UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number
June 30, 2002 000-23943
PETER KIEWIT SONS', INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1842817
(State of Incorporation) (I.R.S. Employer Identification No.)
Kiewit Plaza, Omaha Nebraska 68131
(Address of principal executive offices) (Zip Code)
(402) 342-2052
(Registrant's telephone number, including area code)
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 [ ]
The number of shares outstanding of each of the registrant's
classes of common stock as of August 14, 2002:
Title of Class Shares Outstanding
Common Stock, $0.01 par value 31,058,535
_______________________________________________________________________________
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Index
Page
_______________________________________________________________________________
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements. 1
Consolidated Condensed Statements of Earnings for the
three and six months ended June 30, 2002 and 2001 2
Consolidated Condensed Balance Sheets as of June 30, 2002
and December 29, 2001 3
Consolidated Condensed Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk. 19
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings. 20
Item 6. Exhibits and Reports on Form 8-K. 20
Signatures 20
i
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Peter Kiewit Sons', Inc.:
We have reviewed the consolidated condensed balance sheet of Peter Kiewit
Sons', Inc. and subsidiaries as of June 30, 2002, and the related
consolidated condensed statements of earnings for the three and six month
periods ended June 30, 2002, and the consolidated condensed statement of cash
flows for the six month period ended June 30, 2002. These consolidated
condensed financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated condensed financial statements referred to
above for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Peter Kiewit Sons', Inc. and subsidiaries as of December 29, 2001, and the
related consolidated statements of earnings, changes in redeemable common
stock and comprehensive income, and cash flows for the year then ended (not
presented herein); and in our report dated March 15, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated condensed
balance sheet as of December 29, 2001, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
(signed) KPMG LLP
Omaha, Nebraska
August 14, 2002
1
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(dollars in millions,
except per share data) 2002 2001 2002 2001
_______________________________________________________________________________
Revenue $ 878 $ 968 $ 1,687 $ 1,940
Cost of revenue (764) (893) (1,512) (1,819)
---- ---- ------ ------
114 75 175 121
General and administrative expenses (50) (44) (101) (92)
Gain on sale of operating assets 4 7 14 11
---- ---- ----- -----
Operating earnings 68 38 88 40
Other income (expense):
Investment (losses) income and
equity earnings (2) 4 (9) 9
Interest expense - (1) (1) (1)
Other, net 2 4 6 7
---- ---- ----- -----
- 7 (4) 15
---- ---- ----- -----
Earnings before income taxes and
minority interest 68 45 84 55
Minority interest in net earnings
of subsidiaries - - - (1)
Provision for income taxes (28) (18) (34) (22)
---- ---- ----- -----
Net earnings $ 40 $ 27 $ 50 $ 32
==== ==== ===== =====
Net earnings per share:
Basic $1.37 $ .91 $ 1.69 $ 1.08
==== ==== ===== =====
Diluted $1.30 $ .88 $ 1.61 $ 1.04
==== ==== ===== =====
See accompanying notes to consolidated condensed financial statements.
2
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
June 30 December 29,
2002 2001
(dollars in millions) (unaudited)
_______________________________________________________________________________
Assets
Current assets:
Cash and cash equivalents $ 88 $ 216
Investments 113 108
Receivables, less allowance of $7 and $7 452 544
Unbilled contract revenue 160 115
Contract costs in excess of related revenue 41 41
Investment in construction joint ventures 180 112
Deferred income taxes 75 59
Other 25 12
----- -----
Total current assets 1,134 1,207
Property, plant and equipment, less accumulated
depreciation and amortization of $448 and $446 325 285
Other assets 102 102
----- -----
$1,561 $1,594
===== =====
Liabilities and Redeemable Common Stock
Current liabilities:
Accounts payable, including retainage
of $62 and $63 $ 199 $ 242
Current portion of long-term debt 1 1
Accrued costs on construction contracts 228 154
Billings in excess of related costs and earnings 108 145
Accrued insurance costs 71 65
Accrued payroll 24 32
Other 25 39
----- -----
Total current liabilities 656 678
Long-term debt, less current portion 25 25
Deferred income taxes 37 30
Accrued reclamation 10 10
Minority interest - 16
Preferred stock, no par value, 250,000 shares
authorized, no shares outstanding - -
Redeemable common stock ($627 million and $679 million
aggregate redemption value):
Common stock, $.01 par value, 125 million shares
authorized 29,722,885 and 31,588,125 outstanding - -
Additional paid-in capital 193 206
Accumulated other comprehensive loss (11) (11)
Retained earnings 651 640
----- -----
Total redeemable common stock 833 835
----- -----
$1,561 $1,594
===== =====
See accompanying notes to consolidated condensed financial statements.
3
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(unaudited)
Six Months Ended
June 30,
----------------
(dollars in millions) 2002 2001
______________________________________________________________________________
Cash flows from operations:
Net cash provided by operations $ 23 $ 55
----- -----
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 10 3
Proceeds from maturities of available-for-sale securities 2 1
Purchases of available-for-sale securities (22) -
Purchases of other investments - (20)
Proceeds from sales of property, plant and equipment 20 15
Acquisitions (17) -
Capital expenditures (83) (53)
Additions to notes receivable - (1)
Payments received on notes receivable 1 -
----- -----
Net cash used in investing activities (89) (55)
----- -----
Cash flows from financing activities:
Issuance of common stock - 27
Repurchases of common stock (41) (47)
Dividends paid (21) (19)
----- -----
Net cash used in financing activities (62) (39)
----- -----
Net decrease in cash and cash equivalents (128) (39)
Cash and cash equivalents at beginning of period 216 302
----- -----
Cash and cash equivalents at end of period $ 88 $ 263
===== =====
See accompanying notes to consolidated condensed financial statements.
4
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
1. Basis of Presentation:
The consolidated condensed balance sheet of Peter Kiewit Sons', Inc. (the
"Company") at December 29, 2001 has been condensed from the Company's audited
balance sheet as of that date. All other financial statements contained herein
are unaudited and, in the opinion of management, contain all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of financial position and results of operations and cash flows for
the periods presented. The Company's accounting policies and certain other
disclosures are set forth in the notes to the consolidated financial
statements contained in the Company's Annual Report on Form 10-K.
The results of operations for the three and six months ended June 30, 2002 are
not necessarily indicative of the results to be expected for the full year.
When appropriate, items within the consolidated condensed financial statements
have been reclassified in the previous periods to conform to current year
presentation.
2. Acquisitions:
On July 31, 2001, a subsidiary of the Company merged with General Construction
Company ("GCC") a marine construction business located in Poulsbo, Washington,
pursuant to which the Company acquired 100% of the outstanding common stock of
GCC for $48 million. The results of GCC's operations have been included in the
consolidated financial statements since that date. The merger occurred as part
of the Company's plan to expand its businesses.
The following table summarizes the estimated fair value of the GCC assets
acquired and liabilities assumed at the date of acquisition.
As of
(dollars in millions) July 31, 2001
______________________________________________________________________________
Current assets $ 28
Property and equipment 36
Non-tax deductible goodwill 18
-----
Total assets acquired 82
-----
Current liabilities 20
Long-term debt 5
Deferred taxes 9
-----
Total liabilities assumed 34
-----
Net assets acquired $ 48
=====
On June 28, 2002, a subsidiary of the Company acquired the remaining 20%
minority interest in ME Holding Inc. ("ME"), an electrical subcontractor
located in Boston, Massachusetts. The initial payment for such minority
interest was $16.6 million. The final purchase price will be determined by
the parties based upon the financial results of ME as of June 30, 2002 when
additional information becomes available.
5
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements - (Continued)
2. Acquisitions, Continued:
The following unaudited, pro-forma financial information assumes the GCC and
ME acquisitions occurred at the beginning of 2001. These results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisition been made at the beginning of
2001, or the results which may occur in the future.
Three Months Ended Six Months Ended
June 30, June 30
------------------ ----------------
(dollars in millions) 2002 2001 2002 2001
_______________________________________________________________________________
Revenue $ 878 $ 993 $1,687 $1,993
===== ===== ===== =====
Net earnings $ 41 $ 27 $ 51 $ 32
===== ===== ===== =====
Net earnings per share:
Basic $ 1.39 $ .91 $ 1.69 $ 1.07
===== ===== ===== =====
Diluted $ 1.32 $ .87 $ 1.62 $ 1.03
===== ===== ===== =====
3. Earnings Per Share:
Basic earnings per share has been computed using the weighted average number of
shares outstanding during each period. Diluted earnings per share gives effect
to convertible debentures considered to be dilutive common stock equivalents.
The potentially dilutive convertible debentures are calculated in accordance
with the "if converted" method. This method assumes that the after-tax
interest expense associated with the debentures is an addition to income and
the debentures are converted into equity with the resulting common shares being
aggregated with the weighted average shares outstanding.
Three Months Ended Six Months Ended
June 30, June 30
------------------ ----------------
(dollars in millions) 2002 2001 2002 2001
_______________________________________________________________________________
Net earnings available to common
stockholders (in millions) $ 40 $ 27 $ 50 $ 32
Add: Interest expense, net of tax
effect, associated with convertible
debentures * * * *
------ ------ ------ ------
Net earnings for diluted shares $ 40 $ 27 $ 50 $ 32
====== ====== ====== ======
Total number of weighted average shares
outstanding used to compute basic
earnings per share (in thousands) 29,767 29,697 29,875 29,778
Additional dilutive shares assuming
conversion of convertible debentures 1,614 1,367 1,616 1,367
------ ------ ------ ------
Total number of shares used to compute
diluted earnings per share 31,381 31,064 31,491 31,145
====== ====== ====== ======
Net earnings:
Basic earnings per share $ 1.37 $ .91 $ 1.69 $ 1.08
====== ====== ====== ======
Diluted earnings per share $ 1.30 $ .88 $ 1.61 $ 1.04
====== ====== ====== ======
* Interest expense attributable to convertible debentures was less than $.5
million
6
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements - (Continued)
4. Financial Instruments:
Receivables at June 30, 2002 and December 29, 2001 include approximately $125
million and $155 million, respectively, of retainage on uncompleted projects,
the majority of which is expected to be collected within one year.
Included in the retainage amounts are $45 million and $59 million,
respectively, of securities which are being held by the owners of various
construction projects in lieu of retainage, which are not yet due. Securities
in the amount of $35 million and $36 million, respectively, are carried at fair
value which is determined based on quoted market prices for the securities on
hand or for similar investments. Net unrealized holding gains and losses, if
any, are reported as a separate component of accumulated other comprehensive
income, net of tax. Securities in the amount of $10 million and $23 million,
respectively, relate to stock warrants which are carried at fair value. Such
fair value is based on a valuation model. Unrealized gains and losses are
recognized as a component of investment income in the Consolidated Condensed
Statements of Earnings.
Also included in accounts receivable are $1 million and $1 million,
respectively, of securities held by the owners which are now due as the
contracts are completed.
5. Goodwill and Intangible Assets:
Amortizable intangibles consist of the following at June 30, 2002 and
December 29, 2001:
June 30, 2002 December 29, 2001
--------------------------- ---------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
(dollars in millions) Amount Amortization Amount Amortization
_______________________________________________________________________________
Coal contracts $ 59 $ (7) $ 59 $ (5)
Other 3 - 3 -
----- ----- ----- -----
$ 62 $ (7) $ 62 $ (5)
===== ===== ===== =====
Amortization expense recognized on intangibles for the three months ended
June 30, 2002 and 2001 were $1 million and $1 million, respectively. For the
six months ended June 30, 2002 and 2001, amortization expense recognized on
intangibles were $2 million and $2 million, respectively.
Future amortization expense is estimated to be $4 million for each of the
fiscal years ended 2002-2006.
Goodwill increased $1 million to $26 million at June 30, 2002 from the net
carrying amount of $25 million at December 29, 2001. The increase is
estimated goodwill on the ME acquisition described in Note 2.
7
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
5. Goodwill and Intangible Assets, Continued:
Following are net earnings and earnings per share as adjusted for the adoption
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets":
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(dollars in millions, except per
share data) 2002 2001 2002 2001
_______________________________________________________________________________
Reported net earnings $ 40 $ 27 $ 50 $ 32
Add back: Goodwill amortization,
net of tax - 1 - 1
----- ----- ----- -----
Adjusted net earnings $ 40 $ 28 $ 50 $ 33
===== ===== ===== =====
Basic earnings per share:
Reported net earnings $ 1.37 $ .91 $ 1.69 $ 1.08
Goodwill amortization, net of tax - .01 - .01
----- ----- ----- -----
Adjusted basic earnings per share $ 1.37 $ .92 $ 1.69 $ 1.09
===== ===== ===== =====
Diluted earnings per share:
Reported net earnings $ 1.30 $ .88 $ 1.61 $ 1.04
Goodwill amortization, net of tax - .01 - .01
----- ----- ----- -----
Adjusted diluted earnings per share $ 1.30 $ .89 $ 1.61 $ 1.05
===== ===== ===== =====
8
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements - (Continued)
6. Comprehensive Income:
Comprehensive income includes net income, unrealized gains (losses) on
securities and foreign currency translation adjustments which are charged or
credited to the cumulative translation account within Redeemable Common Stock.
Comprehensive income for the three and six months ended June 30, 2002 and 2001
is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
(dollars in millions) 2002 2001 2002 2001
_______________________________________________________________________________
Net earnings $ 40 $ 27 $ 50 $ 32
Other comprehensive income,
before tax:
Unrealized gains (losses)
arising during period (3) 3 (5) (1)
Foreign currency translation
adjustments 3 - 3 -
Income tax benefit (expense)
related to items of other
comprehensive income - (1) 1 -
----- ----- ----- -----
Comprehensive income $ 40 $ 29 $ 49 $ 31
===== ===== ===== =====
7. Segment Data:
The Company primarily operates in the construction industry and currently has
one reportable operating segment. The Construction segment performs services
for a broad range of public and private customers primarily in North America.
Construction services are performed in the following construction markets:
transportation (including highways, bridges, airports, railroads and mass
transit), commercial buildings, water supply, sewage and waste disposal, dams,
mining, power, telecommunication infrastructure, heating and cooling, and oil
and gas.
Intersegment sales are recorded at cost. Operating earnings is comprised of
net sales less all identifiable operating expenses, allocated general and
administrative expenses, gain on sale of operating assets, depreciation and
amortization. Investment income, interest expense and income taxes have been
excluded from segment operations. The management fee earned by the Company for
mine management and related coal mining operations services is excluded from
the segment information that follows as it is included in other income on the
Statement of Earnings and not included in operating earnings. Segment asset
information has not been presented as it is not reported to or reviewed by the
chief operating decision maker.
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------ ------------------
(dollars in millions) Construction Other Construction Other
_______________________________________________________________________________
Revenue - external customers $ 868 $ 10 $ 958 $ 10
===== ===== ===== =====
Operating earnings $ 65 $ 3 $ 36 $ 2
===== ===== ===== =====
9
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements - (Continued)
7. Segment Data, Continued:
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------------- -------------------
(dollars in millions) Construction Other Construction Other
_______________________________________________________________________________
Revenue - external customers $1,665 $ 22 $1,920 $ 20
===== ===== ===== =====
Operating earnings $ 81 $ 7 $ 35 $ 5
===== ===== ===== =====
During the three and six months ended June 30, 2001, the Company earned 25.3%
and 27.5%, respectively, of revenues from Level 3 Communications, Inc. This
project was substantially complete at the end of 2001.
8. Other Matters:
Materials Spin-Off:
On September 30, 2000, the Company distributed all of the 32,288,840 shares of
common stock ("Materials Stock") of its former subsidiary, Kiewit Materials
Company ("Materials"), it then held to stockholders of the Company in a Spin-
off (the "Materials Spin-off"). As a result of the Materials Spin-off, the
Company and Materials now operate as two separate independent companies.
In connection with the Materials Spin-off, Materials and the Company entered
into various agreements including a Separation Agreement (the "Materials
Separation Agreement") and a Tax Sharing Agreement (the "Materials Tax Sharing
Agreement").
The Materials Separation Agreement provides for the allocation of certain risks
and responsibilities between Materials and the Company and for cross-
indemnifications that are intended to allocate financial responsibility to the
Company for liabilities arising out of the construction business and to
allocate to Materials liabilities arising out of the Materials Businesses. On
July 9, 2002, Materials, Jem Lear Acquisition Company, Inc. ("Purchaser") and
Rinker Materials Corporation entered into an Agreement and Plan of Merger
("Merger Agreement") pursuant to which Purchaser would merge into Materials
(the "Merger") subsequent to the completion of Purchaser's tender offer to
purchase at least 90% of the issued and outstanding Materials Stock. In
connection with the execution of the Merger Agreement, and in consideration of
the payment of $150,000 to the Company by Materials at the effective time of
the Merger, the Company and Materials entered into an Amendment to Separation
Agreement pursuant to which: (i) the Company agreed to continue to provide
certain administrative services to Materials and its subsidiaries for a period
of time subsequent to the effective time of the Merger; (ii) the Company agreed
to provide Materials with a transition period of up to six months following the
effective time of the Merger to continue to use the name (Kiewit) as part of
the name (Kiewit Materials Company); (iii) the Company and Materials agreed to
use their respective best efforts to amend an existing Cement Purchase
Agreement between Kiewit Construction Group Inc. and California Portland Cement
Company to release Kiewit Construction Group Inc. of its obligations under such
agreement; (iv) the Company agreed to indemnify Materials from certain kinds of
claims made by or on behalf of stockholders or former stockholders of Materials
relating to sales of Materials Stock by such stockholders; and (v) a subsidiary
of the Company would acquire certain real property owned by a subsidiary of
Materials on or prior to the effective time of the Merger.
10
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements - (Continued)
8. Other Matters, Continued:
Under the Materials Tax Sharing Agreement, with respect to periods, or portions
thereof, ending on or before the Materials Spin-off, Materials and the Company
generally will be responsible for paying the taxes relating to such returns,
including any subsequent adjustments resulting from the redetermination of
such tax liabilities by the applicable taxing authorities, that are allocable
to the materials business and construction business, respectively. The
Materials Tax Sharing Agreement also provides that Materials and the Company
will indemnify the other from certain taxes and expenses that would be assessed
if the Materials Spin-off were determined to be taxable, but solely to the
extent that such determination arose out of the breach by Materials or the
Company, respectively, of certain representations made to the Internal
Revenue Service in connection with the private letter ruling issued with respect
to the Materials Spin-off.
Other:
On April 25, 2001, Bibb and Associates, Inc. ("Bibb"), a subsidiary of the
Company, was served with a complaint (the "Complaint") filed in the Circuit
Court of Jackson County, Missouri (the "Court"), in an action brought by Kansas
City Power & Light ("KCPL") with respect to a January 13, 1999 explosion at
KCPL's Hawthorn No. 5 power plant. The Complaint lists a total of 13
defendants, and generally alleges as to Bibb, strict liability, negligence,
professional gross negligence, fraud, negligent misrepresentation and
wrongful inducement to contract. The Complaint also names the Company, and
alleges that the Company is either the alter ego of Bibb or the successor to
Bibb's liability. The Complaint alleges damages in excess of $450 million
including property damage, costs of replacement of power and lost profits. On
October 18, 2001, the Company filed a motion to dismiss the action for lack of
personal jurisdiction. During February 2002, the Company's motion was
overruled, pending the results of final discovery on the issue of jurisdiction,
and the Court ordered the parties to proceed with such discovery.
The Company believes that the factual allegations and legal claims asserted
against Bibb and the Company by KCPL are without merit and intends to
vigorously defend them.
The Company is involved in various other lawsuits and claims incidental to its
business. Management believes that any resulting liability, beyond that
provided, should not materially affect the Company's financial position, future
results of operations or future cash flows.
It is customary in the Company's industry to use various financial instruments
in the normal course of business. These instruments include items such as
letters of credit. Letters of credit are conditional commitments issued on
behalf of the Company in accordance with specified terms and conditions. The
Company has informal arrangements with a number of banks to provide such
commitments. As of June 30, 2002, the Company had outstanding letters of
credit of approximately $247 million.
11
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PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements - (Continued)
9. Recent Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143 (SFAS 143),
"Accounting for Asset Retirement Obligations". SFAS 143 applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) the normal operation
of a long-lived asset. The provisions of SFAS 143 will be effective for fiscal
years beginning after June 15, 2002. Under SFAS 143: (1) retirement
obligations, measured at fair value, will be recognized when they are incurred
and displayed as liabilities, and (2) the associated asset retirement costs
will be capitalized as part of the carrying amount of the long-lived asset and
subsequently allocated to expense over the asset's useful life.
The Company does not anticipate the adoption of SFAS No. 143 to have a material
effect on its consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144 (SFAS 144), "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes both FASB
Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-lived Assets to be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30 (Opinion 30), "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
for the disposal of a segment of a business (as previously defined in that
Opinion). SFAS 144 retains the fundamental provisions in SFAS 121 for
recognizing and measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS 121. For example, SFAS
144 provides guidance on how a long-lived asset that is used as part of a group
should be evaluated for impairment, establishes criteria for when a long-lived
asset is held for sale, and prescribes the accounting for a long-lived asset
that will be disposed of other than by sale. SFAS 144 retains the basic
provisions of Opinion 30 on how to present discontinued operations in the
income statement but broadens that presentation to include a component of an
entity (rather than a segment of a business). Unlike SFAS 121, an impairment
assessment under SFAS 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under SFAS No. 142, "Goodwill and
Other Intangible Assets".
The Company adopted SFAS 144 this year. Adoption of SFAS 144 has not had a
material impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The
Company does not anticipate that adoption of SFAS No. 145 will result in any
material changes to its financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting For Costs Associated
with Exit or Disposal Activities. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company does not
anticipate that adoption of SFAS No. 146 will result in any material changes to
its financial position or results of operations.
12
_______________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This document contains forward looking statements and information that are
based on the beliefs of management as well as assumptions made by and
information currently available to the Company. When used in this document,
the words "anticipate," "believe," "estimate," "expect" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks
or uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this document.
Results of Operations - Second Quarter 2002 vs. Second Quarter 2001
Revenue.
Revenue for the second quarter of 2002 consisted of $622 million from sole
contracts, $246 million from joint ventures and $10 million from other sources.
Total revenues decreased $90 million or 9% from the same period in 2001. The
decrease was primarily attributed to a $228 million reduction in revenue earned
on a significant fiber optic project for the second quarter of 2002 from the
same period in 2001. This project was substantially complete at the end of
2001. Partially offsetting the decrease were increases in other sole contract
projects of $25 million and joint venture projects of $113 million. These
increases are primarily attributed to projects awarded to the Company during
the years 2001 and 2002.
Contract backlog at June 30, 2002 increased to $4.6 billion from $4.2
billion at December 29, 2001. Foreign operations, located primarily in Canada,
represent 6.7% of backlog. Domestic projects are spread geographically
throughout the U.S. The Company's share of a highway contract in Colorado and
a bridge contract in California makes up 17% and 14%, respectively, of total
backlog.
Margin.
Margins for the second quarter of 2002 consisted of $79 million from sole
contracts, $31 million from joint ventures and $4 million from other sources.
Total margin increased $39 million or 52% from the same period in 2001.
Construction margin, as a percentage of revenue, excluding the significant
fiber optic project, for the second quarter of 2002 increased to 12.5% compared
to 5.6% for the same period in 2001. The increased margin is primarily
attributable to a reduction in sole contract and joint venture losses for the
second quarter of 2002 and increased margins earned on power projects. Margins
on a significant fiber optic project decreased $30 million for the second
quarter of 2002 as compared to the same period in 2001. This project was
substantially complete at the end of 2001.
General and Administrative Expenses.
General and administrative expenses for the second quarter of 2002
increased $6 million to $50 million compared to the same period in 2001. As a
percentage of revenue, general and administrative expenses for the second
quarter of 2002 increased to 5.7% compared to 4.5% for the same period in 2001.
This increase was primarily attributed to the general and administrative
expenses of a marine construction operation in Washington State acquired on
July 31, 2001, a $2 million contribution to a charitable foundation and the
fact that the Company has not experienced a proportionate decrease in general
and administrative costs relative to its decrease in revenue. Historically,
contributions to the charitable foundation have been made in the fourth quarter
of each fiscal year.
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Gain on Sale of Operating Assets.
Net gains on the disposition of property, plant and equipment and other
assets decreased to $4 million during the second quarter of 2002 from $7
million the same period in 2001. Several large pieces of equipment were sold
in the second quarter of 2001, resulting in the decreased gain compared to the
same period in 2002.
Investment Income and Equity Earnings, net.
Investment income and equity earnings decreased $6 million for the second
quarter of 2002 from the same period in 2001. During the second quarter 2002,
the Company recognized a $3 million unrealized holding loss on its investment
in stock warrants acquired in December 2001. The Company also experienced a
decline in interest rates earned on money market and bond funds from
approximately 1.2% for the second quarter of 2001 to approximately 0.4% for the
same period in 2002. Another contributing factor was the change in the
Company's portfolio mix from primarily interest-bearing money market funds
during the second quarter 2001 to a diversified portfolio that includes bond
and stock mutual funds that primarily recognize changes in market value as a
separate component of accumulated other comprehensive income.
Other, net.
Other income is comprised primarily of mine management fee income. Fees
for these services for the second quarter of 2002 and 2001 were each $1
million. The Company's fee is a percentage of adjusted operating earnings of
coal mines managed, as defined in a mine management agreement. The mines earn
the majority of their revenues under long-term contracts. The remainder of
the mines' sales are made on the spot market where prices are substantially
lower than those of the long-term contracts.
Provision for income taxes.
The effective income tax rate for the three months ended June 30, 2002 and
2001 was 40%. This rate differs from the federal statutory rate of 35%
primarily due to state income taxes.
Results of operations - Six Months 2002 vs. Six Months 2001
Revenue.
Revenue for the six months ended June 30, 2002 consisted of $1,230 million
from sole contracts, $435 million from joint ventures and $22 million from
other sources. Total revenues decreased $253 million or 13% from the same
period in 2001. The decrease was primarily attributed to a $475 million
reduction in revenue earned on a significant fiber optic project for the six
months ended June 30, 2002 from the same period in 2001. This project was
substantially complete at the end of 2001. Partially offsetting the decrease
were increases in other sole contract projects of $59 million and joint venture
projects of $161 million. These increases are primarily attributed to projects
awarded to the Company during the years 2001 and 2002.
Margin.
Margins for the six months ended June 30, 2002 consisted of $113 million
from sole contracts, $53 million from joint ventures and $9 million from other
sources. Total margin increased $54 million or 45% from the same period in
2001. Construction margin, as a percentage of revenue, excluding the
significant fiber optic project, for the six months ended June 30, 2002
increased to 8.7% compared to 6.6% in 2001. The increased margin is primarily
attributable to a reduction in joint venture losses and increased margins
earned on power projects for the six months ended June 30, 2002. Margins on a
significant fiber optic project decreased $27 million for the six months ended
June 30, 2002 as compared to the same period in 2001. This project was
substantially complete at the end of 2001.
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General and Administrative Expenses.
General and administrative expenses for the six months ended June 30, 2002
increased $9 million to $101 million compared to the same period in 2001. As a
percentage of revenue, general and administrative expenses for the six months
ended June 30, 2002 increased to 6.0% compared to 4.7% for the same period in
2001. This increase was primarily attributed to the acquisition of a marine
construction operation in Washington State on July 31, 2001, a $2 million
contribution to a charitable foundation and the fact that the Company has not
experienced a proportionate decrease in general and administrative costs
relative to its decrease in revenue.
Gain on Sale of Operating Assets.
Net gains on the disposition of property, plant and equipment and other
assets increased to $14 million during the six months ended June 30, 2002 from
$11 million the same period in 2001. The increase was due to additional sales
of excess construction equipment.
Investment Income and Equity Earnings, net.
Investment income and equity earnings decreased $18 million for the six
months ended June 30, 2002 from the same period in 2001. During the six months
ended June 30, 2002, the Company recognized a $12 million unrealized holding
loss on its investment in stock warrants acquired in December 2001. The
Company also experienced a decline in interest rates earned on money market and
bond funds from approximately 2.6% for the six months ended June 30, 2001 to
approximately 0.9% for the same period in 2002. Another contributing factor
was the change in the Company's portfolio mix from primarily interest-bearing
money market funds during the second quarter 2001 to a diversified portfolio
that includes bond and stock mutual funds that primarily recognize changes in
market value as a separate component of accumulated other comprehensive income.
Other, net.
Other income is comprised primarily of mine management fee income. Fees
for these services for the six months ended June 30, 2002 and 2001 were each $3
million. The Company's fee is a percentage of adjusted operating earnings of
coal mines managed, as defined in a mine management agreement. The mines earn
the majority of their revenues under long-term contracts. The remainder of the
mines' sales are made on the spot market where prices are substantially lower
than those of the long-term contracts.
Provision for income taxes.
The effective income tax rate for the six months ended June 30, 2002 and
2001 was $40%. This rate differs from the federal statutory rate of 35%
primarily due to state income taxes
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Financial Condition - June 30, 2002 vs. December 29, 2001
Cash and cash equivalents decreased $128 million to $88 million at
June 30, 2002 from $216 million at December 29, 2001. The decrease reflects
net cash provided by operations of $23 million; offset by net cash used in
investing activities of $89 million and $62 million used in financing
activities.
Net cash provided by operating activities for the six months ended
June 30, 2002 decreased by $32 million to $23 million as compared to the same
period in 2001. This decrease was primarily due to increased working capital
requirements for construction contracts, increased net contributions to
investment in construction joint ventures of $37 million and increased federal
income taxes paid of $35 million as compared to the same period in 2001.
Accounts receivable decreased $92 million to $452 million at June 30, 2002 from
$544 million at December 29, 2001 primarily due to $70 million cash received on
a settlement reached in December 2001. Cash provided or used by operating
activities is affected to a large degree by the mix, timing, stage of
completion and terms of individual contracts which are reflected in changes
through current assets and liabilities.
Net cash used in investing activities for the six months ended June 30,
2002 increased by $34 million to $89 million as compared to the same period in
2001. This increase was due primarily to an increase of cash used for higher
capital expenditures of $30 million, predominately related to the continued
development of an operating office in Texas, purchases of available-for-sale
securities of $22 million and the acquisition of minority interest in ME of $17
million. This increase was primarily offset by a decrease in purchases of
other investments of $20 million, additional proceeds from sales of securities
of $7 million and sales of property, plant and equipment of $5 million.
Capital spending varies due to the nature and timing of jobs awarded.
Acquisitions depend largely on market conditions.
Net cash used in financing activities for the six months ended June 30,
2002 increased by $23 million to $62 million as compared to the same time
period in 2001. This increase was primarily due to a reduction in issuances of
common stock of $27 million. Common stock historically has been issued in
June, but was issued in August during 2002.
Liquidity.
The Company continues to explore opportunities to expand and develop new
businesses and anticipates investing between $50 and $100 million annually to
expand its operations. Other long-term liquidity uses include the payment of
income taxes and the payment of dividends. As of June 30, 2002, the Company
had no material firm binding purchase commitments related to its investments
other than meeting the normal course of business needs of its construction
joint ventures. The current portion of long-term debt is $1 million. The
Company paid dividends during the six months ended June 30, 2002 and 2001 of
$21 million and $19 million, respectively. These amounts were determined by
the Board of Directors and were paid in January and May of each such year.
The Company also has the commitment to repurchase Common Stock at any time
during the year from shareholders.
The Company's current financial condition, together with anticipated cash
flows from operations, should be sufficient for immediate cash requirements and
future investing activities. The Company does not presently have any committed
bank credit facilities. In the past, the Company has been able to borrow on
terms satisfactory to it. The Company believes that, to the extent necessary,
it will likewise be able to borrow funds on acceptable terms for the
foreseeable future.
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Critical Accounting Policies.
Revenue Recognition - Construction Contracts:
The Company operates as a general contractor throughout North America and
engages in various types of construction projects for both public and private
owners. Credit risk is minimal with public (government) owners since the
Company ascertains that funds have been appropriated by the governmental
project owner prior to commencing work on public projects. Most public
contracts are subject to termination at the election of the government.
However, in the event of termination, the Company is entitled to receive the
contract price on completed work and reimbursement of termination-related
costs. Credit risk with private owners is minimized because of statutory
mechanics liens, which give the Company high priority in the event of lien
foreclosures following financial difficulties of private owners.
The construction industry is highly competitive and lacks firms with
dominant market power. A substantial portion of the Company's business
involves construction contracts obtained through competitive bidding. A
company's ability to bid on new projects is affected by many factors, including
its ability to obtain performance bonds. Currently, the Company has not
experienced, nor does management anticipate, any problems securing performance
bonds on future projects. The volume and profitability of the Company's
construction work depends to a significant extent upon the general state of the
economies of North America and the volume of work available to contractors.
The Company's construction operations could be adversely affected by labor
stoppages or shortages, adverse weather conditions, shortages of supplies or
other governmental action.
The Company uses the percentage of completion method of accounting on
long-term construction contracts. For fixed-price construction contracts, an
estimated percentage of completion for each contract, as determined by the
Company's engineering estimate based on the amount of work performed, is
applied to total estimated revenue. For cost-plus construction contracts, the
percentage of completion, based upon costs incurred divided by projected costs,
is applied to total estimated profit. Provision is made for the entire amount
of future estimated losses on construction contracts in progress; claims for
additional contract compensation, however, are not reflected in the accounts
until the period in which such claims are settled. Revisions in cost and
profit estimates during the course of the work are reflected in the accounting
period in which the facts which require the revision become known. It is at
least reasonably possible that cost and profit estimates will be revised in the
near-term.
In accordance with industry practice, amounts realizable and payable under
contracts which may extend beyond one year are included in current assets and
liabilities.
Investments:
The Company continually evaluates its investments for other than temporary
declines in value. Several factors are analyzed in evaluating investments,
including an analysis of the relevant company, its industry, valuation levels
and subsequent developments. Unrealized losses that are determined to be other
than temporary are recognized in earnings.
Included in accounts receivable retainage are securities in the amount of
$10 million that relate to stock warrants which are carried at fair value.
Such fair value is estimated based on a valuation model. Unrealized gains and
losses are recognized as a component of investment income in the Consolidated
Statement of Earnings.
Construction Joint Ventures:
The Company has entered into a number of construction joint venture
arrangements which are accounted for under the equity method in the balance
sheet and on a pro rata basis in the statement of earnings. Under these
arrangements, if one venturer is financially unable to bear its share of the
costs, the other venturers will be required to pay those costs.
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Property, Plant and Equipment:
Property, plant and equipment are recorded at cost. Depreciation for the
majority of the Company's property, plant and equipment is calculated using
accelerated methods. The estimated useful lives of the Company's property,
plant and equipment are as follows:
Buildings 5 - 39 years
Equipment 3 - 20 years
A change in depreciation methods or estimated useful lives could have a
significant impact to earnings.
Accrued Insurance Costs:
The Company is self-insured for certain general, auto and worker's
compensation claims, and accrues for the estimated ultimate liability for
incurred losses, both reported and unreported. The Company bases its estimate
of loss on historic trends modified for recent events. It is at least
reasonably possible that the estimate of ultimate liability will be revised in
the near-term.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk.
The Company holds a diversified portfolio of investments that includes
cash, high quality commercial paper of maturities less than 90 days, U.S.
Government debt obligations and money market, stock and bond mutual funds and
stock warrants. Except for cash, each of these investments is subject, in
varying degrees, to market risks, interest rate risks, economic risks and
credit risks. These risks, among others, can result in loss of principal. The
majority of the Company's investments consist of holdings in a money market
mutual fund.
In addition, the Company is a limited partner in an investment limited
partnership (the "Partnership"). The investment objective of the Partnership
is to generate current income and capital appreciation while minimizing the
potential for loss of principal. The Partnership may use a variety of
investment strategies with the principal one being merger arbitrage. In
general, a merger arbitrage strategy involves purchasing the stock of a
company being acquired or merging with another company and selling short the
stock of the acquiring company. A particular merger arbitrage transaction will
either derive a profit or a loss depending on the price differential between
the price of the securities when purchased and the price ultimately realized
when the transaction is completed. The primary risk is that a loss could
result if the transaction is not completed. The Partnership invests in a
diversified portfolio of these types of transactions to minimize risk of loss.
Stock warrants are accounted for under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities". The value of the warrants is
primarily based on the volatility of the underlying stock, the price of the
underlying stock and the time period until the warrants expire. The risk to
the value of the stock warrants predominately relates to the potential change
in volatility and price of the underlying stock.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material changes in the legal proceedings reported in
the Company's previously filed quarterly report on Form 10-Q for the period
ended March 31, 2002.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
15.1 Letter re unaudited interim financial information
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
PETER KIEWIT SONS', INC.
Date: August 14, 2002
/s/ Michael J. Piechoski
-------------------------
Michael J. Piechoski
Vice President and Principal
Financial Officer
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