expense:
Vessel construction...................................... $ 194 $206 $ 628 $ 612
Repair and conversions................................... 147 151 465 410
Included in selling, general and administrative expenses. 117 238 326 711
------ ---- ------ ------
Total depreciation and amortization expense.......... $ 458 $595 $1,419 $1,733
====== ==== ====== ======
Capital expenditures:
Vessel construction...................................... $ 575 $ 39 $ 977 $ 464
Repair and conversions................................... 405 954 2,668 2,263
Other.................................................... 58 -- 364 196
------ ---- ------ ------
Total capital expenditures........................... $1,038 $993 $4,009 $2,923
====== ==== ====== ======
9
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total assets of the Company by segment is as follows as of September 30,
2002 and December 31, 2001 (in thousands):
2002 2001
------- -------
Total assets:
Vessel construction.... $22,645 $27,336
Repair and conversions. 15,465 11,720
Other.................. 10,542 13,518
------- -------
Total assets....... $48,652 $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.
7. 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 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 $650,000.
In September 2002, the Company entered into an employment agreement with
Lewis J. Derbes, Jr. providing for employment as the Company's Vice President
and Chief Financial Officer through December 31, 2004 and annual extensions
thereafter, subject to the parties' mutual agreement. The minimum annual total
compensation under the agreement is $140,000. Pursuant to the agreement, on the
executive's start date of September 30, 2002, he was granted 2,500 restricted
shares of common stock, vesting on the first anniversary of his start date, and
options to purchase 25,000 shares of common stock at the market price on the
start date, vesting over a three-year period.
Construction Commitments --As of September 30, 2002, the Company had an
outstanding commitment of $0.8 million for the construction of its new repair
and conversion facility in Amelia, Louisiana.
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 $26.5 million at September 30, 2002. At December 31, 2001, no such
amounts were outstanding.
10
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. TERMINATED ACQUISITION COSTS
On October 9, 2002, the Company announced that it had terminated
negotiations under a non-binding letter of intent executed August 12, 2002
regarding the purchase of substantially all of the assets of Swiftships
Shipbuilders, LLC and Swiftships Technologies, LLC. Approximately $350,000 of
deferred acquisition costs were charged to operations for the three and nine
months ended September 30, 2002 as a result of the termination of this proposed
acquisition.
In connection with the letter of intent, Conrad entered into an agreement
pursuant to which it loaned approximately $500,000, secured by real estate, to
Swiftships Shipbuilders, LLC. The loan was due on September 30, 2002. This
amount is included under the caption "Other Assets" in the Company's
consolidated balance sheet as of September 30, 2002.
9. EXECUTIVE COMPENSATION EXPENSE
In August 2001, the Company and William H. Hidalgo entered into a transition
agreement and terminated his employment agreement. The agreement provided that
he would remain employed by the Company as President and Chief Executive
Officer through August 26, 2001 and as Special Advisor to the new Chief
Executive Officer through October 31, 2001. In consideration of past services,
assistance with an orderly transition, surrender of his stock options,
execution of the agreement (including a one-year non-competition covenant) and
severance, Mr. Hidalgo received approximately 132,820 shares of common stock
and, on February 28, 2002, a severance payment of $195,290 and bonus of
$622,500. Options to purchase 285,957 shares of common stock previously granted
to Mr. Hidalgo were cancelled. His $233,327 promissory note payable and related
accrued interest payable to the Company were also cancelled.
The Company also granted Cecil A. Hernandez, the Company's former Chief
Financial Officer, in consideration of past services and surrender of his stock
options, approximately 44,261 shares of common stock and paid a cash bonus on
February 28, 2002, of $248,000. Options to purchase 114,043 shares of common
stock previously granted to Mr. Hernandez were cancelled. His $139,277
promissory note payable and related accrued interest payable to the Company
were also cancelled.
Messrs. Hidalgo and Hernandez executed notes payable to the Company in the
amount of their related withholding tax obligations, which were repaid on
February 28, 2002 by an offset against the bonuses due on that date. In
addition, the Company purchased 19,683 shares of common stock from the
executives to assist them in meeting their income tax obligations relating to
these transactions.
As a result of these transactions, the Company incurred a one-time earnings
charge of approximately $2.6 million or $0.37 per diluted share ($1.6 million,
net of tax or $0.23 per diluted share), in the quarter ended September 30, 2001.
10. 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. In accordance with SFAS No. 142, the Company
discontinued the amortization of goodwill upon the adoption of this statement
on January 1, 2002.
11
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 nine months ended September 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 income per share to
the amounts adjusted for the exclusion of goodwill amortization follows (in
thousands, except per share data):
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- ---------------
2002 2001 2002 2001
------ ------ ------- ------
Reported (loss) income before cumulative effect of change in accounting
principle............................................................ $ (263) $ (743) $ 495 $1,184
Add: Goodwill amortization............................................. -- 196 -- 588
------ ------ ------- ------
Adjusted (loss) income before cumulative effect of change in accounting
principle............................................................ (263) (547) 495 1,772
Cumulative effect of change in accounting principle.................... -- -- (4,500) --
------ ------ ------- ------
Adjusted net (loss) income.......................................... $ (263) $ (547) $(4,005) $1,772
====== ====== ======= ======
Reported basic and diluted (loss) income per share before cumulative
effect of change in accounting principle............................. $(0.04) $(0.10) $ 0.07 $ 0.17
Add: Goodwill amortization, per basic and diluted share................ -- 0.03 -- 0.08
------ ------ ------- ------
Adjusted basic and diluted (loss) income per share before cumulative
effect of change in accounting principle............................. (0.04) (0.07) 0.07 0.25
Cumulative effect of change in accounting principle, per basic share... -- -- (0.62) --
------ ------ ------- ------
Adjusted basic and diluted (loss) income per share.................. $(0.04) $(0.07) $ (0.55) $ 0.25
====== ====== ======= ======
The carrying amount of goodwill as of September 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 September 30, 2002. $ 8,101 $-- $ 8,101
======= === =======
12
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 does not expect the adoption of this standard will have a material
effect 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 from extinguishments of debt should be classified as extraordinary items
only if they meet the criteria of 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 Cost 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 restructuring, discontinued operations, plant closing, 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.
13
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. The Company designs,
builds and overhauls tugboats, ferries, liftboats, barges, offshore support
vessels and other steel and aluminum products for both commercial and
government markets. 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 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 and third quarters 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 fourth quarter repair production-hours will be similar to
the third quarter and does not anticipate a significant increase in activity in
the repair and conversion segment until at least the first quarter of 2003
when, as a result of seasonality, the market traditionally improves.
Bid activity in the vessel construction segment has improved since the
fourth quarter of 2001. The Company's backlog, excluding unexercised options,
was $32.7 million at September 30, 2002 as compared to $10.4 million at
December 31, 2001 and $10.0 million at September 30, 2001. The increase in
backlog is primarily attributable to the award of a $16.6 million contract by
the Corps of Engineers for the construction of three towboats. The contract
also includes an option, exercisable by the customer, for one additional
towboat valued at approximately $5.6 million. In addition, the Company is
currently in discussion and negotiations with various customers for new vessel
construction projects and remains cautiously optimistic that these projects
will add to our backlog in the near future. The Company believes that the
impact of the increased bid activity, new contracts and potential projects will
become more evident in the 2003 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
14
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. Work is
currently in progress to develop approximately 14 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 current phase of
development includes additional site preparation, installation of a steel
sheet-pile bulkhead system, dry excavation and dredging, other infrastructure
improvements and outfitting with tools and equipment at an anticipated total
cost of approximately $6.7 million. As of September 30, 2002, the Company has
incurred $2.4 million of cost on the project. Current plans are to move the
Company's two largest drydocks to the facility. The facility will allow the
Company to handle vessels with deeper drafts than the Company can currently
service at its other facilities. The infrastructure improvements also allow for
the potential future development of the facility to accommodate vessel
construction should the market so dictate. The facility was originally planned
to be in service during the fourth quarter of 2002; however, due to Tropical
Storm Isidore, Hurricane Lili, and the excessive rainfall in Southern Louisiana
the last few months, the Amelia facility is not expected to be in service until
either late in the fourth quarter of 2002 or early during the first quarter of
2003.
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
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
15
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.
Change in Management
Cecil A. Hernandez elected to resign as Chief Financial Officer effective
September 30, 2002. Mr. Hernandez will remain an officer of the Company through
November 15, 2002 and also will remain as a Director of Conrad Industries, Inc.
The Company has appointed Lewis J. Derbes, Jr. as Vice-President and Chief
Financial Officer, effective September 30, 2002, pursuant to the terms of an
employment agreement described in Note 7 to the Company's consolidated
financial statements included herein. Mr. Derbes has spent the past five years
with Northrop Grumman Corporation's subsidiary--Avondale Industries, Inc.,
serving in various senior management positions, recently as Vice President and
Controller.
Swiftships Letter of Intent and Loan
On October 9, 2002, the Company announced that it had terminated
negotiations under a previously announced non-binding letter of intent for the
purchase of the assets of Swiftships Shipbuilders, LLC and Swiftships
Technologies, LLC. Approximately $350,000 of deferred acquisition costs were
charged to operations for the three and nine months ended September 30, 2002 as
a result of the termination of this proposed acquisition.
The letter of intent contained a binding exclusivity agreement whereby the
Swiftships parties agreed that before the earlier of the termination of
negotiations by Conrad or October 31, 2002 they would 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 entered into an agreement
pursuant to which it loaned approximately $500,000, secured by real estate, to
Swiftships Shipbuilders, LLC. The loan was due on September 30, 2002. The
Company is currently in negotiations with Swiftships relating to the collection
of the outstanding loan.
16
Results of Operations
The following table sets forth certain historical data of the Company and
percentage of revenues for the periods presented (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------- -------------- -------------- --------------
Financial Data:
Revenue
Vessel construction.................. $7,618 81.2% $ 9,352 72.3% $22,266 73.3% $25,757 69.6%
Repair and conversions............... 1,761 18.8% 3,589 27.7% 8,125 26.7% 11,242 30.4%
------ ----- ------- ----- ------- ----- ------- -----
Total revenue..................... 9,379 100.0% 12,941 100.0% 30,391 100.0% 36,999 100.0%
------ ----- ------- ----- ------- ----- ------- -----
Cost of revenue
Vessel construction.................. 6,383 83.8% 7,241 77.4% 18,477 83.0% 20,133 78.2%
Repair and conversions............... 1,897 107.7% 2,881 80.3% 7,005 86.2% 8,350 74.3%
------ ----- ------- ----- ------- ----- ------- -----
Total cost of revenue............. 8,280 88.3% 10,122 78.2% 25,482 83.8% 28,483 77.0%
------ ----- ------- ----- ------- ----- ------- -----
Gross profit
Vessel construction.................. 1,235 16.2% 2,111 22.6% 3,789 17.0% 5,624 21.8%
Repair and conversions............... (136) -7.7% 708 19.7% 1,120 13.8% 2,892 25.7%
------ ----- ------- ----- ------- ----- ------- -----
Total gross profit................ 1,099 11.7% 2,819 21.8% 4,909 16.2% 8,516 23.0%
S G & A expenses......................... 1,150 12.3% 1,247 9.6% 3,617 11.9% 3,597 9.7%
Non-cash executive compensation (1)...... -- 0.0% 2,613 20.2% -- 0.0% 2,613 7.1%
Terminated acquisition costs (2)......... 350 3.7% -- 0.0% 350 1.2% -- 0.0%
------ ----- ------- ----- ------- ----- ------- -----
Income (loss) from operations............ (401) -4.3% (1,041) -8.0% 942 3.1% 2,306 6.2%
Interest expense......................... 38 0.4% 61 0.5% 200 0.7% 144 0.4%
Other expenses (income), net............. (9) -0.1% (24) -0.2% (24) -0.1% (107) -0.3%
------ ----- ------- ----- ------- ----- ------- -----
Income (loss) before income taxes........ (430) -4.6% (1,078) -8.3% 766 2.5% 2,269 6.1%
Income taxes (benefit)................... (167) -1.8% (335) -2.6% 271 0.9% 1,085 2.9%
------ ----- ------- ----- ------- ----- ------- -----
Income (loss) before cumulative effect of
change in accounting principle.......... (263) -2.8% (743) -5.7% 495 1.6% 1,184 3.2%
Cumulative effect of change in accounting
principle (3)........................... -- 0.0% -- 0.0% (4,500) -14.8% -- 0.0%
------ ----- ------- ----- ------- ----- ------- -----
Net income (loss)........................ $ (263) -2.8% $ (743) -5.7% $(4,005) -13.2% $ 1,184 3.2%
====== ===== ======= ===== ======= ===== ======= =====
EBITDA (4)............................... $ 57 0.6% $ 1,101 8.5% $ 2,361 7.8% $ 5,586 15.1%
====== ===== ======= ===== ======= ===== ======= =====
Net cash provided by operating activities $2,513 $ 1,946 $ 4,040 $ 1,428
====== ======= ======= =======
Operating Data: Labor hours.............. 97 168 348 500
====== ======= ======= =======
- --------
(1) Represents non-recurring executive compensation expense related to the
issuance of shares of common stock, forgiveness of notes and related
interest, severance payment and cash bonuses to executives by the Company
as detailed in the notes to the financial statements.
(2) Represents non-recurring expenses related to the terminated proposed
acquisition of Swiftships Shipbuilders, LLC and Swiftships Technologies,
LLC as detailed in "Recent Events" and the notes to the financial
statements.
(3) 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" as detailed
in the notes to the financial statements.
(4) 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
17
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.
Revenue for the third quarter of 2002 decreased $3.6 million, or 27.5%, to
$9.4 million compared to $12.9 million for the third quarter of 2001 while
revenue for the first nine months of 2002 reflected a decrease of $6.6 million,
or 17.9%, compared to the same period in the prior year. Revenue declined in
both segments of the business. Vessel construction revenue decreased $1.7
million for the third quarter of 2002, or 18.5%, compared to the same period of
the prior year, while vessel construction revenue decreased $3.5 million, or
13.6%, for the first nine months of 2002 compared to the same period in 2001.
Repair and conversion revenue also declined $1.8 million, or 50.9%, and $3.1
million, or 27.7% for the third quarter and first nine months of 2002 compared
to the same periods in 2001. The decrease in revenue in the current periods is
primarily a result of a decrease in production hours attributable to decreased
offshore oil and gas activity. Vessel construction hours decreased 39.2% and
31.6% for the third quarter and first nine months of 2002, respectively, while
repair and conversion hours were lower by 47.0% and 28.6% for the three and
nine months ended September 30, respectively, when compared to the same periods
in 2001.
Gross profit for the third quarter and first nine months of 2002 decreased
$1.7 million, or 61.0%, and $3.6 million or 42.4%, compared to the same periods
of the prior year. Vessel construction gross profit decreased $876,000, or
41.5%, for the third quarter of 2002 compared to the third quarter of 2001,
while vessel construction gross profit decreased $1.8 million, or 32.6%, for
the first nine months of 2002 compared to the same period in 2001. Repair and
conversion gross profit decreased $844,000, or 119.2%, and $1.8 million or
61.3% for the third quarter and first nine months of 2002, respectively,
compared to the same periods of 2001. The decrease in gross profit was
primarily due to the decrease in production hours as discussed above due to
less demand for vessel construction and repair and conversion jobs.
In addition, gross profit margins decreased 10.1% and 6.8%, respectively,
for the three and nine months ended September 30, 2002, compared to the same
periods in 2001. As a result of the decrease in demand, vessel construction
gross profit margins decreased to 16.2% for the three months ended September
30, 2002, compared to gross profit margins of 22.6% for the three months ended
September 30, 2001 while gross profit margins for vessel construction for the
nine months ended September 30, 2002, reflected a decrease of 4.8% to 17.0%
compared to the same period of the prior year. Repair and conversion gross
profit margins decreased to -7.7% for the three months ended September 30,
2002, compared to gross profit margins of 19.7% for the same period of 2001
while repair and conversion gross profit margins reflected a decrease of 11.9%
to 13.8% for the nine months ended September 30, 2002 when compared to the
first nine months of 2001.
Selling, general and administrative expenses ("SG&A") decreased $97,000, or
7.8%, in the third quarter of 2002 and increased $20,000, or 0.6%, for the
first nine months of 2002 compared to the same periods in 2001. The change in
SG&A expenses was due primarily to the elimination of goodwill amortization
expense due to SFAS No. 142, as discussed in Note 10 to the financial
statements, offset by an increase in depreciation and consulting expenses
related to implementation of a new enterprise business system and an increase
in legal and accounting expenses.
Interest expense decreased $23,000, or 37.7%, for the third quarter of 2002,
compared to the same period in 2001, while interest expense increased $56,000
for the first nine months of 2002 compared to the same period in the prior
year. The decrease in the third quarter of 2002 is primarily attributable to
the capitalization of interest related to the development of the 52 acres of
land in Amelia, LA, while the increase for the nine month period is the result
of an increase in the average outstanding loan balance.
18
The Company had an income tax benefit of $167,000 for the third quarter of
2002 compared to $335,000 in the same period of 2001. The reduction in the
income tax benefit is primarily a result of the non-cash executive compensation
expense associated with the management change as discussed in Note 9 to the
financial statements in 2001. For the nine months ended September 30, 2002, the
Company had an income tax expense of $271,000 (35.4% effective tax rate)
compared to $1.1 million (47.8% effective tax rate) for the same period of the
prior year. 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.
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 10 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 nine months ended September 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 $4.0 million for the nine months ended September 30, 2002.
Liquidity and Capital Resources
Historically, the Company has funded its business through funds generated
from operations. Net cash provided by operations was $4.0 million for the nine
months ended September 30, 2002 compared to $1.4 million for the prior year
period due to decreases in billings related to costs and estimated earnings on
uncompleted contracts and increases in accounts payable and accrued expenses
offset by an increases in accounts receivable, inventory and other assets. The
Company's working capital position was $5.8 million at September 30, 2002
compared to $9.3 million at December 31, 2001. The decrease in the working
capital position was primarily due to approximately $4.0 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 $4.1 million for the nine months ended September 30,
2002 reflected approximately $800,000 for the expansion of the Company's new
construction facilities in Morgan City, $900,000 in improvements to facilities
and equipment, $2.4 million for improvements to the 52 acres in Amelia and
$500,000 for the secured note with Swiftships 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 14 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 current phase of
development includes 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 total
cost of approximately $6.7 million. As of September 30, 2002, the Company had
incurred $2.4 million on the project. Current plans are to move the Company's
two largest drydocks to the facility. The facility will allow the Company to
handle vessels with deeper drafts than the Company can currently service at its
other facilities. The infrastructure improvements also allow for the potential
future development of the facility to accommodate vessel construction should
the market so dictate. The facility was originally planned to be in
19
service during the fourth quarter; however, due to Tropical Storm Isidore,
Hurricane Lili, and the excessive rainfall in Southern Louisiana the last few
months, the Amelia facility is not expected to be in service until either late
in the fourth quarter of 2002 or early during the first quarter of 2003.
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 approved $2.2 million in capital expenditures for the maintenance,
repair and upgrade of existing facilities. The Company anticipates spending
$4.9 million during the fourth quarter of 2002 for approved capital
expenditures including the Amelia development.
Net cash used in financing activities was $963,000 for the nine months ended
September 30, 2002 which was entirely 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 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 December 2, 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 September 30,
2002, the Company was in compliance with these covenants.
The Term Loan is payable in 31 remaining monthly principal payments of
$107,000 plus interest, with a final payment of $4.7 million due on May 31,
2005. At September 30, 2002, the Term Loan balance outstanding was $8.0 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 September 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 October 31, 2002, no amounts were
outstanding on this credit facility. The Company anticipates drawing on this
credit facility during the fourth quarter of 2002 in connection with the Amelia
project discussed above.
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 September 30, 2002, outstanding
letters of credit and bonds amounted to $26.5 million. The Company believes
that general industry conditions have led customers to require performance
bonds more often than in the past. The Company believes that it has secured
adequate bonding for potential future job prospects. Although the Company
believes that it will be able to obtain contract bid and performance bonds,
letters of credit, and similar obligations on terms it regards as acceptable,
there can be no assurance it will be successful in doing so. In addition, the
cost of obtaining such bonds, letters of credit and similar obligations may
increase.
20
The Company's backlog, excluding unexercised options, was $32.7 million at
September 30, 2002 as compared to $10.4 million at December 31, 2001 and $10.0
million at September 30, 2001. The increase in backlog is primarily
attributable to the award of a $16.6 million contract by the Corps of Engineers
for the construction of three towboats. The contract also includes an option,
exercisable by the customer, for one additional towboat valued at approximately
$5.6 million. In addition, the Company is currently in discussion and
negotiations with various customers for new vessel construction projects and
remains cautiously optimistic that these projects will add to our backlog in
the near future.
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 2003. The Company
may pursue acquisition opportunities if deemed 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, 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 does not expect the adoption of this standard will have a material
effect 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 from extinguishments of debt should be classified as extraordinary items
only if they meet the criteria of 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 Cost 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 restructuring, discontinued operations, plant closing, 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.
21
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of changing interest rates. Interest on
$8.0 million of the Company's long-term debt with an interest rate of 3.57% at
September 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 $80,000 per year if the Company were to maintain
the same debt level and structure.
Item 4: Controls and Procedures
Within the 90 days prior to the filing date of this report, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures. The evaluation was carried out under the supervision
of and with the participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer. Based on and as
of the date of the evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company, including its consolidated subsidiaries, required to be included in
reports the Company files with or submits to the Securities and Exchange
Commission under the Securities Exchange Act of 1934. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect the Company's internal controls subsequent to the
date of the evaluation.
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 its consolidated financial statements.
22
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 --Third Amended and Restated Loan Agreement, dated as of July 18, 2002, by and among Whitney
National Bank, Conrad Shipyard, L.L.C., Orange Shipbuilding Company, Inc., and Conrad
Industries, Inc.
10.2 --Loan Agreement, dated August 12, 2002, by and among Swift Group, L.L.C., Swiftships
Shipbuilders, L.L.C., Swiftships Technologies, L.L.C., Land and Industrial Asset Management,
L.L.C., Swiftships Freeport, Inc., Champion Shipyards, Inc. and Conrad Shipyard, L.L.C.
10.3 --Employment Agreement effective September 30, 2002, between Conrad Industries, Inc. and Lewis J.
Derbes, Jr.
(b) Reports on Form 8-K
The Company has not filed any Current Reports on Form 8-K during the quarter
for which this report is filed.
23
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: November 8, 2002
CONRAD INDUSTRIES, INC
By: /s/ LEWIS J. DERBES, JR.
-----------------------------
Lewis J. Derbes, Jr.
Vice President and Chief
Financial Officer
24
CERTIFICATIONS
I, Kenneth G. Myers, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conrad Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002.
/S/ KENNETH G. MYERS, JR
- ---------------------------
Kenneth G. "Jerry" Myers, Jr.
President & Chief Executive Officer
25
CERTIFICATIONS
I, Lewis J. Derbes, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conrad Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002.
/S/ LEWIS J. DERBES, JR
- ---------------------------
Lewis J. Derbes, Jr.
Vice President & Chief Financial Officer
26