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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 June 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-24263
CONRAD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-1416999
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 Front Street
P.O. Box 790
Morgan City, Louisiana 70381
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (504) 384-3060
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of August 10, 2000, 7,056,923 shares of the registrant's Common Stock
were outstanding.
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<PAGE>
FORM 10-Q
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets June 30, 2000 and December 31, 1999......... 3
Consolidated Statements of Operations Three and Six Months Ended June
30, 2000 and 1999...................................................... 4
Consolidated Statements of Cash Flows Six Months Ended June 30, 2000 and
1999................................................................... 5
Notes to the Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 16
Part II. Other Information
Item 1. Legal Proceedings................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signature................................................................. 18
</TABLE>
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. 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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 5,396 $ 4,252
Accounts receivable, net............................... 4,383 3,072
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 2,219 3,843
Inventories............................................ 213 175
Other current assets................................... 2,183 2,025
------- -------
Total current assets................................. 14,394 13,367
PROPERTY, PLANT AND EQUIPMENT, net....................... 18,655 17,377
COST IN EXCESS OF NET ASSETS ACQUIRED.................... 13,782 14,176
OTHER ASSETS............................................. 205 200
------- -------
TOTAL ASSETS............................................. $47,036 $45,120
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable....................................... $ 1,940 $ 769
Accrued employee costs................................. 936 421
Accrued expenses....................................... 1,137 971
Current maturities of long-term debt................... 2,508 2,508
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 462 535
------- -------
Total current liabilities............................ 6,983 5,204
LONG-TERM DEBT, less current maturities.................. 3,552 4,806
DEFERRED INCOME TAXES.................................... 3,243 3,126
------- -------
Total liabilities.................................... 13,778 13,136
------- -------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value, 20,000,000 shares
authorized, 7,077,723 shares issued in 2000 and 1999.. 71 71
Additional paid-in capital............................. 27,780 27,780
Treasury stock at cost (20,800 shares)................. (84) --
Retained earnings...................................... 5,491 4,133
------- -------
Total shareholders' equity........................... 33,258 31,984
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $47,036 $45,120
======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June Six Months
30, Ended June 30,
-------------- ----------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
REVENUE..................................... $8,611 $8,710 $18,486 $18,170
COST OF REVENUE............................. 6,329 6,419 13,679 13,389
------ ------ ------- -------
GROSS PROFIT................................ 2,282 2,291 4,807 4,781
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 1,206 1,011 2,345 1,990
------ ------ ------- -------
INCOME FROM OPERATIONS...................... 1,076 1,280 2,462 2,791
INTEREST EXPENSE............................ (136) (161) (284) (339)
OTHER INCOME, NET........................... 87 57 187 123
------ ------ ------- -------
INCOME BEFORE INCOME TAXES.................. 1,027 1,176 2,365 2,575
PROVISION FOR INCOME TAXES.................. 451 484 1,007 1,051
------ ------ ------- -------
NET INCOME.................................. $ 576 $ 692 $ 1,358 $ 1,524
====== ====== ======= =======
Net income per common share:
Basic and diluted......................... $ 0.08 $ 0.10 $ 0.19 $ 0.22
====== ====== ======= =======
Weighted average common shares outstanding:
Basic and diluted......................... 7,061 7,078 7,069 7,078
====== ====== ======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 1,358 $ 1,524
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 1,103 1,126
Deferred income tax expense................................ 117 239
Changes in assets and liabilities:
Accounts receivable....................................... (1,311) 4,587
Net change in billings related to cost and estimated
earnings on uncompleted contracts........................ 1,551 (708)
Inventory and other assets................................ (210) (1,720)
Accounts payable and accrued expenses..................... 1,852 (1,077)
------- -------
Net cash provided by operating activities................ 4,460 3,971
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment................ (1,978) (286)
------- -------
Net cash used in investing activities.................... (1,978) (286)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of debt................................ (1,254) (1,339)
Purchase of treasury stock.................................. (84) --
------- -------
Net cash used in financing activities.................... (1,338) (1,339)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................... 1,144 2,346
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 4,252 3,074
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 5,396 $ 5,420
======= =======
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid............................................... $ 284 $ 339
======= =======
Taxes paid.................................................. $ 1,060 $ 1,452
======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
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, Inc. ("Conrad") and Orange Shipbuilding Company, Inc.
("Orange Shipbuilding"). New construction work and some repair and conversion
work is performed on a fixed-price basis. The Company performs the majority of
repair and conversion 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 1999 consolidated financial statements and related notes
filed on Form 10-K for the year ended December 31, 1999.
The results of operations for the three-month and six-month periods ended
June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
2. RECEIVABLES
Receivables consisted of the following at June 30, 2000 and December 31,
1999 (in thousands):
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
U.S. Government:
Amounts billed............................................. $1,104 $ 347
Unbilled costs and estimated earnings on uncompleted
contracts................................................. 1,146 3,505
------ ------
2,250 3,852
Commercial:
Amounts billed............................................. 3,279 2,725
Unbilled costs and estimated earnings on uncompleted
contracts................................................. 1,073 338
------ ------
Total.................................................... $6,602 $6,915
====== ======
</TABLE>
Included above in amounts billed is an allowance for doubtful accounts of
$20,000 at June 30, 2000 and December 31, 1999. During 2000 and 1999 there
were no significant transactions recorded in the allowance for doubtful
accounts.
Unbilled costs and estimated earnings on uncompleted contracts were not
billable to customers at the balance sheet dates under terms of the respective
contracts. Of the unbilled costs and estimated earnings at June 30, 2000,
substantially all is expected to be collected within the next twelve months.
6
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information with respect to uncompleted contracts as of June 30, 2000 and
December 31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $11,325 $27,108
Estimated earnings.......................................... 3,824 8,257
------- -------
15,149 35,365
Less billings to date....................................... 13,392 32,057
------- -------
$ 1,757 $ 3,308
======= =======
</TABLE>
The above amounts are included in the accompanying balance sheets under the
following captions (in thousands):
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... $2,219 $3,843
Billings in excess of cost and estimated earnings on
uncompleted contracts...................................... 462 535
------ ------
Total..................................................... $1,757 $3,308
====== ======
</TABLE>
3. LONG-TERM DEBT
The Company has a Loan Agreement with a commercial bank, which specifies
the terms of the Term Loan and the Revolving Credit Facility. Interest accrues
at LIBOR plus 2.0% until August 24, 2000, and thereafter at the option of the
Company either at the lender's prime rate minus 0.5% or LIBOR plus 2.0%. The
Loan Agreement is secured by substantially all of the Company's assets,
contains customary restrictive covenants and requires the maintenance of
certain financial ratios, including a current ratio requirement of 1.25 to 1.0
that could limit the Company's use of available capacity under the Revolving
Credit Facility. In addition, the Loan Agreement prohibits the Company from
paying dividends without the consent of the lender and restricts the ability
of the Company to incur additional indebtedness. At June 30, 2000, the Company
was in compliance with these covenants.
The Term Loan is payable in monthly principal payments of $209,000 plus
interest, with a final payment due in April 2004. At June 30, 2000, the Term
Loan balance outstanding was $6.1 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 April 30, 2001. The Company pays a
fee of 0.25% per annum on the unused portion of the facility. No draws against
the Revolving Credit Facility were outstanding as of June 30, 2000.
4. SHAREHOLDERS' EQUITY
Treasury Stock--On March 21, 2000, the Company's Board of Directors
authorized management to repurchase up to 200,000 shares or $1 million of its
outstanding common stock. Management may repurchase shares from time to time
in the open market at prevailing prices, or through privately negotiated
transactions depending on prevailing market conditions. The shares will be
held as treasury stock and will be available for use in connection with the
Company's stock options and other compensation programs or for other corporate
purposes. Funds for the program will come from cash, internally generated
funds or additional borrowings. The Company has repurchased approximately
20,800 shares at a total cost of $84,000 as of June 30, 2000.
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" and "diluted" income per share was 7,060,893 and
7,077,723 for the three months ended June 30, 2000 and 1999, respectively and
7,069,308 and 7,077,723 for the six months ended June 30, 2000 and 1999,
respectively.
7
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. SEGMENT AND RELATED INFORMATION
The Company classifies its business into two segments:
Vessel Construction
The Company constructs a variety of marine vessels, including large and
small deck barges, single and double hull tank barges, lift boats, push boats,
offshore tug boats and offshore support vessels. The Company 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, 1999. Intersegment sales and transfers are not significant.
Selected information as to the operations of the Company by segment is as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended June Six Months
30, Ended June 30,
-------------- ----------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenue:
Vessel construction.................... $5,114 $6,758 $12,091 $13,883
Repair and conversions................. 3,497 1,952 6,395 4,287
------ ------ ------- -------
Total revenue........................ 8,611 8,710 18,486 18,170
------ ------ ------- -------
Cost of revenue:
Vessel construction.................... 3,900 4,831 9,045 9,905
Repair and conversions................. 2,429 1,588 4,634 3,484
------ ------ ------- -------
Total cost of revenue................ 6,329 6,419 13,679 13,389
------ ------ ------- -------
Gross profit:
Vessel construction.................... 1,214 1,927 3,046 3,978
Repair and conversions................. 1,068 364 1,761 803
------ ------ ------- -------
Total gross profit................... 2,282 2,291 4,807 4,781
Selling, general and administrative
expenses................................ 1,206 1,011 2,345 1,990
------ ------ ------- -------
Income from operations................... 1,076 1,280 2,462 2,791
Interest expense......................... (136) (161) (284) (339)
Other income, net........................ 87 57 187 123
------ ------ ------- -------
Income before income taxes............... 1,027 1,176 2,365 2,575
Provision for income taxes............... 451 484 1,007 1,051
------ ------ ------- -------
Net income............................... $ 576 $ 692 $ 1,358 $ 1,524
====== ====== ======= =======
</TABLE>
8
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain other financial information of the Company by segment is as follows
(in thousands):
<TABLE>
<CAPTION>
Three
Months Six Months
Ended June Ended June
30, 30,
----------- -------------
2000 1999 2000 1999
------ ---- ------ ------
<S> <C> <C> <C> <C>
Depreciation and amortization expense:
Vessel construction............................ $ 193 $195 $ 388 $ 398
Repair and conversions......................... 120 131 242 262
Included in selling, general and administrative
expenses...................................... 236 233 473 466
------ ---- ------ ------
Total depreciation and amortization expense.. $ 549 $559 $1,103 $1,126
====== ==== ====== ======
<CAPTION>
Three
Months Six Months
Ended June Ended June
30, 30,
----------- -------------
2000 1999 2000 1999
------ ---- ------ ------
<S> <C> <C> <C> <C>
Capital expenditures:
Vessel construction............................ $ 166 $ 10 $ 300 $ 33
Repair and conversions......................... 1,545 11 1,578 29
Other.......................................... 4 75 100 224
------ ---- ------ ------
Total capital expenditures................... $1,715 $ 96 $1,978 $ 286
====== ==== ====== ======
</TABLE>
Total assets of the Company by segment is as follows at June 30, 2000 and
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Total assets:
Vessel construction........................................ $29,763 $34,307
Repair and conversions..................................... 8,399 5,663
Other...................................................... 8,874 5,150
------- -------
Total assets............................................. $47,036 $45,120
======= =======
</TABLE>
Certain assets and capital expenditures of the Company are allocated to
corporate and are included in the "Other" caption.
Revenues included in the consolidated financial statements of the Company
are derived from customers domiciled in the United States. All assets of the
Company are located in the United States.
6. COMMITMENTS AND CONTINGENCIES
Legal Matters--The Company is a party to various legal proceedings
primarily involving commercial claims and workers' compensation claims. While
the outcome of these claims and legal proceedings cannot be predicted with
certainty, management believes that the outcome of all such proceedings, even
if determined adversely, would not have a material adverse effect on the
Company's consolidated financial statements.
Employment Agreements--The Company has employment agreements with certain
of its executive officers which generally provide for an initial term of three
years ending on March 31, 2001 and minimum annual total compensation of
$763,000.
Letters of Credit and Bonds--In the normal course of its business, the
Company is required to provide letters of credit to secure the payment of
workers' compensation obligations. Additionally, under certain contracts
9
<PAGE>
CONRAD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company may be required to provide letters of credit and bonds to secure
certain performance and payment obligations of the Company thereunder.
Outstanding letters of credit and bonds relating to these business activities
amounted to $1.8 million at June 30, 2000 and December 31, 1999.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new
accounting and reporting standards for derivative financial instruments and
for hedging activities. SFAS No. 133 requires the Company to measure all
derivatives at fair value and to recognize them in the balance sheet as an
asset or liability, depending on the Company's rights or obligations under the
applicable derivative contract. In June 1999, the FASB issued SFAS No. 137,
which deferred the effective date of adoption of SFAS No. 133 for one year.
The Company will adopt SFAS No. 133 no later than the first quarter of fiscal
year 2001. The Company has considered the implications of adopting the new
method of accounting for derivatives and hedging activities and has concluded
that its implementation will not have a material impact on the Company's
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB 101, as amended, is effective beginning in the fourth quarter
of fiscal year 2000. Management currently believes that this new accounting
pronouncement should not have any material effect on the Company's
consolidated financial statements.
10
<PAGE>
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,
1999.
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 on
June 15, 1998 by issuing 2.1 million shares of common stock. Conrad has
operated since 1948 at its shipyard in Morgan City, Louisiana, and specializes
in the construction, conversion and repair of large and small deck barges,
single and double hull tank barges, lift boats, push boats, tow boats,
offshore tug boats and offshore supply vessels. In December 1997, Conrad
acquired Orange Shipbuilding to increase its capacity to serve Conrad's
existing markets and to expand its product capability into the construction of
additional types of marine vessels, including 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.
The 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. Demand for the Company's products and
services have been adversely impacted in the past by decreased activity in the
offshore oil and gas industry. Recently the Company has experienced an
increase in demand for products and services due to the upturn in activity in
the offshore oil and gas industry. Activity by other commercial and government
customers to construct new vessels to replace older vessels and upgrade the
capacity or functionality of existing vessels has remained steady. In
addition, the Orange Acquisition has enabled the Company to capitalize on the
demand for new vessel construction by government customers such as the U.S.
Army, U.S. Navy, U.S. Coast Guard and Corps of Engineers.
The Company is engaged in various types of construction under contracts
that generally range from one month to 36 months in duration. The Company uses
the percentage-of-completion method of accounting and therefore, takes into
account the estimated costs, estimated earnings and revenue to date on fixed-
price contracts not yet completed. The amount of revenue recognized is equal
to the portion of the total contract price that the labor hours incurred to
date bears to the estimated total labor hours, based on current estimates to
complete. This method is used because management considers expended labor
hours to be the best available measure of progress on these contracts.
Revenues from cost-plus-fee contracts are recognized on the basis of cost
incurred during the period plus the fee earned.
Most of the contracts entered into by the Company for new vessel
construction, whether commercial or governmental, are fixed-price contracts
under which the Company retains all cost savings on completed contracts but is
liable for all cost overruns. The Company develops its bids for a fixed price
project by estimating the amount of labor hours and the cost of materials
necessary to complete the project and then bids such projects in order to
achieve a sufficient profit margin to justify the allocation of its resources
to such project. The Company's revenues therefore may fluctuate from period to
period based on, among other things, the aggregate amount of materials used in
projects during a period and whether the customer provides materials and
equipment. For projects in which the customer provides material or equipment,
the Company generally charges material handling and warehousing fees,
resulting in higher profit margins than for projects in which the Company
provides the 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.
11
<PAGE>
Recent Events
On March 21, 2000 the Company's Board of Directors authorized management to
repurchase up to 200,000 shares or $1 million of its outstanding common stock.
Management may repurchase shares from time to time in the open market at
prevailing prices, or through privately negotiated transactions depending on
prevailing market conditions. The shares will be held as treasury stock and
will be available for use in connection with the Company's stock option plan
and other compensation programs or for other corporate purposes. Funds for the
program will come from cash, internally generated funds or additional
borrowings. The Company has repurchased approximately 20,800 shares at a total
cost of $84,000 through June 30, 2000.
On May 1, 2000 the Company's Board of Directors authorized the construction
of a new dry-dock, up to a total size of 280' long and 160' wide with a
lifting capacity of up to 10,000 tons. The estimated cost is $5.3 million.
Funds for the construction of the dry-dock will come from cash, internally
generated funds or additional borrowings. This dock will allow the Company to
(1) increase repair and conversion capacity; (2) compete for larger repair and
conversion projects; and (3) launch larger new vessel construction projects
more competitively.
Results of Operations
The following table sets forth certain historical data of the Company and
percentage of revenues for the periods presented (in thousands):
Conrad Industries, Inc. Summary Results of Operations
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended June
30, Six Months Ended June 30,
---------------------------- ------------------------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Data:
Revenue
Vessel construction... $5,114 59.4% $6,758 77.6% $12,091 65.4% $13,883 76.4%
Repair and
conversions.......... 3,497 40.6% 1,952 22.4% 6,395 34.6% 4,287 23.6%
------ ------ ------- -------
Total revenue....... 8,611 100.0% 8,710 100.0% 18,486 100.0% 18,170 100.0%
------ ------ ------- -------
Cost of revenue
Vessel construction... 3,900 76.3% 4,831 71.5% 9,045 74.8% 9,905 71.3%
Repair and
conversions.......... 2,429 69.5% 1,588 81.4% 4,634 72.5% 3,484 81.3%
------ ------ ------- -------
Total cost of
revenue............ 6,329 73.5% 6,419 73.7% 13,679 74.0% 13,389 73.7%
------ ------ ------- -------
Gross profit
Vessel construction... 1,214 23.7% 1,927 28.5% 3,046 25.2% 3,978 28.7%
Repair and
conversions.......... 1,068 30.5% 364 18.6% 1,761 27.5% 803 18.7%
------ ------ ------- -------
Total gross profit.. 2,282 26.5% 2,291 26.3% 4,807 26.0% 4,781 26.3%
S G & A expenses........ 1,206 14.0% 1,011 11.6% 2,345 12.7% 1,990 11.0%
------ ------ ------- -------
Income from operations.. 1,076 12.5% 1,280 14.7% 2,462 13.3% 2,791 15.4%
Interest expense........ 136 1.6% 161 1.8% 284 1.5% 339 1.9%
Other expenses (income),
net.................... (87) -1.0% (57) -0.7% (187) -1.0% (123) -0.7%
------ ------ ------- -------
Income before income
taxes.................. 1,027 11.9% 1,176 13.5% 2,365 12.8% 2,575 14.2%
Income taxes............ 451 5.2% 484 5.6% 1,007 5.4% 1,051 5.8%
------ ------ ------- -------
Net Income.............. $ 576 6.7% $ 692 7.9% $ 1,358 7.3% $ 1,524 8.4%
====== ====== ======= =======
EBITDA (1).............. $1,625 18.9% $1,839 21.1% $ 3,565 19.3% $ 3,917 21.6%
====== ====== ======= =======
Operating Data: Labor
hours.................. 131 132 284 279
</TABLE>
--------
(1) Represents income from operations before deduction of depreciation, and
amortization. EBITDA is not a measure of cash flow, operating results or
liquidity as determined by generally accepted accounting principles. The
Company has included information concerning EBITDA as supplemental
disclosure because management believes that EBITDA provides meaningful
information regarding a company's historical ability to incur and service
debt. EBITDA as defined and measured by the Company may not be comparable
to similarly titled measures reported by other companies. EBITDA should
not be considered in isolation or as an alternative to, or more meaningful
than, net income or cash flow provided by operations as determined in
accordance with generally accepted accounting principles as an indicator
of the Company's profitability or liquidity.
12
<PAGE>
Three Months Ended June 30, 2000 Compared with Three Months Ended June 30,
1999.
During the three months ended June 30, 2000, the Company generated revenue
of $8.6 million, a decrease of approximately $99,000, or 1.1%, compared to
$8.7 million generated for the three months ended June 30, 1999. The decrease
was due to a $1.6 million (24.3%) decrease in vessel construction to $5.1
million for the three months ended June 30, 2000, compared to $6.8 million for
the three months ended June 30, 1999. The decrease was partially offset by a
$1.5 million (79.1%) increase in repair and conversion revenue to $3.5 million
for the three months ended June 30, 2000 compared to $2.0 million for the
three months ended June 30, 1999. The decrease in vessel construction revenue
was attributable to the decrease in vessel construction production hours which
decreased by 32.2% during the three months ended June 30, 2000 compared to the
three months ended June 30, 1999. This decline was primarily due to tighter
market conditions and competition for vessel construction projects and the
delay in the commencement of certain vessel construction projects. The
construction of the drydock by production personnel absorbed hours which could
otherwise have been available for billable work. The increase in repair and
conversion revenue during the three months ended June 30, 2000 compared to the
three months ended June 30, 1999 was primarily attributable to increased
demand for repair and conversions due to increased offshore oil and gas
activity. Repair and conversion hours increased by 66.7% during the three
months ended June 30, 2000 compared to the three months ended June 30, 1999.
Gross profit was essentially unchanged at $2.3 million (26.5% of revenue)
for the three months ended June 30, 2000 as compared to gross profit of $2.3
million (26.3% of revenue) for the three months ended June 30, 1999. Vessel
construction gross profit decreased $713,000 or 37.0% to $1.2 million for the
three months ended June 30, 2000 as compared to vessel construction gross
profit of $1.9 million for the three months ended June 30, 1999. Repair and
conversion gross profit increased $704,000 or 193.4% to $1.1 million for the
three months ended June 30, 2000 as compared to repair and conversion gross
profit of $364,000 for the three months ended June 30, 1999. These
fluctuations were due primarily to the factors described above.
Repair and conversion gross profit margins increased to 30.5% for the three
months ended June 30, 2000, compared to gross profit margins of 18.6% for the
three months ended June 30, 1999 and vessel construction gross profit margins
decreased to 23.7% for the three months ended June 30, 2000, compared to gross
profit margins of 28.5% for the three months ended June 30, 1999. The increase
in repair and conversion gross profit margins was primarily due to a reduction
in indirect fixed cost per hour due to the substantial increase in activity
during the three months ended June 30, 2000 as compared to the three months
ended June 30, 1999. The decline in vessel construction gross profit margins
was primarily due to tighter market conditions and competition for vessel
construction projects and an increase in indirect fixed cost per hour due to
the decrease in activity during the three months ended June 30, 2000 as
compared to the three months ended June 30, 1999.
Selling, general and administrative expenses increased $195,000, or 19.3%,
to $1.2 million (14.0% of revenue) for the three months ended June 30, 2000,
as compared to $1.0 million (11.6% of revenue) for the three months ended June
30, 1999. These increases were primarily due to an increase in employee
related costs, legal and accounting fees and taxes and licenses.
Income before income taxes decreased $149,000 to $1.0 million for the three
months ended June 30, 2000 as compared to a net income before income taxes of
$1.2 million for the three months ended June 30, 1999, primarily due to the
factors listed above.
The Company had net income of $576,000 for the three months ended June 30,
2000 as compared to net income of $692,000 for the three months ended June 30,
1999. Interest expense decreased $25,000 to $136,000 for three months ended
June 30, 2000 as compared to interest expense of $161,000 for the three months
ended June 30, 1999 due to a reduction of debt.
The Company had income tax expense of $451,000 (43.9% effective tax rate)
for the three months ended June 30, 2000, compared to income taxes of $484,000
(41.2% effective tax rate) for the three months ended June 30, 1999. The
Company's effective tax rate is higher than its actual tax rate because its
cost in excess of net assets acquired is not amortized for tax purposes.
13
<PAGE>
Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999.
During the six months ended June 30, 2000, the Company generated revenue of
$18.5 million, an increase of approximately $316,000, or 1.7%, compared to
$18.2 million generated for the six months ended June 30, 1999. The increase
was due to a $2.1 million (49.2%) increase in repair and conversion revenue to
$6.4 million for the six months ended June 30, 2000 compared to $4.3 million
for the six months ended June 30, 1999. The increase was partially offset by a
$1.8 million (12.9%) decrease in vessel construction to $12.1 million for the
six months ended June 30, 2000, compared to $13.9 million for the six months
ended June 30, 1999. The decrease in vessel construction revenue was
attributable to the decrease in vessel construction production hours which
decreased by 23.0% during the six months ended June 30, 2000 compared to the
six months ended June 30, 1999. This decline was primarily due to tighter
market conditions and competition for vessel construction projects, the delay
in the commencement of certain vessel construction projects, and the
construction of the drydock by production personnel. The increase in repair
and conversion revenue during the six months ended June 30, 2000 compared to
the six months ended June 30, 1999 was primarily attributable to increased
demand for repair and conversions due to increased offshore oil and gas
activity. Repair and conversion hours increased by 55.7% during the six months
ended June 30, 2000 compared to the six months ended June 30, 1999.
Gross profit was essentially unchanged at $4.8 million (26.0% of revenue)
for the six months ended June 30, 2000 as compared to gross profit of $4.8
million (26.3% of revenue) for the six months ended June 30, 1999. Vessel
construction gross profit decreased $932,000 or 23.4% to $3.0 million for the
six months ended June 30, 2000 as compared to vessel construction gross profit
of $4.0 million for the six months ended June 30, 1999. Repair and conversion
gross profit increased $958,000 or 119.3% to $1.8 million for the six months
ended June 30, 2000 as compared to repair and conversion gross profit of
$803,000 for the six months ended June 30, 1999. These fluctuations were due
primarily to the factors described above.
The decrease in gross profit as a percentage of revenue was primarily due
to the decrease in vessel construction gross profit margins to 25.2% for the
six months ended June 30, 2000, compared to gross profit margins of 28.7% for
the six months ended June 30, 1999. Gross profits as a percentage of revenue
for repair and conversion were 27.5% for the six months ended June 30, 2000,
compared to gross profit margins of 18.7% for the six months ended June 30,
1999. The decline in vessel construction gross profit margins was primarily
due to tighter market conditions and competition for vessel construction
projects and an increase in indirect fixed cost per hour due to the decrease
in activity during the six months ended June 30, 2000 as compared to the six
months ended June 30, 1999. The increase in repair and conversion gross profit
margins was primarily due to a reduction in indirect fixed cost per hour due
to the substantial increase in activity during the six months ended June 30,
2000 as compared to the six months ended June 30, 1999.
Selling, general and administrative expenses increased $355,000, or 17.8%,
to $2.3 million (12.7% of revenue) for the six months ended June 30, 2000, as
compared to $2.0 million (11.0% of revenue) for the six months ended June 30,
1999. These increases were primarily due to an increase in employee related
costs, legal and accounting fees and taxes and licenses.
Income before income taxes decreased $210,000 to $2.4 million for the six
months ended June 30, 2000 as compared to a net income before income taxes of
$2.6 million for the six months ended June 30, 1999, primarily due to the
factors listed above.
The Company had net income of $1.4 million for the six months ended June
30, 2000 as compared to net income of $1.5 million for the six months ended
June 30, 1999. Interest expense decreased $55,000 to $284,000 for six months
ended June 30, 2000 as compared to interest expense of $339,000 for the six
months ended June 30, 1999 due to a reduction of debt.
The Company had income tax expense of $1.0 million (42.6% effective tax
rate) for the six months ended June 30, 2000, compared to income taxes of $1.1
million (40.8% effective tax rate) for the six months ended June 30, 1999. The
Company's effective tax rate is higher than its actual tax rate because its
cost in excess of net assets acquired is not amortized for tax purposes.
14
<PAGE>
Liquidity and Capital Resources
Historically, the Company has funded its business through funds generated
from operations. Net cash provided by operations was $4.5 million for the six
months ended June 30, 2000 due to an increase in accounts payable and accrued
expenses, and billings related to costs and estimated earnings on uncompleted
contracts, offset by an increase in accounts receivable and other assets. The
Company has borrowed in the past to expand its facilities and to fund the
acquisition of Orange Shipbuilding in December 1997. The Company's working
capital position was $7.4 million at June 30, 2000 compared to $8.2 million at
December 31, 1999.
The Company's capital requirements historically have been primarily for
improvements to its facilities and equipment. The Company's net cash used in
investing activities of $2.0 million for the six months ended June 30, 2000
was for improvements to facilities and equipment of which approximately $1.5
million was for work in progress of the construction of a new dry-dock
authorized by the Company's Board of Directors on May 1, 2000.
The Board authorized the construction of a new dry-dock, up to a total size
of 280' long and 160' wide with a lifting capacity of up to 10,000 tons. The
estimated cost is $5.3 million. Funds for the construction of the dry-dock
will come from cash, internally generated funds or additional borrowings. This
dock will allow the Company to (1) increase repair and conversion capacity;
(2) compete for larger repair and conversion projects; and (3) launch larger
new vessel construction projects more competitively.
Net cash used in financing activities was $1.3 million for the six months
ended June 30, 2000 relating to the repayment of debt of $1.3 million and the
repurchase of 20,800 shares of the Company's stock at a total cost of $84,000.
The repurchase of the Company's stock was in conformity with the Company's
Board of Directors authorization on March 21, 2000 to repurchase up to 200,000
shares or $1 million of its outstanding common stock. Management may
repurchase shares from time to time in the open market at prevailing prices,
or through privately negotiated transactions depending on prevailing market
conditions. The shares will be held as treasury stock and will be available
for use in connection with the Company's stock option plan and other
compensation programs or for other corporate purposes. Funds for the program
will come from cash, internally generated funds or additional borrowings.
The Company has a Loan Agreement with a commercial bank, which specifies
the terms of the Term Loan and the Revolving Credit Facility. Interest accrues
at LIBOR plus 2.0% until August 24, 2000, and thereafter at the option of the
Company either at the lender's prime rate minus 0.5% or LIBOR plus 2.0%. The
Loan Agreement is secured by substantially all of the Company's assets,
contains customary restrictive covenants and requires the maintenance of
certain financial ratios, including a current ratio requirement of 1.25 to 1.0
that could limit the Company's use of available capacity under the Revolving
Credit Facility. In addition, the Loan Agreement prohibits the Company from
paying dividends without the consent of the lender and restricts the ability
of the Company to incur additional indebtedness. At June 30, 2000, the Company
was in compliance these covenants.
The Term Loan is payable in monthly principal payments of $209,000 plus
interest, with a final payment due in April 2004. At June 30, 2000, the Term
Loan balance outstanding was $6.1 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 April 30, 2001. The Company pays a
fee of 0.25% per annum on the unused portion of the facility. No draws against
the Revolving Credit Facility were outstanding as of June 30, 2000.
The Company's backlog of $19.5 million at June 30, 2000 was attributable to
15 projects, of which $7.9 million was attributable to five government
projects.
15
<PAGE>
Management believes that the Company's existing working capital, cash flows
from operations and available borrowing under the Revolving Credit Facility
will be adequate to meet its working capital needs and planned capital
expenditures for property and equipment through 2000. The Company may pursue
acquisition opportunities it believes are attractive if and when such
opportunities arise. The timing, size or success of any acquisition effort and
the associated potential capital commitments cannot be predicted.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS No. 133
establishes new accounting and reporting standards for derivative financial
instruments and for hedging activities. SFAS No. 133 requires the Company to
measure all derivatives at fair value and to recognize them in the balance
sheet as an asset or liability, depending on the Company's rights or
obligations under the applicable derivative contract. In June 1999, the FASB
issued SFAS No. 137, which deferred the effective date of adoption of SFAS No.
133 for one year. The Company will adopt SFAS No. 133 no later than the first
quarter of fiscal year 2001.The Company has considered the implications of
adopting the new method of accounting for derivatives and hedging activities
and has concluded that its implementation will not have a material impact on
the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB 101, as amended, is effective beginning in the fourth quarter
of fiscal year 2000. Management currently believes that this new accounting
pronouncement should not have any material effect on the Company's
consolidated financial statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of changing interest rates. Interest on
$6.1 million of the Company's long-term debt with an interest rate of 8.65% at
June 30, 2000 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 $61,000 per year if the Company were to maintain
the same debt level and structure.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various routine legal proceedings primarily
involving commercial claims and workers' compensation claims. While the
outcome of these claims and legal proceedings cannot be predicted with
certainty, management believes that the outcome of such proceedings in the
aggregate, even if determined adversely, would not have a material adverse
effect on the Company's business or financial condition.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<C> <S>
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).
10.13 --Second Amended and Restated Loan Agreement, dated as of December 31,
1999 by and among Whitney National Bank, Conrad Shipyard, Inc., Orange
Shipbuilding and Conrad Industries, Inc.
27 --Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company has not filed any Current Reports on Form 8-K since filing
of the Company's final prospectus pursuant to Rule 424(b) in connection
with its initial public offering on June 10, 1998.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000
CONRAD INDUSTRIES, INC.
/s/ Cecil A. Hernandez
By:__________________________________
Cecil A. Hernandez
Senior Vice President and
Chief Financial Officer
18
