Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-22992
THE SHAW GROUP INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-1106167
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
8545 UNITED PLAZA BOULEVARD
BATON ROUGE, LOUISIANA 70809
(Address of principal executive offices) (zip code)
(225) 932-2500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common stock, no par
value, registered on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the stock held by non-affiliates (affiliates being
directors, officers and holders of more than 5% of the Company's common stock)
of the Registrant at September 30, 1999 was approximately $219 million.
The number of shares of the Registrant's common stock, no par value, outstanding
at October 29, 1999 was 11,748,796.
2
PART I
ITEM 1. BUSINESS
GENERAL
The Shaw Group Inc. ("Shaw" or the "Company) is the largest supplier of
fabricated piping systems in the United States and one of the leading suppliers
of integrated piping systems and services for new construction, site expansion
and retrofit projects in the world. Shaw is a cost-effective single-source
provider of fabricated piping systems and services for projects primarily in the
following industries:
o power generation;
o chemical processing;
o crude oil refining;
o petrochemical processing; and
o oil and gas exploration and production.
By serving a diverse portfolio of industries worldwide, the Company
reduces its dependence on any one industry or geographic region. The Company is
currently benefitting from substantial demand for its products and services in
the power generation industry, particularly for activity related to the
installation of gas turbine power systems in the United States. The Company
believes that it has provided more piping systems for the power generation
market worldwide than any other domestic competitor, positioning it to
capitalize on the significant and growing demand in this sector.
Shaw differentiates itself from its competition by offering its
customers comprehensive piping solutions consisting of integrated engineering,
design, fabrication, erection and maintenance of piping systems and the
manufacture of pipe fittings. Over the past several years, the Company's
customers have included:
AlliedSignal, Inc. Mitsubishi Heavy Industries, Inc.
Black & Veatch Corporation Monsanto
Chevron Chemical Raytheon Engineers & Constructors, Inc.
Duke/Fluor Daniel Rolls Royce
FMC Corporation Southern Companies Service, Inc.
Hitachi Toshiba Corporation
Shaw has also formed strategic alliances with:
ABB AG The Dow Chemical Company
Air Products and Chemicals, Inc. General Electric Company
Alstom S.A. Orion Refining Corporation
BASF AG Parsons Corporation
Bechtel Corporation Praxair, Inc.
The Company was founded in 1987 and has expanded rapidly through
internal growth and the completion and integration of a series of strategic
acquisitions. The Company has increased its revenues from $131.1 million for
fiscal 1994 to $494.0 million for fiscal 1999, representing approximately a 30%
compound annual growth rate. Over this same time period, Shaw has also achieved
a 30% compound annual growth rate in earnings per share. In addition, the
Company's backlog has increased from $75.0 million as of August 31, 1994 to
$818.3 million as of August 31, 1999.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKs
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The statements contained in this
Annual Report on Form 10-K that are not historical facts (including without
limitation statements to the effect that the Company "believes," "expects,"
"anticipates," "plans," or other similar expressions) are forward-looking
statements based on the Company's current expectations and beliefs concerning
future developments and their potential effects on the Company. There can be no
assurance that future developments affecting
2
3
the Company will be those anticipated by the Company. Actual results may differ
from those projected in the forward-looking statements. These forward-looking
statements involve significant risks and uncertainties (some of which are beyond
the control of the Company) and are subject to change based upon various
factors, including but not limited to the following risks and uncertainties:
changes in the demand for and market acceptance of the Company's products;
changes in general economic conditions and, specifically, in economic conditions
prevailing in international markets; the presence of competitors with greater
financial resources and the impact of competitive products and pricing; the
effect of the Company's policies, including the amount and rate of growth of
Company expenses; the continued availability to the Company of adequate funding
sources and changes in interest rates; delays or difficulties in the production,
delivery or installation of products and the provision of services; Y2K risks;
and various legal, regulatory and litigation risks. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
COMPETITIVE ADVANTAGES
Over the past several years, the Company has increased its pipe
fabrication capacity, expanded its products and services, and broadened the
scope of its projects to include engineering, pipe erection, maintenance and
related construction services. These initiatives have enabled Shaw to become a
technologically advanced producer of complex piping systems, to achieve
substantial economies of scale in purchasing raw materials and to provide its
customers with a broad range of products and services. As a result, the Company
enjoys the following competitive advantages:
Coordination and integration of piping systems and services. Shaw's
ability to provide its customers with a single source of comprehensive
piping products and services and to coordinate and integrate its products
and services allows it to maximize project efficiency and reduce lead time
and costs for its customers.
State-of-the-art induction pipe bending technology. Traditionally, pipe
fabricators cut and connect pipe through the use of fittings that are welded
into place. While a significant amount of the Company's fabrication is still
based on this method, pipe bending techniques such as Shaw's have grown in
acceptance in recent years. Pipe bending techniques require fewer cut and
weld connections than the traditional method and as a result require less
labor and material expenditures. Induction bending is a technique using
simultaneous super-heating and compression of pipe to produce tight-radius
bends to customers' specifications. Shaw believes that it offers its
customers the most sophisticated and efficient pipe bending machines and
technology available in the world today. Shaw's induction pipe bending
machines are capable of bending pipe as large as 66 inches in diameter with
a wall thickness of up to five inches. In addition, when compared to the
traditional cut and weld method, the Company's technology provides a more
uniform and cost-effective product that is generally considered to be
stronger and less prone to structural fatigue.
Established, diversified customer base. The Company's customers include
a group of large, multi-national companies with whom it has had
long-standing relationships. In some cases, these relationships have taken
the form of strategic alliances through which the Company provides a
significant portion of its customers' piping requirements. Because many of
its customers are active in more than one of the industries the Company
serves, they have historically remained significant purchasers of the
Company's piping systems and services despite fluctuations in activity
within any particular industry.
Strategically positioned worldwide operations. Shaw has established a
leading market position in the United States and has devoted substantial
resources to select international markets in South America, Europe, Asia and
Australia. The Company's pipe fabrication facilities currently include eight
locations in the United States and four in international markets. These
facilities consist of over 1.5 million square feet of fabrication space and
can produce more than 97,000 tons of fabricated pipe annually. In the past
two fiscal years, the Company has fabricated products in its overseas
facilities representing approximately one-half of its international sales.
The Company believes that its international presence strengthens its ability
to pursue new markets and customers on a global basis, particularly
multi-national customers seeking suppliers who can provide worldwide
solutions for their piping requirements. For example, in the past six years
one of the Shaw's alliance partners has installed the Company's systems in
24 power plants in 13 countries on three continents.
Proprietary software technology. The Company's proprietary
SHAW-DRAW(TM) and SHAW-MAN(TM) software programs enhance its customers'
ability to plan, schedule and track their projects and reduce installation
costs and cycle
3
4
times. SHAW-DRAW(TM) converts customer designs into production drawings
while SHAW-MAN(TM) manages and controls the movement of project materials.
Many of Shaw's customers have found its software to be of such value that
they have electronically linked their own planning and control processes
with the Company's systems and software.
Specialty manufacturing capability. While Shaw's competitors are
generally dependent on third-party manufacturers of specialty fittings, the
Company has the capability to manufacture many of these products in-house.
By manufacturing these critical elements of the pipe fabrication process,
the Company is able to maintain greater control over the sourcing of
fittings, which reduces its supply costs and minimizes delays in
fabrication.
BUSINESS STRATEGY
The Company's business strategy is to enhance its leading position as a
provider of comprehensive piping solutions within existing markets and to enter
select new markets. The Company intends to achieve this goal by:
Growing through internal development. Shaw's fabrication facilities are
currently operating at or near capacity while its backlog has more than
tripled in the last year. In order to meet projected demand, Shaw
anticipates developing or acquiring one or more facilities in the next year.
The Company will also hire additional sales, marketing and project
maintenance personnel worldwide as well as purchase and upgrade equipment
and technology. In addition to increasing its plant capacity and
strengthening its sales, manufacturing and technology infrastructure, Shaw
intends to evaluate opportunities to enter new international markets,
particularly those in which significant power plant construction is
anticipated.
Pursuing alliance agreements. The Company intends to enter into
additional alliance agreements with current and future customers. Shaw's
alliance agreements enhance its ability to obtain contracts for individual
projects by eliminating formal bid preparation. The alliance process
involves joint steering committees in which the Company works closely with
its customers to achieve process improvements and systems integration. The
Company believes that its ongoing dialogue with its alliance partners
greatly enhances its customer relationships. These agreements have tended to
provide Shaw with a steady source of projects, minimize the impact of
short-term pricing volatility and enable it to anticipate a larger portion
of its future revenues.
Strengthening its technological position. Shaw will continue to
strengthen its technological position through investment in new equipment,
technology and information systems, which it believes will allow it to
increase its fabrication and manufacturing capabilities and capacity, better
integrate its product and service offerings and improve overall project
efficiency. In addition, to address its customers' desire to share project
information with it electronically, the Company is developing information
systems to enable its customers to monitor closely the progress of their
piping projects and to integrate fully the installation and erection of the
entire piping project.
Expanding erection, maintenance and related construction services. The
Company has developed expertise in providing erection, maintenance and
construction services related to its core fabrication projects. The Company
believes that its ability to offer these services appeals to many of its
customers and provides it with significant growth opportunities.
Pursuing selective acquisitions. Since January 1996, the Company has
completed 11 acquisitions for total consideration of approximately $93
million. Nine of these acquisitions were completed during the fiscal years
ended August 31, 1997, 1998 and 1999 (see Note 3 of Notes to Consolidated
Financial Statements). Shaw intends to continue to pursue selective
acquisitions of businesses that will expand or complement its current
portfolio of products and services.
INDUSTRY OVERVIEW
The Company's industry provides piping systems and services for
projects in the power generation, chemical processing, crude oil refining,
petrochemical processing, oil and gas exploration and production, and other
industries (including pulp and paper, food processing and pharmaceutical
industries). Because these industries have historically been cyclical and
affected by general downturns in the economy, the Company's revenues and the
revenues of its competitors have fluctuated with the demand by these industries
for new construction and site expansions, while maintenance work has
4
5
typically been more recurring in nature.
Power Generation
According to the Department of Energy, demand for domestic electricity
generation has increased 17% since 1990 while capacity has increased less than
one percent. This imbalance, coupled with deregulation of the power industry and
decommissioning of nuclear plants, has resulted in a surge in domestic
construction of power plants. According to the Energy Information
Administration, or EIA, a projected 1,344 new plants with a total of 403
gigawatts of capacity will be needed by 2020 to meet growing demand and to
offset retirements of nuclear and fossil fuel plants. Approximately 85% of new
capacity is projected to be combined-cycle or combustion turbine technology
fueled by natural gas or both oil and gas. The EIA estimates that between 1995
and 2010 approximately $1.4 trillion will be spent on electricity generation
investments worldwide. The Company's backlog reflects this activity; at August
31, 1999, the Company had approximately $527 million in backlog attributable to
the power generation industry, representing approximately 64% of its total
backlog on that date.
Chemical Processing
While its chemical processing customers have experienced limited growth
overall, the Company has continued to experience relatively steady activity in
this sector. The Company anticipates that the majority of its work in this
sector in the near-term will consist of maintenance and retrofit work necessary
to modernize existing facilities and to comply with increasingly stringent
environmental requirements. Approximately 12% of its backlog at August 31, 1999
consisted of work in the chemical processing industry.
Crude Oil Refining
Demand for the Company's services in the crude oil refining industry
has remained steady in recent years. The consistent demand for its services in
this industry has been driven by refiners' need to process a broader spectrum of
crude and to produce a greater number of products. In addition, increasingly
stringent environmental regulations, including significantly reduced emissions
allowances required by the Clean Air Act, have increased retrofit activity.
The refining industry represented approximately 19% of its backlog at August 31,
1999.
Petrochemical Processing
The petrochemical processing industry has experienced a downturn over
the past several years and Shaw's activity in this sector also diminished in
fiscal 1999. Similar to the chemical processing industry, most of the Company's
work in this sector will be driven by maintenance and retrofit requirements.
Projects in the petrochemical processing sector represented an insignificant
percentage of Shaw's backlog at August 31, 1999.
Oil and Gas Exploration and Production
The Company entered the domestic offshore oil and gas exploration and
production market with the acquisition of Bagwell Brothers, Inc. in fiscal 1998.
Although demand in this industry is directly related to capital spending in the
oil and gas sector which, in turn, is directly influenced by the levels of oil
and gas prices, demand for Shaw's products and services lags behind significant
commodity price increases. Since January 1, 1999, West Texas Intermediate crude
oil and Henry Hub natural gas prices have increased approximately 86% and 35%,
respectively. As a result of the improving commodity price outlook, a number of
independent and major oil and gas companies have increased capital expenditure
budgets for the second half of 1999 and for 2000. As a result of increases in
capital expenditures, the Company's bidding activity in this sector has
increased in recent months. Approximately four percent of its backlog at August
31, 1999 consisted of projects in the oil and gas exploration and production
industry. While the Company does not expect to experience significantly higher
activity rates in this sector in the near-term, it believes it is well
positioned to take advantage of significant opportunities for growth, both
domestically and internationally.
PRODUCTS AND SERVICES
The Company has segregated its business into two segments: pipe
services and manufacturing. Pipe services
5
6
provides a complete range of piping products and services, including
fabrication, induction pipe bending, engineering and design, and erection and
maintenance. The manufacturing segment manufactures and distributes specialty
stainless, alloy and carbon steel pipe fittings. These fittings include
stainless and other alloy elbows, tees, reducers and stub ends.
PIPE SERVICES
The Company has set forth below a brief description of each of its
major products and services in the Pipe Services segment of its business.
Fabrication
The Company's primary service is the fabrication of complex piping
systems from raw materials including carbon steel, stainless steel and other
alloys, nickel, titanium and aluminum. The Company fabricates pipe by cutting it
to length, welding fittings on the pipe and bending the pipe, each to precise
customer specifications. Shaw currently operates pipe fabrication facilities in
Louisiana, Oklahoma, South Carolina, Texas, Utah, Virginia, the United Kingdom,
Venezuela and Bahrain (where it has a 49% interest in a joint venture). Shaw's
fabrication facilities are capable of fabricating pipe ranging in diameter from
1/2 inch to 72 inches, with overall wall thicknesses from 1/8 inch to 7 inches.
The Company can fabricate pipe assemblies up to 100 feet in length and weighing
up to 45 tons.
A significant portion of Shaw's work consists of the fabrication of
critical piping systems for use in high pressure, high temperature or corrosive
applications, including systems designed to withstand pressures of up to 2,700
pounds per square inch and temperatures of up to 1,020 degrees Fahrenheit. In
order to ensure that its products can withstand these types of extreme
conditions, the Company has set rigid quality control standards for all of its
products. In addition to visual inspection, the Company uses other advanced
methods to confirm that its products meet specifications such as:
o radiography;
o hydro testing;
o dye penetration; and
o ultrasonic flaw detection.
Induction Pipe Bending
In fiscal 1994, the Company began purchasing state-of-the-art induction
pipe bending equipment, which significantly increased its capacity to fabricate
piping systems in both volume and complexity. In addition, this equipment
enables Shaw to substitute pipe bending for the more traditional cutting and
welding techniques on certain projects, resulting in labor, time and raw
material savings. In January 1998, the Company acquired Cojafex B.V. of
Rotterdam, Holland ("Cojafex"). Cojafex owns the technology for certain
induction pipe bending machines used for bending pipe and other carbon steel and
alloy items for industrial, commercial and architectural applications.
Primarily because of the significant reductions in labor, time and
material costs associated with pipe bending techniques, the market for pipe
fabrication is increasingly moving in the direction of bending according to
customer specifications. The Company believes that its technology is the most
advanced of its kind available in the world and gives it a technological
advantage in this growing segment of the market.
The Company currently has eight induction pipe bending machines in
operation capable of bending pipe up to 66 inches in diameter with wall
thicknesses of up to five inches. Their model numbers, locations and pipe
bending capabilities are presented in the following table:
PIPE BENDING CAPABILITIES
-------------------------
MAXIMUM MAXIMUM
PIPE PIPE WALL
MODEL LOCATION DIAMETER THICKNESS
--------------------- --------------------- ------------ ------------
Cojafex PB Special 16 Walker, Louisiana 16 inches 2.5 inches
Cojafex PB Special 16 Laurens, South Carolina 16 inches 2.5 inches
Cojafex PB Special 16 Tulsa, Oklahoma 16 inches 2.5 inches
Cojafex PB Special 16 Manama, Bahrain 16 inches 2.5 inches
Cojafex PB-1200 Walker, Louisiana 48 inches 4.0 inches
Cojafex PB-1600 Clearfield, Utah 66 inches 5.0 inches
Cojafex PB-850 Clearfield, Utah 34 inches 3.0 inches
Cojafex PB Special 12 Clearfield, Utah 12 inches .75 inches
6
7
Engineering and Design
In 1994, as an integral part of its strategy to offer comprehensive
piping solutions, the Company expanded its services to include engineering and
design capabilities for power projects, primarily for its customers outside the
United States. The Company also designs and engineers pipe hangers and pipe
support systems and specializes in engineering analyses of complex piping
systems and related services, primarily for the power generation industry. These
engineering, design and pipe support capabilities complement Shaw's fabrication
services, particularly for power generation projects, enabling it to provide
more comprehensive piping packages with reduced overall lead times and lower
total installed costs.
The Company uses sophisticated plant design software to create virtual
three-dimensional piping system models. The models provide customers with a
clear, understandable picture of the complete project, enabling them to "walk
through" the project on a three-dimensional basis to accurately review designs.
Shaw currently operates approximately 25 workstations that utilize this plant
design software.
The Company's engineering capabilities are directly linked to its
fabrication shops and its proprietary computer aided design system,
SHAW-DRAW(TM). SHAW-DRAW(TM) converts customer design drawings into its detailed
production drawings in seconds, significantly reducing the lead-time required
before fabrication can begin and substantially eliminating detailing errors. The
Company has also implemented SHAW-MAN(TM), which efficiently manages and
controls the movement of all required materials through each stage of the
fabrication process utilizing bar code technology. These proprietary programs
enhance Shaw's customers' planning and scheduling, reducing total installed
costs and project cycle times.
Erection and Maintenance
The Company's acquisition of several industrial erection and
maintenance businesses in fiscal 1997 and 1998 has enabled it to expand its
piping solutions to include on-site piping system erection services and total
project construction and plant maintenance services. The Company currently
offers erection and maintenance services in the Gulf Coast region of the United
States and in the United Kingdom, Australia and Venezuela.
Shaw's erection projects are generally capital-intensive and include
the construction of new facilities, plant expansions and upgrades. Its services
incorporate most of the construction disciplines, including:
o civil, structural and steel erection;
o mechanical and equipment installation and assembly;
o piping erection;
o skid and modular unit fabrication and assembly;
o constructability reviews;
o materials and labor procurement and management;
o American Society of Mechanical Engineers code work; and
o plant maintenance.
MANUFACTURING
The Company manufactures specialty stainless, alloy and carbon steel
pipe fittings for use in pipe fabrication. These pipe fittings include stainless
and other alloy elbows, tees, reducers and stub ends ranging in size from 1/2
inch to 48 inches and heavy wall carbon and chrome elbows, tees, caps and
reducers with wall thicknesses of up to 3 1/2 inches. Shaw operates a
manufacturing facility in Shreveport, Louisiana, which distributes its fittings
to its pipe services operations and to third parties. The Company also operates
several distribution centers in the United States, which distribute its
products, as well as products manufactured by third parties. Manufacturing pipe
fittings enables the Company to realize greater
7
8
efficiencies in the purchase of raw materials, reduces overall lead times and
lowers total installed costs. Shaw's manufacturing capabilities also reflect its
commitment to be a comprehensive piping solution for its customers.
SEGMENT FINANCIAL DATA AND EXPORT SALE INFORMATION
See Note 13 of the Notes to Consolidated Financial Statements for
detailed financial information regarding each business segment and export sale
information.
MARKETS
The Company's principal markets are the erection of new systems and
retrofits in the power generation, chemical processing, crude oil refining,
petrochemical processing and oil and gas exploration and production industries,
both in the United States and internationally. The Company also has supplied
piping systems to other industries including the pulp and paper, food processing
and pharmaceutical industries.
The Company's sales by industry in its two most recent fiscal years
approximated the following amounts:
YEAR ENDED AUGUST 31,
----------------------
INDUSTRY 1998 1999
-------- -------- --------
(DOLLARS IN MILLIONS)
Power Generation $ 193.5 $ 161.8
Chemical Processing 132.6 141.0
Crude Oil Refining 83.9 109.3
Petrochemical Processing 42.4 20.8
Oil and Gas Exploration and Production 23.1 29.0
Other 26.1 32.1
-------- -------
$ 501.6 $ 494.0
======== =======
The Company's sales by geographic region in its two most recent fiscal
years approximated the following amounts:
YEAR ENDED AUGUST 31,
---------------------
GEOGRAPHIC REGION 1998 1999
----------------- -------- --------
(DOLLARS IN MILLIONS)
United States $ 286.5 $ 366.2
Far East/Pacific Rim 100.6 41.1
Europe 55.8 49.7
South America 31.9 18.7
Middle East 18.4 10.2
Other 8.4 8.1
-------- --------
$ 501.6 $ 494.0
======== ========
Prior to February 1994, the Company conducted its international
business exclusively from its plants in the United States. Critical or high
pressure piping systems are typically fabricated in industrialized nations that
tend to have greater capacity for manufacturing piping that satisfies stringent
tolerance and consistency requirements. United States pipe fabricators have
generally fabricated these systems more efficiently than their Western European
and Japanese competitors due to lower labor costs and greater availability of
raw materials. However, geographical sourcing requirements, local labor rates
and transportation considerations may make it difficult for the Company to use
its domestic facilities to compete on many international projects, particularly
those involving non-critical piping systems. Therefore, Shaw has established
facilities abroad to allow it to bid more competitively for international
projects. The Company currently operates facilities in Venezuela, the United
Kingdom, Australia and Bahrain.
In November 1993, the Company entered into a joint-venture agreement to
construct and operate a fabrication facility in Bahrain. Shaw's joint venture
partner is Abdulla Ahmed Nass, a Bahrainian industrialist. The Company's
Bahrainian joint-venture facility is one of the first modern pipe fabrication
facilities in the Middle East and has received
8
9
the Gulf States Certification from the Gulf Cooperation Council. The Gulf States
Certification enables the joint venture to export products to other Arab
countries without paying additional tariffs. In fiscal 1999, the joint venture
had sales of approximately $9.6 million and the Company's share of the joint
venture's net income was approximately $681,000.
In the future, the Company's pursuit of joint-venture relationships to
conduct foreign operations will be determined on a case-by-case basis depending
on market, operational, legal and other relevant factors.
BACKLOG
The Company defines its backlog as a "working backlog," which includes
projects for which Shaw has received a commitment from its customers. This
commitment typically takes the form of a written contract for a specific
project, a purchase order or a specific indication of the amount of time or
material the Company needs to make available for a customer's anticipated
project. In certain instances, the engagement is for a particular product or
project for which the Company estimates anticipated revenue, often based on
engineering and design specifications that have not been finalized and may be
revised over time. Shaw's backlog for maintenance work is derived from
maintenance contracts and its customers' historic maintenance requirements. The
Company estimates that its backlog was approximately $818.3 million at August
31, 1999, compared to $253.4 million and $254.3 million at August 31, 1997 and
1998, respectively. The Company estimates that $403.5 million, or 49%, of its
backlog at August 31, 1999 will be completed in fiscal 2000.
Approximately $300 million, or 37%, of the Company's backlog at August
31, 1999 was attributable to a contract with General Electric that requires the
Company to fabricate 90% of the pipe necessary to install the combined-cycle gas
turbines to be built by General Electric domestically through 2004.
Approximately 53% of this backlog is for power generation projects for which
General Electric has been engaged and is in various stages of design,
engineering and construction and for which the Company has received a work
release or has been notified that a work release is pending. The balance is for
work for which General Electric has requested that the Company reserve capacity.
The Company cannot provide any assurance, however, that all of these projects
will be constructed or that they will be completed in its currently anticipated
time frame.
On occasion, customers will cancel or delay projects for reasons beyond
Shaw's control. Most of Shaw's contracts provide for cancellation fees in the
event projects in backlog are canceled, but the Company typically has no
contractual right to the total revenues reflected in its backlog. These fees
typically provide for reimbursement of the Company's out-of-pocket costs,
revenue associated with work performed to date and a varying percentage of the
profits the Company would have realized had the contract been completed. Where
Shaw does not have a written agreement, it often has been able to recover
similar amounts from its clients. In addition to cancellation risks, projects
may remain in Shaw's backlog for extended periods of time. Historically, delays
have impacted Shaw's operations from time to time, but cancellations have been
immaterial. Cancellation is more likely to occur during the initial phases of
projects, when erection and related construction services are provided, than
during later phases, when fabrication services are provided. Accordingly,
cancellation rates for projects reflected in the Company's backlog may increase
in the future if its business mix includes a larger percentage of erection and
related construction services.
The following table breaks out the percentage of its backlog in the
following industry sectors and geographic regions for the periods indicated:
AT AUGUST 31,
----------------------
1998 1999
-------- --------
INDUSTRY
Power Generation 30% 64%
Chemical Processing 39 12
Petrochemical Processing 11 0
Crude Oil Refining 8 19
Oil and Gas Exploration and Production 9 4
Other 3 1
-------- --------
100% 100%
======== ========
GEOGRAPHIC REGION
Domestic 65% 75%
International 35 25
-------- --------
100% 100%
======== ========
9
10
TYPES OF CONTRACTS
The Company's contracts are generally priced on a unit price, fixed
price or lump-sum, or cost-plus basis.
A significant portion of the Company's contracts, particularly for
domestic piping fabrication, are bid on a unit price basis under which the
customer pays a negotiated rate for the product or service, such as a weld,
radiograph inspection, bend or engineering revision. The Company generally bills
raw materials to customers at published prices in effect on the date of the
contract, and the Company generally obtains fixed pricing commitments from its
suppliers at the time of the contract for most of the items necessary to
complete the project in order to minimize the risk of raw material price
increases during the fabrication process.
The Company quotes many of its projects on a fixed price or lump-sum
basis. To minimize the risk of increases in the cost of its supplies, Shaw
generally does not quote the actual contract price until the Company has secured
fixed pricing commitments from its suppliers for most of the items necessary to
complete the project.
Additionally, a significant portion of its erection contracts are bid
on a cost-plus basis. Revenues are recognized on the basis of costs incurred
plus the fee earned.
The Company obtains orders through competitive bidding, negotiated
contracts and awards under alliance agreements. In addition to price, the
awarding of contracts is often based on other factors, including reputation,
experience and ability to meet project deadlines.
The Company also obtains orders under alliance agreements entered into
with its customers to expedite individual project contract negotiations through
means other than the formal bidding process. These agreements typically contain
a standardized set of purchasing terms and pre-negotiated pricing provisions and
often provide for annual price adjustments. The Company's current alliance
partners include ABB AG, Air Products and Chemicals, Inc., Alstom S.A., BASF AG,
Bechtel Corporation, The Dow Chemical Company, General Electric, Orion Refining
Corporation, Parsons Corporation and Praxair, Inc. These agreements are
typically implemented by establishing a joint steering committee to provide
guidance and direction on alliance issues. Normally this committee meets on a
periodic basis to monitor alliance progress and assign resources to effect
continuous improvements in the various work processes associated with project
execution. Alliance agreements allow the Company's customers to achieve greater
cost efficiencies and reduced cycle times in the design and fabrication of
complex piping systems for power, chemical and refinery projects. In addition,
the Company believes that these agreements provide it with a steady source of
new projects and help minimize the impact of short-term pricing volatility. The
recurring nature of Shaw's alliance agreements also enables it to anticipate a
larger portion of its future revenues. In fiscal 1999, approximately 35% of the
Company's revenues were generated under its alliance agreements.
CUSTOMERS AND MARKETING
The Company's customers are principally major multi-national
engineering and construction firms, equipment manufacturers and industrial
corporations. For fiscal 1999, Orion Refining Corporation represented 14% of its
sales while no other customer represented more than ten percent of its sales.
Shaw conducts its marketing efforts principally through a sales force
comprised of 35 employees at August 31, 1999. In addition, the Company engages
independent contractors to cover certain customers and territories. The Company
pays its sales force a base salary plus, when applicable, an annual bonus, while
it pays independent contractors commissions.
RAW MATERIALS AND SUPPLIERS
The Company's principal raw materials are carbon steel, stainless steel
and other alloy piping, which it obtains from a number of domestic and foreign
primary steel producers. The market for most raw materials is extremely
competitive and Shaw's relationships with its suppliers are good. Certain types
of raw materials, however, are available from only one or a few specialized
suppliers. The Company's inability to obtain materials from these suppliers
could
10
11
jeopardize its ability to timely complete a project or realize a profit.
The Company purchases directly from manufacturers, or manufactures
itself, a majority of its pipe fittings. This generally lowers the Company's
pipe fabrication costs. Because of the volume of piping the Company purchases,
it is often able to negotiate advantageous purchase prices. If a manufacturer is
unable to deliver the materials according to the negotiated terms, the Company
may be required to purchase the materials from another source at a higher price.
The Company keeps items in stock at each of its facilities and transports items
between its facilities as required. Shaw obtains more specialized materials from
suppliers when required for a project.
INDUSTRY CERTIFICATIONS
In order to perform fabrication and repairs of coded piping systems,
the Company's domestic construction operations and fabrication facilities, as
well as its subsidiaries in Derby, UK and Maracaibo, Venezuela, have obtained
the required American Society of Mechanical Engineers (ASME) certification (S,U
& PP stamps), and its facilities in Laurens, South Carolina; Walker, Louisiana;
Derby, UK; and Maracaibo, Venezuela have obtained the National Board
certification (R stamp). In addition, the Laurens, South Carolina and the
Troutville, Virginia facilities are licensed to fabricate piping for nuclear
power plants and are registered by the International Organization of Standards
(ISO 9002). The Company's engineering subsidiary and its UK operations are also
registered by the International Organization of Standards (ISO 9001), as is its
pipe support fabrication facility (ISO 9002).
PATENTS, TRADEMARKS AND LICENSES
The Company does not own any material patents, registered trademarks
or licenses. However, the Company considers its design and project control
systems, SHAW-DRAW(TM) and SHAW-MAN(TM), to be proprietary information of the
Company.
COMPETITION
In pursuing piping engineering and fabrication projects, Shaw
experiences significant competition from competitors in both international and
domestic markets. In the United States, there are a number of smaller pipe
fabricators while, internationally, its principal competitors are divisions of
large industrial firms. Some of its competitors, primarily in the international
sector, have greater financial and other resources than the Company.
In erection, maintenance and related construction services, the Company
has numerous regional, national and international competitors, many of which
have greater financial and other resources than the Company. Moreover, the
Company is a recent entrant into this business, and many of its competitors also
possess substantially greater experience, market knowledge and customer
relationships than the Company.
EMPLOYEES
At August 31, 1999, the Company employed approximately 5,300 full-time
employees, 916 of whom are represented by unions. Of the total employees, 260
worked in the Company's wholly-owned subsidiaries in Venezuela and 493 worked in
the United Kingdom and Australia. Additionally, the Company employed 833
part-time employees in one of its Venezuelan subsidiaries. In 1998, a five-year
agreement was reached between the Company and a union whereby several of the
Company's subsidiaries in the United States are represented by local affiliates
of the union.
ENVIRONMENTAL
The Company is subject to environmental laws and regulations,
including those concerning emissions into the air, discharges into waterways,
generation, storage, handling, treatment and disposal of waste materials and
health and safety. These laws and regulations generally impose limitations and
standards for certain pollutants or waste materials to obtain a permit and
comply with various other requirements. In addition, under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA") and comparable state laws, the Company may be required to investigate
and remediate hazardous substances. CERCLA and these comparable state laws
typically impose liability without regard to whether a company knew of or caused
the release, and liability has been interpreted to
11
12
be joint and several unless the harm is divisible and there is a reasonable
basis of allocation. The Company has not been notified that it is a potentially
responsible party under CERCLA or any comparable state law at any site. The
Company's foreign operations are also subject to various requirements governing
environmental protection.
The environmental, health and safety laws and regulations to which the
Company is subject are constantly changing, and it is impossible to predict the
effect of such laws and regulations on the Company in the future. The Company
believes that it is in substantial compliance with all applicable environmental,
health and safety laws and regulations. However, with respect to environmental
matters, the Company has not conducted environmental audits of all of its
properties. To date, the Company's costs with respect to environmental
compliance have not been material, and the Company does not anticipate any
material environmental liability.
ITEM 2. PROPERTIES
The principal properties of the Company at August 31, 1999 are as
follows:
LOCATION DESCRIPTION SQUARE FEET
-------- ----------- -----------
Baton Rouge, LA Corporate Headquarters 58,000(2)(3)
Laurens, SC Pipe Fabrication Facility 200,000(2)
Prairieville, LA Pipe Fabrication Facility 60,000(1)
West Monroe, LA Pipe Fabrication Facility 70,000
Walker, LA Pipe Fabrication Facility 154,000(2)
Maracaibo, Venezuela Pipe Fabrication Facility 45,000
Tulsa, OK Pipe Fabrication Facility 158,600(2)
Clearfield, UT Pipe Fabrication Facility 335,000(2)(3)
Houston, TX Pipe Fabrication Facility 12,000
Troutville, VA Pipe Fabrication Facility 150,000(1)
Derby, U.K Pipe Fabrication Facility 200,000(1)
Wolverhampton, U.K Pipe Fabrication Facility 43,000(1)
Baton Rouge, LA Distribution Facility 30,000(1)
Englewood, NJ Design and Engineering Headquarters 14,000(1)
Longview, TX Pipe Supports Manufacturing and Fabrication Facility 28,000
Shreveport, LA Piping Components and Manufacturing Facility 385,000(2)
Shreveport, LA Pipe Storage Facility 40,000(2)
Houston, TX Pipe Fittings Distribution Facility 107,000(1)
Vacaville, CA Pipe Supports Manufacturing Facility 43,000(1)
Baton Rouge, LA Construction, Administrative, Warehouse and Fabrication Facility 32,400(2)
Delcambre, LA Offshore Construction and Fabrication Facility 80,000
(1) Leased facility. (2) Encumbered with debt. (3) A portion is leased to outside tenants.
The Bahrain joint venture leases a 94,000 square foot pipe fabrication
facility in Manama, Bahrain.
The distribution facility in Baton Rouge, Louisiana, the pipe fittings
distribution facility in Houston, Texas and the two facilities in Shreveport,
Louisiana are used in the Company's manufacturing segment of business. All other
facilities, except for the corporate headquarters in Baton Rouge, Louisiana, are
used by the Company's pipe servicing segment of business.
The Company considers each of its current facilities to be in good
operating condition and adequate for its present use.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits in the ordinary course of
its business. Although the outcome of certain of these matters cannot be
predicted, management believes based upon information currently available, that
none of such lawsuits, if adversely determined, would have a material adverse
effect on the Company's financial position or results of operations.
12
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, no par value (the "Common Stock"), is
traded on the New York Stock Exchange (the "NYSE") under the symbol "SGR". The
following table sets forth, for the quarterly periods indicated, the high and
low sale prices per share for the Common Stock as reported by the NYSE, for the
Company's two most recent fiscal years and for the current fiscal year to date.
HIGH LOW
--------- ----------
Fiscal year ended August 31, 1998
First quarter $ 24 3/8 $ 17 3/4
Second quarter 26 3/8 18 1/2
Third quarter 25 5/8 22 1/8
Fourth quarter 27 15/16 8 1/16
Fiscal year ended August 31, 1999
First quarter $ 10 5/8 $ 6 13/16
Second quarter 15 7/16 7 5/16
Third quarter 14 9/16 11 9/16
Fourth quarter 21 3/8 12 5/16
Fiscal year ending August 31, 2000
First quarter (through September 30, 1999) $ 23 1/4 $ 19 7/8
The closing sale price of the Common Stock on October 29, 1999, as
reported on the NYSE, was $22 3/4 per share. As of October 4, 1999, the Company
had approximately 152 shareholders of record.
The Company has not paid any dividends on the Common Stock and
currently anticipates that, for the foreseeable future, any earnings will be
retained for the development of the Company's business. Accordingly, no
dividends are expected to be declared or paid on the Common Stock for the
foreseeable future. The declaration of dividends is at the discretion of the
Company's Board of Directors. The Company's dividend policy will be reviewed by
the Board of Directors as may be appropriate in light of relevant factors at the
time. The Company is, however, subject to certain prohibitions on the payment of
dividends under the terms of existing credit facilities.
On July 29, 1998 the Company issued an aggregate of 645,000 shares of
its Common Stock in exchange for all of the remaining capital stock of Bagwell
Brothers, Inc. ("Bagwell"). The Common Stock was issued to the former
shareholders of Bagwell pursuant to Regulation D under the Securities Act of
1933, as amended, and was valued at an aggregate of $13.0 million as of the date
of exchange.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents, for the periods and as of the dates
indicated, selected statement of income data and balance sheet data of the
Company on a consolidated basis. The selected historical consolidated financial
data for each of the three fiscal years in the period ended August 31, 1999
presented below have been derived from the Company's audited consolidated
financial statements. Such data should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto
included elsewhere in this Annual Report on Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
information has been restated to exclude discontinued operations.
13
14
YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(1)(3)(7) (1)(4)(7) (5)(7) (6)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF INCOME
Sales $ 156,922 $ 248,969 $ 335,734 $ 501,638 $ 494,014
=========== =========== =========== =========== ===========
Income from continuing operations $ 3,912 $ 6,915 $ 14,300 $ 16,232 $ 18,121
=========== =========== =========== =========== ===========
Basic income per common share from
continuing operations (2) $ 0.44 $ 0.71 $ 1.23 $ 1.29 $ 1.52
=========== =========== =========== =========== ===========
Diluted income per common share from
continuing operations (2) $ 0.44 $ 0.69 $ 1.20 $ 1.26 $ 1.47
=========== =========== =========== =========== ===========
CONSOLIDATED BALANCE SHEETS
Total assets $ 121,917 $ 218,503 $ 262,459 $ 389,844 $ 407,062
=========== =========== =========== =========== ===========
Long-term debt obligations,
net of current maturities $ 11,718 $ 36,840 $ 39,039 $ 91,715 $ 87,841
=========== =========== =========== =========== ===========
Cash dividends declared per common share $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
(1) Restated to account for the acquisition of NAPTech, Inc., which was
completed on January 27, 1997, and which was accounted for using the
pooling-of-interests method of accounting.
(2) Earnings per share amounts for fiscal 1995, 1996 and 1997 have been
restated for the adoption of Statement of Financial Standards No. 128,
"Earnings Per Share."
(3) Includes the acquisition of the 50% interest of the other participant in
the Company's joint venture located in Venezuela in fiscal 1995.
(4) Includes the acquisitions of the assets of Word Industries Pipe
Fabricating, Inc. and certain affiliates and of Alloy Piping Products, Inc.
in fiscal 1996.
(5) Includes the acquisitions of Pipe Shields Incorporated and United Crafts,
Inc. and certain assets of MERIT Industrial Constructors, Inc. in fiscal
1997.
(6) Includes the acquisitions of certain assets of Prospect Industries plc,
Lancas, C.A., Cojafex and Bagwell in fiscal 1998. See Note 3 of Notes to
Consolidated Financial Statements.
(7) Fiscal 1996 and 1997 were restated to exclude the discontinued operations
disposed of in fiscal 1998. The effect in fiscal 1995 is immaterial. See
Note 18 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements, including the notes thereto.
14
15
RECENT ACQUISITIONS AND DISPOSALS
Effective October 1, 1996, the Company acquired all of the outstanding
capital stock of Pipe Shields Incorporated ("Pipe Shields"), an industrial pipe
insulation company located in Vacaville, California, for approximately $2.5
million in cash, net of cash received.
On January 27, 1997, the Company acquired all of the outstanding stock
of NAPTech, Inc., a fabricator of industrial piping systems and engineered
piping modules located in Clearfield, Utah, and the 335,000 square foot facility
that NAPTech, Inc. leased from a related entity (collectively, "NAPTech"). In
connection with the acquisition, the Company issued 432,881 shares of the
Company's Common Stock. The transaction was accounted for using the
pooling-of-interests method, and accordingly the financial information for all
periods presented has been restated to include the financial information of
NAPTech.
Effective February 1, 1997, the Company purchased all of the
outstanding capital stock of United Crafts, Inc. ("UCI"), now named Shaw
Constructors, Inc., an industrial construction and maintenance company based in
Baton Rouge, Louisiana, for cash and acquisition costs of $8.2 million.
On March 20, 1997, the Company, through a newly-formed, wholly-owned
subsidiary, completed the purchase of certain assets and the assumption of
certain liabilities of MERIT Industrial Constructors, Inc. ("MERIT"), an
industrial construction and maintenance firm based in Baton Rouge, Louisiana,
and certain of its affiliates. Total consideration paid by the Company was
approximately $1.3 million in cash and acquisition costs, 62,500 shares of the
Company's Common Stock valued at $1.3 million, options to purchase 25,000 shares
of the Company's Common Stock at $20.25 per share, as well as the assumption of
approximately $340,000 of debt.
On October 8, 1997, the Company purchased the capital stock of
Pipework Engineering and Developments Limited ("PED"), a pipe fabrication
company in Wolverhampton, United Kingdom, for $699,000 in cash and acquisition
costs, net of cash received, and notes payable to former stockholders of
$1,078,000.
On November 14, 1997, the Company purchased all of the capital stock or
substantially all of the assets of the principal operating businesses of
Prospect Industries plc ("Prospect") of Derby, United Kingdom, for approximately
$16.6 million in cash and acquisition costs, net of cash received. Excluded from
the purchase price is $1.4 million, which represents the fair value of the
assets and liabilities of a discontinued operation, CBP Engineering Corp.
("CBP"). The sale of the assets of CBP was consummated in 1998 at no gain or
loss. Prospect, a mechanical contractor and provider of turnkey piping systems
serving the power generating and process industries worldwide, operated through
several wholly-owned subsidiaries including Connex Pipe Systems, Inc.
("Connex"), a piping systems fabrication business located in Troutville,
Virginia; Aiton Australia Pty Limited ("Aiton Australia"), a piping systems,
boiler refurbishment and project management company based near Sydney,
Australia; and Prospect Engineering Limited ("PEL"), a mechanical contractor and
a provider of turnkey piping systems located in Derby, United Kingdom. Under the
terms of the acquisition agreement, the Company acquired all of the outstanding
capital stock of Prospect Industries Overseas Limited, a United Kingdom holding
company that held the entire ownership interest in Connex and CBP, all of the
capital stock of Aiton Australia and certain assets of PEL, as well as
Prospect's entire ownership interest in Inflo. The Company also assumed certain
liabilities of PEL and Prospect relating to its employees and pension plans.
On January 15, 1998, the Company purchased all of the outstanding
capital stock of Lancas, C.A. ("Lancas"),a construction company in Punto Fijo,
Venezuela for approximately $2.7 million in cash and acquisition costs, net of
cash received.
On January 19, 1998, the Company completed the acquisition of all of
the outstanding capital stock of Cojafex of Rotterdam, Holland for $8.5 million;
$4.6 million of cash and acquisition costs of which was paid at closing (net of
cash received). The balance of the purchase price will be paid through December
31, 2003. Cojafex owns the technology for certain induction pipe bending
machines used for bending pipe and other carbon steel and alloy items for
industrial, commercial and agricultural applications, and using such technology,
Cojafex designs, engineers, manufactures, markets and sells such induction
bending machines.
On July 28, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Bagwell. Total consideration paid was $1.8 million
of cash and acquisition costs and 645,000 shares of the Company's Common Stock
15
16
valued at $13.0 million. Bagwell specializes in the fabrication and construction
of offshore modules, topsides, heliports, vessels and offshore platforms, as
well as management of offshore construction and maintenance work.
See Note 3 of the Notes to Consolidated Financial Statements for
discussions regarding these acquisitions.
In June 1998, the Company adopted a plan to discontinue its operations
of the following subsidiaries: Weldtech, a seller of welding supplies; its 66%
interest in Inflo Control Systems Limited ("Inflo"), a manufacturer of boiler
steam leak detection, acoustic mill and combustion monitoring equipment and
related systems; Greenbank (a division of PEL), an abrasive and corrosion
resistant pipe systems specialist; and NAPTech Pressure Systems Corporation, a
manufacturer of pressure vessels. The Company sold and/or discontinued its
investment in each of these operations prior to August 31, 1998. Proceeds from
the sale of these operations totaled approximately $1.2 million in net cash and
notes receivable of approximately $7.4 million, which resulted in a net gain on
the disposal of $2.6 million, net of tax. The results of these operations have
been classified as discontinued operations in the consolidated financial
statements of the Company. Revenues of these discontinued operations totaled
approximately $0.4 million, $2.6 million, and $7.7 million in 1996, 1997 and
1998, respectively.
GENERAL
The Company is the largest supplier of fabricated piping systems in the
United States and one of the leading providers of integrated piping systems and
services for new construction, site expansion and retrofit projects in the
world. The Company was founded in 1987 and has expanded rapidly through both
internal growth and a series of strategic acquisitions. Most of Shaw's
operations are conducted through wholly-owned subsidiaries, although Shaw owns a
49% interest in Shaw-Nass, a joint venture for pipe fabrication in Bahrain. The
Company provides products and services to customers in the power generation,
chemical processing, crude oil refining, petrochemical processing, oil and gas
exploration and production and other industries, including pulp and paper, food
processing and pharmaceuticals. The Company serves its customers on a worldwide
basis and has established a leading market position in the United States as well
as select international markets in South America, Europe, Asia and Australia.
As discussed below, financial performance is impacted by the broader
economic trends affecting Shaw's customers. All of the major industries in which
the Company operates are cyclical. Because the Company's customers participate
in a broad portfolio of industries, its experience has been that downturns in
one sector may be mitigated by opportunities in others. The domestic power
generation market currently represents the Company's most significant growth
opportunity. Despite a softening in the international power generation market,
operating results in the fourth quarter of fiscal 1999 showed significant
additional activity primarily attributable to combined-cycle gas turbines being
built by General Electric. Because the outlook for power generation investments
is strong (the Energy Information Agency estimates that $1.4 trillion will be
spent globally between 1995 and 2010), the Company believes that it is well
positioned to capitalize on these opportunities. While its chemical processing
and crude oil refining customers have experienced limited growth in recent
years, the Company continues to experience relatively steady activity in those
sectors as its customers complete retrofit and expansion work required to
produce new products, modernize aging facilities and meet increasingly stringent
environmental requirements. The petrochemical processing sector accounted for a
declining percentage of revenues in 1999 as that sector experienced a
significant downturn over the past several years. The Company does not expect
increased activity in this sector in the near-term. Finally, the Company entered
the oil and gas exploration and production sector in July 1998 and expects its
activity in this sector to increase after oil and gas companies increase capital
spending based on recent increases in the price of oil and gas.
Due to increased demand for its services, the Company's backlog has
increased from $75.0 million as of August 31, 1994 to $818.3 million as of
August 31, 1999. Approximately 64% of this backlog is attributable to the power
generation sector, 12% to the chemical processing sector, 19% to the crude oil
refining sector, 4% to the oil and gas exploration and production sector and 1%
for other industries. The backlog is largely a reflection of the broader
economic trends being experienced by the Company's customers and is important in
anticipating operational needs. Backlog is not a measure defined in generally
accepted accounting principles and the Company's backlog may not be comparable
to backlog of other companies. While Shaw believes backlog information may be
helpful in understanding its business, it is not necessarily indicative of
future earnings. See "Business -- Forward-Looking Statements and Associated
Risks" and "Business -- Backlog" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Investment Considerations."
16
17
RESULTS OF OPERATIONS
The following table presents certain income and expense items as a
percentage of sales for the years ended August 31, 1997, 1998 and 1999:
YEAR ENDED AUGUST 31,
------------------------------
1997 1998 1999
------ ------ ------
Sales 100.0% 100.0% 100.0%
Cost of sales 80.9 84.1 81.0
------ ------ ------
Gross profit 19.1 15.9 19.0
General and administrative expenses 11.2 9.7 12.2
------ ------ ------
Operating income 7.9 6.2 6.8
Interest expense (2.0) (1.7) (1.8)
Other income, net -- 0.1 0.3
------ ------ ------
Income before income taxes 5.9 4.6 5.3
Provision for income taxes 1.8 1.4 1.8
------ ------ ------
Income from continuing operations before earnings (losses)
From unconsolidated entity 4.1 3.2 3.5
Earnings (losses) from unconsolidated entity 0.2 -- 0.2
------ ------ ------
Income from continuing operations 4.3 3.2 3.7
Discontinued operations, net of tax:
Operating results (0.1) 0.1 --
Net gain on disposals -- 0.5 --
------ ------ ------
Net income 4.2% 3.8% 3.7%
====== ====== ======
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues decreased slightly to $494.0 million in fiscal 1999 from
$501.6 million in fiscal 1998. Gross profit increased 17.8% to $93.8 million in
fiscal 1999 from $79.6 million in fiscal 1998. These variances are discussed
below.
The Company's sales to customers in the following geographic regions
approximated the following amounts and percentages:
GEOGRAPHIC REGION FISCAL 1998 FISCAL 1999
----------------- --------------------- ---------------------
(IN MILLIONS) % (IN MILLIONS) %
------------- ------ ------------- ------
United States $ 286.5 57.1% $ 366.2 74.1%
Far East/Pacific Rim 100.6 20.0 41.1 8.3
Europe 55.8 11.1 49.7 10.1
South America 31.9 6.4 18.7 3.8
Middle East 18.4 3.7 10.2 2.1
Other 8.4 1.7 8.1 1.6
------- ------ ------- ------
$ 501.6 100.0% $ 494.0 100.0%
======= ====== ======= ======
Revenues from domestic projects increased $79.7 million, or 28%, from
$286.5 million for fiscal 1998 to $366.2 million for fiscal 1999. Increases were
experienced in all domestic industry sectors except petrochemical processing.
Revenues from international projects decreased $87.3 million, or 41%, from
$215.1 million for fiscal 1998 to $127.8 million for fiscal 1999. The decline in
international sales was primarily attributable to decreases in activity in the
power generation sector in the Far East/Pacific region, in the crude oil
refining sector in South America and the Middle East and in the chemical
processing sector in South America.
The Company's sales to customers in the following industries
approximated the following amounts and percentages:
17
18
INDUSTRY SECTOR FISCAL 1998 FISCAL 1999
--------------- --------------------- ---------------------
(IN MILLIONS) % (IN MILLIONS) %
------------- ------ ------------- ------
Power Generation $ 193.5 38.6% $ 161.8 32.8%
Chemical Processing 132.6 26.4 141.0 28.5
Crude Oil Refining 83.9 16.7 109.3 22.1
Petrochemical Processing 42.4 8.5 20.8 4.2
Oil and Gas Exploration and Production 23.1 4.6 29.0 5.9
Other 26.1 5.2 32.1 6.5
------- ------ ------- ------
$ 501.6 100.0% $ 494.0 100.0%
======= ====== ======= ======
Although total revenues from power generation projects declined in
fiscal 1999 compared to fiscal 1998, revenues from domestic power generation
projects increased nearly 51% for fiscal 1999 compared to fiscal 1998 due to new
domestic power generation projects, including the start-up of a previously
announced $300 million, five-year contract for General Electric in August 1999.
In fiscal 1999, the Company experienced a decline in international power
generation project revenues, particularly in the Far East/Pacific Rim market due
to general economic conditions. Revenues associated with international power
generation projects declined 33% in fiscal 1999 compared to fiscal 1998.
Revenues from the chemical processing industry increased in fiscal 1999
over the prior year due to increased domestic activity offset in part by
decreased international activity. The decrease in international chemical
processing revenues was due primarily to weak activity in the South American
region as a result of general economic conditions.
Revenues from the crude oil refining industry for fiscal 1999 increased
over the prior year due to increases in domestic project activity exceeding
declines in international project activity. Domestically, activity was
positively impacted by a large construction project for a refinery in Norco,
Louisiana that accounted for approximately 14% of the Company's revenues in
fiscal 1999. The Company experienced a decrease in revenues from international
crude oil refining primarily due to weak activity in South America (resulting
from general economic conditions and recent political events, particularly in
Venezuela) and the Middle East.
Revenues from the petrochemical processing industry decreased
significantly in both the domestic and international markets during fiscal 1999
compared to the prior year. The decrease in revenues from petrochemical
processing was primarily attributable to weak global demand.
Revenues from the oil and gas exploration and production industry
increased in fiscal 1999 over fiscal 1998 due to the results of a subsidiary
that was acquired in July 1998 and were partially offset by reductions in oil
and gas project work performed by other subsidiaries. Most of revenues from this
sector are domestic.
Gross profit margin for fiscal 1999 increased to 19.0% from 15.9% for
the prior year. The gross profit margin was positively impacted by increased
revenues from higher-margin projects in the domestic power generation, chemical
processing and crude oil refining industries. The overall increase in demand for
domestic power generation related projects has had a favorable impact on margins
for those projects. The Company anticipates that margins on domestic power
generation projects should remain stable provided that the current level of
demand remains steady. Shaw has historically realized lower overall margins on
erection and construction services because the Company generally assumes
responsibility for providing all materials and subcontractor costs on these
projects. These costs are typically passed through to the customer with minimal
profit recognized. During fiscal 1999, the Company entered into a contract for
the expansion of a refinery in Norco, Louisiana which excluded materials and
subcontractor costs from the scope of services. The Company does not expect to
continue to enter into erection and construction contracts which exclude a
significant amount of customer furnished material or subcontractor costs in the
future. The increase in the gross profit margin was partially offset by
continued lower margins on the Company's manufactured products due to pricing
pressures from foreign imports and lower margins from its foreign operations due
to reduced activity in foreign power generation and petrochemical processing
industries. During the second half of fiscal 1999, the Company began to
experience easing of pricing pressures for foreign imports. As previously
discussed, Shaw does not expect to see short-term improvements in its various
foreign operating locations and anticipates margins will remain unchanged in its
foreign operating locations.
General and administrative expenses were $60.1 million for fiscal 1999,
up 24% from $48.5 million for fiscal 1998. The increase primarily related to
growth of erection and construction services and the integration of Shaw
Bagwell, Inc., the Company's oil and gas services subsidiary, and Shaw Lancas,
C.A., the Company's Venezuelan construction
18
19
subsidiary, into its business for all of fiscal 1999. The Company believes that
general and administrative expenses as a percentage of revenues will trend
downward toward historical levels as revenues from Shaw Bagwell, Inc. and Shaw
Lancas, C.A. increase, but the Company cannot be assured that this will occur.
For fiscal 1999, interest expense was $8.6 million, up $0.1 million
from $8.5 million in the previous year. Interest expense varies in relation to
the balances in, and variable interest rates under, the Company's principal
revolving line of credit facility, which has generally been used to provide
working capital and fund fixed asset purchases and subsidiary acquisitions.
Additionally, during fiscal 1999, the Company used its line of credit facility
to purchase treasury stock totaling $13.7 million.
The Company's effective tax rates for fiscal 1998 and fiscal 1999 were
30.2% and 33.1%, respectively. The increase in the effective tax rate from 1998
to 1999 was due to the reduced amount of foreign export sales and a reduced
amount of income earned in foreign jurisdictions with lower tax rates than the
United States Federal rate.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues increased 49.4% for fiscal 1998 to $501.6 million from $335.7
million for fiscal 1997. Gross profit increased 24.4% to $79.6 million for
fiscal 1998 from $64.0 million for fiscal 1997. Approximately $112 million of
the increase in revenues related to sales of subsidiaries that the Company
acquired during fiscal 1998.
The Company's sales to customers in the following geographic regions
approximated the following amounts and percentages:
GEOGRAPHIC REGION FISCAL 1998 FISCAL 1999
----------------- --------------------- ---------------------
(IN MILLIONS) % (IN MILLIONS) %
------------- ------ ------------- ------
United States $ 232.5 69.3% $ 286.5 57.1%
Far East/Pacific Rim 62.6 18.6 100.6 20.0
Europe 4.8 1.4 55.8 11.1
South America 18.4 5.5 31.9 6.4
Middle East 12.8 3.8 18.4 3.7
Other 4.6 1.4 8.4 1.7
------- ------ ------- ------
$ 335.7 100.0% $ 501.6 100.0%
======= ====== ======= ======
Revenues from domestic projects increased $54.0 million, or 23%, from
$232.5 million for fiscal 1997 to $286.5 million for fiscal 1998. Revenues in
fiscal 1998 from all geographic areas increased over fiscal 1997 levels
primarily due to continued expansion through acquisitions. The increase in
revenues from Europe in fiscal 1998, compared to the prior year, was primarily
due to the acquisition of the Company's United Kingdom operations (Pipework
Engineering and Development and Prospect) in the first quarter of fiscal 1998.
During fiscal 1998, the Company began streamlining its United Kingdom
operations.
The Company's sales to customers in the following industry sectors
approximated the following amounts and percentages:
INDUSTRY SECTOR FISCAL 1998 FISCAL 1999
--------------- --------------------- ---------------------
(IN MILLIONS) % (IN MILLIONS) %
------------- ------ ------------- ------
Power Generation $ 101.2 30.1% $ 193.5 38.6%
Chemical Processing 130.4 38.9 132.6 26.4
Crude Oil Refining 47.8 14.2 83.9 16.7
Petrochemical Processing * * 42.4 8.5
Oil and Gas Exploration and
Production * * 23.1 4.6
Other 56.3 16.8 26.1 5.2
------- ------ ------- -------
$ 335.7 100.0% $ 501.6 100.0%
======= ====== ======= ======
* Sales for the petrochemical processing and oil and gas exploration and
production sectors are not segregated and are
19
20
included in the other sectors in the above chart.
Revenues from the power generation sector in fiscal 1998 increased over
the prior year primarily due to increased revenues from the international power
generation market. Revenues from the international power generation market
increased primarily as a result of the acquisitions of Pipework Engineering and
Development and Prospect. Domestic power generation revenues also increased
primarily due to the expansion of construction services performed by the
Company's subsidiaries that were acquired in February and March of 1997.
Revenues from the chemical processing sector increased slightly over
fiscal 1997 as a result of increased activity in both the domestic and
international markets.
Revenues from the crude oil refining sector for fiscal 1998 increased
over fiscal 1997 due to increased activity in the international markets.
Revenues from the petrochemical processing and oil and gas exploration
and production sectors were not segregated during fiscal 1997; therefore,
explanations of variances are not available. The decline in other sector
revenues in fiscal 1998 is the result of a decline in revenues from the
Company's pipe fabrication and bending operations in 1998 due to the substantial
completion of a large mining contract in fiscal 1997.
Gross profit margins in fiscal 1998 decreased to 15.9% from 19.1% for
fiscal 1997 due primarily to the following factors:
o a higher volume of pipe erection, maintenance and related
construction services work in fiscal 1998, which typically produces a
lower gross profit margin;
o reduced gross profit margins on the Company's manufactured products
due to pricing pressure from foreign imports in fiscal 1998; and
o lower profit margins realized from the Company's United Kingdom
operations since the acquisition of Pipework Engineering and
Development and Prospect.
General and administrative expenses were $48.5 million for fiscal 1998,
up 29.7% from $37.4 million for fiscal 1997. Approximately $9 million of the
increase relates to general and administrative expenses of newly acquired
subsidiaries, including those owned for only part of fiscal 1997. The remaining
increase related to increased corporate overhead costs due to the general
expansion of its operations. However, as a percentage of revenues, general and
administrative expenses decreased from 11.2% in fiscal 1997 to 9.7% in fiscal
1998.
Interest expense for fiscal 1998 was $8.5 million, up 25.0% from $6.8
million in fiscal 1997, primarily due to increased borrowings to expand the
Company's business and to complete the acquisitions of Prospect, Cojafex,
Pipework Engineering and Development and Lancas in 1998.
The Company's effective tax rates for fiscal 1997 and fiscal 1998 were
30.6% and 30.2%, respectively. The decrease in the fiscal 1998 rates from fiscal
1997 was primarily due to additional tax savings from higher foreign export
sales and foreign sourced income taxed at lower rates partially offset by lower
state income tax incentives and refunds.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $26.9 million for fiscal 1999,
compared to net cash used in operations of $3.2 million for fiscal 1998. For
fiscal 1999, net cash was favorably impacted primarily by net income of $18.1
million, depreciation and amortization of $13.3 million, deferred income taxes
of $3.7 million, a decrease in receivables of $15.6 million and an increase in
accrued liabilities of $4.3 million. Offsetting these positive factors were
increases of $12.2 million in inventories and $4.5 million in cost and estimated
earnings in excess of billings on uncompleted contracts and decreases of $7.7
million in accounts payable and $4.0 million in advanced billings and billings
in excess of cost and estimated earnings on uncompleted contracts.
20
21
The decrease in receivables was primarily attributable to increased
collection efforts. The increase in inventory was due to the recent purchase of
a large quantity of materials from foreign markets at favorable prices and a
higher amount of work-in-progress inventory at year-end due to the increased
volume of work on hand, particularly in the Company's fabrication facilities.
Accounts payables and accrued liabilities changed due to normal operating
activities and the timing of receipts and payment of invoices from vendors.
Changes in cost and estimated earnings in excess of billings, advanced billings
and billings in excess of cost and estimated earnings on uncompleted contracts
relate to the changes in contractual terms negotiated with customers each year.
Net cash used in investing activities was $30.3 million for fiscal
1999, compared to $38.0 million for fiscal 1998. During fiscal 1999, the Company
purchased $18.0 million of property and equipment, including $6.5 million for a
new corporate facility in Baton Rouge, Louisiana, $5.7 million of construction
equipment and $5.8 million of other property and equipment. During fiscal 1999,
the Company also embarked on its first significant project financing
participation. In connection with construction and maintenance work on a
refinery project in Norco, Louisiana, Shaw acquired $12.5 million of 15% senior
secured notes due December 1, 2003 and shares of preferred stock. The notes are
secured by a first priority security interest in some of the refinery's assets.
Through December 1, 2000, the Company expects to receive additional notes in
lieu of interest. The investment in the notes was $13.8 million as of August 31,
1999. This investment represents a one-time investment, although the Company may
from time to time pursue similar investments on a selective basis. This type of
investment will generally be limited in size to the profit expected to be
received from the projects and will carry a return that the Company believes
will reflect the risk inherent in its investment. These uses of cash were
partially offset by proceeds from the sale of property and equipment of $1.5
million. In fiscal 1998, in addition to $14.6 million of purchases of property
and equipment, the Company invested $27.7 million, net of cash received, in the
Pipework Engineering and Development, Prospect, Lancas, Cojafex and Bagwell
acquisitions.
Net cash provided by financing activities totaled $6.8 million for
fiscal 1999, compared to $40.8 million provided in fiscal 1998. Net borrowings
from the Company's revolving lines of credit totaled $22.7 million in fiscal
1999. The Company's revolving line of credit has been generally used to provide
working capital and fund fixed asset and subsidiary acquisitions. During fiscal
1999, the Company also used its revolving line of credit facility to repurchase
1,561,320 shares of the Company's common stock for $13.7 million (including
brokerage commissions) through open market and block transactions in accordance
with a plan adopted by its board of directors. In September 1999 the Company's
board of directors voted to terminate its stock repurchase plan. Cash was also
provided by $5.6 million of new debt and a $2.6 million increase in short-term
liabilities while funds of $10.7 million were used to repay outstanding debt. In
fiscal 1998, $62.2 million of cash was provided from the issuance of new debt,
primarily $60 million of senior secured notes funded in May 1998. The proceeds
from the senior secured notes were used primarily to pay down the Company's
revolving line of credit facility, which had reached a balance of $69.5 million.
Cash provided by financing activities in fiscal 1998 was $40.8 million,
primarily from the $62.2 million of new debt, net repayments on the revolving
lines of credit of $10.2 million and the repayment of debt and leases of $13.8
million.
In September 1999, the maturity date of the Company's primary revolving
line of credit facility was extended to May 31, 2002. The amendment also
modified the interest rate spread not to exceed, at the Company's election,
2.50% over the London Interbank Offering Rate or 1.75% over the Prime Rate. The
facility permits the Company to borrow up to $100 million in principal amount
subject to satisfaction of the conditions to borrowing set forth in the
facility. The facility contains covenants that are customary for revolving loan
agreements of this nature. The credit facility and senior secured notes are
equally ranked and are secured by domestic subsidiary accounts receivable,
inventory, intangible assets and bank deposits, as well as by the pledge of the
capital stock of some of the Company's domestic subsidiaries. The Company
believes that its current financing arrangements are sufficient to support its
operations for the next twelve months.
YEAR 2000 COMPLIANCE
The year 2000 or Y2K issue is the result of computerized systems being
written to store and process the year portion of dates using two digits rather
than four. Date-sensitive systems may fail, or produce erroneous results because
the year 2000 may be interpreted as the year 1900. During 1998, the Company
began implementation of a program to identify, evaluate and address its Y2K
risks to ensure that its information technology systems and non-information
technology systems are able to process dates from and after January 1, 2000
without critical systems failure. In addition to evaluating its own systems, the
Company assessed the Y2K risks associated with its significant customers and
suppliers.
21
22
In general, the Company's program for identifying, evaluating and
addressing its Y2K risks for all of its systems involved preliminary assessments
by its personnel and detail audits and assessments by consultants. The Company
completed this phase in the fourth quarter of fiscal 1999. Total outside costs
of approximately $412,000, consisting primarily of consultant expenses, were
incurred and expensed in fiscal 1999 during this evaluation and assessment
process. The Company incurred no outside costs in fiscal 1998.
The Company segmented the analysis of its systems into local, national
and international categories. Shaw divided each category into major business
areas consisting of systems, products, facilities, and suppliers. The Company
divided these business areas into smaller categories for data collection and
evaluation, such as computers, network equipment, production equipment,
manufacturing equipment, alarm systems and phone systems. The Company entered
the data into a repository that was created to track evaluation and remediation
efforts. The following is an example of the methodology and results gathered
during the Company's year 2000 program:
Systems
Shaw identified its proprietary and off-the-shelf systems during the
inventory phases of its Y2K program. The Company's proprietary software has been
remediated and tested for year 2000 problems. Year 2000 compliant software has
been installed on all production systems. A testing methodology used for these
proprietary systems, in an identical but separate environment, was established
to evaluate operational functionality and current, future and crossover dates
between the years 1999 and 2000. The Company upgraded other business critical
off-the-shelf applications according to the directions of manufacturers to meet
year 2000 compliance specifications.
Products
After an inventory and evaluation, Shaw believes that the majority of
its products are generally not vulnerable to year 2000 problems. Design
modifications are being implemented to Cojafex bending machines, the Company's
only significant products with imbedded technology, to assure Y2K compliance of
future machines. The Company believes that, while certain reporting functions
may be impacted, the production functionality of Cojafex machines previously
sold will not be adversely affected by Y2K problems.
Facilities
The Company has evaluated its facilities for Y2K purposes, including
phone systems, HVAC, alarm systems, fire systems, elevators and electrical
power. The Company evaluated these items because of their potential impact on
business operations if they were to fail. To date, Shaw has not discovered that
any of its business facilities are materially noncompliant with its Y2K
requirements.
Suppliers
Shaw believes the most likely Y2K problem that it may experience would
be a temporary disruption in certain materials and services provided to it by
third parties. These disruptions could have a material adverse effect on the
Company. Shaw has attempted to identify and classify business suppliers based on
relevant priority factors and has contacted numerous suppliers and potential
suppliers regarding their Y2K compliance. Shaw believes that it will be able to
replace non-compliant vendors; however, certain types of raw materials are
available from only one or a few specialized suppliers. To date, the Company
believes that it has contacted all suppliers material to its operations about
their compliance efforts and status. The Company has not discovered any problems
that it believes will materially adversely affect it, but the Company cannot be
assured that problems of this nature will not arise.
Current Assessment
The Company will continue its Y2K contingency planning and compliance
monitoring through January 2000.
Based upon the outcome of its assessments and the information derived
from its significant customers and suppliers, the Company is currently
developing contingency plans to address certain risks. However, the Company
cannot be assured that it will not be materially adversely affected by Y2K
problems.
22
23
Shaw also believes that the remaining cost to modify or replace its
non-compliant systems should not exceed $700,000, bringing its total expected
Y2K expenditures paid to outside sources to a maximum of $1,112,000. Shaw has
incurred approximately $435,000 in Y2K-related expenses to date. The Company
cannot be assured, however, that such costs will not escalate and materially and
negatively impact it.
SUBSEQUENT EVENT
On October 7, 1999, the Company filed a Registration Statement on Form
S-3 (Registration No. 333-88563) with the Securities and Exchange Commission for
an offering of 2.5 million shares of Common Stock. Managing underwriters for the
offering are Merrill Lynch & Co., Jefferies & Company, Inc., Morgan Keegan &
Company, Inc. and RBC Dominion Securities Corporation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 131 - "Disclosures about Segments of an
Enterprise and Related Information" was issued. SFAS 131 requires the Company to
report financial and descriptive information about its operating segments in its
financial statements. The required disclosures are made for the first time in
its fiscal 1999 financial statements.
In early 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." The statement is effective for fiscal years beginning after
December 15, 1998 and will require costs of start-up activities and organization
costs to be expensed as incurred. Any unamortized costs on the date of adoption
of the new standard will be written off and reflected as a cumulative effect of
a change in accounting principle. As of August 31, 1999, Shaw had total deferred
organizational costs of approximately $492,000. The Company intends to adopt
this new requirement in fiscal 2000.
During fiscal 1999, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Changes in a derivative's
fair value are to be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company will be required to adopt SFAS No. 133,
as amended by SFAS No. 137 which defers the effective date, on September 1,
2000. The Company has not yet quantified the impact on its financial statements
that may result from adoption of SFAS No. 133; however, it does not use
derivative instruments or hedging activities extensively in its business.
RISK FACTORS
Investing in the Company's Common Stock will provide an investor with
an equity ownership interest in the Company. Shareholders will be subject to
risks inherent in the Company's business. The performance of Shaw's shares will
reflect the performance of the Company's business relative to, among other
things, general economic and industry conditions, market conditions and
competition. The value of the investment in the Company may increase or decline
and could result in a loss. An investor should carefully consider the following
factors as well as other information contained in this Form 10-K before deciding
to invest in shares of the Company's Common Stock.
This Form 10-K also contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in the forward-looking statements as a result of many
factors, including the risk factors described below and the other factors
described elsewhere in this Form 10-K. See "Business - Forward-Looking
Statements and Associated Risks."
DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES IS CYCLICAL AND VULNERABLE TO
CHANGES IN THE ECONOMY.
The demand for Shaw's products and services depends primarily on the
existence of erection and retrofit projects, particularly in the power
generation, chemical processing, crude oil refining and petrochemical processing
industries. These industries historically have been, and will likely continue to
be, cyclical in nature and vulnerable to general downturns in the economy. The
Company's results of operations have varied and may continue to vary depending
on the
23
24
demand for future projects from these industries. For example, demand in the
petrochemical processing sector has declined significantly in recent periods.
THE DOLLAR AMOUNT OF THE COMPANY'S BACKLOG, AS STATED AT ANY GIVEN TIME, IS NOT
NECESSARILY INDICATIVE OF THE COMPANY'S FUTURE EARNINGS.
Shaw cannot assure you that the revenues projected in the Company's
backlog will be realized. To the extent that Shaw experiences significant
terminations or adjustments in the scope of its projects as reflected in its
backlog contracts, the Company could be materially adversely affected.
The Company defines its backlog as a "working backlog," which includes
projects for which Shaw has received a commitment from its customers. This
commitment takes the form of a written contract for a specific project, a
purchase order or a specific indication of the amount of time or material Shaw
needs to make available for a customer's anticipated project. In certain
instances, the engagement is for a particular product or project for which Shaw
estimates anticipated revenue, often based on engineering and design
specifications that have not been finalized and may be revised over time. The
Company's backlog for maintenance work is derived from maintenance contracts and
the Company's customers' historic maintenance requirements.
Approximately $300 million, or 37%, of the Company's backlog at August
31, 1999 is attributable to a contract with General Electric that requires Shaw
to fabricate 90% of the pipe necessary to install the combined-cycle gas
turbines to be built by General Electric domestically through 2004.
Approximately 53% of this backlog is for power generation projects for which
General Electric has been engaged and is in various stages of design,
engineering and construction, and for which Shaw has received a work release or
has been notified that a work release is pending. The balance is for work for
which General Electric has requested that Shaw reserve capacity. The Company
cannot be assured that all of these projects will be constructed or that they
will be completed in the Company's currently anticipated time-frame.
On occasion, customers will cancel or delay projects for reasons beyond
the Company's control. In the event of project cancellation, Shaw may be
reimbursed for certain costs but typically has no contractual right to the total
revenues reflected in the Company's backlog. In addition, projects may remain in
the Company's backlog for extended periods of time. If Shaw were to experience
significant cancellations or delays of projects in its backlog, the Company's
financial condition would be significantly adversely affected.
THE COMPANY'S RESULTS OF OPERATIONS DEPEND ON THE COMPANY'S ABILITY TO OBTAIN
FUTURE CONTRACTS.
In the case of large-scale domestic and international projects where
timing is often uncertain, it is particularly difficult to predict whether and
when Shaw will receive a contract award. The uncertainty of the Company's
contract award timing can present difficulties in matching workforce size with
contract needs. In some cases, Shaw maintains and bears the cost of a ready
workforce that is larger than called for under existing contracts in
anticipation of future workforce needs under expected contract awards. If an
expected contract award is delayed or not received, Shaw would incur costs that
could have a material adverse effect on it.
Projects in the power generation, chemical processing, crude oil
refining and petrochemical processing industries frequently involve a lengthy
and complex bidding and selection process. Because a significant portion of the
Company's sales is generated from large projects, the Company's results of
operations can fluctuate from quarter to quarter. While Shaw's revenues are
derived from a concentrated customer base, its significant customers vary
between years. The loss of any one or more of the Company's key customers could
have a material adverse impact on it.
POLITICAL AND ECONOMIC CONDITIONS IN COUNTRIES IN WHICH SHAW OPERATES COULD
ADVERSELY AFFECT THE COMPANY.
In fiscal 1999, approximately 26% of the Company's sales were
attributable to projects in international markets. Shaw expects international
sales and operations to continue to contribute materially to the Company's
growth and earnings for the foreseeable future. International contracts,
operations and expansion expose the Company to risks inherent in doing business
outside the United States, including:
o uncertain economic conditions in the foreign countries in which Shaw
makes capital investments, operates and sells
24
25
products and services;
o the lack of well-developed legal systems in some countries in which
Shaw operates and sells products and services, which could make it
difficult for it to enforce the Company's contractual rights;
o expropriation of property;
o restrictions on the right to convert or repatriate currency; and
o political risks, including risks of loss due to civil strife, acts of
war, guerrilla activities and insurrection.
The risks associated with operating internationally are reflected in the
recent decrease in the Company's international sales from $215.1 million in
fiscal 1998 to $127.8 million in fiscal 1999. The decrease was primarily
attributable to the economic downturn in the Far East/Pacific Rim, resulting in
fewer power generation projects, and general economic conditions and political
events in South America, causing a reduction in sales to the petrochemical
processing sector.
FOREIGN EXCHANGE RISKS MAY AFFECT THE COMPANY'S ABILITY TO REALIZE A PROFIT FROM
CERTAIN PROJECTS.
While Shaw attempts to denominate its contracts in United States
dollars, from time to time the Company enters into contracts denominated in a
foreign currency without escalation provisions. This practice subjects the
Company to foreign exchange risks. Foreign exchange controls may also adversely
affect the Company. For instance, prior to the lifting of foreign exchange
controls in Venezuela in November 1995, foreign exchange controls adversely
affected the Company's ability to repatriate profits from the Company's
Venezuelan subsidiary or otherwise convert local currency into United States
dollars. Shaw generally does not obtain insurance for or hedge against foreign
exchange risks. In addition, the Company's ability to obtain international
contracts is impacted by the relative strength or weakness of the United States
dollar relative to foreign currencies.
THE NATURE OF SHAW'S CONTRACTS COULD ADVERSELY AFFECT THE COMPANY.
Shaw enters into fixed price or lump-sum contracts on a significant
number of the Company's domestic contracts and substantially all of its
international projects. The Company's profit for these projects could decrease,
or Shaw could experience losses, if the Company is unable to secure fixed
pricing commitments from its suppliers at the time the contracts are entered
into or if Shaw experiences cost increases for material or labor during the
performance of the contracts.
Shaw enters into contractual agreements with customers for some
construction services to be performed based on agreed upon reimbursable costs
and labor rates. In some instances, the terms of these contracts provide for the
customer's review of the accounting and cost control systems to verify the
completeness and accuracy of the reimbursable costs invoiced. These reviews
could result in proposed reductions in reimbursable costs and labor rates
previously billed to the customer.
SHAW'S DEPENDENCE ON A FEW SPECIALIZED SUPPLIERS FOR SOME OF ITS MATERIALS COULD
ADVERSELY AFFECT THE COMPANY.
The Company's principal raw materials are carbon steel, stainless steel
and other alloy piping, which Shaw obtains from a number of domestic and foreign
primary steel producers. To the extent that Shaw cannot acquire raw materials,
the Company's ability to complete a project in a timely fashion or at a profit
may be jeopardized. In addition, if a manufacturer is unable to deliver the
materials according to the negotiated terms, Shaw may be required to purchase
the materials from another source at a higher price. This may reduce the profit
to be realized or result in a loss on a project for which the materials were
needed.
THE COMPANY'S PROJECTS EXPOSE IT TO POTENTIAL PRODUCT LIABILITY, WARRANTY CLAIMS
AND LIABILITY CLAIMS ARISING FROM ITS CONSTRUCTION PROJECTS.
The Company's products are typically installed in large industrial
facilities in which system failure can be disastrous. Any catastrophic
occurrences in excess of insurance limits at locations where the Company's
products are installed could result in significant product liability or warranty
claims against it. In addition, under some of the Company's contracts, Shaw must
use new metals or processes for producing or fabricating pipe for its customers.
The failure of any of these metals or processes could result in warranty claims
against the Company for significant replacement or reworking costs.
25
26
The increasing number of erection and construction projects Shaw is
performing exposes it to additional risks including cost overruns, equipment
failures, personal injuries, property damage, shortages of materials and labor,
work stoppages, labor disputes, weather problems and unforeseen engineering,
architectural, environmental and geological problems. In addition, once the
Company's construction is complete, Shaw may face claims with respect to the
performance of these facilities.
PROBLEMS INTEGRATING ACQUISITIONS AND MANAGING GROWTH COULD ADVERSELY AFFECT THE
COMPANY.
Shaw has experienced substantial growth through internal expansion and
acquisitions and plans to pursue select acquisitions in the future. Because the
Company pursues acquisitions around the world and may actively pursue a number
of opportunities simultaneously, Shaw may encounter unforeseen expenses,
complications and delays, including difficulties in staffing and providing
operational and management oversight. As Shaw expands its operations through
acquisitions, the Company may encounter difficulties integrating acquisitions
and successfully managing its growth. The Company cannot give assurance that its
current management, personnel and other corporate infrastructure will be
adequate to manage its growth or that the Company's systems, procedures and
controls will be adequate to support its expanding operations. To the extent
Shaw encounters problems in integrating acquisitions and managing its growth,
the Company could be materially adversely affected.
The Company is currently operating at or near full capacity in all of
its operating facilities. The Company's production needs will likely exceed its
current capacity in the future. To satisfy the Company's production needs, Shaw
plans to purchase or build additional plants. The Company cannot give assurance
that it will complete the acquisition or construction of these plants on a
timely basis or at the Company's budgeted costs.
THE COMPANY'S COMPETITORS MAY HAVE GREATER RESOURCES AND EXPERIENCE THAN SHAW
DOES.
In pipe engineering and fabrication, Shaw experiences significant
competition from competitors in both international and domestic markets. In the
United States, there are a number of smaller pipe fabricators. Internationally,
the Company's principal competitors are divisions of large industrial firms.
Some of the Company's competitors, primarily in the international sector, have
greater financial and other resources than Shaw does.
In the Company's erection, maintenance and related construction
services, Shaw has numerous regional, national and international competitors,
many of which have greater financial and other resources than Shaw does.
Moreover, Shaw is a recent entrant into this business, and many of its
competitors also possess substantially greater experience, market knowledge and
customer relationships than Shaw does.
ENVIRONMENTAL FACTORS AND CHANGES IN LAWS AND REGULATIONS COULD INCREASE THE
COMPANY'S COSTS AND LIABILITIES.
The Company is subject to environmental laws and regulations, including
those concerning:
o emissions into the air;
o discharges into waterways;
o generation, storage, handling, treatment and disposal of waste
materials; and
o health and safety.
These laws and regulations generally impose limitations and standards
for certain pollutants or waste materials and require the Company to obtain a
permit and comply with various other requirements. Governmental authorities may
seek to impose fines and penalties on the Company, or revoke or deny the
issuance or renewal of operating permits, for failure to comply with applicable
laws and regulations.
In addition, under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), as amended and comparable
state laws, Shaw may be required to investigate and remediate hazardous
substances. CERCLA and these comparable state laws typically impose liability
without regard to whether a company knew of or caused the release, and liability
has been interpreted to be joint and several unless the harm is divisible and
there is a reasonable basis of allocation. The Company's foreign operations are
also subject to various requirements governing
26
27
environmental protection.
The environmental health and safety laws and regulations to which Shaw
are subject are constantly changing, and it is impossible to predict the effect
of such laws and regulations on the Company in the future. Shaw has not
conducted environmental audits of all of its properties. Shaw cannot give any
assurance that its operations will continue to comply with future laws and
regulations or that these laws and regulations will not significantly adversely
affect the Company.
WORK STOPPAGES AND OTHER LABOR PROBLEMS COULD ADVERSELY AFFECT THE COMPANY.
Some of the Company's employees in the United States are represented by
a union. Shaw experienced a strike, without material impact on production, by
union members in February 1997 relating to the termination of collective
bargaining agreements covering its facilities in Walker and Prairieville,
Louisiana. A lengthy strike or other work stoppage at any of the Company's
facilities could have a material adverse effect on the Company. From time to
time Shaw has also experienced attempts to unionize the Company's non-union
shops. While these efforts have achieved limited success to date, Shaw cannot
give any assurance that it will not experience additional union activity in the
future.
PROTECTION OF THE COMPANY'S INDUCTION PIPE BENDING AND SOFTWARE TECHNOLOGY IS
LIMITED AND THE COMPANY'S COMPETITORS MAY DEVELOP OR OTHERWISE ACQUIRE
EQUIVALENT OR SUPERIOR TECHNOLOGY.
The Company's induction pipe bending technology and capabilities impact
its ability to compete successfully. This technology and the Company's
proprietary software are not currently patented. While Shaw may have some legal
protections, litigation brought by the Company in this regard could be
time-consuming and expensive and could prove unsuccessful. Likewise, although
Shaw protects some proprietary materials and processes through non-disclosure
and confidentiality agreements, Shaw cannot give any assurance that these
agreements will not be breached. Finally, there is nothing to prevent the
Company's competitors from independently attempting to develop or obtain access
to technologies that are similar or superior to the Company's technology.
THE COMPANY'S SUCCESS DEPENDS ON KEY MEMBERS OF ITS MANAGEMENT, INCLUDING J.M.
BERNHARD, JR.
The Company's success is dependent upon the continued services of J. M.
Bernhard, Jr., Shaw's founder, Chairman, President and Chief Executive Officer,
and other key officers. The loss of Mr. Bernhard or other key officers could
adversely affect the Company.
THE COMPANY'S ARTICLES OF INCORPORATION AND BY-LAWS AND LOUISIANA LAW CONTAIN
PROVISIONS THAT CONCENTRATE VOTING POWER IN MANAGEMENT AND COULD DISCOURAGE A
TAKEOVER.
At September 30, 1999, the Company's officers and directors
beneficially owned approximately 25% of the Company's outstanding Common Stock
but, due to the voting provisions described below, controlled in excess of 54%
of the voting power. Consequently, these persons, in particular Mr. Bernhard,
will be able to exercise significant influence over corporate actions and the
outcome of matters requiring a shareholder vote, including the election of
directors.
The Company's articles of incorporation provide that each share of
Common Stock that has been held by the same person for at least four consecutive
years is entitled to five votes on each matter to be voted upon at shareholders'
meetings, and all shares held for less than four years are entitled to one vote
per share for each matter. This charter provision concentrates control in
current management and could:
o increase the difficulty of removing the incumbent board of directors
or management;
o diminish the likelihood that a potential buyer would make an offer for
the Common Stock; and
o impede a transaction favorable to the interests of some shareholders.
Each new purchaser of shares of Common Stock will be entitled to one vote for
each share of Common Stock at all shareholders' meetings until the shares have
been continuously owned for a period of four years. After the shares have been
continuously owned by the same person for a period of four years, the holder
will be entitled to five votes for each share on all matters submitted to
shareholders.
27
28
In addition, certain provisions of the Company's articles of
incorporation and by-laws, and Louisiana law may tend to deter potential
unsolicited offers or other efforts to obtain control of us that are not
approved by the Company's board of directors. The provisions may deprive the
Company's shareholders of opportunities to sell shares of Common Stock at prices
higher than prevailing market prices.
THE COMPANY'S ISSUANCE OF PREFERRED STOCK COULD ADVERSELY AFFECT SHAREHOLDER
RIGHTS OF A HOLDER OF COMMON STOCK.
The Company's board of directors is authorized to issue up to 5,000,000
shares of preferred stock without any further action on the part of the
Company's shareholders. In the event that Shaw issues preferred stock in the
future that has preference over the Common Stock with respect to payment of
dividends or upon the Company's liquidation, dissolution or winding up, rights
as holders of Common Stock could be adversely affected.
THE COMPANY'S COMPUTER SYSTEMS AND THOSE OF THIRD PARTIES MAY NOT BE YEAR 2000
COMPLIANT, WHICH MAY CAUSE SYSTEM FAILURES AND DISRUPTIONS IN OPERATIONS.
The inability of some computer programs and embedded computer chips to
distinguish between the year 1900 and the year 2000 poses a serious threat of
business disruption to any organization that utilizes computer technology and
computer chip technology in its business systems or equipment. If the Company's
information systems fail or if suppliers on which Shaw depends for essential
goods and services experience information system failures, the Company could be
materially adversely affected. The Company could face substantial claims by
customers, as well as loss of revenues, due to:
o service interruptions;
o inability to fulfill contractual obligations;
o inability to account for transactions; and
o increased expenses associated with
-- litigation;
-- harm to persons or to property;
-- stabilization of operations following system failures; and
-- the execution of contingency plans.
In addition:
o Shaw depends on third parties, including customers, suppliers and
service providers, who may fail to address adequately their year 2000
problems; and
o Shaw relies on automated plant systems, computerized billing
procedures and other embedded chip technologies that could necessitate
expensive corrective actions.
Any or all of these consequences, should they materialize, could have a
material adverse effect on the Company's results of operations. For a more
detailed discussion on the state of the Company's year 2000 readiness, the costs
Shaw anticipates incurring to become year 2000 ready and the Company's year 2000
contingency plans, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company is exposed to interest rate risk due to changes in interest
rates, primarily in the United States. The Company's policy is to manage
interest rates through the use of a combination of fixed and floating rate debt.
The Company currently does not use any derivative financial instruments to
manage its exposure to interest rate risk. The table below provides information
about the Company's future maturities of principal for outstanding debt
instruments and fair value at August 31, 1999. All instruments described are
non-trading instruments ($ in millions).
28
29
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------ ------ ------ ------ ------ ---------- ------ ------
Long-term Debt
Fixed rate $ 4.9 $ 5.1 $ 7.7 $ 10.6 $ 10.7 $ 40.2 $ 79.2 $ 75.0
Average interest rate 6.8% 6.8% 7.3% 6.8% 6.8% 6.6% 6.8% --
Variable rate $ 3.1 $ 4.3 $ 3.2 $ 3.3 $ 1.2 $ 1.6 $ 16.7 $ 16.7
Average interest rate 7.0% 7.0% 7.0% 7.1% 7.1% 5.6% 6.9% --
Short-term Debt
Variable rate $ 43.6 -- -- -- -- -- $ 43.6 $ 43.6
Average interest rate 7.0% -- -- -- -- -- 7.0% --
FOREIGN CURRENCY RISKS
Although the majority of the Company's transactions are in U.S.
dollars, the Company does have certain of its subsidiaries which conduct their
operations in various foreign currencies. The Company currently does not use any
off-balance sheet hedging instruments to manage its risks associated with its
operating activities conducted in foreign currencies unless that particular
operation enters into a contract in a foreign currency which is different than
the local currency of the particular operation. In limited circumstances and
when considered appropriate, the Company will utilize forward exchange contracts
to hedge the anticipated purchases and/or sales. The Company has historically
used these instruments primarily in the buying and selling of certain pipe
bending machines. The Company attempts to minimize its exposure to foreign
currency fluctuations by matching its revenues and expenses in the same currency
for its contracts. As of August 31, 1999, the Company does not have any
outstanding forward exchange contracts. See Notes 1 and 17 of Notes to the
Consolidated Financial Statements.
29
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-------
Reports of Independent Public Accountants.....................................................................31 - 32
Consolidated Balance Sheets as of August 31, 1998 and 1999....................................................33 - 34
Consolidated Statements of Income for the years ended
August 31, 1997, 1998 and 1999...................................................................................35
Consolidated Statements of Shareholders' Equity for the years
ended August 31, 1997, 1998 and 1999.............................................................................36
Consolidated Statements of Cash Flows for the years
ended August 31, 1997, 1998 and 1999........................................................................37 - 38
Notes to Consolidated Financial Statements....................................................................39 - 61
30
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of The Shaw Group Inc.:
We have audited the accompanying consolidated balance sheet of The Shaw
Group Inc. (a Louisiana corporation) and subsidiaries as of August 31, 1999, and
the related consolidated statements of income, shareholders' equity and cash
flows for the year ended August 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Shaw Group Inc.
and subsidiaries as of August 31, 1999, and the results of their operations and
their cash flows for the year ended August 31, 1999, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
- ------------------------
Arthur Andersen LLP
New Orleans, Louisiana
October 1, 1999
31
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of The Shaw Group Inc.:
We have audited the accompanying consolidated balance sheet of The Shaw
Group Inc. (a Louisiana corporation) and subsidiaries as of August 31, 1998, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the two years in the period ended August 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Shaw Group Inc.
and subsidiaries as of August 31, 1998, and the results of their operations and
their cash flows for each of the two years in the period ended August 31, 1998,
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP /s/ Hannis T. Bourgeois, LLP
- ----------------------- -----------------------------
Arthur Andersen LLP Hannis T. Bourgeois, LLP
New Orleans, Louisiana Baton Rouge, Louisiana
October 22, 1998
32
33
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 1998 AND 1999
(DOLLARS IN THOUSANDS)
ASSETS
1998 1999
---------- ----------
Current assets:
Cash and cash equivalents $ 3,743 $ 6,901
Accounts receivable, net 140,631 122,053
Receivables from unconsolidated entity, net 1,758 4,310
Inventories 65,861 78,464
Cost and estimated earnings in excess of billings
on uncompleted contracts 19,797 24,277
Prepaid expenses 4,948 4,131
Deferred income taxes 4,697 992
Other current assets 9,559 10,942
---------- ----------
Total current assets 250,994 252,070
Investment in unconsolidated entity 3,965 4,646
Investment in securities available for sale -- 13,830
Property and equipment:
Transportation equipment 3,153 3,704
Furniture and fixtures 10,756 10,487
Machinery and equipment 65,158 73,060
Buildings and improvements 32,920 36,471
Land 5,923 7,038
---------- ----------
117,910 130,760
Less: Accumulated depreciation (25,050) (35,252)
---------- ----------
92,860 95,508
Goodwill, net of accumulated amortization of $1,430
and $3,276 at August 31, 1998 and 1999, respectively 33,356 32,134
Other assets 8,669 8,874
---------- ----------
$ 389,844 $ 407,062
========== ==========
(Continued)
The accompanying notes are an integral part of these statements.
33
34
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1999
---------- ----------
Current liabilities:
Outstanding checks in excess of bank balance $ 4,009 $ 6,633
Accounts payable 45,307 37,714
Accrued liabilities 24,831 28,407
Current maturities of long-term debt 9,314 8,056
Revolving lines of credit 20,898 43,562
Deferred revenue-prebilled 1,813 3,576
Advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts 14,367 10,147
---------- ----------
Total current liabilities 120,539 138,095
Long-term debt, less current maturities 91,715 87,841
Deferred income taxes 6,895 6,887
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, no par value,
50,000,000 shares authorized;
19,942,782 and 19,960,282 shares issued, respectively;
13,279,866 and 11,736,046 shares outstanding, respectively 119,360 119,353
Retained earnings 58,950 77,071
Accumulated other comprehensive income (420) (1,535)
Unearned restricted stock compensation (367) (125)
Treasury stock, 6,662,916 and 8,224,236 shares respectively (6,828) (20,525)
---------- ----------
Total shareholders' equity 170,695 174,239
---------- ----------
$ 389,844 $ 407,062
========== ==========
The accompanying notes are an integral part of these statements.
34
35
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED AUGUST 31, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1998 1999
---------- ---------- ----------
Sales $ 335,734 $ 501,638 $ 494,014
Cost of sales 271,759 422,057 400,186
---------- ---------- ----------
Gross profit 63,975 79,581 93,828
General and administrative expenses 37,377 48,503 60,082
---------- ---------- ----------
Operating income 26,598 31,078 33,746
Interest expense (6,778) (8,471) (8,649)
Other income, net 155 698 978
---------- ---------- ----------
(6,623) (7,773) (7,671)
---------- ---------- ----------
Income before income taxes 19,975 23,305 26,075
Provision for income taxes 6,112 7,033 8,635
---------- ---------- ----------
Income from continuing operations
before earnings (losses) from unconsolidated entity 13,863 16,272 17,440
Earnings (losses) from unconsolidated entity 437 (40) 681
---------- ---------- ----------
Income from continuing operations 14,300 16,232 18,121
Discontinued operations, net of taxes:
Operating results (252) 298 --
Net gain on disposals -- 2,647 --
---------- ---------- ----------
Net income $ 14,048 $ 19,177 $ 18,121
========== ========== ==========
Basic income per common share:
Income per common share:
Continuing operations $ 1.23 $ 1.29 $ 1.52
Discontinued operations (.02) .23 --
---------- ---------- ----------
Net income per common share $ 1.21 $ 1.52 $ 1.52
========== ========== ==========
Diluted income per common share:
Income per common share:
Continuing operations $ 1.20 $ 1.26 $ 1.47
Discontinued operations (.02) .23 --
---------- ---------- ----------
Net income per common share $ 1.18 $ 1.49 $ 1.47
========== ========== ==========
The accompanying notes are an integral part of these statements.
35
36
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNEARNED ACCUMULATED
COMMON STOCK RESTRICTED TREASURY OTHER TOTAL
-------------------- STOCK -------------------- COMPREHENSIVE RETAINED SHAREHOLDERS'
SHARES AMOUNT COMPENSATION SHARES AMOUNT INCOME EARNINGS EQUITY
---------- -------- ------------ ---------- -------- ------------- --------- -------------
Balance, September 1, 1996 16,619,099 $ 56,849 $ -- 6,662,916 $ (6,828) $ -- $ 26,024 $ 76,045
Comprehensive income:
Net income 14,048 14,048
---------
Comprehensive income 14,048
Shares issued in public offering 2,398,000 46,986 -- -- -- -- -- 46,986
Shares issued to acquire certain
assets of MERIT Industrial
Constructors, Inc. and certain
of its affiliates 62,500 1,266 -- -- -- -- -- 1,266
Exercise of options 71,710 433 -- -- -- -- -- 433
Pooled entity:
Purchase of treasury stock -- (664) -- -- -- -- -- (664)
Distributions to members of
Freeport Properties, L.C -- -- -- -- -- -- (168) (168)
Net loss not included in
reporting period -- -- -- -- -- -- (131) (131)
---------- -------- ------------ ---------- -------- --------- --------- ---------
Balance, August 31, 1997 19,151,309 104,870 -- 6,662,916 (6,828) -- 39,773 137,815
Comprehensive income:
Net income -- -- -- -- -- -- 19,177 19,177
Other comprehensive income:
Foreign translation
adjustments -- -- -- -- -- (420) -- (420)
---------
Comprehensive income 18,757
Restricted stock compensation 30,000 581 (581) -- -- -- -- --
Amortization of restricted stock
compensation -- -- 214 -- -- -- -- 214
Shares issued to acquire Bagwell 645,000 13,033 -- -- -- -- -- 13,033
Exercise of options 116,473 876 -- -- -- -- -- 876
---------- -------- ------------ ---------- -------- --------- --------- ---------
Balance, August 31, 1998 19,942,782 119,360 (367) 6,662,916 (6,828) (420) 58,950 170,695
Comprehensive income:
Net income -- -- -- -- -- -- 18,121 18,121
Other comprehensive income:
Foreign translation
adjustments -- -- -- -- -- (1,115) -- (1,115)
---------
Comprehensive income 17,006
Restricted stock cancellation (15,000) (255) 145 -- -- -- -- (110)
Amortization of restricted stock
compensation -- -- 97 -- -- -- -- 97
Exercise of options 32,500 248 -- -- -- -- -- 248
Purchases of treasury stock -- -- -- 1,561,320 (13,697) -- -- (13,697)
---------- -------- ------------ ---------- -------- --------- --------- ---------
Balance, August 31, 1999 19,960,282 $119,353 $ (125) 8,224,236 $(20,525) $ (1,535) $ 77,071 $ 174,239
========== ======== ============ ========== ======== ========= ========= =========
The accompanying notes are an integral part of these statements.
36
37
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS)
1997 1998 1999
-------- -------- --------
Cash flows from operating activities:
Net income $ 14,048 $ 19,177 $ 18,121
Net loss not included in reporting period (132) -- --
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 7,358 10,280 13,271
Provision for deferred
income taxes 2,231 40 3,697
(Earnings) losses from unconsolidated
entity (437) 40 (681)
Transaction losses 6 702 533
Gain on sale of discontinued operations -- (3,010) --
Other 290 246 (462)
Changes in assets and liabilities,
net of effects of acquisitions:
(Increase) decrease in receivables (2,817) (38,291) 15,640
Increase in cost and estimated earnings in excess of
billings on uncompleted contracts (1,050) (7,530) (4,485)
(Increase) decrease in inventories (5,833) 4,211 (12,243)
(Increase) decrease in other current assets (1,847) 848 (471)
(Increase) decrease in prepaid expenses 257 (2,708) 564
(Increase) decrease in other assets 311 (1,317) (954)
Increase (decrease) in accounts payable 274 5,842 (7,688)
Increase (decrease) in deferred
revenue--prebilled 1,742 (1,769) 1,763
Increase (decrease) in accrued
liabilities (3,467) 1,660 4,326
Increase (decrease) in advanced billings and billings in excess
of cost and estimated earnings on uncompleted contracts (3,330) 8,355 (4,046)
-------- -------- --------
Net cash provided by (used in)
operating activities 7,604 (3,224) 26,885
Cash flows from investing activities:
Investment in unconsolidated entity (1,647) -- --
Investment in subsidiaries, net of
cash received (11,651) (27,738) --
Proceeds from sale of property and
equipment 622 3,167 1,530
Proceeds from sale of discontinued operations -- 1,208 --
Purchase of property and equipment (15,832) (14,616) (17,967)
Purchase of securities available for sale -- -- (13,830)
Payment of note receivable by a
related party 87 -- --
-------- -------- --------
Net cash used in investing activities (28,421) (37,979) (30,267)
(Continued)
The accompanying notes are an integral part of these statements.
37
38
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
1997 1998 1999
-------- -------- --------
Cash flows from financing activities:
Net proceeds (repayments) from
revolving credit agreement (23,890) (10,182) 22,720
Proceeds from issuance of debt 15,031 62,154 5,571
Repayment of debt and leases (13,107) (13,817) (10,690)
Increase (decrease) in outstanding
checks in excess of bank balance (2,414) 1,725 2,614
Distributions to members of Freeport Properties, L.C (168) -- --
Purchase of treasury stock (664) -- (13,697)
Issuance of common stock 47,419 876 248
-------- -------- --------
Net cash provided by financing activities 22,207 40,756 6,766
Effects of exchange rate changes
on cash -- (168) (226)
-------- -------- --------
Net increase (decrease) in cash 1,390 (615) 3,158
Cash and cash equivalents--beginning
of year 2,968 4,358 3,743
-------- -------- --------
Cash and cash equivalents--end of year $ 4,358 $ 3,743 $ 6,901
======== ======== ========
Supplemental disclosures:
Cash payments for:
Interest $ 6,663 $ 7,048 $ 9,151
======== ======== ========
Income taxes $ 5,784 $ 2,873 $ 5,592
======== ======== ========
Noncash investing and financing activities:
Property and equipment acquired through
issuance of debt $ 83 $ 85 $ --
======== ======== ========
Investment in subsidiaries acquired
through issuance of common stock $ 1,266 $ 13,033 $ --
======== ======== ========
Other current assets acquired through issuance
of debt $ 134 $ -- $ --
======== ======== ========
Purchase of inventory and payment of liabilities through
cancellation of notes receivable to a related party $ 538 $ -- $ --
======== ======== ========
Investment in subsidiaries acquired through issuance
of debt $ -- $ 4,702 $ --
======== ======== ========
Sale of subsidiaries financed through issuance of
notes receivables $ -- $ 8,792 $ --
======== ======== ========
Sale of building for noncash $ -- $ -- $ 1,400
======== ======== ========
The accompanying notes are an integral part of these statements.
38
39
THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of The Shaw
Group Inc. (a Louisiana corporation) and its wholly-owned subsidiaries
(collectively, the Company). All material intercompany accounts and transactions
have been eliminated in these financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Nature of Operations
The Company is a supplier of fabricated piping systems, integrated
piping systems and related services for new construction, site expansion and
retrofit projects throughout the world, primarily in the United States, the Far
East/Pacific Rim, Europe, South America and the Middle East for customers in the
power generation, chemical processing, crude oil refining, petrochemical
processing, oil and gas exploration and development and other industries. The
Company offers comprehensive design and engineering services, piping system
fabrication, industrial construction and maintenance services, manufacturing and
sale of specialty pipe fittings and design and fabrication of pipe support
systems. The Company's operations are conducted primarily through wholly-owned
subsidiaries and one joint venture.
Cash and Cash Equivalents
For purposes of reporting cash flows, all highly liquid investments
with a maturity of three months or less when purchased are cash equivalents. At
August 31, 1998 and 1999, the Company included in cash and cash equivalents
approximately $1,200,000 and, $1,300,000, respectively, the proceeds of which
came from industrial development bond financing. These funds are required to be
invested in short-term marketable securities until used for other capital
improvements.
Accounts Receivable and Credit Risk
The Company's customers include major multi-national construction and
engineering firms and industrial corporations. Work is performed under contract
and the Company believes that its credit risk is minimal. The Company grants
short-term credit to its customers.
At August 31, 1998 and 1999, accounts receivable includes approximately
$18,000,000 and $13,000,000, respectively, of receivables and claims due under
contracts which are subject to contract renegotiations or legal proceedings and
which are recorded at estimated net realizable value. At August 31, 1999,
contracts with seven customers made up the $13,000,000 balance discussed above.
Management believes that the ultimate resolution of these disputes will not have
a significant impact on future results of operations.
Allowance for Uncollectable Receivables and Contract Adjustments
The allowance for uncollectable receivables and contract adjustments of
approximately $7,100,000 and $5,800,000 at August 31, 1998 and 1999,
respectively, is based on management's estimate of the amount expected to be
uncollectable considering historical experience and the information management
is able to obtain regarding the financial condition of significant customers.
The Company includes contract adjustments as a reduction of sales. Net
provisions to this allowance were approximately $1,700,000 in fiscal 1998.
Increases to the allowance for the year ended
39
40
August 31, 1999 were $4,600,000 with total reductions of $5,900,000. Provisions
for uncollectable receivables included in bad debt expense was not material for
1997, 1998 and 1999.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) or weighted-average cost
methods.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements
are capitalized. Maintenance and repair expenses are charged to income as
incurred. The cost of property and equipment sold or otherwise disposed of and
the accumulated depreciation thereon are eliminated from the property and
related accumulated depreciation accounts, and any gain or loss is credited or
charged to income.
For financial reporting purposes, depreciation is provided by utilizing
the straight-line method over the following estimated useful service lives:
Transportation equipment 5-15 Years
Furniture and fixtures 3-7 Years
Machinery and equipment 3-18 Years
Buildings and improvements 8-40 Years
At August 31, 1999, the Company had equipment not yet placed into
service of $5,267,000.
Income Taxes
The Company provides for deferred taxes in accordance with Statement of
Financial Accounting Standards No. 109 - "Accounting for Income Taxes," which
requires an asset and liability approach for measuring deferred tax assets and
liabilities due to temporary differences existing at year end using currently
enacted tax rates.
Revenues
For unit-priced pipe fabrication contracts, the Company recognizes
revenues upon completion of individual spools of production. A spool consists of
piping materials and associated shop labor to form a prefabricated unit
according to contract specifications. Spools are generally shipped to job site
locations when complete. During the fabrication process, all direct and indirect
costs related to the fabrication process are capitalized as work in progress.
For lump-sum fabrication contracts, the Company recognizes revenues based on the
percentage of completion method, measured primarily by the cost of materials for
which production is complete compared with the total estimated material costs of
the contract.
For project management and construction services, the Company
recognizes revenues under the percentage of completion method measured primarily
on contract costs incurred to date, excluding the costs of any purchased but
uninstalled materials, compared with total estimated contract costs. Revenues
from cost-plus-fee contracts are recognized on the basis of costs incurred
during the period plus the fee earned.
The company recognizes revenues for pipe fittings, manufacturing
operations and other services primarily at the time of shipment or upon
completion of the services.
Provisions for estimated losses for uncompleted contracts are made in
the period in which such losses are identified. Other changes, including those
arising from contract penalty provisions, final contract settlements and reviews
performed by customers, are recognized in the period in which the revisions are
identified. To the extent that these adjustments result in a reduction or
elimination of previously reported profits, the Company would report such a
change
40
41
by recognizing a charge against current earnings, which might be significant
depending on the size of the project or the adjustment.
Goodwill
Goodwill represents the excess of the purchase price of acquisitions
over the fair value of the net assets acquired. Such excess costs are being
amortized on a straight-line basis over a twenty-year period. The Company
periodically assesses the recoverability of the unamortized balance based on
expected future profitability and undiscounted future cash flows of the
acquisitions and their contribution to the overall operation of the Company.
Financial Instruments, Forward Contracts - Non-Trading Activities
When considered appropriate, the Company utilizes forward foreign
exchange contracts to hedge firm purchases and sales of certain pipe bending
machines. Financial instruments are designated as a hedge at inception where
there is a direct relationship to the price risk associated with the Company's
future sales and purchases. Gains and losses on the early termination or
maturity of forward contracts designated as hedges are deferred and included in
revenues in the period the hedged transaction is recorded. If the direct
relationship to price risk ceases to exist, the difference in the carrying value
and fair value of a forward contract is recognized as a gain or loss in revenues
in the period the direct relationship ceases to exist. Future changes in fair
value of the forward contracts are recognized as gains or losses in revenues in
the period of change.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," which was required to
be adopted by the Company in the first quarter of fiscal 1999, establishes
standards for the reporting and display of comprehensive income as part of a
full set of financial statements. Comprehensive income for a period encompasses
net income and all other changes in a company's equity other than from
transactions with the company's owners.
The foreign currency translation adjustments relate to the varying
strength of the U.S. dollar in relation to the British pound, Australian dollar
and Dutch guilder. The Company's comprehensive income is included in the
consolidated statements of shareholders' equity.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements in order to conform to current reporting practices.
New Accounting Standards
In early 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP"). The SOP is effective for fiscal years beginning after
December 15, 1998 and will require costs of start-up activities and organization
costs to be expensed as incurred. Any such unamortized costs on the date of
adoption of the new standard will be written off and reflected as a cumulative
effect of a change in accounting principle. As of August 31, 1999, the Company
had total deferred organizational costs of approximately $492,000.
During fiscal 1999, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Changes in a
derivative's fair value are to be recognized currently in earnings unless
specific hedge accounting criteria are met. The company will be required to
adopt SFAS No. 133, as amended by SFAS No. 137 which defers the effective date,
on September 1,
41
42
2000. The Company has not yet quantified the impact on its financial statements
that may result from adoption of SFAS No. 133, however, the Company does not use
derivative instruments or hedging activities extensively in its business.
NOTE 2--PUBLIC OFFERING OF COMMON STOCK
On December 23, 1996, the Company closed the sale of 2,000,000 shares
of its common stock, no par value (the "Common Stock"), in an underwritten
public offering at a price of $21.00 per share less underwriting discounts and
commissions. On January 10, 1997, the underwriters for such offering exercised
an option to purchase an additional 398,000 shares of Common Stock from the
Company pursuant to such terms to cover over-allotments. The net proceeds to the
Company, less underwriting discounts and other expenses of the offering, totaled
approximately $47,000,000 and were used to pay down amounts outstanding under
the Company's revolving line of credit. The Company's revolving line of credit
has been used to provide working capital, as well as to fund fixed asset and
subsidiary acquisitions.
NOTE 3--ACQUISITIONS
Effective October 1, 1996, the Company acquired all of the outstanding
capital stock of Pipe Shields Incorporated (Pipe Shields), an industrial pipe
insulation company located in Vacaville, California, for approximately
$2,500,000 in cash, net of cash received. The purchase method was used to
account for the acquisition. The excess of cost over the estimated fair value of
the assets acquired (goodwill) was approximately $2,000,000 and is being
amortized on a straight-line basis over 20 years. The operating results of Pipe
Shields have been included in the consolidated statements of income of the
Company from the effective date of the acquisition. The pro-forma effect of the
acquisition of Pipe Shields, had it occurred on September 1, 1996, is not
material to the operations of the Company.
On January 27, 1997, the Company completed the acquisition of NAPTech,
Inc., a fabricator of industrial piping systems and engineered piping modules
located in Clearfield, Utah. The Company issued 432,881 shares of its Common
Stock in exchange for NAPTech, Inc. and the 335,000 square foot facility that
NAPTech, Inc. had leased from a related entity, Freeport Properties, L.C.
(Freeport). The acquisition was accounted for using the pooling-of-interests
method; accordingly, the Company's financial information for all prior periods
presented herein has been restated to include financial information of NAPTech,
Inc. and Freeport, (collectively, NAPTech). Summarized results of operations of
the separate companies for the period from September 1, 1996 through January 27,
1997, the date of acquisition, are as follows (in thousands):
SHAW NAPTECH
---- -------
Sales $ 106,555 $ 24,482
========== ==========
Net income $ 2,505 $ 584
========== ==========
Net income of the combined companies for the fiscal year ended August
31, 1997 has been reduced by approximately $700,000 of merger and business
combination costs of the NAPTech acquisition.
Because the fiscal periods of the Company and NAPTech were not the
same, the 1996 fiscal year financial statements of NAPTech were recast from the
twelve months ended March 31, 1996 to the twelve months ended June 30, 1996. As
a result, the following sales and losses of NAPTech have been excluded from the
respective statements of income (in thousands):
FISCAL PERIOD MONTHS EXCLUDED SALES NET LOSSES
- ------------- --------------- ----- ----------
1997 July and August, 1996 $5,194 $132
====== ====
Effective February 1, 1997, the Company purchased all of the
outstanding capital stock of United Crafts, Inc., now named Shaw Constructors,
Inc. ("Shaw Constructors"), an industrial construction and maintenance company
based in Baton Rouge, Louisiana, for cash of $8,000,000. Acquisition costs of
approximately $192,000 were incurred by the Company. The purchase method was
used to account for the acquisition. Goodwill of approximately $4,800,000 is
being amortized on a straight-line basis over 20 years. The estimated fair value
of the assets and liabilities of Shaw Constructors as of February 1, 1997 are as
follows (in thousands):
42
43
Accounts receivable $ 6,040
Property and equipment 2,992
Other assets 4,832
Accounts payable & accrued liabilities (3,502)
Advanced billings (1,277)
Notes payable (1,101)
Deferred income taxes (146)
----------
Purchase price (net of cash received of $354) $ 7,838
==========
The operating results of Shaw Constructors have been included in the
consolidated statements of income from the effective date of the acquisition.
On March 20, 1997, the Company, through a newly-formed, wholly-owned
subsidiary, completed the purchase of certain assets and the assumption of
certain liabilities of MERIT Industrial Constructors, Inc. (MERIT), an
industrial construction and maintenance firm based in Baton Rouge, Louisiana,
and certain of its affiliates. Total consideration paid by the Company was
approximately $1,300,000 in cash (including acquisition costs), 62,500 shares of
the Company's Common Stock valued at approximately $1,300,000, options to
purchase 25,000 shares of the Company's Common Stock at $20.25 per share, as
well as the assumption of approximately $340,000 of debt. The purchase method
was used to account for the acquisition. Goodwill of approximately $1,100,000 is
being amortized on a straight-line basis over 20 years. The operating results
related to the acquired MERIT assets have been included in the consolidated
statements of income from the date of the acquisition. The pro-forma effect of
the acquisition of the MERIT assets, had it occurred on September 1, 1996, is
not material to the operations of the Company.
On October 8, 1997, the Company purchased the capital stock of Pipework
Engineering and Developments Limited (PED), a pipe fabrication company in
Wolverhampton, United Kingdom, for $539,000 in cash, net of cash received, and
notes payable to former stockholders of $1,078,000. Acquisition costs of
approximately $160,000 were incurred by the Company. The purchase method was
used to account for the acquisition. Goodwill, which is being amortized over 20
years using the straight-line method, was approximately $1,600,000. The
operating results of PED have been included in the consolidated statements of
income of the Company from the date of acquisition. The pro-forma effect of the
acquisition of PED, had it occurred on September 1, 1996, is not material to the
operations of the Company.
On November 14, 1997, the Company purchased all of the capital stock or
substantially all of the assets of the principal operating businesses of
Prospect Industries plc (Prospect) of Derby, United Kingdom, for approximately
$14,600,000 in cash, net of cash received. Acquisition costs of approximately
$2,000,000 were incurred by the Company. Excluded from the purchase price is
$1,438,000, which represents the fair value of the assets and liabilities of a
discontinued operation, CBP Engineering Corp. (CBP). The sale of CBP was
completed in 1998 at no gain or loss. Prospect, a mechanical contractor and
provider of turnkey piping systems serving the power generating and process
industries worldwide, operated through several wholly-owned subsidiaries
including Connex Pipe Systems, Inc. (Connex), a piping systems fabrication
business located in Troutville, Virginia; Aiton Australia Pty Limited (Aiton
Australia), a piping systems, boiler refurbishment and project management
company based near Sydney, Australia; and Prospect Engineering Limited (PEL), a
mechanical contractor and a provider of turnkey piping systems located in Derby,
United Kingdom. Under the terms of the acquisition agreement, the Company
acquired all of the outstanding capital stock of Prospect Industries Overseas
Limited, a United Kingdom holding company that held the entire ownership
interest in Connex and CBP, all of the capital stock of Aiton Australia and
certain assets of PEL, as well as Prospect's entire ownership interest in Inflo.
The Company also assumed certain liabilities of PEL and Prospect relating to its
employees and pension plans including approximately $3,800,000 of costs related
to the Company's plan to reduce the workforce at Prospect. These costs relate to
amounts due to employees under statutory and contractual severance entitlements.
All amounts related to the severance entitlements have been paid as of August
31, 1999. The purchase method was used to account for the acquisition. Goodwill,
which is being amortized over 20 years using the straight-line method, was
approximately $2,400,000. The estimated fair value of the assets acquired and
liabilities assumed as of November 14, 1997 are as follows (in thousands):
43
44
Accounts receivable $ 15,288
Inventories 2,087
Cost and estimated earnings in excess of billings on
uncompleted contracts 7,588
Property and equipment 11,339
Other assets 5,907
Outstanding checks in excess of bank balance (1,527)
Accounts payable and accrued liabilities (19,331)
Revolving line of credit (318)
Advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts (4,456)
----------
Purchase price (net of cash received of $99) $ 16,577
==========
The operating results of the Prospect businesses have been included in
the consolidated statements of income from the date of the acquisition.
In connection with the Prospect acquisition, the Company incurred
certain contingent liabilities (see Note 12 of Notes to Consolidated Financial
Statements).
On January 15, 1998, the Company purchased all of the outstanding
capital stock of Lancas, C.A. (Lancas), a construction company in Punto Fijo,
Venezuela for approximately $2,600,000 in cash, net of cash received. The
Company also incurred approximately $100,000 of acquisition costs. Goodwill of
approximately $400,000 is being amortized over 20 years, using the straight-line
method. The purchase method was used to account for this acquisition. The
operating results of Lancas have been included in the consolidated statements of
income from the date of acquisition. The pro-forma effect of the acquisition of
Lancas, had it occurred on September 1, 1996, is not material to the operations
of the Company.
On January 19, 1998, the Company completed the acquisition of all of
the outstanding capital stock of Cojafex, B.V. of Rotterdam, Holland (Cojafex)
for approximately $8,500,000; $4,547,000 (net of cash received) of which was
paid at closing. The balance of the purchase price will be paid through December
31, 2003. Acquisition costs of approximately $60,000 were incurred by the
Company. Cojafex owns the technology for certain induction pipe bending machines
used for bending pipe and other carbon steel and alloy items for industrial,
commercial and agricultural applications, and using such technology, Cojafex
designs, engineers, manufactures, markets and sells such induction bending
machines. Goodwill, which is being amortized over 20 years using the
straight-line method, was approximately $8,500,000. The purchase method was used
to account for this acquisition. The operating results of Cojafex have been
included in the consolidated statements of income from the date of acquisition.
The pro-forma effect of the acquisition of Cojafex, had it occurred on September
1, 1996, is not material to the operations of the Company.
On July 28, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Bagwell Brothers, Inc. and a subsidiary
(collectively, Bagwell). Total consideration paid was $1,600,000 cash and
645,000 shares of the Company's Common Stock valued at $13,033,000. The Company
also incurred $163,000 of acquisition costs. The purchase method was used to
account for the acquisition. Goodwill of approximately $11,300,000 is being
amortized on a straight-line basis over 20 years. The operating results of
Bagwell have been included in the consolidated statements of income from the
date of acquisition. The pro-forma effect of the acquisition of Bagwell, had it
occurred on September 1, 1996, is not material to the operations of the Company.
The following summarized unaudited income statement data reflects the
impact the Shaw Constructors and Prospect acquisitions would have had on 1997;
and the Prospect acquisition would have had on 1998, if such acquisitions had
taken place at the beginning of the applicable fiscal year (in thousands, except
per share data):
44
45
UNAUDITED PRO-FORMA
RESULTS FOR THE
YEARS ENDED AUGUST 31,
-------------------------------
1997 1998
---- ----
Gross revenue $ 476,384 $ 531,329
============= =============
Income from continuing operations $ 10,196 $ 16,193
============= =============
Basic earnings from continuing operations per common share $ .88 $ 1.28
============= =============
Diluted earnings from continuing operations per common share $ .86 $ 1.26
============= =============
NOTE 4--INVENTORIES
The major components of inventories consist of the following (in
thousands):
AUGUST 31,
-------------------------------------------------------------------------------------
1998 1999
---------------------------------------- ----------------------------------------
Weighted Weighted
Average FIFO TOTAL Average FIFO TOTAL
---------- ---------- ---------- ---------- ---------- ----------
Finished Goods $ 28,671 $ -- $ 28,671 $ 29,244 $ 642 $ 29,886
Raw Materials 3,162 25,937 29,099 3,686 32,869 36,555
Work In Process 1,914 6,177 8,091 1,306 10,717 12,023
---------- ---------- ---------- ---------- ---------- ----------
$ 33,747 $ 32,114 $ 65,861 $ 34,236 $ 44,228 $ 78,464
========== ========== ========== ========== ========== ==========
NOTE 5--INVESTMENT IN UNCONSOLIDATED ENTITIES
During the years ended August 31, 1998 and 1999, the Company has not
made any additional investments in Shaw-Nass Middle East, W.L.L., the Company's
Bahrain joint venture (Shaw-Nass). The Company owns 49% of Shaw-Nass and
accounts for this investment on the equity basis. As such, during the years
ended August 31, 1997, 1998, and 1999, the Company recognized earnings (losses)
of $437,000, $(40,000), and $681,000, respectively, from Shaw-Nass. No
distributions have been received through August 31, 1999 from Shaw-Nass. As of
August 31, 1998 and 1999, the Company had outstanding receivables from Shaw-Nass
totaling $1,758,000 and $4,310,000, respectively. These receivables relate to
inventory and equipment sold and net short-term advances to Shaw-Nass. In
addition, at August 31, 1998, the Company had a note receivable from Shaw-Nass
of $436,000 included in other assets.
During 1997, 1998 and 1999, revenues of $782,000, $1,626,000, and
$1,188,000 were recognized on sales of products from the Company to Shaw-Nass.
The Company's 49% of profit on these sales was eliminated. At August 31, 1999,
undistributed earnings of Shaw-Nass included in the consolidated retained
earnings of the Company amounted to approximately $960,000.
NOTE 6--INVESTMENT FOR SECURITIES AVAILABLE FOR SALE
In connection with its construction services, the Company embarked on
its first significant project financing participation. As a result, the Company
acquired $12,500,000 of 15% Senior Secured Notes (the "Notes") due December 1,
2003, from a customer, together with certain preferred stock related thereto.
The notes are secured by a first priority security interest in some of the
refinery's assets. The amount and value of the preferred stock is not material.
Through December 1, 2000, additional bonds are expected to be received in lieu
of interest, increasing the Company's investment in the Notes. Since these
securities are available for sale, SFAS No. 115--"Accounting for Certain
Investments in Debt and Equity Securities" requires that the securities be
measured at fair value in the balance sheet and that unrealized holding gains
and losses, net of taxes, for these investments be reported in a separate
component of shareholders equity until realized. Based on sales of additional
securities by the debtor during fiscal 1999 and the estimates obtained by the
Company from an investment banking firm, the securities had an aggregate value
approximating the outstanding principal amount of $13,830,000 at August 31,
1999. As a result, no unrealized gain or loss is recognized in shareholders'
equity. Since the financing arrangement is related to construction services, the
interest income of $1,330,000 in 1999 from the Notes is included in sales and
the interest cost of $621,000 in 1999 associated with carrying the Notes is
included in cost of sales in the statement of income. The interest cost was
calculated at the Company's estimated effective borrowing rate of 7%.
45
46
NOTE 7--LONG-TERM DEBT
Long-term debt consisted of: (dollars in thousands) AUGUST 31,
1998 1999
--------- ---------
(IN THOUSANDS)
Notes payable to insurance companies; variable interest rates based on 30-day
commercial paper rates plus 190 to 235 basis points ranging from 7.04% to
7.49% as of August 31, 1999; payable in monthly installments based on
amortization over the respective note lives; maturing from 2001 to 2006;
secured by property and equipment with an approximate net book value of
$20,139 as of August 31, 1999 and guaranties by the Company and certain
subsidiaries of the Company $ 13,638 $ 11,827
Note payable to a bank; interest payable quarterly based upon London Interbank
Offering Rate (LIBOR) plus 1.6%; payable in quarterly principal installments
of $264 with remaining balance due in 2003; secured by equipment with an
approximate net book value of $9,233 as of August 31, 1999 5,286 4,229
South Carolina Revenue Bonds payable; principal due in 2005; interest paid
monthly accruing at a variable rate of 3.60% as of August 31, 1999; secured
by $4,000 letter of credit 4,000 4,000
Note payable to a bank; variable interest rate based upon London Interbank
Offering Rate (LIBOR) plus 1.4%; payable in quarterly principal installments
of $143 through March 25, 2004 plus interest; secured by equipment with an
approximate net book value of $2,067 as of August 31, 1999 3,286 2,714
Mortgages payable to a bank; interest payable monthly at 8.38%; monthly payments
of $10 and $27 with remaining balance due on June 1, 2002; secured by real
property with an approximate net book value of $2,350 as of August 31, 1999 3,107 2,922
Mortgage payable to an insurance company; variable interest rate based on
average weekly yield of 30 day commercial paper plus 2.35%; payable in
monthly installments of $40 through June 30, 2007, secured by land and
buildings with an approximate net book value of $1,787 as of August 31, 1999 3,036 2,773
Notes payable to employees relating to non-competition agreements; Interest
payable monthly at 7.125% and 7%; monthly payments of $21 and $5 until April
2004 and August 2000 respectively; unsecured; see Note 16 - Related Party
Transactions 1,274 1,047
Mortgage payable to a bank; interest payable monthly at 8.63%; monthly
installments of $8 with remaining balance due on November 7, 2001; secured by
real property with an approximate net book value of $661 as of August 31, 1999 524 479
46
47
AUGUST 31,
1998 1999
---------- ----------
(IN THOUSANDS)
Senior secured notes payable primarily to insurance companies; interest payable
semi-annually at 6.44% and 6.93% respectively; payable in annual principal
installments of $2,857 beginning May 1999 and $5,714 beginning May 2002,
respectively; rank in pari passu with the Company's U.S. revolving credit
facility (see Note 8 - Revolving Lines of Credit); secured by domestic
subsidiary accounts receivable, inventory, intangible assets,
and bank deposits with an approximate net book value of $ 212,000 as of
August 31, 1999, as well as by the pledge of the capital stock of certain
of the Company's domestic subsidiaries 60,000 57,143
Notes payable to former owners in conjunction with an acquisition; payable in
annual installments of $750 (including interest imputed at 6.56%) through
December 31, 2003; secured by the stock of the acquired subsidiary 3,624 3,112
Note payable to a bank; interest payable quarterly at 7.23%; quarterly payments
of $52 through April 1, 2005; secured by equipment with an
approximate net book value of $1,506 as of August 31, 1999 1,100 969
Notes payable to employees in conjunction with an acquisition; interest payable
semi-annually at 7.00%; payable on April 30th or October 31st of
any year with balance due no later than April 30, 2002 1,078 --
Note payable to an insurance company, interest payable monthly, at 7.20%;
monthly payments of $35 through June 1, 2019 secured by land, buildings and
equipment with an approximate net book value of $7,029 at August 31, 1999 -- 4,383
Other notes payable; interest rates ranging from 5.50% to 8.25%; payable in
monthly installments based on amortization over the respective note lives;
maturing from 1999 through 2003 1,076 299
---------- ----------
Total debt 101,029 95,897
Less: current maturities (9,314) (8,056)
---------- ----------
Total long-term portion of debt $ 91,715 $ 87,841
========== ==========
Annual maturities of long-term debt during each year ending August 31,
are as follows (in thousands):
2000 $ 8,056
2001 9,352
2002 10,854
2003 13,941
2004 and thereafter 53,694
----------
$ 95,897
==========
Certain of the debt agreements contain restrictive covenants which the
Company is required to meet including financial ratios and minimum capital
levels among other restrictions. As of August 31, 1999, the Company was in
compliance with the covenants or had obtained the required waivers.
47
48
The estimated fair value of long-term debt as of August 31, 1998 and
1999 was approximately $103,700,000 and $91,712,000 respectively, based on
borrowing rates currently available to the Company for notes with similar terms
and average maturities.
NOTE 8--REVOLVING LINES OF CREDIT
In May 1998, the Company entered into a three-year revolving credit
facility with its U.S. banks, which allows the Company to borrow up to
$100,000,000 at an interest rate not to exceed 2% over the London Interbank
Offering Rate (LIBOR) or .75% over the Prime rate. The index used to determine
the interest rate is selected by the Company and the spread over the index is
dependent upon certain financial ratios of the Company. During fiscal 1998 and
1999, the maximum amount outstanding under the revolving credit facility was
approximately $87,873,000 and $80,532,000 respectively, and the average amount
outstanding was approximately $51,523,000 and $55,006,000 respectively, at
weighted average interest rates of 7.19% and 6.53% respectively. The revolving
credit facility ranks in pari passu with the Company's Senior Secured Notes and
is secured by the Company's domestic subsidiary accounts receivable, inventory,
intangible assets and bank deposits, as well as by the pledge of the capital
stock of certain of the Company's domestic subsidiaries.
In September 1999, the Company's revolving credit facility was amended
to extend the expiration date to May 31, 2002. The amendment also modified the
interest rate spread, not to exceed 2.50% over the London Interbank Offering
Rate (LIBOR) or 1.75% over the Prime rate, and certain financial covenants and
ratios.
In 1998, a foreign subsidiary of the Company initiated an overdraft
credit facility with a bank for up to (pound)3.0 million ($4.9 million), with
interest at the bank's base rate plus 1.25%. The facility is secured by the
assets of the subsidiary and a (pound)10.0 million ($16.3 million) limited
guarantee given by the Company. The facility expired December 17, 1998 and was
extended for one year in January 1999. The extension reduced the facility to
(pound)2.0 million ($3.3 million) at the same interest rate spread as the
previous facility. The outcome of the negotiations to renew or replace this
overdraft credit facility is not expected to have any material adverse effect on
the future operations of the Company.
NOTE 9--INCOME TAXES
The significant components of net deferred taxes are as follows (in thousands):
AUGUST 31,
--------------------------
1998 1999
---------- ----------
Assets:
Tax basis of inventory in excess of book basis $ 946 $ 371
Receivable reserves not currently deductible 1,649 177
Self insurance reserves not currently deductible 667 620
Net operating loss and tax credit carry forwards 2,505 1,457
State tax credits 720 628
Other expenses not currently deductible 693 1,248
Less: valuation allowance (932) (937)
---------- ----------
Assets 6,248 3,564
Liabilities:
Excess of financial reporting over tax basis of assets (6,462) (7,456)
Excess of financial reporting over tax basis of receivables (1,279) (1,298)
Pension (705) (705)
---------- ----------
Liabilities (8,446) (9,459)
---------- ----------
Net deferred tax liabilities $ (2,198) $ (5,895)
========== ==========
48
49
Income (loss) before provision for income taxes for the years ended
August 31 was as follows (in thousands):
1997 1998 1999
---------- ---------- ----------
Domestic $ 17,544 $ 12,764 $ 27,663
Foreign 2,431 10,541 (1,588)
---------- ---------- ----------
Total $ 19,975 $ 23,305 $ 26,075
========== ========== ==========
The provision for income taxes for the years ended August 31 was as
follows (in thousands):
1997 1998 1999
---------- ---------- ----------
Current $ 4,313 $ 6,874 $ 4,534
Net operating loss utilized (890) (200) --
Deferred 2,231 40 3,697
State 458 319 404
---------- ---------- ----------
Total $ 6,112 $ 7,033 $ 8,635
========== ========== ==========
A reconciliation of Federal statutory and effective income tax rates
for the years ended August 31 was as follows:
1997 1998 1999
----- ----- -----
Statutory rate 35% 35% 35%
State taxes provided 1 1 1
Foreign income taxed at different rates (4) (6) (2)
Other 2 3 1
State tax credits (3) (3) (2)
----- ----- -----
31% 30% 33%
===== ===== =====
As of August 31, 1999, for Federal income tax return purposes, the
Company had approximately $1,900,000 of U.S. net operating loss carryforwards
available to offset future taxable income of its Connex subsidiary. The
carryforwards expire beginning in 2011 through 2013. As of August 31, 1999, the
Company's United Kingdom operations had net operating loss carryforwards of
approximately (pound)1,600,000, ($2,600,000), which can be used to reduce future
taxable income in the United Kingdom. As of August 31, 1999, no benefit had been
given to these losses in the accompanying financial statements due to the
current operating environment in that market. Therefore, a valuation allowance
is provided for these loss carryforwards.
Unremitted foreign earnings reinvested abroad upon which deferred
income taxes have not been provided aggregated approximately $7,000,000 at
August 31, 1999. Due to the timing and circumstances of repatriation of such
earnings, if any, it is not practicable to determine the unrecognized deferred
tax liability relating to such amounts. Withholding taxes, if any, upon
repatriation would not be significant.
NOTE 10--COMMON STOCK
The Company has one class of common stock. Each outstanding share of
common stock which has been held for four consecutive years entitles its holder
to five votes on each matter properly submitted to the Company's shareholders
for their vote, waiver, release or other action. Each outstanding share of
common stock which has been held for less than four consecutive years entitles
its holder to only one vote. Also, the Board of Directors is authorized to
approve the issuance of preferred stock.
NOTE 11--LEASES
Operating Leases - The Company leases certain offices, fabrication
shops, warehouse facilities, office equipment and machinery under non-cancelable
operating lease agreements which expire at various times and which require
various minimum rentals. The non-cancelable operating leases which were in
effect as of August 31, 1999
49
50
require the Company to make the following future minimum lease payments:
For the year ending August 31 (in thousands):
2000 $ 3,578
2001 2,404
2002 1,679
2003 1,192
2004 and thereafter 2,728
----------
Total minimum lease payments $ 11,581
==========
The Company enters into short-term lease agreements for equipment
needed to fulfill the requirements of specific jobs. Any payments owed or
committed under these lease arrangements as of August 31, 1999 are not included
as part of total minimum lease payments. Rent expense for the fiscal years ended
August 31, 1997, 1998 and 1999 was $3,587,000, $7,902,000 and $8,297,000,
respectively.
NOTE 12--COMMITMENTS AND CONTINGENCIES
In the normal course of business activities, the Company enters into
contractual agreements with customers for certain construction services to be
performed based on agreed upon reimbursable costs and labor rates. In some
instances, the terms of these contracts provide for the customer's review of the
accounting and cost control systems to verify the completeness and accuracy of
the reimbursable costs invoiced. These reviews could result in proposed
reductions in reimbursable costs and labor rates previously billed to the
customer. The Company does not believe that any such reviews will result in a
material change to the Company's financial position or results of operations.
The Company has posted letters of credit aggregating approximately
$5,600,000 as of August 31, 1999 to secure its performance under certain
contracts and insurance arrangements.
During 1998 and 1999, the Company was self-insured for workers'
compensation claims in certain states up to certain policy limits. Claims in
excess of $250,000 per incident are insured by third party reinsurers. The
Company has accrued a liability for outstanding and incurred, but not reported,
claims based on historical experience totaling approximately $780,000 and
$821,000 at August 31, 1998 and 1999, respectively.
During 1998 and 1999, certain subsidiaries of the Company were
self-insured for health claims up to certain policy limits. Claims in excess of
$125,000 per incident and approximately $10,000,000 in the aggregate per year
are insured by third party reinsurers. The Company had accrued a liability of
$812,000 and $1,198,000, respectively, for outstanding and incurred, but not
reported, claims based on historical experience.
In connection with the acquisition of the principal operating
businesses of Prospect (see Note 3 of Notes to Consolidated Financial
Statements), the Company entered into several indemnification agreements in
favor of Prospect, PEL, and Prospect's principal lender (the Lender). The first
agreement required the Company to indemnify the Lender for any losses that the
Lender may incur in connection with certain letters of credit, bonds and
guarantees previously issued by the Lender relating to projects entered into by
PEL, Connex, CBP, Aiton Australia and other subsidiaries of Prospect. The
Company has determined that its exposure for indemnity under the agreement with
the Lender as of August 31, 1999 was approximately $400,000.
Additionally, the Company has agreed to indemnify each of Prospect, PEL
and the Lender with respect to certain preferential creditors of Prospect and
PEL. Immediately after the closing of the acquisition by the Company of
Prospect, the Lender had an administrative receiver appointed for Prospect, PEL
and the subsidiaries not acquired by the Company. The Company is obligated to
indemnify Prospect and PEL for preferential debts of PEL and Prospect in
connection with the receivership proceedings. Further, the Company has agreed to
indemnify the Lender for any loss the Lender may suffer as a result of the
Company's failure to perform its indemnity obligations under the Company's
agreement with Prospect and PEL concerning preferential creditors. As of August
31, 1999, the Company estimates the
50
51
aggregate preferential debt of Prospect and PEL to be approximately $3,800,000;
this amount is included in accrued liabilities in the accompanying financial
statements.
In the normal course of its business, the Company becomes involved in
various litigation matters including, among other things, claims by third
parities for alleged property damages, personal injuries, and other matters.
While the Company believes it has meritorious defenses against these claims,
management has used estimates in determining the Company's potential exposure
and has recorded reserves in its financial statements related thereto where
appropriate. It is possible that a change in the Company's estimates of that
exposure could occur, but the Company does not expect such changes in estimate
costs will have a material effect on the Company's financial position or results
of operations.
NOTE 13--BUSINESS SEGMENTS, OPERATIONS BY GEOGRAPHIC REGION AND MAJOR CUSTOMERS
Business Segments
The company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), Disclosures about Segments of an Enterprise and Related
Information," as of August 31, 1999. SFAS 131 establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 defined
operating segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company has aggregated its business activities into two
operating segments: pipe services and manufacturing.
The pipe services segment of the Company supplies integrated systems,
products and services for piping systems, primarily for the power generation,
chemical processing, crude oil refining, petrochemical processing, oil and gas
exploration and production and other industries. As a "total piping resource",
the Company offers comprehensive design and engineering services related to
piping systems and pipe support fabrication and manufacturing, and final on-site
erection, turnkey construction and piping project maintenance.
The manufacturing segment offers its capabilities primarily to the
power generation, chemical processing, crude oil refining, petrochemical
processing, oil and gas exploration and production and other industries,
including the pulp and paper, and food processing industries, by manufacturing
and distributing specialty stainless, alloy and carbon steel pipe fittings.
These fittings include stainless and other alloy elbows, tees, reducers and stub
ends. The Company has one manufacturing facility which distributes its products
to the pipe services segment of the Company enhancing the Company's piping
package, as well as to third parties. The Company also has several distribution
centers in the United States, which distribute its products primarily to third
parties.
51
52
Business Segment Data
The following table presents information about segment profit and
assets (in thousands):
PIPE
SERVICES MANUFACTURING CORPORATE TOTAL
---------- ------------- ---------- ----------
FISCAL 1997
Sales to external customers $ 272,180 $ 63,554 $ -- $ 335,734
Intersegment sales -- 19,523 501 20,024
Corporate overhead allocations 7,695 1,580 (9,275) --
Interest income 122 59 138 319
Interest expense 4,673 1,568 537 6,778
Depreciation and amortization 4,854 1,867 637 7,358
Earnings from unconsolidated entity 437 -- -- 437
Income tax expense 4,111 1,974 27 6,112
Income (loss) from discontinued operations 94 (346) -- (252)
Net income 10,021 3,979 48 14,048
Total assets 187,755 54,487 20,217 262,459
Investment in unconsolidated entity 4,005 -- -- 4,005
Purchases of property and equipment 6,333 6,386 3,113 15,832
Other increases in long-lived assets, net 10,762 -- 211 10,973
FISCAL 1998
Sales to external customers $ 445,866 $ 55,772 $ -- $ 501,638
Intersegment sales -- 22,538 569 23,107
Corporate overhead allocations 4,800 2,340 (7,140) --
Interest income 174 17 60 251
Interest expense 4,520 1,477 2,474 8,471
Depreciation and amortization 7,272 2,264 744 10,280
Earnings (loss) from unconsolidated entity (40) -- -- (40)
Income tax expense 8,198 707 (1,872) 7,033
Income (loss) from discontinued operations 3,563 (618) -- 2,945
Net income 21,544 689 (3,056) 19,177
Total assets 312,145 55,675 22,024 389,844
Investment in unconsolidated entity 3,965 -- -- 3,965
Purchases of property and equipment 12,564 1,201 851 14,616
Other increases in long-lived assets, net 25,196 15 2,142 27,353
FISCAL 1999
Sales to external customers $ 446,708 $ 47,306 $ -- $ 494,014
Intersegment sales -- 19,914 566 20,480
Corporate overhead allocations 9,214 1,586 (10,800) --
Interest income 234 4 227 465
Interest expense 3,906 1,323 3,420 8,649
Depreciation and amortization 10,431 2,028 812 13,271
Earnings from unconsolidated entity 681 -- -- 681
Income tax expense 10,196 (64) (1,497) 8,635
Net income 20,449 (165) (2,163) 18,121
Total assets 319,904 54,833 32,325 407,062
Investment in unconsolidated entity 4,646 -- -- 4,646
Purchases of property and equipment 9,441 869 7,657 17,967
Other increases in long-lived assets, net 66 -- 48 114
52
53
Operations by Geographic Region
The following tables present geographic sales and long-lived assets (in
thousands):
YEARS ENDED AUGUST 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
Sales:
United States $ 232,500 $ 286,574 $ 365,942
China 27,342 56,069 30,795
England 2,496 52,219 49,822
Other Far East/Pacific Rim countries 35,283 47,025 10,257
Other European countries 1,562 1,057 160
South America 18,359 31,877 18,736
Middle East 12,777 18,374 10,181
Other 5,415 8,443 8,121
---------- ---------- ----------
$ 335,734 $ 501,638 $ 494,014
========== ========== ==========
AUGUST 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
Long-lived assets:
United States $ 78,749 $ 105,741 $ 109,466
England -- 13,167 12,639
Other foreign countries 10,408 19,942 19,057
---------- ---------- ----------
$ 89,157 $ 138,850 $ 141,162
========== ========== ==========
Sales are attributed to geographic regions based on location of
customer. Long-lived assets include all long-term assets except those
specifically excluded under SFAS No. 131, such as deferred income taxes and
securities available for sale.
Information about Major Customers
The Company's customers are principally major multi-national
engineering and construction firms, equipment manufacturers and industrial
corporations. For the year ended August 31, 1997, no one customer represented
more than 10% of sales. For the year ended August 31, 1998, sales to one
customer totaled $51.7 million, or 10% of sales. For the year ended August 31,
1999, sales to a different customer were $67.7 million, or 14% of sales.
Export Sales
For the years ended August 31, 1997, 1998 and 1999, the Company has
included as part of its international sales approximately $89,000,000,
$111,000,000 and $60,000,000, respectively, of exports from its domestic
facilities.
NOTE 14--EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 replaced
the previously reported primary and fully-diluted earnings per share with basic
and diluted earnings per share.
Basic earnings per common share were computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. Diluted earnings per common share were determined on the assumptions that
all dilutive stock options (see Note 15 of Notes to Consolidated Financial
Statements) were exercised and stock was repurchased using the treasury stock
method, at the average price for each year. The Company adopted SFAS No. 128
effective December 15, 1997. The following table sets forth the computation of
basic and diluted income from continuing operations per share:
53
54
FOR THE YEARS ENDED AUGUST 31,
1997 1998 1999
------------- ------------- -------------
Income from continuing operations (dollars in thousands) $ 14,300 $ 16,232 $ 18,121
============= ============= =============
Shares:
Weighted average number of common shares outstanding 11,632,068 12,616,997 11,934,595
Net effect of stock options 269,253 214,980 420,831
------------- ------------- -------------
Weighted average number of common shares outstanding,
plus assumed exercise of stock options 11,901,321 12,831,977 12,355,426
============= ============= =============
Income from continuing operations:
Basic earnings per share $ 1.23 $ 1.29 $ 1.52
============= ============= =============
Diluted earnings per share $ 1.20 $ 1.26 $ 1.47
============= ============= =============
At August 31, 1997, 1998 and 1999, the Company had dilutive stock
options of 427,003, 343,905, and 1,188,500 respectively, which were assumed
exercised using the treasury stock method. The resulting net effect of stock
options was used in the calculation of diluted income per common share for each
period. Additionally, the Company had 28,341, 74,341, and 53,000 of stock
options at August 31, 1997, 1998 and 1999, respectively, which were excluded
from the calculation of diluted income per share because they were antidilutive.
NOTE 15--EMPLOYEE BENEFIT PLANS
The Company has a Stock Option Plan (the Plan) under which both
qualified and non-qualified options and restricted stock may be granted. As of
August 31, 1999, 1,645,000 shares of common stock are reserved for issuance
under the Plan. The Plan is administered by a committee of the Board, which
selects persons eligible to receive options and determines the number of shares
subject to each option, the vesting schedule, the exercise price, and the
duration of the option. The exercise price of any option granted under the Plan
cannot be less than 100% of the fair market value on the date of grant and its
duration cannot exceed 10 years. Only qualified options have been granted under
the Plan.
Shares of restricted stock are subject to risk of forfeiture during the
vesting period. Restrictions related to these shares and the restriction terms
are determined by the committee. Holders of restricted stock have the right to
vote the shares. During the year ended August 31, 1998, the Company issued
30,000 shares of restricted stock which had a weighted average grant-date fair
value of $19.38. During fiscal 1999, 15,000 shares were cancelled, and at August
31, 1999, 15,000 shares remain outstanding.
In connection with the Company's acquisition of FCI and PSSI during
1994, options to acquire 5,000 shares with an exercise price of $18.00 were
issued. In January 1995, the exercise price of these options was amended to
$5.875 per share, which was the fair market value of the common stock at the
date of such amendment. These options were exercised in 1998. In addition, in
1994 the Company granted options contingent upon the ability of FCI, PSSI and
certain other subsidiaries to generate consolidated net income in excess of
certain thresholds during the fiscal years ended August 31, 1995, 1996 and 1997.
The maximum number of shares related to these options issuable under this plan
was 19,000 per year or 57,000. These options expire in 2004 and have an exercise
price equal to the closing price quoted on the last business day of the
immediately preceding fiscal year to which the grant of options relate. The
minimum threshold for the year ended August 31, 1995 was not met, and therefore,
no options were issued for that year. For the year ended August 31, 1996,
options to acquire 12,000 shares with an exercise price of $9.59 per share were
earned and subsequently issued. For the year ended August 31, 1997, options to
acquire an additional 12,000 shares with an exercise price of $32.875 were
earned and were issued in fiscal 1998.
In fiscal 1997, the Company adopted a Non-Employee Director Stock
Option Plan. Each member of the Board of Directors who is not, and who has not
been during the one year period immediately preceding the date the director is
first elected to the Board, an officer or employee of the Company or any of its
subsidiaries or affiliates, is eligible to participate in the Plan. A committee
of two or more members of the Board who are not eligible to receive grants under
the Option Plan administers the Plan. Upon adoption, options to acquire an
aggregate of 20,000 shares of Common Stock were issued. Additionally, each
eligible director will be granted an option to acquire 1,500 shares of Common
54
55
Stock on an annual basis upon his election or re-election to the Board of
Directors. An aggregate of 50,000 shares of Common Stock have been reserved for
issuance under the Option Plan.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS No. 123) which is effective for the Company's fiscal year
beginning September 1, 1996. Under SFAS No. 123, companies can either record
expense based on the fair value of stock-based compensation upon issuance or
elect to remain under the APB 25 method whereby no compensation cost is
recognized upon grant if certain requirements are met. The Company has elected
to continue to account for its stock-based compensation under APB 25. However,
pro-forma disclosures, as if the Company adopted the cost recognition
requirements under SFAS No. 123, are presented below.
Had compensation cost been determined based on the fair value at the
grant date consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per common share would have approximated the pro-forma
amounts below:
FOR THE YEARS ENDED AUGUST 31,
----------------------------------------------
1997 1998 1999
---- ---- ----
Net income from continuing operations (in thousands):
As reported $ 14,300 $ 16,232 $ 18,121
============ ============ ============
Pro-forma $ 14,086 $ 15,751 $ 17,398
============ ============ ============
Basic earnings per share from continuing operations:
As reported $ 1.23 $ 1.29 $ 1.52
============ ============ ============
Pro forma $ 1.21 $ 1.25 $ 1.46
============ ============ ============
Diluted earnings per share from continuing operations:
As reported $ 1.20 $ 1.26 $ 1.47
============ ============ ============
Pro-forma $ 1.18 $ 1.23 $ 1.41
============ ============ ============
The pro-forma effect on net earnings for 1998 and 1999 is not
representative of the pro-forma effect on net earnings in future years because
it does not take into consideration pro-forma compensation expense related to
grants prior to September 1, 1995.
The following table summarizes the activity in the Company's stock
option plans:
Weighted
Average
Shares Option Price
---------- ------------
Outstanding at September 1, 1996 529,615 $ 8.962
Granted 83,689 $ 18.116
Exercised (71,710) $ 5.984
Canceled (86,250) $ 15.755
---------- ----------
Outstanding at August 31, 1997 455,344 $ 9.827
Granted 87,000 $ 23.920
Exercised (116,473) $ 7.511
Canceled (7,625) $ 6.449
---------- ----------
Outstanding at August 31, 1998 418,246 $ 13.465
Granted 1,086,250 $ 8.820
Exercised (32,500) $ 7.654
Canceled (214,246) $ 16.925
========== ==========
Outstanding at August 31, 1999 1,257,750 $ 9.053
========== ==========
Exercisable at August 31, 1999 262,750 $ 9.324
========== ==========
55
56
As of August 31, 1997, 1998 and 1999, the number of shares relating to
options exercisable under the stock option plans was 160,344; 191,996; and
262,750, respectively, and the weighted average exercise price of those options
was $10.023, $20.608 and $9.324, respectively.
The weighted average fair value at date of grant for options granted
during 1997, 1998 and 1999 was $12.72, $13.21 and $5.23 per share, respectively.
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions in 1997, 1998 and 1999, respectively: (a) dividend yield of 0.00%,
0.00% and 0.00%; (b) expected volatility of 54%, 59% and 65% (c) risk-free
interest rate of 6.7%, 5.8% and 5.1%; and (d) expected life of 5 years, 5 years
and 5 years.
The following table summarizes information about stock options
outstanding as of August 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACT LIFE PRICE EXERCISABLE PRICE
- -------------------------- ----------- -------------- --------- ----------- ---------
$ 5.875 -- $ 6.750 184,125 5.3 Yrs $ 6.332 184,125 $ 6.332
$ 8.375 -- $ 8.375 961,875 9.0 Yrs $ 8.375 38,125 $ 8.375
$ 13.188 -- $ 19.813 66,250 9.7 Yrs $ 15.678 7,500 $ 15.313
$ 21.500 -- $ 22.375 33,500 7.3 Yrs $ 21.845 21,000 $ 21.679
$ 32.875 -- $ 32.875 12,000 8.0 Yrs $ 32.875 12,000 $ 32.875
--------- -------
1,257,750 8.5 Yrs $ 9.053 262,750 $ 9.324
========= =======
During 1994, the Company, excluding NAPTech, adopted a voluntary 401(k)
profit sharing plan for substantially all employees who are not subject to
collective bargaining agreements. The plan provides for the eligible employee to
contribute from 1% to 15% of annual compensation, subject to an annual limit,
with the Company matching 50% of the employee's eligible contribution up to 6%.
The Company's expense for this plan during 1997, 1998 and 1999 was approximately
$480,000, $813,000 and $1,278,000, respectively.
The Company has a qualified, contributory 401(k) savings plan covering
all employees of NAPTech who belong to the Certified Metal Trades Journeymen
collective bargaining unit. The Company is required to make a contribution of 3%
of participants' compensation on an annual basis. The Company's expense for this
plan was approximately $52,000, $61,000 and $18,000 for the years ended August
31, 1997, 1998 and 1999, respectively.
The Company has a defined benefit pension plan for employees of Connex.
Effective January 1, 1994, no new participants were admitted to the plan. The
pension plan's benefit formulas generally base payments to retired employees
upon their length of service and a percentage of qualifying compensation during
their final year of employment. The pension plan's assets are invested in fixed
income assets, equity based mutual funds, and money market funds. At August 31,
1999, the fair market value of the plan assets was $1,509,000, which exceeded
the estimated projected benefit obligation.
56
57
The Company has two pension plans (Plan A and Plan B) for employees of
one of its United Kingdom subsidiaries. Plan A is a money purchase plan in which
the employer and employee make matching contributions between 3% and 6% of
employees' salaries depending on age. From date of acquisition through August
31, 1998, the Company's expense for this plan was $98,000. For the year ended
August 31, 1999, the expense was $78,000. Plan B is a salary-related plan for
certain employees; admittance to this plan is now closed. The employees in Plan
B contribute 7%. The Company contribution depends on length of service, the
employee's salary at retirement, and the earnings of the fund investments. If
the plan's earnings are sufficient, the Company makes no contributions. From the
date of acquisition to August 31, 1998 the Company expensed $111,000 for this
plan. For the year ended August 31, 1999, the Company reflected a credit of
$18,000. The following table sets forth Plan B's pension cost from the date of
acquisition (November 14, 1997) to August 31, 1999, and the plan's funded status
as of August 31, 1998 and 1999 in accordance with the provisions of Statement of
Financial Accounting Standards No. 132 - "Employers' Disclosure about Pensions
and Other Postretirement Benefits":
57
58
FOR THE YEARS ENDED AUGUST 31,
------------------------------
1998 1999
---------- ----------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at the start of the year $ 14,593 $ 17,133
Service cost 284 253
Interest cost 711 914
Member's contributions 153 132
Actuarial loss/ (gain) 1,053 --
Benefits paid (330) (452)
Foreign currency exchange rate changes 669 (831)
---------- ----------
Projected benefit obligation at the end of the year 17,133 17,149
---------- ----------
CHANGE IN PLAN ASSETS
Fair value of the assets at the start of the year 15,582 17,437
Actual return on plan assets 1,333 2,949
Employer contributions -- 111
Employee contributions 153 132
Benefits Paid (330) (452)
Foreign currency exchange rate changes 699 (881)
---------- ----------
Fair value of the assets at the end of the year 17,437 19,296
---------- ----------
Funded status 304 2,147
Unrecognized net loss/ (gain) 615 (1,146)
---------- ----------
Prepaid benefit cost $ 919 $ 1,001
========== ==========
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate at end of the year 5.5% 5.5%
Expected return on plan assets for the year 7.0% 7.0%
Rate of compensation increase at end of the year 4.5% 4.5%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 284 $ 253
Interest cost 711 914
Expected return on plan assets (884) (1,185)
---------- ----------
Total net periodic benefit cost (credit) $ 111 $ (18)
========== ==========
The Company contributes to a Group Employee superannuation fund for its
employees in Australia. This fund is a defined contribution fund with both
employees and the Company contributing a fixed percentage of salary each week.
The Company also contributes to Industry Funds for its employees. These Funds
are also defined contribution funds with the Company contributing a fixed amount
each week for each employee. All members are entitled to benefits on termination
due to retrenchment, retirement, death or disability. The Company is under no
obligation to make up any shortfall in the funds assets to meet payments due to
employees. From the date of acquisition to August 31, 1998, the Company expensed
$139,000 (US dollars) for this plan. For the year ended August 31, 1999, the
Company expensed $82,000 (US dollars) for this plan.
58
59
NOTE 16--RELATED PARTY TRANSACTIONS
During 1994, the Company entered into an employment agreement with the
President and Chief Executive Officer (CEO) of the Company. Under terms of the
agreement, the President and CEO will receive, among other things, an annual
base salary of $575,000 (subsequently adjusted to $650,000), participation in
the Company's annual bonus plan as determined by the Compensation Committee of
the Board of Directors, and other benefits such as health and life insurance. In
the event the President and CEO's employment is terminated due to events as
defined in the agreement, the President and CEO will receive a lump-sum payment
equal to the full amount payable under the agreement. The employment agreement
was amended on August 25, 1997 to extend the expiration date to December 31,
2007. The term shall be automatically extended for an additional one-year period
upon each December 31, unless a party electing not to extend the agreement
provides written notice to the other party at least three months prior to such
December 31.
The Company has entered into several loan agreements with key
management, some of which were non-interest bearing. The impact of discounting
such loans to record interest income was not significant. The balance of these
employee loan receivables as of August 31, 1997, 1998, and 1999 was
approximately $416,000, $996,000 and $1,579,000, respectively. These balances
are included in other assets.
During 1996 and 1997, in connection with certain acquisitions discussed
in Note 3, the Company has entered into non-competition agreements with several
key employees. Related assets totaling approximately $930,000 (net of
accumulated amortization of $1,338,000) are included in other assets and is
being amortized over five to eight years using the straight-line method. Any
corresponding liabilities are included in long-term debt as further discussed in
Note 7 of Notes to Consolidated Financial Statements.
A director of the Company was a managing director of the investment
banking firm that was an underwriter and acted as one of the representatives of
the underwriters for the public offering of 2,000,000 shares of Common Stock
discussed in Note 2 of Notes to Consolidated Financial Statements. The Company
also granted to the underwriters an option to purchase up to an additional
398,000 shares of Common Stock pursuant to such terms to cover over-allotments,
which over-allotment option was exercised. The closing of such public offering
was completed in December 1996 and January 1997, at a price of $21.00 per share,
less the underwriting discounts and commissions of approximately $2,500,000.
Approximately 40% of these commissions were earned by the director's investment
banking firm. In connection with this public offering, certain officers and
directors of the Company sold 494,118 shares of stock. The same investment
banking firm handled the repurchase of some of the shares of the Company's
common stock which began in fiscal 1999, earning $74,330 in commissions.
A director of the Company is an owner of construction companies that
were used primarily as a sub-contractor by the Company. During fiscal 1998, the
Company paid these construction companies approximately $4,000,000 for work
performed. During fiscal 1999, payments to these construction companies were not
material.
In connection with the acquisition of a subsidiary in fiscal 1998, the
Company financed $1,078,000 of the purchase with two of the former owners, who
are now employees of the Company. This debt was paid off in 1999.
NOTE 17--FOREIGN CURRENCY TRANSACTIONS
The Company's wholly-owned subsidiaries in Venezuela had net assets of
approximately $16,300,000 and $16,700,000 denominated in Venezuelan Bolivars as
of August 31, 1998 and 1999, respectively. In accordance with SFAS 52, "Foreign
Currency Translation," the U.S. dollar is used as the functional reporting
currency since the Venezuelan economy is defined as highly inflationary.
Therefore, the asset and liabilities must be translated into U.S. dollars using
a combination of current and historical exchange rates.
During 1996, the Venezuelan government lifted its foreign exchange
controls. Subsequent to this action, the Bolivar devalued from 170 to 620 (at
August 31, 1999) to the U.S. dollar. During 1998 and 1999, the Company recorded
losses of approximately $734,000 and $652,000 respectively, in translating the
assets and liabilities of its Venezuelan subsidiaries into U.S. dollars. Because
these losses were partially offset by inflationary billing provisions in certain
Company contracts, the $734,000 and $652,000 were offset against sales.
59
60
Other foreign subsidiaries maintain their accounting records in their
local currency (primarily British Sterling, Australian Dollar and Dutch
Guilder). The currencies are converted to U.S. dollars with the effect of the
foreign currency translation reflected in "accumulated other comprehensive
income," a component of shareholders' equity, in accordance with SFAS No. 52 and
SFAS No 130--"Reporting Comprehensive Income." Foreign currency transaction
gains or losses are credited or charged to income. There were no material
transaction gains or losses incurred in fiscal 1997. At August 31, 1998 and 1999
respectively, cumulative foreign currency translation adjustments related to
these subsidiaries reflected in shareholders' equity amounted to $420,000 and
$1,535,000; transaction gains reflected in income amounted to $32,000 and
$119,000.
At August 31, 1998 and 1999, the Company's subsidiaries in the United
Kingdom had net assets of approximately $12,100,000 and $13,900,000; the
Company's subsidiary in Australia had net assets of approximately $1,300,000 and
$900,000; and the Company's subsidiary in the Netherlands had net assets of
approximately $9,600,000 and $9,100,000, respectively.
NOTE 18--DISCONTINUED OPERATIONS
In June 1998, the Company adopted a plan to discontinue its operations
of the following subsidiaries: Weldtech, a seller of welding supplies; Inflo
Control Systems Limited (Inflo), a manufacturer of boiler steam leak detection,
acoustic mill and combustion monitoring equipment and related systems; Greenbank
(a division of PEL), an abrasive and corrosion resistant pipe systems
specialist; and NAPTech Pressure Systems Corporation, a manufacturer of pressure
vessels and truck tanker trailers. The Company sold and/or discontinued its
investment in each of these operations prior to August 31, 1998. Proceeds from
the sale of these operations totaled approximately $1,200,000 in net cash and
notes receivable of approximately $7,400,000, which resulted in a net gain on
the disposal of $2,647,000, net of tax. The results of these operations have
been classified as discontinued operations in the consolidated financial
statements of the Company. Revenues of these discontinued operations totaled
approximately $2,600,000 and $7,700,000 in 1997 and 1998, respectively.
NOTE 19--UNBILLED RECEIVABLES, RETAINAGE RECEIVABLE AND COSTS AND ESTIMATED
EARNINGS ON UNCOMPLETED CONTRACTS
Included in accounts receivable is $10,841,000 and $12,338,000 at
August 31, 1998 and 1999, respectively, related to unbilled receivables.
Advanced billings on contracts as of August 31, 1998 and 1999 was $5,476,000 and
$7,025,000, respectively. Balances under retainage provisions totaled $9,222,000
and $4,554,000 at August 31, 1998 and 1999, respectively, and are also included
in accounts receivable in the accompanying consolidated balance sheets.
The components of costs and estimated earnings in excess of billings
and billings in excess of costs and estimated earnings on uncompleted contracts
as of August 31, 1998 and 1999 are as follows (in thousands):
FOR THE YEARS ENDED AUGUST 31,
------------------------------
1998 1999
---------- ----------
Costs incurred on uncompleted contracts $ 115,334 $ 149,115
Estimated earnings thereon 10,159 17,907
---------- ----------
125,493 167,022
Less billings applicable thereto (114,587) (145,867)
---------- ----------
$ 10,906 $ 21,155
========== ==========
Included in the accompanying balance sheet under
the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 19,797 $ 24,277
Billings in excess of costs and estimated earnings on
uncompleted contracts (8,891) (3,122)
---------- ----------
$ 10,906 $ 21,155
========== ==========
60
61
NOTE 20--QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- --------------- --------------- ---------------
FISCAL 1998
Sales $ 98,030 $ 132,200 $ 143,561 $ 127,847
============= ============ ============== =============
Gross profit $ 17,854 $ 22,223 $ 22,640 $ 16,864
============= ============ ============== =============
Net income from continuing operations $ 4,633 $ 5,481 $ 5,769 $ 349
============= ============ ============== =============
Basic net income from continuing operations per share $ .37 $ .44 $ .46 $ .03
============= ============ ============== =============
Diluted net income from continuing operations per share $ .36 $ .43 $ .45 $ .03
============= ============ ============== =============
FISCAL 1999
Sales $ 116,032 $ 112,660 $ 125,211 $ 140,111
============= ============ ============== =============
Gross profit $ 20,717 $ 22,385 $ 24,101 $ 26,625
============= ============ ============== =============
Net income from continuing operations $ 2,822 $ 4,324 $ 5,225 $ 5,750
============= ============ ============== =============
Basic net income from continuing operations per share $ .23 $ .37 $ .45 $ .49
============= ============ ============== =============
Diluted net income from continuing operations per share $ .23 $ .36 $ .43 $ .47
============= ============ ============== =============
61
62
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
A Current Report on Form 8-K was filed on September 22, 1999, to
announce a change in the Company's independent public accountants. The Company
engaged Arthur Andersen LLP ("AA"), New Orleans, Louisiana, as its sole
independent auditor for the fiscal year ended August 31, 1999. Previously, the
Company engaged both Hannis T. Bourgeois, LLP ("HTB") and AA as its independent
auditors. The single jointly signed audit report by HTB and AA was considered to
be the equivalent of two separately signed auditors' reports. Thus, previously
each firm represented that it had complied with generally accepted auditing
standards and was in a position that would justify it being the only signatory
of the report. Given Shaw's expansion of its overseas operations, HTB believes
it would be unable to continue to make this representation after fiscal 1998.
Therefore, HTB decided to resign as one of Shaw's independent auditors effective
September 22, 1999.
During the period from September 1, 1996, through the date hereof,
there have been no disagreements on accounting principles or practices,
financial statement disclosure or auditing scope or procedure between the
Company and AA or HTB.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information regarding the Company's
executive officers and directors.
NAME AGE POSITION
- -------------------- --- ---------------------------------------------
J. M. Bernhard, Jr. 45 Chairman of the Board of Directors, President
and Chief Executive Officer
Richard F. Gill 55 Executive Vice President and Chief Operating
Officer
Robert L. Belk 50 Executive Vice President, Chief Financial
Officer and Treasurer
G. Ray Wilkie, Jr. 53 Senior Vice President -- U.S. Operations
George P. Bevan 51 Senior Vice President
N. Andrew Dupuy, Jr. 44 Senior Vice President -- International and
Construction Operations
Michael H. Wootton 51 Senior Vice President of Business Development
Albert McAlister 48 Director
L. Lane Grigsby 57 Director
David W. Hoyle 60 Director
John W. Sinders, Jr. 43 Director
William H. Grigg 66 Director
J. M. Bernhard, Jr., the Company's founder, has been the Company's
President and Chief Executive Officer since Shaw's inception in September 1987.
He has also been one of the Company's directors since the Company's inception.
Mr. Bernhard has been Chairman of the Board since August 1990. Mr. Bernhard has
spent the last 20 years in the pipe fabrication business. Immediately prior to
his position with Shaw, Mr. Bernhard was Vice President and General Manager of
Sunland Services, a pipe fabrication company, and served on the board of
directors of Barnard and Burk Engineers & Constructors. Mr. Bernhard also serves
on the board of directors of Cajun Contructors, Inc.
Richard F. Gill has been employed by the Company since 1997, when Shaw
acquired certain assets of MERIT Industrial Constructors, Inc. and other
affiliated entities. Mr. Gill served as the President of Shaw Process and
Industrial Group, Inc., a wholly-owned subsidiary of Shaw's, from March 1997
until August 1998, and as Senior Vice President in charge of Construction and
International Operations, one of the Company's two principal operating divisions
from September 1998 to May 1999. In May 1999, Mr. Gill was appointed Executive
Vice President and Chief Operating
62
63
Officer. Mr. Gill served as President of MERIT from its founding in January 1982
until its sale to Shaw in 1997. MERIT was an industrial construction and
maintenance firm based in Baton Rouge, Louisiana. Mr. Gill has over 31 years of
experience in the industrial construction and maintenance industry.
Robert L. Belk joined Shaw in October 1998 as Executive Vice President,
Chief Financial Officer and Treasurer. Prior to joining us, Mr. Belk served
Ocean Energy, Inc. as its Executive Vice President of Administration from March
1998 until October 1998, as its Executive Vice President and Chief Financial
Officer from June 1997 until March 1998, and as its Senior Vice President, Chief
Financial Officer and Treasurer from 1993 until 1997. Prior to joining Ocean
Energy, Inc., Mr. Belk was engaged in public accounting with national and local
firms and as a sole-practitioner.
G. Ray Wilkie, Jr. joined the Company in March 1988 and served as Vice
President of B. F. Shaw, Inc., a wholly-owned subsidiary of Shaw's, from
September 1990 until May 1993, as President of B. F. Shaw, Inc. from May 1993
until November 1995, and as the Company's Executive Vice President from November
1995 until August 1998. In September 1998, Mr. Wilkie was appointed the
Company's Senior Vice President in charge of its U.S. Operations, one of the
Company's two principal operating divisions. Mr. Wilkie also served as one of
the Company's directors from January 1993 until March 1995. Mr. Wilkie has spent
the last 31 years in the pipe fabrication business.
George P. Bevan has been employed by the Company since September 1994
and served as an Executive Vice President from April 1997 to August 1998. In
September 1998, he was appointed a Senior Vice President and prior to that time
was a Vice President. Prior to joining Shaw, Mr. Bevan was a senior partner in
the law firm of Bevan-Hernandez, which he formed in 1991. He also served as
President of Southern United Financial Corporation, an insurance and financial
services company from 1987 to 1994.
N. Andrew Dupuy, Jr. has been employed by the Company since February
1997 when Shaw acquired certain assets of United Crafts, Inc. Mr. Dupuy served
as President of United Crafts, Inc. from February 1997 to December 1997,
President of Shaw Power Services, Inc., one of the Company's subsidiaries, from
December 1997 until August 1998 and as Vice President of the Company's
international and construction operations from August 1998 until May 1999. In
May 1999, Mr. Dupuy was appointed Senior Vice President of International and
Construction Operations. Mr. Dupuy co-founded United Crafts, Inc. in 1978 and
was its President from 1986 until its sale to Shaw. Mr. Dupuy has over 25 years
of experience in the industrial construction and maintenance industry.
Michael H. Wootton joined Shaw in September 1990 and served as the
Company's Vice President of Power and Business Development from 1990 until 1992
and as President of Shaw International, one of the Company's subsidiaries, from
1992 until 1999. In May 1999, Shaw appointed Mr. Wootton as the Company's Senior
Vice President of Business Development. Prior to joining Shaw, Mr. Wootton
served as President of the pipe fabrication division of Dravo Corporation from
1973 until 1990. Mr. Wootton has over 29 years of experience in the pipe
fabrication and construction industry.
Albert McAlister has been one of the Company's directors since April
1990. Since 1975, Mr. McAlister has been a partner in the law firm of McAlister
& McAlister, P.A. in Laurens, South Carolina. He also served as Chairman of the
Democratic Party in South Carolina from 1990 until 1994.
L. Lane Grigsby has served as one of the Company's directors since
January 1995. Mr. Grigsby is also Chairman of the Board of Cajun Constructors,
Inc., for which he also served as President and Chief Executive Officer from
April 1973 to June 1994. He has 30 years of experience in the industrial
construction industry. He also serves as an officer or director for several
industry and charitable organizations, including the Associated Builders and
Contractors and the Louisiana Association of Business and Industry.
David W. Hoyle has served on the Company's board of directors since
January 1995. For the past 12 years, he has been self-employed, primarily as a
real estate developer. He has been a member of the Senate Chamber of the North
Carolina General Assembly since 1992. Senator Hoyle serves as a director of
several private corporations, including as Chairman of the Board of Gaston
Federal Bank, as well as several civic, educational and charitable
organizations.
63
64
John W. Sinders, Jr. has served on Shaw's board of directors since
March 1995. He has served as Managing Director of RBC Dominion Securities
Corporation, an investment banking firm, since August 1999. From 1993 to 1999,
Mr. Sinders served as an Executive Vice President and as a managing director of
Jefferies & Company, Inc., an investment banking firm. Mr. Sinders served as a
Managing Director of Howard Weil Labouisse Friedrichs Incorporated, an
investment banking firm, from 1987 to 1993. He was a member of the board of
directors of Howard Weil from 1990 to 1993. Prior to joining Howard Weil, he was
a partner with the law firm of McGlinchey, Stafford, Mintz, Cellini & Lang in
New Orleans.
William H. Grigg has served on the Company's board of directors since
January 1998. He is the retired Chairman and Chief Executive Officer of Duke
Power Company, now Duke Energy Corporation. Mr. Grigg began his career at Duke
Power in 1963. He served as Chairman and Chief Executive Officer from April 1994
to June 1997. Prior to being elected chairman, he served as Vice Chairman for
three years. Mr. Grigg is on the board of directors of Hatteras Income
Securities, Inc., a mutual fund company, Nations Fund, Inc., a mutual fund
company, Associated Electric and Gas Insurance Services Ltd., a mutual casualty
insurance company and the Charlotte-Mecklenburg Hospital Authority, a local
hospital. He is a member of several civic and charitable organizations, serving
as Chairman of the Board of Foundation for the Carolinas.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Section 16"), requires the Company's directors and certain officers and
beneficial owners (collectively, the "reporting persons") of the Company's
common stock, no par value per share (the "Common Stock") to file with the
Securities and Exchange Commission (the "SEC") reports of ownership and changes
in ownership of the Common Stock. The reporting persons are required to furnish
the Company with copies of all reports filed pursuant to Section 16(a).
Based solely upon a review of such reports received by it, or written
representations from certain reporting persons that no Form 5 reports were
required for those persons, the Company believes that, during fiscal 1999, all
filing obligations applicable to the reporting persons were complied with except
as follows: Messrs. McAlister, Hoyle and Sinders failed to file timely Form 5
reports with respect to grants of options to purchase Common Stock under the
Company's 1996 Non-Employee Director Stock Option Plan in connection with their
re-election to the Company's Board of Directors at the 1998 Annual Meeting of
Shareholders. Messrs. Bernhard, Dupuy and Gill failed to report timely certain
option transactions pursuant to the Company's 1993 Employee Stock Option Plan on
a Form 5 report that each such reporting person otherwise timely filed with the
Commission.
ITEM 11. EXECUTIVE COMPENSATION
The following table contains compensation data for the last three
fiscal years for the Company's Chief Executive Officer and its four other most
highly compensated executive officers during fiscal 1999 (the "Named Executive
Officers").
64
65
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
OTHER ANNUAL SECURITIES ALL OTHER
FISCAL COMPENSATION UNDERLYING LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (1) SALARY(4) BONUS (5) OPTIONS (#)(6) PAYOUTS(7) (8)
- ---------------------------- --------- --------- -------- -------- -------------- ---------- ------------
J. M. Bernhard, Jr., President 1999 $604,038 $375,000 $ 66,741 200,000 -- $ 6,454
Chief Executive Officer and 1998 $539,343 $ 50,000 $ 75,318 35,000 -- $ 4,142
Chairman of the Board 1997 $500,000 -- $ 54,531 -- -- $ 4,750
Richard F. Gill (2) 1999 $225,859 $200,000 -- 75,000 -- $ 6,252
Executive Vice President and 1998 $213,221 $ 20,000 -- -- -- $ 3,132
Chief Operating Officer 1997 $ 76,667 -- -- 25,000 -- --
G. Ray Wilkie, Jr. 1999 $225,080 $130,000 -- 42,500 $ 11,917 $ 5,881
Senior Vice President - U.S. 1998 $185,593 $ 18,500 -- -- -- $ 4,816
Operations 1997 $185,000 -- -- -- -- $ 5,448
Michael H. Wootton 1999 $211,961 $ 60,000 -- 30,000 $ 14,119 $ 3,770
Senior Vice President of 1998 $216,946 $ 20,000 -- -- -- $ 6,386
Business Development 1997 $215,000 -- -- -- -- $ 4,750
Robert L. Belk (3) 1999 $203,365 $147,500 -- 75,000 -- --
Executive Vice President and 1998 -- -- -- -- -- --
Chief Financial Officer 1997 -- -- -- -- -- --
- -------------------
(1) The Company's fiscal year ends on August 31.
(2) Mr. Gill did not join the Company until March 1997.
(3) Mr. Belk did not join the Company until October 1998.
(4) From time to time, executive officers receive raises that are made
retroactive to prior periods. These raises may overlap fiscal periods. The
entire amount of the retroactive payment is reported in the year such amount
is received.
(5) Perquisites and other personal benefits, except those for Mr. Bernhard, have
not been disclosed in the "Other Annual Compensation" column since, in the
aggregate, they did not exceed the lesser of either $50,000 or 10% of the
total salary and bonus. As a result of Company record keeping procedures,
the amounts disclosed in the 1999, 1998 and 1997 columns for Mr. Bernhard
constitute total personal benefits for the calendar years of 1998, 1997 and
1996, respectively. Of the totals, $51,634, $49,616 and $37,909 represent
Mr. Bernhard's personal use of Company transportation for the calendar years
1998, 1997 and 1996, respectively.
(6) Denotes shares of Common Stock of the Company that may be purchased upon
exercise of options awarded pursuant to the Company's 1993 Employee Stock
Option Plan, as amended. The options awarded in 1998 to Mr. Bernhard to
purchase 35,000 shares of Common Stock have been cancelled and replaced by
the 1999 award of options to purchase 35,000 shares of Common Stock, which
award is included in the 200,000 shares reflected for 1999. The options to
purchase 25,000 shares of Common Stock awarded to Mr. Gill in 1997 have been
adjusted as follows: (i) options to purchase 18,750 shares of Common Stock
have been cancelled and replaced by options to purchase 18,750 shares
awarded in 1999 and (ii) options to purchase 6,250 shares of Common Stock
were repriced by adjusting during 1999 the exercise price of such options.
These options to purchase a total of 25,000 shares that have been either
awarded to replace outstanding options or which were the result of an
amendment to the exercise price of outstanding options are included in the
75,000 shares reflected for 1999. See "Ten-Year Option Repricings" below.
(7) Payments under the long-term incentive plan ("LTIP") with respect to awards
made during fiscal 1995.
(8) Represents the Company's contribution on behalf of the officers to the
Company's 401(k) plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding the grants of
options to purchase shares of the Company's
65
66
Common Stock that were made under the Company's 1993 Employee Stock Option Plan,
as amended, to any of the Company's Chief Executive Officer and the Named
Executive Officers during fiscal 1999:
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE
SECURITIES OPTIONS VALUE AT ASSUMED ANNUAL
UNDERLYING GRANTED TO EXERCISE RATE OF STOCK PRICE
OPTIONS EMPLOYEES IN PRICE APPRECIATION FOR OPTION
NAME GRANTED (1) FISCAL YEAR $/SHARES (2) EXPIRATION DATE TERM (2)
--------------------------
5% 10%
- -------------------------- ------------ -------------- ------------- ------------------ ------------ ------------
J. M. Bernhard, Jr. (3) 200,000 18% $ 8.38 October 19, 2008 $ 1,053,398 $ 2,669,519
G. Ray Wilkie, Jr 42,500 4% $ 8.38 October 19, 2008 $ 223,847 $ 567,273
Michael H. Wootton 30,000 3% $ 8.38 October 19, 2008 $ 158,010 $ 400,428
Richard F. Gill (4) 50,000 5% $ 8.38 October 19, 2008 $ 263,350 $ 667,380
Richard F. Gill (5) 6,250 1% $ 8.38 October 19, 2008 $ 32,919 $ 83,422
Richard F. Gill 18,750 2% $ 8.38 January 4, 2009 $ 98,756 $ 250,267
Robert L. Belk 75,000 7% $ 8.38 October 19, 2008 $ 395,024 $ 1,001,069
(1) The options are subject to the terms of the 1993 Employee Stock Option
Plan, as amended, and are generally exercisable in 25% annual installments
beginning one year from the date of grant.
(2) Based upon the closing price of a share of the Company's Common Stock
listed on the New York Stock Exchange on the date of award.
(3) Includes options to purchase 35,000 shares of Common Stock that replaced a
1998 award of options to purchase the same number of shares.
(4) Includes options to purchase 18,750 shares of Common Stock that replaced a
1997 award of options to purchase the same number of shares.
(5) Represents the repricing of options to purchase 6,250 shares of Common
Stock previously awarded in 1997.
FISCAL YEAR-END OPTION VALUES
The following table sets forth the value at August 31, 1999 of the
unexercised options held by any of the Chief Executive Officer and the Named
Executive Officers during fiscal 1999:
VALUE OF UNEXERCISED
NUMBER OF SHARES UNDERLYING IN-THE-MONEY OPTIONS AT FISCAL YEAR END
UNEXERCISED OPTIONS AT FISCAL YEAR-END --------------------------------------------
NAME EXERCISABLE / UNEXERCISABLE EXERCISABLE (1)(2) UNEXERCISABLE (2)(3)
- ---------------------------------- -------------------------------------- ------------------ -------------------
J. M. Bernhard, Jr 0 / 200,000 $ -- $2,425,000
G. Ray Wilkie, Jr 30,000 / 42,500 $ 412,500 $ 515,313
Michael H. Wootton 16,250 / 30,000 $ 237,656 $ 363,750
Richard F. Gill 6,250 / 68,750 $ 75,781 $ 833,594
Robert L. Belk 0 / 75,000 $ -- $ 909,375
(1) The exercise prices of the reported options range from $5.88 per share to
$8.38 per share with a weighted average exercise price of $6.67.
(2) The values are based upon the closing price reported on the New York Stock
Exchange of the Common Stock on August 31, 1999 ($20.50).
(3) The exercise prices of the reported options are $8.38 per share.
66
67
TEN-YEAR OPTION REPRICINGS
The following table sets forth information regarding the repricing of
options held by any of the Company's Chief Executive Officer and its other four
most highly compensated executive officers during the ten year period ended
August 31, 1999.
LENGTH OF
ORIGINAL TERM
MARKET PRICE OF REMAINING AT
NUMBER OF STOCK AT THE EXERCISE PRICE DATE OF
OPTIONS TIME OF AT TIME OF NEW EXERCISE AMENDMENT
NAME DATE AMENDED(#) AMENDMENT($) AMENDMENT($) PRICE($)
- ------------------- ------------- ------------ --------------- -------------- ------------- -------------
Michael H. Wootton 09/13/94 65,000(1) $ 11.50 $ 15.00 $ 11.50 12/07/03
Michael H. Wootton 11/30/94 65,000(1) $ 4.56 $ 11.50 $ 5.88(2) 09/13/04
Richard F. Gill 10/19/98 25,000 $ 8.38 $ 20.25 $ 8.38 03/20/07
J. M. Bernhard, Jr 10/19/98 35,000 $ 8.38 $ 24.00 $ 8.38 02/09/08
(1) These options were amended twice, such that the entries do not reflect
additional options, but two separate amendments to the same options held by
the Named Executive Officer.
(2) The book value of a share of the Company's Common Stock on August 31, 1994
was $5.83 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The persons serving as members of the Compensation Committee of the
Board of Directors during fiscal 1999 were John W. Sinders and David W. Hoyle.
No member of the Compensation Committee was an officer or employee of the
Company or any of its subsidiaries during fiscal 1999. No executive officer of
the Company served during fiscal 1999 as a director or as a member of the
Compensation Committee of another entity, one of whose executive officers served
as a director or on the Compensation Committee of the Company.
John W. Sinders, Jr., a director of the Company, was a managing
director of Jefferies & Company, Inc., an investment banking firm that handled
the repurchase of some of the shares of the Company's Common Stock which began
in fiscal 1999, earning $74,330 in commissions. Mr. Sinders is now Managing
Director of RBC Dominion Securities Corporation ("RBC"), also an investment
banking firm. On October 7, 1999, the Company filed a Registration Statement on
Form S-3 (Registration No. 333-88563) with the Securities and Exchange
Commission for an offering of 2.5 million shares of Common Stock. RBC is one of
the managing underwriters for this public offering.
DIRECTOR COMPENSATION
Each non-employee director of the Company receives a fee of $20,000 per
year and $1,000 for each meeting of the Company's Board of Directors attended.
Each non-employee director serving on a committee of the Board receives a fee of
$250 for each committee meeting attended. Directors are also reimbursed for
certain expenses in connection with their attendance at board and committee
meetings. In addition, pursuant to the Company's 1996 Non-Employee Director
Stock Option Plan (the "Director Plan"), each non-employee director serving as
of the effective date (July 14, 1996) of the Director Plan received an option to
purchase 5,000 shares of the Company's Common Stock. These options vest in 25%
increments in each of the four years following grant. In addition, each
non-employee director will be awarded an additional option to purchase 1,500
shares of the Company's Common Stock on an annual basis upon his or her election
or reelection to the Board. Such options will vest one year from the date of
award. The exercise price for all options granted under the Director Plan is the
closing price of a share of the Company's Common Stock reported on the New York
Stock Exchange on the date of award.
EMPLOYMENT AGREEMENTS
The Company and Mr. Bernhard are parties to an Employment Agreement
(the "Employment Agreement") pursuant to which Mr. Bernhard has agreed to serve
as the Company's President and Chief Executive Officer. The initial term of the
Employment Agreement expired on December 31, 1996, but was automatically
extended for a three-year period in accordance with provisions of the Employment
Agreement since neither party terminated the agreement in accordance with its
terms. As of August 21, 1997, the Company and Mr. Bernhard amended the
Employment Agreement to provide for a term expiring on December 31, 2007, with
automatic one-year extensions thereafter unless one of the parties notifies the
other in writing of his or its intention to terminate at least three months
prior to the relevant December 31st. The Employment Agreement, as amended,
provides that Mr. Bernhard will receive, among other things, an annual base
salary in the amount of $575,000 (subsequently adjusted to $650,000),
participation in the Company's bonus plan as determined by the Compensation
Committee of the Board of Directors and the inclusion of Mr. Bernhard in all
plans and programs of the Company which are made available to the Company's
executives and other salaried employees generally, including group life
insurance, accidental death and dismemberment insurance, hospitalization,
long-term disability, vacations and holidays. Mr. Bernhard is also entitled
under the Employment Agreement to other benefits in addition to those made
available to the Company's management, including providing him with acceptable
Company vehicles and other means of transportation for his personal use and
benefit.
67
68
In the event Mr. Bernhard's employment is terminated as a result of his
death or disability (as defined in the Employment Agreement), he or his legal
representative will receive, among other payments, all amounts owed under his
Employment Agreement as of the date of his death or disability. In the event Mr.
Bernhard's employment is terminated by the Company for Cause (as defined in the
Employment Agreement), Mr. Bernhard will receive all amounts owed to him under
his Employment Agreement as of the date of termination. In the event Mr.
Bernhard's employment is terminated by the Company other than for Cause, Mr.
Bernhard will receive a lump sum payment equal to the full amount payable under
the Employment Agreement.
In addition, the Company and Mr. Gill are parties to an Employment and
Non-Competition Agreement dated March 20, 1997 entered into in connection with
the acquisition of certain assets from Mr. Gill's businesses. See Item 13 -
"Certain Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents the beneficial ownership of the Company's
Common Stock, and the number of votes relating to the Common Stock, as of
September 30, 1999, by (1) each person, or group of affiliated persons, known by
the Company to own beneficially more than five percent of the Company's Common
Stock, (2) each of the Company's directors, (3) each of the Company's executive
officers, and (4) all of the Company's directors and executive officers as a
group. Unless stated otherwise, the persons or entities in this table have sole
voting and investment power with respect to all the shares of Common Stock owned
by them. The Company's articles of incorporation provide that each share of
Common Sock that has been held by the same person for at least four consecutive
years is entitled to five votes on each matter to be voted on at shareholders'
meetings, and all shares held for less than four years are entitled to one vote
per share for each matter. Accordingly, some of the Company's directors and
officers possess a number of votes in excess of their number of shares owned.
SHARES OWNED AND VOTES
---------------------------------------
NUMBER
OF VOTING
NAME OF OWNER SHARES PERCENT POWER
--------------- --------- --------- ---------
J.M. Bernhard, Jr.(1) 1,510,566 12.4% 34.6%
G. Ray Wilkie, Jr.(2) 342,363 2.7 7.4
Richard F. Gill(3) 85,938 * *
Albert McAlister(4) 75,802 * 1.7
Michael H. Wootton(5) 47,600 * *
George P. Bevan(6) 34,646 * *
John W. Sinders, Jr.(7) 23,750 * *
Robert L. Belk(8) 23,750 * *
David W. Hoyle(9) 19,250 * *
N. Andrew Dupuy, Jr.(10) 12,500 * *
L. Lane Grigsby(11) 12,600 * *
William H. Grigg(12) 3,500 * *
--------- ------- --------
All directors and executive officers (13) 2,192,265 17.8% 44.9%
========= ======= ========
- ---------------------
* less than 1%
(1) Includes 50,000 shares of which Mr. Bernhard may be deemed to be
beneficial owner as a result of rights that he may exercise to acquire
ownership within 60 days.
(2) Includes 40,625 shares of which Mr. Wilkie may be deemed to be beneficial
owner as a result of rights that he may exercise to acquire ownership
within 60 days.
(3) Includes 40,000 shares owned by a company in which Mr. Gill has an
ownership interest and 23,438 shares of which Mr. Gill may be deemed to be
beneficial owner as a result of rights that he may exercise to acquire
ownership within 60 days.
68
69
(4) Includes 6,750 shares of which Mr. McAlister may be deemed to be
beneficial owner as a result of rights that he may exercise to acquire
ownership within 60 days.
(5) Includes 23,750 shares of which Mr. Wootton may be deemed to be beneficial
owner as a result of rights that he may exercise to acquire ownership
within 60 days and 15,000 shares of which Mr. Wootton may vote, but not
sell or otherwise transfer until July 1, 2001.
(6) Includes 5,740 shares owned of record by Mr. Bevan's spouse and 28,906
shares of which Mr. Bevan may be deemed to be beneficial owner as a result
of rights that he may exercise to acquire ownership within 60 days.
(7) Includes 6,750 shares of which Mr. Sinders may be deemed to be beneficial
owner as a result of rights that he may exercise to acquire ownership
within 60 days.
(8) Includes 18,750 shares of which Mr. Belk may be deemed to be beneficial
owner as a result of rights that he may exercise to acquire ownership
within 60 days.
(9) Includes 3,000 shares owned of record by Mr. Hoyle's spouse and 6,750
shares of which Mr. Hoyle may be deemed to be beneficial owner as a result
of rights that he may exercise to acquire ownership within 60 days.
(10) Includes 12,500 shares of which Mr. Dupuy may be deemed to be beneficial
owner as a result of rights that he may exercise to acquire ownership
within 60 days.
(11) Includes 6,750 shares of which Mr. Grigsby may be deemed to be beneficial
owner as a result of rights that he may exercise to acquire ownership
within 60 days.
(12) Includes 1,500 shares of which Mr. Grigg may be deemed to be beneficial
owner as a result of rights that he may exercise to acquire ownership
within 60 days.
(13) Includes 8,740 shares owned of record by spouses of executive officers and
directors and 226,469 shares of which executive officers and directors may
be deemed to be the beneficial owners as a result of rights they may
exercise to acquire ownership within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 20, 1997, the Company acquired certain assets (including a
non-compete covenant) of MERIT Industrial Constructors, Inc. ("MERIT") and an
affiliated entity for approximately $1.3 million in cash, 22,500 shares of Shaw
Common Stock and the assumption of approximately $340,000 in debt. The
transaction was effected pursuant to an Asset Purchase, Non-Competition and
Consultation Agreement (the "Asset Purchase Agreement") among the Company, MERIT
and Richard F. Gill, as well as a Purchase Agreement between the Company and an
affiliate of Mr. Gill and MERIT. The Asset Purchase Agreement contains certain
representations, warranties and covenants by MERIT and Mr. Gill, including a
two-year non-compete agreement. The Asset Purchase Agreement also contains an
agreement by Mr. Gill to provide certain consulting services to the Company for
a period of five years.
The Company, in connection with the foregoing, entered into a lease
with an affiliate of MERIT and Mr. Gill for an office building and related real
estate located in Baton Rouge, Louisiana. The lease was for a five-year term at
a monthly rental of $5,400. The lease contained an option to purchase the office
building and related real estate in favor of the Company, for which option the
Company paid 40,000 shares of Common Stock. This option to purchase the office
building and related real estate was exercised in fiscal 1999. Also, in
connection with the transaction, Mr. Gill and an affiliate placed the 62,500
shares of Shaw Common Stock in escrow to cover potential claims by the Company
for indemnity pursuant to the Asset Purchase Agreement. The escrow arrangement
is for a period of two years or until all claims for indemnity made during such
period have been disposed. Furthermore, the Company entered into an Employment
and Non-Competition Agreement with Mr. Gill whereby the Company agreed to employ
Mr. Gill for a two-year period at an annual salary of $200,000 (subsequently
raised). The agreement also provides for an agreement by Mr. Gill not to compete
with the Company for a period of two years following termination of employment.
In connection with the employment of Mr. Gill, the Company also awarded to him
options to purchase 25,000 shares of Shaw Common Stock pursuant to the terms of
the Company's 1993 Employee Stock Option Plan. The options had an exercise price
of $20.25 per share and were exercisable in 25% increments on each of March
69
70
20, 1998, 1999, 2000 and 2001, based upon continual employment. During fiscal
1999, options to purchase 18,750 of these shares were cancelled and replaced and
the exercise price of the options to purchase the remaining 6,250 shares was
amended. See "Ten-Year Option Repricings" above.
John W. Sinders, Jr., a director of the Company, was a managing
director of Jefferies & Company, Inc., an investment banking firm that handled
the repurchase of some of the shares of the Company's Common Stock which began
in fiscal 1999, earning $74,330 in commissions. Mr. Sinders is now Managing
Director of RBC Dominion Securities Corporation ("RBC"), also an investment
banking firm. On October 7, 1999, the Company filed a Registration Statement on
Form S-3 (Registration No. 333-88563) with the Securities and Exchange
Commission for an offering of 2.5 million shares of Common Stock. RBC is one of
the managing underwriters for this public offering.
The Company has, from time to time, made loans to certain of its
executive officers and/or entities in which such persons have a material
interest. Each such loan in which the indebtedness exceeded $60,000 at any time
since the beginning of fiscal 1999 is listed below with the following
information indicated for each: (i) the name of the borrower; (ii) the nature of
the borrower's relationship with the Company' (iii) the largest amount of
indebtedness outstanding at any time since the beginning of fiscal 1999; (iv)
the nature of the loan and of the transaction in which it was incurred; (v) the
amount outstanding as of September 30, 1999; and (vi) the interest rate charges
thereon.
(i) MERIT Industrial Constructors, Inc. ("MERIT"); (ii)
controlled by Richard F. Gill, an executive officer of the Company;
(iii) $500,000; (iv) made in connection with the acquisition by the
Company of certain assets of MERIT; (v) $500,000; (vi) 8%.
(i) Richard F. Gill; (ii) executive officer of the Company;
(iii) $837,500 (iv) made in connection with Mr. Gill's employment; (v)
$837,500; (vi) 8%.
(i) George P. Bevan; (ii) executive officer of the Company;
(iii) $130,000; (iv) made in connection with Mr. Bevan's employment;
(v) $51,210; (vi) 0% on $26,666 and 8.5% on 24,544.
The Company imputes interest on the loan with a 0% interest rate to Mr. Bevan at
the applicable federal rate and includes such amount in his compensation for
federal income purposes.
70
71
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
See Item 8 of Part II of this report.
2. Financial Statement Schedules.
3. Exhibits.
*3.1 Restatement of the Articles of Incorporation of the
Company dated December 10, 1993.
*3.2 Amended and Restated By-Laws of the Company dated
December 9, 1993.
**4.1 Specimen Common Stock Certificate.
***10.1 Credit Agreement dated May 15, 1998 among the Company,
Mercantile Business Credit, Inc., City National Bank of
Baton Rouge, Hibernia National Bank and Union Planters
Bank of Louisiana.
@10.2 Amendment to Credit Agreement made as of August 31,
1998 among the Company, Mercantile Business Credit
Inc., City National Bank of Baton Rouge, Hibernia
National Bank and Union Planters Bank of Louisiana.
+10.3 Second Amendment to Credit Agreement made as of
February 1, 1999, among the Company, Mercantile
Business Credit Inc., Bank One Louisiana, N.A.
(successor of First National Bank of Commerce, assignee
of City National Bank of Baton Rouge), Hibernia
National Bank and Union Planters Bank of Louisiana.
+10.4 Third Amendment to Credit Agreement made as of August
31, 1999, among the Company, Mercantile Business Credit
Inc., Bank One Louisiana, N.A. (successor of First
National Bank of Commerce, assignee of City National
Bank of Baton Rouge), Hibernia National Bank and Union
Planters Bank of Louisiana.
***10.5 Note Purchase Agreement dated May 21, 1998.
****10.6 1993 Employee Stock Option Plan, as amended and
restated.
**10.7 Employment Agreement by and between the Company and
James M. Bernhard, Jr.
**10.8 Joint Venture Agreement of Shaw-Nass Middle East,
W.L.L. dated November 18, 1993, by and among Shaw
Overseas (Cayman), Ltd., Abdulla Ahmed Nass and the
Company.
++10.9 Plan and Agreement of Merger, dated as of August 5,
1996, among the shareholders of NAPTech, Inc.
("NAPTech"), NAPTech, The Shaw Group Inc. and SAON,
Inc., as amended by the First amendment to Plan and
Agreement of Merger dated as of January 27, 1997.
++10.10 Purchase and Sale Agreement dated as of January 27,
1997, among the members of Freeport Properties, L.C.
("Freeport"), Freeport, The Shaw Group Inc. and SAON
Properties, Inc.
+++10.11 1996 Non-Employee Director Stock Option Plan.
++++16.1 Letter from Hannis T. Bourgeois, LLP, Consenting to the
Form 8-K Current Report.
+21.1 Subsidiaries of the Company.
+24.1 Powers of Attorney.
+27 Financial Data Schedule
-------------
* Incorporated by reference from the Company's Form 10-K for the
fiscal year ended August 31, 1994, as amended.
** Incorporated by reference from the Company's Registration
Statement on Form S-1 filed October 22, 1993, as amended
(Registration Number 33-70722).
*** Incorporated by reference from the Company's Form 10-Q for the
quarterly period ended May 31, 1998.
**** Incorporated by reference from the Company's Form 10-K for the
fiscal year ended August 31, 1997.
+ Filed herewith.
++ Incorporated by reference from the Company's Current Report on
Form 8-K dated February 11, 1997, as amended by Amendment No.1
to Current Report on Form 8-K/A-1 dated April 9, 1997.
+++ Incorporated by reference from the Company's Registration
Statement on Form S-8 filed on September 24, 1997
(Registration Number 333-36315).
++++ Incorporated by reference from the Company's Current Report on
Form 8-K dated September 22, 1999.
71
72
@ Incorporated by reference from the Company's Form 10-K for the
fiscal year ended August 31, 1998.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on September 22, 1999, to report
a change in the Company's independent public accountants. The Company engaged
Arthur Andersen LLP ("AA"), New Orleans, Louisiana, as its sole independent
auditor for the fiscal year ended August 31, 1999. Previously, the Company
engaged both Hannis T. Bourgeois, LLP ("HTB") and AA as its independent
auditors. The single jointly signed audit report by HTB and AA was considered to
be the equivalent of two separately signed auditors' reports. Thus, previously
each firm represented that it had complied with generally accepted auditing
standards and was in a position that would justify it being the only signatory
of the report. Given Shaw's expansion of its overseas operations, HTB believes
it would be unable to continue to make this representation after fiscal 1998.
Therefore, HTB decided to resign as one of Shaw's independent auditors effective
September 22, 1999.
During the period from September 1, 1996, through the date hereof,
there have been no disagreements on accounting principles or practices,
financial statement disclosure or auditing scope or procedure between the
Company and AA or HTB.
72
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE SHAW GROUP INC.
/s/ J. M. Bernhard, Jr.
-----------------------------------
By: J. M. Bernhard, Jr.
President and Chief Executive Officer
Date: November 3, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ J. M. Bernhard, Jr. Chairman of the Board, November 3, 1999
- --------------------------- President and Chief
(J. M. Bernhard, Jr.) Executive Officer
/s/ Robert L. Belk Executive Vice President, Chief Financial
- --------------------------- Officer and Chief Accounting Officer November 3, 1999
(Robert L. Belk)
*
- --------------------------- Director November 3, 1999
(Albert McAlister)
*
- --------------------------- Director November 3, 1999
(L. Lane Grigsby)
*
- --------------------------- Director November 3, 1999
(David W. Hoyle)
*
- --------------------------- Director November 3, 1999
(John W. Sinders, Jr.)
*
- --------------------------- Director November 3, 1999
(William H. Grigg)
* By: /s/ Robert L. Belk November 3, 1999
----------------------
Robert L. Belk
Attorney-in-Fact
73
74
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*3.1 Restatement of the Articles of Incorporation of the
Company dated December 10, 1993.
*3.2 Amended and Restated By-Laws of the Company dated
December 9, 1993.
**4.1 Specimen Common Stock Certificate.
***10.1 Credit Agreement dated May 15, 1998 among the Company,
Mercantile Business Credit, Inc., City National Bank of
Baton Rouge, Hibernia National Bank and Union Planters
Bank of Louisiana.
@10.2 Amendment to Credit Agreement made as of August 31,
1998 among the Company, Mercantile Business Credit
Inc., City National Bank of Baton Rouge, Hibernia
National Bank and Union Planters Bank of Louisiana.
+10.3 Second Amendment to Credit Agreement made as of
February 1, 1999, among the Company, Mercantile
Business Credit Inc., Bank One Louisiana, N.A.
(successor of First National Bank of Commerce, assignee
of City National Bank of Baton Rouge), Hibernia
National Bank and Union Planters Bank of Louisiana.
+10.4 Third Amendment to Credit Agreement made as of August
31, 1999, among the Company, Mercantile Business Credit
Inc., Bank One Louisiana, N.A. (successor of First
National Bank of Commerce, assignee of City National
Bank of Baton Rouge), Hibernia National Bank and Union
Planters Bank of Louisiana.
***10.5 Note Purchase Agreement dated May 21, 1998.
****10.6 1993 Employee Stock Option Plan, as amended and
restated.
**10.7 Employment Agreement by and between the Company and
James M. Bernhard, Jr.
**10.8 Joint Venture Agreement of Shaw-Nass Middle East,
W.L.L. dated November 18, 1993, by and among Shaw
Overseas (Cayman), Ltd., Abdulla Ahmed Nass and the
Company.
++10.9 Plan and Agreement of Merger, dated as of August 5,
1996, among the shareholders of NAPTech, Inc.
("NAPTech"), NAPTech, The Shaw Group Inc. and SAON,
Inc., as amended by the First amendment to Plan and
Agreement of Merger dated as of January 27, 1997.
++10.10 Purchase and Sale Agreement dated as of January 27,
1997, among the members of Freeport Properties, L.C.
("Freeport"), Freeport, The Shaw Group Inc. and SAON
Properties, Inc.
+++10.11 1996 Non-Employee Director Stock Option Plan.
++++16.1 Letter from Hannis T. Bourgeois, LLP, Consenting to the
Form 8-K Current Report.
+21.1 Subsidiaries of the Company.
+24.1 Powers of Attorney.
+27 Financial Data Schedule
- ----------
* Incorporated by reference from the Company's Form 10-K for the
fiscal year ended August 31, 1994, as amended.
** Incorporated by reference from the Company's Registration
Statement on Form S-1 filed October 22, 1993, as amended
(Registration Number 33-70722).
*** Incorporated by reference from the Company's Form 10-Q for the
quarterly period ended May 31, 1998.
**** Incorporated by reference from the Company's Form 10-K for the
fiscal year ended August 31, 1997.
+ Filed herewith.
++ Incorporated by reference from the Company's Current Report on
Form 8-K dated February 11, 1997, as amended by Amendment No.1
to Current Report on Form 8-K/A-1 dated April 9, 1997.
+++ Incorporated by reference from the Company's Registration
Statement on Form S-8 filed on September 24, 1997
(Registration Number 333-36315).
++++ Incorporated by reference from the Company's Current Report on
Form 8-K dated September 22, 1999.
@ Incorporated by reference from the Company's Form 10-K for the
fiscal year ended August 31, 1998.