Modtech (NASDAQ:MODTE)
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Modtech Holdings, Inc. (Modtech) (Nasdaq:MODTE) has
filed with the Securities and Exchange Commission its Annual Report on
Form 10-K for the fiscal year ended December 31, 2004, and its
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.
The submission of the Annual Report on Form 10-K for the fiscal
year ended December 31, 2004, was delayed due to several issues,
including the completion of Management's Report on Internal Controls
over Financial Reporting and finalization of the audits by KPMG,
Modtech's former independent registered public accounting firm of the
financial statements for the year ended December 31, 2004, and on the
effectiveness of the Company's internal control over financial
reporting as of December 31, 2004. As described more fully in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2004, KPMG's reports on the above-referenced audits expressed an
unqualified opinion on the 2004 financial statements and an
unqualified opinion on management's assessment of, and an adverse
opinion on the effective operation of, internal control over financial
reporting as of December 31, 2004. The Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 2005, was delayed to follow the
release of the Form 10-K for the fiscal year ended December 31, 2004.
Cost overruns on the Heritage High School construction project,
contracted to the Liberty Union Unified School District in Northern
California, resulted in adjustments to the previously reported results
for the fourth quarter and year ended December 31, 2004. These
overruns are included in the 2004 results because they relate to
certain contract conditions that existed as of December 31, 2004, and
subsequent information obtained during April and May 2005 allowed for
the refinement of the loss estimate on this contract prior to the
issuance of our audited consolidated financial statements. This
refinement is made pursuant to paragraph 82 of the AICPA's Statement
of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts, which states that cost estimate
refinements obtained subsequent to the balance sheet date should be
included as an adjustment to the unissued financial statements. In
addition to the negative impact on operating income, the resulting
losses required an adjustment to the valuation reserve for our net
deferred tax assets.
The Heritage project was originally contracted in October 2003 for
$13.8 million. Modtech recognized in the quarter ended September 30,
2004, an estimated $4.0 million cost overrun, due to specific items
such as plant labor, material costs, additional setup requirements,
and transportation costs. Of the estimated $4.0 million cost overrun,
$3.0 million was associated with project cost overruns in the factory
and in the field, and $1.0 million was reserved for engineering tests
that the Department of State Architect required on the joints
supporting the corner columns of the buildings.
During January, February, and into March of 2005, there were
significant pauses in the project due to additional testing called for
by the owner, architect, and by the Department of State Architect.
This testing, which resulted in the destruction of the units tested,
had to be carried out on several units to prove that the previously
inspected and approved welding techniques were compatible with the
code load requirements for this facility. The structural tests were
concluded on March 20, 2005, with a result favorable to us when the
Department of State Architect determined that the Modtech welding
structural integrity met with all code requirements.
In addition to the $4.0 million recognized in the quarter ended
September 30, 2004, Modtech has, or will incur, additional costs of
$6.6 million on the Heritage project. Of the $6.6 million overrun,
$0.4 million was for the additional work outside of the contract
amount for which change orders will or have been submitted.
Approximately $3.8 million represent costs associated with
accelerating the remaining work to complete the project within the
contracted timeframe, and to repair the damage caused by other
destructive testing ordered by the inspectors. The majority of these
costs are labor-related at California prevailing wage rates.
Approximately $0.5 million in cost overruns are associated with
remediation of water intrusion due to the heavy winter rains. The
balance of the cost overruns is associated with quality issues that
required remediation during March, April, May, and June.
The Heritage project is now substantially complete. There will be
some minor punch list and project close-out work that is expected to
take place in October of 2005, when the other prime contractor has
completed their scope of work on the project, and Modtech is able to
return and finish Modtech's scope of work.
Because of the results of the Heritage project, actions were taken
as early as September of 2004 by the new management team to insure
that a project similar to Heritage will not occur again. Additional
measures have been taken in 2005 to move the company's focus away from
complex, multi-story projects with a significant field construction or
installation component such as Heritage. Levels of authority and
restrictions on scope and project type have been in effect for several
months, and as a result, the projects that have been sold in 2005, as
well as those currently being bid, have a reduced scope which limits
risk and provides for faster project completion.
Modtech previously released results for the year ended December
31, 2004, in a press release on March 30, 2005. Due to the impact of
adjustments recorded in connection with subsequent events related to
the Heritage project, the final financial statements for the year
ended December 31, 2004, included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2004, have been updated to
reflect these adjustments. A summary of these changes are provided on
the following table:
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Summary Results for 2004 Previously Impact from Annual Report
Released on Heritage on Form 10-K
March 30 Project for Fiscal
Year 2004
------------- ------------- -------------
Net sales $186,718,000 $( 1,524,000) $185,194,000
Cost of goods sold 183,938,000 4,176,000 188,114,000
------------- ------------- -------------
Gross profit 2,780,000 ( 5,700,000) (2,920,000)
Selling, general, and
administrative expenses 14,495,000 -- 14,495,000
Gain on sale of property and
equipment (745,000) -- (745,000)
Covenant amortization 29,000 -- 29,000
------------- ------------- -------------
Loss from operations (10,999,000) (5,700,000) (16,699,000)
------------- ------------- -------------
Other (expense) income:
Interest expense (2,867,000) -- (2,867,000)
Interest income 31,000 -- 31,000
Other, net 881,000 -- 881,000
------------- ------------- -------------
(1,955,000) -- (1,955,000)
------------- ------------- -------------
Loss before income taxes (12,954,000) (5,700,000) (18,654,000)
Income tax benefit 5,075,000 (4,967,000) 108,000
------------- ------------- -------------
Net loss (7,879,000) (10,667,000) (18,546,000)
------------- ------------- -------------
Series A preferred stock
dividend 221,000 -- 221,000
Net loss applicable to
common shareholders $(8,100,000) $(10,667,000) $(18,767,000)
============= ============= =============
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The results for the Quarter Ended March 31, 2005, as reported on
the Quarterly Report on Form 10-Q for the First Quarter 2005 are as
follows:
Revenues for the quarter were $50.5 million, compared to $29.4
million for first-quarter 2004, largely spurred by incremental growth
outside of the California education market. Cost of sales rose to
$48.2 million, from $29.6 million for the same period last year
primarily as a result of the $21.1 million of incremental revenue.
Cost of sales includes approximately $1.9 million of non-recurring
costs not associated with volume increases of which $0.9 million was
from additional cost overruns on the Heritage project incurred in
2005, $0.6 million was for overtime in California associated with
record rains for the region, and $0.4 million was due to a roofing
repair required on an older project that is not yet closed.
Details of the two non-Heritage costs recorded during the first
quarter follow:
-- Approximately $0.6 million in overtime for California was due
to record rainfall in the State. Because of an inability to
get on project sites for more than 3 weeks in January and
February, on-site and in-factory overtime was necessary to
accelerate projects both in the factory and in the field,
resulting in increased costs associated with these projects.
Actions have been taken to provide greater protection from
future rain in the factory. Given that this year was the
heaviest rain in history for the region, it is not expected
that we will see similar rains of this magnitude or impact in
the future, and that the actions taken as a result of these
rains will be sufficient to prevent future lost time in
manufacturing.
-- A reserve in the amount of $0.4 million for the repair of a
roof on a project that was completed in 2003 was recorded in
the first quarter. The excessively heavy winter rains caused
the roof to leak, which required a significant repair of the
roof. We anticipate that the work will be complete and the
project will be closed out before the end of the third
quarter, 2005.
In addition, $0.5 million associated with the financial and
internal control audit work performed by our former auditors was
charged to SG&A during the quarter ended March 31, 2005. It is felt
that the additional cost of sales and SG&A expenses described above
are non-recurring, and that sufficient actions have been taken by
management to avoid similar costs of this magnitude in the future.
Aside from the Heritage project cost overruns and the other
non-recurring costs described above, the operations of the business
were roughly on-track with management's estimates for performance on
the quarter. On a pro-forma basis excluding the extraordinary costs
outlined above, gross margin would have been 8.4% and EBITDA would
have been a positive $1.3 million.
Total backlog at April 30, 2005, was $180 million, compared to
$158 million a year ago. California education backlog accounted for
$130 million of this backlog. As Lean Enterprise efforts continue
throughout the company, there will be less focus on backlog and more
focus on throughput and pipeline. For the first quarter 2005,
California booked $26.6 million of business, compared to $22.4 million
in 2004. Arizona booked $5.6 million, compared to $3.2 million in
2004. Texas booked $3.6 million of business, compared to $1.9 million
in 2004; and Florida booked $13.3 million, compared to $1.9 million in
first quarter of 2004.
Under the strict project size and margin requirements that have
been in effect since October 2004, the projects that are being booked
are at an increased gross margin, with a reduced scope and a lower
field component of work. Due to the slow-turning nature of California
education projects, our California business has not yet benefited
significantly from the projects booked in the past 6 months. We are
now finishing several older California projects bid at lower margins
with greater scope and field components. As we begin to work on newer,
recently booked California projects, we should begin to see an
increase in gross margin attained.
Our projects in Florida have shown a significant increase in gross
margin attained. For the first quarter of 2005, Florida projects
attained gross margins of $2.6 million, or 19.4%, on $13.3 million of
sales. This is compared to a gross loss of $0.7 million, or a 36.6%
loss in the first quarter, 2004. For the first quarter of 2005,
Arizona projects attained $0.6 million in gross margin, or 10.6%,
compared to $0.2 million in gross margin, or 7.6%, in the first
quarter, 2004. Our Texas business incurred a gross loss of 7.2%, or
$0.3 million, on sales of $3.6 million in the first quarter of 2005,
compared to a gross loss of 13.8%, or $0.3 million, in the first
quarter of 2004. Our California projects attained a gross loss of $0.6
million, or 2.1%, on sales of $28.0 million, compared to a gross
margin of $0.5 million, or 2.1%, in first quarter 2004.
Modtech President and Chief Executive Officer David Buckley
commented: "We are clearly disappointed with the cost overruns on the
Heritage project. This type of project was attractive due to the
associated large revenues, but what was not understood was the
complexity and associated costs of the field work necessary to
complete such a project. These issues, coupled with the difficulties
experienced with the other interested parties on the project, have led
to a project cost overrun that cannot ever be repeated. We have put
our most experienced project management personnel on this project and
we are now substantially complete with this incredibly difficult
project.
"Our focus now is getting on to the work ahead of us," Buckley
continued. "I am very encouraged by the progress in Florida and
Arizona. Texas is starting to see an increase in volume, and
California is starting recently booked projects that should produce
much better numbers. The fundamentals of the business are improving on
a daily basis, and we are starting to see improvements in productivity
and throughput from our Lean Enterprise efforts."
Buckley went on to state: "The losses on Heritage have lengthened
our timeline for recovery. The lessons learned and the fundamental
changes brought on by the project will be extremely beneficial for the
business in the future. The best way we can overcome the effects of
the Heritage project is to accelerate our internal improvements and
deliver on our commitments for the remainder of the year. We are
actively attacking costs in direct and indirect materials. We are
addressing productivity and eliminating waste at every opportunity
through our Lean Enterprise efforts. We are implementing metrics and
controls that tie performance to targeted results at all levels of the
company. We feel we are making the necessary fundamental process
changes, the proof of which is in the improving financial performance
of the company."
Dennis Shogren, Modtech's Chief Financial Officer, remarked: "The
fundamental flaws in the previous business model for California
education were clearly demonstrated in the Heritage project. All of
the risks associated with complex projects, with multiple stories,
multiple prime contractors, and a significant percentage of work in
the field all came together on this project. The labor costs necessary
to complete this project demonstrate very clearly the benefits of work
in the factory, and the need to restrict the portion of work performed
in the field."
Shogren added: "In our operations outside of California, namely
Arizona, Texas, and Florida, we had a combined increase in revenues
from $7.0 million in the first quarter of 2004 to $22.5 million in the
first quarter of 2005. This was accompanied by an improvement in gross
profit for these three regions from a loss of $0.7 million in the
first quarter of 2004 to a gross profit of $2.9 million in the first
quarter of 2005, or an improvement of $3.6 million in gross profit
year over year.
"These improvements were achieved in regions where the projects
have a much shorter life-cycle, and the backlog turn is much faster
than in California. We expect to realize improvements in California as
the region works through the older backlog and begins to work on the
projects booked in the same period," Shogren said.
Shogren continued: "In April and May, we experienced an unusually
high rate of employee turnover brought on by an increased level of
scrutiny at the National level by the Social Security Administration
and Immigration and Naturalization Service. Our second quarter results
have been somewhat hampered by our difficulties in hiring and
replacing our labor force, but the actions we have taken on this front
in April and May should mitigate the impact." Shogren concluded by
saying: "We expect to see continued improvements into the third
quarter and full year in both sales and operating income."
The Company will hold a teleconference on June 23, 2005, at 1:30
p.m. PDT (4:30 p.m. EDT) to provide further information about the
Company's operations, financial, and business and growth strategies.
To participate in the teleconference, please call toll-free
800-291-8929 (or 706-634-0478 for international callers) approximately
10 minutes prior to the above start time. You may also listen to the
teleconference live via the Internet at www.earnings.com. For those
unable to attend, this website will host an archive of the call. A
telephone playback will be available beginning at 5 p.m. PDT on June
23. To hear the playback, call 800-642-1687 (or 706-645-9291 for
international callers) and provide Conference ID 7161775.
About Modtech Holdings, Inc.
Modtech(TM) is a leading national designer and manufacturer of
modular buildings, both permanent and relocatable. In the school
industry, the Company has advanced typical modular building technology
to greater dimensions of flexibility and architectural integrity.
Modtech(TM) has substantial product and geographic diversification
throughout the southwestern states and a growing presence in Florida
and Texas. Modtech's commercial and industrial buildings are sold to a
diverse end-user market and may be leased through national, regional,
and local dealers. The Company also designs and manufactures modular
buildings to customer specifications for a wide variety of uses.
Some statements in this press release may constitute
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties, and other
factors that may cause the actual results, performance, or
achievements of the company to be materially different from any future
results, performance, or achievements expressed or implied by
forward-looking statements. Refer to the Company's filings with the
Securities and Exchange Commission for further discussion of such
factors. The forward-looking statements are made as of the date of
this press release and the Company assumes no obligation to update
such statements.
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MODTECH HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2005 2004
Assets
Current assets:
Cash and cash equivalents $16,660,000 $11,799,000
Contracts receivable, net, including
costs in excess of billings of
$10,833,000 and $9,273,000 in 2005
and 2004, respectively 46,154,000 47,450,000
Inventories 11,061,000 13,603,000
Income tax receivable 4,231,000 4,231,000
Other current assets 1,603,000 1,938,000
Total current assets 79,709,000 79,021,000
Property and equipment, net 15,311,000 15,511,000
Other assets
Restricted cash 16,898,000 10,000,000
Goodwill 71,903,000 71,903,000
Covenants not to compete, net 23,000 29,000
Debt issuance costs, net 4,200,000 2,068,000
Other assets 603,000 613,000
Total assets $188,647,000 $179,145,000
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities $41,790,000 $41,134,000
Billings in excess of costs 5,898,000 4,427,000
Current revolving credit line 2,748,000 16,900,000
Current maturities of long-term debt 4,000,000 5,000,000
Total current liabilities 54,436,000 67,461,000
Long-term debt, excluding current portion 43,916,000 19,756,000
Total liabilities 98,352,000 87,217,000
Shareholders' equity:
Common stock, $.01 par value.
Authorized 25,000,000 shares; issued
and outstanding 14,792,764 and
14,479,082 in 2005 and 2004,
respectively 148,000 145,000
Additional paid-in capital 86,071,000 83,575,000
Retained earnings 4,076,000 8,208,000
Total shareholders' equity 90,295,000 91,928,000
$188,647,000 $179,145,000
See accompanying notes to condensed consolidated financial statements.
MODTECH HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
2005 2004
Net sales $50,538,000 $29,409,000
Cost of goods sold 48,216,000 29,639,000
Gross profit (loss) 2,322,000 (230,000)
Selling, general and administrative expenses 3,887,000 2,299,000
Loss from operations (1,565,000) (2,529,000)
Other (expense) income:
Interest expense, net (1,568,000) (418,000)
Other, net (999,000) 15,000
(2,567,000) (403,000)
Loss before income taxes (4,132,000) (2,932,000)
Income tax benefit --- 1,231,000
Net loss $(4,132,000) $(1,701,000)
Basic and diluted loss per common share $(0.28) $(0.12)
Basic and diluted weighted-average common
shares outstanding 14,665,185 13,754,354
See accompanying notes to condensed consolidated financial statements.
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