<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 1998
-------------------------------------------------
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 33-6967
HALTER MARINE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2656828 75-2656828
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation Identification No.)
or Organization)
13085 Industrial Seaway Road, 39503
Gulfport, Mississippi
(Zip Code)
(Address of principal executive
offices)
Registrant's Telephone Number, Including Area Code: (228)896-0029
---------------------------
- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report
Indicate by check mark whether the registrant:(1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. 28,856,661 as of January 31,
1999
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1998 1998
------ ------------ ---------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................. $ 185 $ 51,146
Contract receivables.................................. 123,385 115,389
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 133,046 81,229
Inventories........................................... 50,425 19,692
Other current assets.................................. 6,622 5,124
-------- --------
Total current assets................................ 313,663 272,580
Property, plant, and equipment, net..................... 166,933 125,962
Excess of cost over net assets acquired................. 101,430 92,101
Other assets............................................ 8,310 8,958
-------- --------
$590,336 $499,601
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued liabilities.............. $ 68,675 $ 51,433
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ 74,959 68,172
Notes payable and current portion of long-term debt... 52,000 1,918
-------- --------
Total current liabilities........................... 195,634 121,523
Long-term debt, less current portion.................... 217,909 218,215
Deferred income taxes................................... 12,228 7,025
Other noncurrent liabilities............................ 1,599 1,735
-------- --------
Total liabilities................................... 427,370 348,498
Stockholders' Equity:
Common stock.......................................... 288 288
Additional paid-in capital............................ 119,417 119,396
Retained earnings..................................... 43,261 31,419
-------- --------
Total stockholders' equity.......................... 162,966 151,103
-------- --------
$590,336 $499,601
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Contract revenue earned..................................... $759,804 $480,835
Cost of revenue earned...................................... 692,672 414,058
-------- --------
Gross profit............................................ 67,132 66,777
Selling, general, and administrative expenses............... 45,449 27,107
Amortization of excess of cost over net assets acquired..... 4,600 1,458
-------- --------
Operating income............................................ 17,083 38,212
Other expenses:
Interest expense, net..................................... 6,778 4,969
Other, net................................................ (103) 1,837
-------- --------
6,675 6,806
-------- --------
Income before income taxes.................................. 10,408 31,406
Income tax expense (benefit)................................ (1,433) 9,429
-------- --------
Net income.................................................. $ 11,841 $ 21,977
======== ========
Net income per share........................................ $ 0.41 $ 0.79
======== ========
Net income per share, diluted............................... $ 0.41 $ 0.76
======== ========
Weighted average shares outstanding:
Basic..................................................... 28,842 27,863
Diluted................................................... 29,198 31,348
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended December
31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Contract revenue earned..................................... $279,246 $180,568
Cost of revenue earned...................................... 267,707 154,010
-------- --------
Gross profit.............................................. 11,539 26,558
Selling, general, and administrative expenses............... 15,231 10,656
Amortization of excess of cost over net assets acquired..... 1,356 783
-------- --------
Operating income (loss)..................................... (5,048) 15,119
Other expenses:
Interest expense, net..................................... 2,883 1,819
Other, net................................................ (34) 793
-------- --------
2,849 2,612
-------- --------
Income (loss) before income taxes........................... (7,897) 12,507
Income tax expense (benefit)................................ (6,925) 3,752
-------- --------
Net income (loss)........................................... $ (972) $ 8,755
======== ========
Net income (loss) per share................................. $ (0.03) $ 0.31
======== ========
Net income (loss) per share, diluted........................ $ (0.03) $ 0.29
======== ========
Weighted average shares outstanding:
Basic..................................................... 28,857 28,238
Diluted................................................... 28,857 35,687
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-------------------
1998 1997
-------- ---------
<S> <C> <C>
Net cash provided (required) by operating activities....... $(46,628) $ 45,776
Investing activities:
Capital expenditures..................................... (54,131) (31,272)
Business acquisitions, net of cash acquired.............. -- (88,693)
-------- ---------
Net cash required by investing activities.............. (54,131) (119,965)
Financing activities:
Net proceeds from sale and issuance of stock............. 22 60
Debt issuance costs...................................... -- (5,674)
Additions to debt........................................ 51,896 248,700
Principal payments on debt............................... (2,120) (124,400)
-------- ---------
Net cash provided by financing activities.............. 49,798 118,686
-------- ---------
Net increase (decrease) in cash and cash equivalents....... (50,961) 44,497
Cash and cash equivalents at beginning of year............. 51,146 7,079
-------- ---------
Cash and cash equivalents at end of period................. $ 185 $ 51,576
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 31, 1998
NOTE 1--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three and
nine month periods ended December 31, 1998 are not necessarily indicative of
the results that may be expected for the fiscal year ended March 31, 1999. The
balance sheet at March 31, 1998 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in the Halter
Marine Group, Inc. and Subsidiaries' Annual Report on Form 10-K for the year
ended March 31, 1998.
NOTE 2--Business Acquisitions
During August 1997, the Company acquired the assets of Bludworth Bond
Shipyard, Inc., Houston, Texas. During the third quarter of fiscal 1998, the
Company completed the acquisitions of four additional companies, including
AmClyde Engineered Products, Inc., and formed the Engineered Products Group.
The aggregate purchase price for these five companies was $75 million, of
which approximately $45 million was paid in cash and the balance in 835,484
shares of the Company's common stock. A substantial portion of the total
purchase price was allocated to cost in excess of net assets acquired.
The following unaudited pro forma financial information presents the
combined results of operations for the three and nine months ended December
31, 1997, assuming consummation of the purchase of these companies as of April
1, 1997 and, after giving effect to the shares issued and certain adjustments,
including amortization of excess of cost over net assets acquired, increased
interest expense on debt related to the acquisitions, and related income tax
expense. This pro forma information does not necessarily reflect the results
of operations that would have occurred had the Company, along with these
companies, constituted a single entity during these periods.
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
----------- ------------
December 31, 1997
------------------------
(in thousands, except
per share data)
<S> <C> <C>
Contract revenue earned.............................. $529,158 $184,238
======== ========
Net income........................................... $ 19,600 $ 7,891
======== ========
Net income per share................................. $ 0.68 $ 0.27
======== ========
Net income per share, diluted........................ $ 0.63 $ 0.26
======== ========
Proforma weighted average number of shares
outstanding:
Basic.............................................. 28,698 29,073
Diluted............................................ 32,183 36,522
</TABLE>
6
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
December 31, 1998
NOTE 3--Segment Information
The Company classifies its business into three segments: Vessels, which
includes the new construction and repair of a wide variety of vessels for the
government, energy and commercial markets; Rigs, which includes the
construction, conversion and repair of mobile offshore drilling rigs; and
Engineered Products, which includes the design, manufacture and marketing of
cranes, derricks, winches, hoists, windlasses, jacks, linear winches,
fairleads, capstans, tuggers, locking devices, turret bearings, control
systems, and other related products used in the marine, offshore and
construction industries. The Company evaluates the performance of its segments
based upon income before interest and income taxes as these expenses are not
allocated to the segments. Corporate overhead expenses are reported within the
Vessels segment.
Selected information as to the operations and other financial information of
the Company by segment follows.
<TABLE>
<CAPTION>
Nine Months Ended December 31, 1998
--------------------------------------
Engineered
Vessels Rigs Products Total
-------- -------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
Operations:
Contract revenue earned.............. $392,751 $282,281 $84,772 $759,804
Cost of revenue earned............... 357,118 265,110 70,444 692,672
-------- -------- ------- --------
Gross profit....................... 35,633 17,171 14,328 67,132
Selling, general and administrative
expenses............................ 29,964 9,153 6,332 45,449
Amortization of excess of cost over
net assets acquired................. 455 1,521 2,624 4,600
Other, net........................... (57) -- (46) (103)
-------- -------- ------- --------
Income before interest and income
taxes............................. $ 5,271 $ 6,497 $ 5,418 $ 17,186
======== ======== ======= ========
Other financial information:
Depreciation expense:
Included in cost of revenue
earned............................ $ 9,451 $ 2,075 $ 595 $ 12,121
Included in selling, general and
administrative expenses........... 784 148 79 1,011
-------- -------- ------- --------
$10,235 $ 2,223 $ 674 $ 13,132
======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended December 31, 1997
--------------------------------------
Engineered
Vessels Rigs Products Total
-------- -------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
Operations:
Contract revenue earned............... $364,567 $108,213 $8,055 $480,835
Cost of revenue earned................ 327,914 79,803 6,341 414,058
-------- -------- ------ --------
Gross profit........................ 36,653 28,410 1,714 66,777
Selling, general and administrative
expenses............................. 19,455 6,425 1,227 27,107
Amortization of excess of cost over
net assets acquired.................. 19 1,013 426 1,458
Other, net............................ (49) 1,893 (7) 1,837
-------- -------- ------ --------
Income before interest and income
taxes.............................. $ 17,228 $ 19,079 $ 68 $ 36,375
======== ======== ====== ========
</TABLE>
7
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
December 31, 1998
<TABLE>
<CAPTION>
Nine Months Ended December 31, 1997
-------------------------------------
Engineered
Vessels Rigs Products Total
-------- -------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
Other financial information:
Depreciation expense:
Included in cost of revenue earned... $ 6,302 $ 1,285 $ -- $ 7,587
Included in selling, general and
administrative expenses............. 245 105 -- 350
-------- -------- ------ --------
$ 6,547 $ 1,390 $ -- $ 7,937
======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended December 31, 1998
---------------------------------------
Engineered
Vessels Rigs Products Total
-------- -------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
Operations:
Contract revenue earned............. $133,052 $119,625 $26,569 $279,246
Cost of revenue earned.............. 120,393 125,281 22,033 267,707
-------- -------- ------- --------
Gross profit (loss)............... 12,659 (5,656) 4,536 11,539
Selling, general and administrative
expenses........................... 10,206 3,193 1,832 15,231
Amortization of excess of cost over
net assets acquired................ 108 452 796 1,356
Other, net.......................... (26) -- (8) (34)
-------- -------- ------- --------
Income (loss) before interest and
income taxes..................... $ 2,371 $ (9,301) $ 1,916 $ (5,014)
======== ======== ======= ========
Other financial information:
Depreciation expense:
Included in cost of revenue
earned........................... $ 3,318 $ 752 $ 214 $ 4,284
Included in selling, general and
administrative expenses.......... 291 53 34 378
-------- -------- ------- --------
$ 3,609 $ 805 $ 248 $ 4,662
======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended December 31, 1997
-------------------------------------
Engineered
Vessels Rigs Products Total
-------- ------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
Operations:
Contract revenue earned................ $131,142 $41,371 $8,055 $180,568
Cost of revenue earned................. 116,618 31,051 6,341 154,010
-------- ------- ------ --------
Gross profit......................... 14,524 10,320 1,714 26,558
Selling, general and administrative
expenses.............................. 6,265 3,164 1,227 10,656
Amortization of excess of cost over net
assets acquired....................... 19 338 426 783
Other, net............................. (46) 846 (7) 793
-------- ------- ------ --------
Income before interest and income
taxes............................... $ 8,286 $ 5,972 $ 68 $ 14,326
======== ======= ====== ========
Other financial information:
Depreciation expense:
Included in cost of revenue earned... $ 2,243 $ 454 $ -- $ 2,697
Included in selling, general and
administrative expenses............. 102 37 -- 139
-------- ------- ------ --------
$ 2,345 $ 491 $ -- $ 2,836
======== ======= ====== ========
</TABLE>
8
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
December 31, 1998
As described in Note 2, the Company formed the Engineered Products Group
during the third quarter of fiscal 1998. Accordingly, there were only two
months of operating results related to this segment during the nine months and
three months ended December 31, 1997.
Total assets and capital expenditures of the Company by segment are set
forth as follows.
<TABLE>
<CAPTION>
Engineered
Vessels Rigs Products Adjustments Total
-------- -------- ---------- ----------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total assets:
As of Dec. 31, 1998......... $341,072 $134,351 $112,171 $ 2,742 $590,336
======== ======== ======== ======= ========
As of March 31, 1998........ $263,820 $102,029 $ 85,247 $48,505 $499,601
======== ======== ======== ======= ========
Capital expenditures
For nine months ended:
Dec. 31, 1998............. $ 28,750 $ 22,864 $ 2,517 $ -- $ 54,131
======== ======== ======== ======= ========
Dec. 31, 1997............. $ 23,816 $ 7,254 $ 202 $ -- $ 31,272
======== ======== ======== ======= ========
For three months ended:
Dec. 31, 1998............. $ 8,327 $ -- $ 156 $ -- $ 8,483
======== ======== ======== ======= ========
Dec. 31, 1997............. $ 6,316 $ 3,716 $ 202 $ -- $ 10,234
======== ======== ======== ======= ========
</TABLE>
For consolidation purposes, certain cash and cash equivalent balances are
allocated to corporate and are included along with other accounting
eliminations and adjustments in the Adjustments column.
NOTE 4--Reconciliation of Net Income (Loss) Per Share
The following tables sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
Nine Months
Ended December
31,
---------------
1998 1997
------- -------
(in thousands,
except per
share data)
<S> <C> <C>
Numerator:
Net income................................................... $11,841 $21,977
======= =======
Numerator for net income per share........................... $11,841 $21,977
Effect of dilutive securities:
4 1/2% Convertible Notes................................... -- 1,708
------- -------
Numerator for net income per share, diluted, after assumed
conversion.................................................. $11,841 $23,685
======= =======
Denominator:
Denominator for net income per share-weighted average shares
outstanding................................................. 28,842 27,862
Effect of dilutive securities:
Stock options.............................................. 356 1,202
4 1/2 Convertible Notes.................................... -- 2,284
------- -------
Denominator for net income per share, diluted, after assumed
conversion.................................................. 29,198 31,348
======= =======
Net income per share........................................... $ 0.41 $ 0.79
======= =======
Net income per share, diluted.................................. $ 0.41 $ 0.76
======= =======
</TABLE>
9
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
December 31, 1998
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------
1998 1997
---------- ----------
(in thousands, except
per share data)
<S> <C> <C>
Numerator:
Net income (loss)..................................... $ (972) $ 8,755
========== ==========
Numerator for net income (loss) per share............. $ (972) $ 8,755
Effect of dilutive securities:
4 1/2% Convertible Notes............................ -- 1,469
---------- ----------
Numerator for net income (loss) per share, diluted,
after assumed conversion............................. $ (972) $ 10,224
========== ==========
Denominator:
Denominator for net income (loss) per share-weighted
average shares outstanding........................... 28,857 28,238
Effect of dilutive securities:
Stock options....................................... -- 1,576
4 1/2 Convertible Notes............................. -- 5,873
---------- ----------
Denominator for net income (loss) per share, diluted,
after assumed conversion............................. 28,857 35,687
========== ==========
Net income (loss) per share............................. $ (0.03) $ 0.31
========== ==========
Net income (loss) per share, diluted.................... $ (0.03) $ 0.29
========== ==========
</TABLE>
NOTE 5--Change in Effective Income Tax Rate
The Company recorded an income tax benefit of $6.9 million (88%)for the
third quarter of fiscal 1999 compared to income tax expense of $3.8 million
for the same quarter last year. The Company recorded an income tax benefit of
$1.4 million (14%) for the first nine months compared to income tax expense of
$9.4 million (30%) for the same period last year. The benefit for the current
quarter reflects additional tax credits for the Company's research and
development activities, and, the write-off for tax purposes, of the Company's
investment in an international joint venture. These items, along with a refund
of income taxes previously paid to Trinity Industries, Inc., the Company's
former parent, also impacted the Company's income tax position for the nine
months ended December 31, 1998.
NOTE 6--Notes Payable and Current Portion of Long-Term Debt
As of December 31, 1998, the Company was in violation of three restrictive
financial covenants under its revolving credit agreement with a group of
banks. Covenants violated included the minimum interest coverage ratio,
minimum debt service coverage ratio, and the ratio of funded debt to earnings
before interest depreciation and amortization. A waiver of these violations as
of December 31, 1998 was received from the group of banks. The waiver is
effective through March 12, 1999. As of this report date, the Company was in
the final stages of renegotiating the terms and conditions of the credit
facility, including the financial covenants. The Company believes it will be
able to satisfactorily renegotiate the terms and conditions of the debt during
March 1999. However, pending finalization of a new debt agreement, $50.0
million of debt related to the revolving credit agreement has been classified
as a current liability.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
All statements (other than statements of historical fact) contained in this
document concerning the Company's financial position and liquidity; results of
operations; prospects for commercial or government
10
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
December 31, 1998
contracts; ability to take advantage of new vessel construction and conversion
opportunities; labor supply and costs; selling, general and administrative
costs; and other matters, are forward-looking statements. Forward-looking
statements in this document generally are accompanied by words such as
"anticipate," "believe," "estimate," or "expect" or similar words or phrases.
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. Certain of the factors that could cause the
Company's results to differ materially from the results discussed in such
forward-looking statements are discussed below. All forward-looking statements
in this document are expressly qualified in their entirety by the cautionary
statements in this paragraph.
Financial Condition
Increases in balance sheet accounts at December 31, 1998 compared to March
31, 1998 were primarily attributable to a net increase in costs and estimated
earnings in excess of billings on uncompleted contracts which represents the
Company's net investment in work-in-process; an increase in inventories in
support of increased sales; and, an increase in property, plant and equipment
resulting from the acquisition of a shipyard facility in Orange, Texas and
other purchases of fixed assets. Cash on hand and borrowings of $50 million
under the Company's revolving credit facility were used to support the
increases described above. For further information, refer to the discussion in
the "Liquidity and Sources of Capital" section on page 15.
Nine Months Ended December 31, 1998 vs.
Nine Months Ended December 31, 1997
Results of Operations
The following tables set forth certain statement of income information as a
percentage of the Company's revenue for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended December
31,
-----------------------------
1998 1997
-------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Contract revenue earned by business segment:
Vessels........................................ $392.7 51.7% $364.6 75.8%
Rigs........................................... 282.3 37.2 108.2 22.5
Engineered Products............................ 84.8 11.1 8.0 1.7
------ ----- ------ -----
$759.8 100.0% $480.8 100.0%
====== ===== ====== =====
Contract revenue earned by customer type:
Government: (1)
Vessels...................................... $112.0 14.7% $148.3 30.8%
Energy: (2)
Vessels...................................... 187.0 24.6 137.5 28.6
Rigs......................................... 282.3 37.2 108.2 22.5
------ ----- ------ -----
469.3 61.8 245.7 51.1
Commercial: (3)
Vessels...................................... 34.1 4.5 47.8 9.9
Other: (4)
Vessels...................................... 59.6 7.8 31.0 6.5
Engineered Products.......................... 84.8 11.2 8.0 1.7
------ ----- ------ -----
144.4 19.0 39.0 8.2
------ ----- ------ -----
$759.8 100.0% $480.8 100.0%
====== ===== ====== =====
</TABLE>
11
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
December 31, 1998
- --------
(1) Consists of revenue from the Company's government customers, including the
U.S. Navy, state and local governments, and foreign governments.
(2) Consists of revenue from the construction or conversion of vessels and the
construction, conversion, and repair of mobile offshore drilling rigs.
Vessels include offshore support vessels, offshore double-hull barges and
tank barges.
(3) Consists of revenue from the Company's commercial customers and includes
vessels such as tugboats, barges, inland towboats and other vessels.
(4) Consists of revenue from customers for the construction of yachts, vessel
repairs and assorted marine products and the design and manufacture of
engineered products.
Contract revenue increased 58.0% to $759.8 million for the nine months ended
December 31, 1998 compared to $480.8 million for the nine months ended
December 31, 1997. Of the $279.0 million increase, $174.1 million was
attributable to the Rigs segment as a result of revenue recognized on
contracts involving the new construction of six multi-service drill barges and
a jack-up rig, as well as increased contracts for repair and conversion of
drilling rigs. Another $76.8 million of the increase was related to revenue
generated by the Engineered Products Group which was acquired during the third
quarter of fiscal 1998. Additionally, $28.1 million of the increase was
generated by the Vessels segment as a result of an increase in contracts for
offshore support vessels.
Revenue generated from the energy customer group increased primarily as a
result of higher revenue generated by the Rigs segment as previously discussed
as well as growth in construction of offshore support vessels within the
Vessels segment. Revenue growth within the other customer group of the Vessels
segment resulted from increased vessel repair and yacht activity. The decline
in government revenue within the Vessels segment occurred as fiscal 1998
included revenue from several contracts that were reaching final stages of
completion during fiscal 1999.
The gross profit margin decreased to 8.8% for the first nine months of
fiscal 1999 compared to 13.9% for the same period last year. Excluding the
Engineered Products Group, the gross margin was 7.8% for the current period.
The overall decrease in gross margin was partially a result of a decline in
the gross margin experienced in the Rigs segment. The Rigs segment gross
margin decreased principally as a result of cost overruns associated with the
new construction of five of the six multi-service drill barges. These cost
overruns were primarily related to engineering delays, owner changes, and a
shortage of trained labor. Additionally, production delays experienced in the
Rigs segment were experienced during the second quarter of the current year
resulting from the effects of two tropical storms that affected the Texas
coast. Also, during the first nine months of fiscal 1998, a larger percentage
of total revenue from the Vessels segment was derived from the government
customer group which generated higher profit margins thus contributing to a
higher overall gross margin for that period.
Selling, general and administrative expenses increased $18.3 million to
$45.4 million for the first nine months of fiscal 1999, or 6.0% of revenue
compared to $27.1 million or 5.6% of revenue for the same period last year.
The increase is primarily a result of the overall growth of the Company during
the past year. The recently acquired Engineered Products Group added
approximately $5.1 million in expenses. The remaining increase was primarily
attributable to a $3.6 million increase in salary expense and a $5.4 million
increase in consulting expenses related to a business process improvement
project undertaken in the Vessels segment during the latter part of fiscal
1998. The Company expects to spend an additional $1.2 million on this project
during the remainder of fiscal 1999.
12
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
December 31, 1998
Interest expense, net of interest income, increased $1.8 million to $6.8
million for the first nine months of fiscal 1999 compared to $5.0 million for
the first nine months of fiscal 1998 primarily as a result of the issuance of
$185.0 million of 4% convertible subordinated notes in September 1997 and $30
million of taxable revenue bonds in January 1998.
The Company recorded an income tax benefit of $1.4 million (14%) for the
first nine months compared to income tax expense of $9.4 million (30%) for the
same period last year. The benefit for the current year reflects additional
tax credits for the Company's research and development activities, and, the
write-off for tax purposes, of the Company's investment in an international
joint venture. Additionally, a refund of income taxes previously paid to
Trinity Industries, Inc., the Company's former parent, also impacted the
Company's income tax position for the nine months ended December 31, 1998.
The Company's construction backlog of $783.5 million at December 31, 1998
decreased 4.1% compared to $817.1 million at March 31, 1998 and increased 6.9%
compared to $732.7 million at December 31, 1997.
Backlog consisted of the following as of December 31, 1998:
<TABLE>
<CAPTION>
Engineering
Vessels Rigs Products Total
------- ------ ----------- ------
<S> <C> <C> <C> <C>
Government.................................... $143.1 $ -- $ -- $143.1
Commercial.................................... 67.2 -- -- 67.2
Energy........................................ 151.3 307.2 -- 458.5
Other......................................... 16.0 -- 98.7 114.7
------ ------ ----- ------
$377.6 $307.2 $98.7 $783.5
====== ====== ===== ======
</TABLE>
Three Months Ended December 31, 1998 vs.
Three Months Ended December 31, 1997
Results of Operations
The following tables set forth certain statement of income information as a
percentage of the Company's revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
1998 1997
-------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Contract revenue earned by business segment:
Vessels........................................ $133.0 47.6% $131.2 72.7%
Rigs........................................... 119.6 42.8 41.4 22.9
Engineered Products............................ 26.6 9.6 8.0 4.4
------ ----- ------ -----
$279.2 100.0% $180.6 100.0%
====== ===== ====== =====
Contract revenue earned by customer type:
Government: (1)
Vessels...................................... $ 34.4 12.3% $ 46.6 25.8%
Energy: (2)
Vessels...................................... 66.6 23.8 47.3 26.2
Rigs......................................... 119.6 42.8 41.4 22.9
------ ----- ------ -----
186.2 66.6 88.7 49.1
</TABLE>
13
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
December 31, 1998
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
1998 1997
-------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Contract revenue earned by customer type
(continued):
Commercial: (3)
Vessels...................................... 13.0 4.7 22.2 12.3
Other: (4)
Vessels...................................... 19.0 6.8 15.1 8.4
Engineered Products.......................... 26.6 9.6 8.0 4.4
------ ----- ------ -----
45.6 16.4 23.1 12.8
------ ----- ------ -----
$279.2 100.0% $180.6 100.0%
====== ===== ====== =====
</TABLE>
Note: See footnote references on page 12.
Contract revenue increased 54.7% to $279.2 million for the quarter ended
December 31, 1998 compared to $180.6 million for the quarter ended December
31, 1997. Of the $98.6 million increase, $78.2 million was attributable to the
Rigs segment as a result of revenue recognized on the new construction of
three multi-service drill barges and a jack-up rig as well as an increase in
rig repair and conversion revenue. Another $18.6 million was attributable to
revenue generated by the Engineered Products Group which was acquired during
the third quarter of fiscal 1998. Additionally, $1.8 million of the increase
was generated by the Vessels segment as a result of an increase in contracts
for offshore support vessels.
Revenue generated from the energy customer group increased primarily as a
result of higher revenue generated by the Rigs segment as previously discussed
as well as growth in construction of offshore support vessels within the
Vessels segment. Revenue growth within the other customer group of the Vessels
segment resulted from increased vessel repair and yacht activity. The decline
in government and commercial revenue within the Vessels segment occurred as
fiscal 1998 included revenue from several contracts that were reaching final
stages of completion during fiscal 1999.
The gross profit margin decreased to 4.1% for the third quarter of fiscal
1999 compared to 14.7% for the third quarter of fiscal 1998. The overall
decrease in gross margin is largely a result of a decline in the gross margin
experienced in the Rigs segment principally as a result of cost overruns
associated with the new construction of five of the six multi-service drill
barges. These cost overruns were primarily related to engineering delays,
owner changes, and a shortage of trained labor.
Selling, general and administrative expenses increased $4.6 million to $15.2
million in the third quarter of fiscal 1999, or 5.5% of revenue compared to
$10.7 million or 5.9% of revenue for the same quarter last year. The increase
is primarily a result of the overall growth of the Company during the past
year. The Engineered Products Group, acquired in November 1997, added
approximately $0.6 million in expenses in the current quarter as the same
quarter last year included only two months of expenses. The remaining increase
was primarily attributable to a $1.9 million increase in salary expense and a
$2.4 million increase in consulting expenses related to a business process
improvement project undertaken in the Vessels segment during the latter part
of fiscal 1998. The Company expects to spend an additional $1.2 million on
this project during the remainder of fiscal 1999 and will consider additional
amounts as necessary.
Interest expense, net of interest income, increased $1.1 million to $2.9
million for the third quarter of fiscal 1999 compared to $1.8 million for the
third quarter of fiscal 1998 primarily as a result of the issuance of $30
million of taxable revenue bonds in January 1998 and funds drawn under the
Company's revolving credit facility.
14
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
December 31, 1998
The Company recorded an income tax benefit of $6.9 million (88%)for the
third quarter of fiscal 1999 compared to income tax expense of $3.8 million
for the same quarter last year. The benefit for the current quarter reflects
additional tax credits for the Company's research and development activities,
and, the write-off for tax purposes, of the Company's investment in an
international joint venture.
Liquidity and Sources of Capital
The Company's needs for capital for the nine months ended December 31, 1998
resulted primarily from the acquisition of fixed assets and increased working
capital requirements as a result of the Company's growth. Additionally, during
the first quarter the Company acquired a shipyard facility in Orange, Texas.
These needs were primarily funded with cash on hand and funds borrowed under
the Company's revolving credit facility. The Company believes that cash flows
from operations, cash on hand, and funds available under the revolving credit
facility will be sufficient to fund its requirements for working capital,
capital expenditures, and other capital needs for at least the next twelve
months. As of December 31, 1998, the Company was in violation of three
restrictive financial covenants under its revolving credit facility. A waiver
of these violations as of December 31, 1998 was received from the group of
banks. The waiver is effective through March 12, 1999. As of this report date,
the Company was in the final stages of renegotiating the terms and conditions
of the credit facility, including the financial covenants. The Company
believes it will be able to satisfactorily renegotiate the terms and
conditions of the debt during March 1999. As of this report date, the Company
had approximately $22.0 million in funds available from cash on hand and funds
available under the existing revolving credit facility. See Note 6 for
additional information regarding the revolving credit facility.
Year 2000 Technological Issues
The Company is currently working to assess the potential impact of the Year
2000 on the processing of time-sensitive information by its computerized
information systems and equipment. Year 2000 issues may arise if computer
programs have been written using two digits (rather than four) to define the
applicable year. In such case, programs that have time-sensitive logic may
recognize a date using "00" as the year 1900 rather than the Year 2000, which
could result in miscalculations or system failures.
Management plans to resolve Year 2000 issues in the following four phases:
assessment, remediation, testing and implementation. Management has
substantially completed its review and assessment of significant software used
in the Company's operations, and, to the extent practicable, in the operations
of its key business relationships such as vendors, suppliers, and financial
institutions, in order to determine if any Year 2000 risks exist that may be
material to the Company as a whole. The Company does not anticipate
significant exposure related to its vendors, suppliers, or financial
institutions.
Remediation and testing measures are currently underway and are expected to
be completed by September 1999. The Company has already begun implementing
certain measures to alter, validate or replace time-sensitive software prior
to any anticipated material impact on its computerized information systems and
equipment. Costs of addressing potential problems have not been material to
date and, based on preliminary information, are not currently expected to have
a material adverse impact on the Company's financial position, results of
operations or cash flows in future periods. The implementation phase is
expected to be completed by September 1999.
Management believes it has an effective program in place to resolve Year
2000 issues in a timely manner. The Company has not yet completed all
necessary phases of its Year 2000 plan. The Company has determined that its
accounting software is Year 2000 compliant and expects to be able to continue
to take customer orders,
15
<PAGE>
HALTER MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
December 31, 1998
invoice customers, collect payments and process payments to vendors. The
Company is still in the process of reviewing machinery and equipment used to
manufacture products. In the unlikely event that the Company is unable to
remediate potential problems, if any, with this equipment, the Company may be
unable to manufacture products on a timely basis. Disruptions in the economy
generally resulting from Year 2000 issues could materially adversely affect
the Company. The Company could be subject to litigation for computer systems
product failure, for example, equipment shutdown. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
The Company is in the process of developing a contingency plan in the
unlikely event that material year 2000 situations arise. The Company expects
to have completed this plan by September 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
16
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. The Registrant filed the following report on Form 8-
K during the quarter ended December 31, 1998.
Date of Report
Item Number and Subject Matter
December 28, 1998 Item 5 reporting a press release issued by the Company
regarding expected third quarter fiscal year 1999
earnings.
17
<PAGE>
SIGNATURES
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: February 16, 1999 HALTER MARINE GROUP, INC.
By: /s/ Rick Rees
__________________________________
Rick Rees
Executive Vice President
As a Duly Authorized Officer
and Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HALTER
MARINE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 123
<ALLOWANCES> 0
<INVENTORY> 50
<CURRENT-ASSETS> 314
<PP&E> 254
<DEPRECIATION> 87
<TOTAL-ASSETS> 590
<CURRENT-LIABILITIES> 197
<BONDS> 218
0
0
<COMMON> 0
<OTHER-SE> 119
<TOTAL-LIABILITY-AND-EQUITY> 560
<SALES> 760
<TOTAL-REVENUES> 760
<CGS> 693
<TOTAL-COSTS> 45
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 10
<INCOME-TAX> (2)
<INCOME-CONTINUING> 12
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
