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
September 30, 2003 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 [ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes [X] No [ ]
The number of shares outstanding of each of the
registrant's classes of common stock as of November 13, 2003:
Title of Class Shares Outstanding
Common Stock, $0.01 par value 30,242,689
PETER KIEWIT SONS', INC.
Index
Page
- ---------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Statements of Earnings
for the three and nine months ended
September 30, 2003 and 2002 2
Consolidated Condensed Balance Sheets as of
September 30, 2003 and December 28, 2002 3
Consolidated Condensed Statements of Cash
Flows for the nine months ended
September 30, 2003 and 2002 4
Notes to Consolidated Condensed Financial
Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 12
Item 3. Quantitative and Qualitative Disclosure about
Market Risk. 15
Item 4. Controls and Procedures. 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 17
Item 6. Exhibits and Reports on Form 8-K. 17
Signatures 17
i
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 September 30,
2003, and the related consolidated condensed statements of
earnings for the three and nine month periods ended September
30, 2003 and 2002, and the consolidated condensed statements of
cash flows for the nine month periods ended September 30, 2003
and 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 28, 2002, 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
February 28, 2003, 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 28, 2002, 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
November 13, 2003
1
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Earnings
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in millions, except per share data)
Revenue $ 904 $ 1,132 $ 2,613 $ 2,819
Cost of revenue (799) (959) (2,343) (2,471)
------- ------- ------- -------
105 173 270 348
General and administrative expenses (58) (49) (173) (150)
Gain on sale of operating assets 6 1 15 15
------- ------- ------- -------
Operating income 53 125 112 213
Other income (expense):
Investment income and equity
earnings, net 2 3 12 (6)
Interest expense (5) (1) (6) (2)
Other, net 2 4 6 10
------- ------- ------- -------
(1) 6 12 2
------- ------- ------- -------
Income before income taxes and cumulative
effect of change in accounting
principle 52 131 124 215
Provision for income taxes (20) (52) (48) (86)
Cumulative effect of change in accounting
principle, net of tax - - 3 -
------- ------- ------- -------
Net income $ 32 $ 79 $ 79 $ 129
======= ======= ======= =======
Basic earnings per share:
Income before cumulative effect of change in
accounting principle $ 1.12 $ 2.59 $ 2.63 $ 4.30
Cumulative effect of change in
accounting principle - - .10 -
------- ------- ------- -------
Net income $ 1.12 $ 2.59 $ 2.73 $ 4.30
======= ======= ======= =======
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle $ 1.08 $ 2.46 $ 2.53 $ 4.10
Cumulative effect of change in
accounting principle - - .10 -
------- ------- ------- -------
Net income $ 1.08 $ 2.46 $ 2.63 $ 4.10
======= ======= ======= =======
See accompanying notes to consolidated condensed financial statements.
2
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
September 30,
2003 December 28,
(unaudited) 2002
------------- ------------
(dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 287 $ 275
Investments 116 111
Receivables, including retainage of $137 and $152
and net of allowance of $8 and $13 469 554
Unbilled contract revenue 135 128
Contract costs in excess of related revenue 52 59
Investment in construction joint ventures 212 258
Deferred income taxes 70 45
Other 25 22
-------- --------
Total current assets 1,366 1,452
Property, plant and equipment, less accumulated
depreciation and amortization of $501 and $480 350 327
Other assets 93 97
-------- --------
$ 1,809 $ 1,876
======== ========
LIABILITIES AND REDEEMABLE COMMON STOCK
Current liabilities:
Accounts payable, including retainage of
$69 and $67 $ 226 $ 248
Current portion of long-term debt 10 -
Accrued costs on construction contracts 203 195
Billings in excess of related costs and earnings 174 217
Accrued insurance costs 73 66
Accrued payroll 38 37
Other 27 53
-------- --------
Total current liabilities 751 816
Long-term debt, less current portion 15 24
Deferred income taxes 41 31
Accrued reclamation 6 10
Minority interest 1 -
Preferred stock, no par value, 250,000 shares authorized,
no shares outstanding - -
Redeemable common stock ($763 million and $849 million aggregate
redemption value):
Common stock, $.01 par value, 125 million shares authorized
28,514,303 and 31,288,355 outstanding - -
Additional paid-in capital 203 223
Accumulated other comprehensive loss (1) (9)
Retained earnings 793 781
-------- --------
Total redeemable common stock 995 995
-------- --------
$ 1,809 $ 1,876
======== ========
See accompanying notes to consolidated condensed financial statements.
3
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
-----------------------
2003 2002
------ ------
(dollars in millions)
Cash flows from operations:
Net cash provided by operations $ 150 $ 11
------- -------
Cash flows from investing activities:
Proceeds from sales of available-for-sale
securities - 10
Proceeds from maturities of available-for-sale
Securities - 2
Purchases of available-for-sale securities (2) (23)
Proceeds from sale of stock warrants 22 -
Payments received on notes receivable 4 4
Proceeds from sales of property, plant and equipment 23 22
Acquisitions, net of cash acquired - (17)
Capital expenditures (95) (100)
------- -------
Net cash used in investing activities (48) (102)
------- -------
Cash flows from financing activities:
Payments on long-term debt - (1)
Issuances of common stock - 29
Repurchases of common stock (76) (42)
Dividends paid (22) (21)
Other 1 -
------- -------
Net cash used in financing activities (97) (35)
------- -------
Effect of exchange rates on cash 7 -
------- -------
Net increase (decrease) in cash and cash equivalents 12 (126)
Cash and cash equivalents at beginning of period 275 216
------- -------
Cash and cash equivalents at end of period $ 287 $ 90
======= =======
Non-cash investing activities:
Stock warrants returned to owner as part of a
contract settlement 3 -
Non-cash financing activities:
Owner account receivable converted to note
receivable 2 -
See accompanying notes to consolidated condensed financial statements.
4
PETER KIEWIT SONS', INC.
Notes to Consolidated Condensed Financial Statements
1. Basis of Presentation:
The consolidated condensed balance sheet of Peter Kiewit Sons', Inc.
("PKS", which together with its subsidiaries is referred to herein as
the "Company") at December 28, 2002 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. Management believes that the
disclosures are adequate to make the information presented not
misleading.
The Company became aware of accounting errors that occurred during 2002
on two construction contracts. The errors resulted in an understatement
of 2002 net income of less than $1 million. The Company has corrected
the errors during the nine months ended September 30, 2003. One
correction decreased net income by $4 million during the first quarter
of 2003 and the second correction increased net income by $5 million
during the third quarter of 2003. The Company does not believe that the
corrections of these errors are material to 2002 operations nor will
they be material to 2003 operations. Excluding these adjustments, net
income for the three and nine months ended September 30, 2003 was $27
and $78 million.
The results of operations for the nine months ended September 30, 2003
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. Recent Accounting Pronouncements:
In April 2002, the Financial Accounting Standards Board "FASB" issued
Statement of Financial Accounting Standards "SFAS" No. 145 (SFAS 145),
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. The Company adopted SFAS
145 in 2003. Adoption of SFAS 145 did not have an impact on the
Company's financial statements.
In July 2002, the FASB issued Statement of Financial Accounting
Standards SFAS No. 146 (SFAS 146), "Accounting For Costs Associated with
Exit or Disposal Activities." The Company adopted SFAS 146 in 2003.
Adoption of SFAS 146 did not have an impact on the Company's financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
elaborates on existing disclosure requirements for most guarantees,
including standby letters of credit. It also clarifies that guarantees
must be recognized as an initial liability for fair value, or market
value, of the obligations assumed under the guarantee and that this
information must be disclosed in interim and annual financial
statements. FIN 45 applies on a prospective basis to guarantees issued
or modified after December 31, 2002. The Company adopted FIN 45 in
2003. The adoption of FIN 45 did not have an impact on the Company's
financial statements.
5
PETER KIEWIT SONS', INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
2. Recent Accounting Pronouncements, Continued:
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 addresses the
consolidation of variable interest entities in which the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties, or the equity investors lack one or more of the essential
characteristics of a controlling financial interest. FIN 46 requires
enterprises to consolidate and disclose existing unconsolidated variable
interest entities in which they are the primary beneficiaries if the
entities do not effectively disperse risk among the parties involved.
FIN 46 also requires disclosures by an enterprise holding significant
interests in variable interest entities in which it is not a primary
beneficiary. FIN 46 applies immediately to variable interest entities
created or in which interest is obtained after January 31, 2003. FIN 46
applies in the first fiscal year or interim period beginning after
December 15, 2003, to variable interest entities in which an interest
was acquired before February 1, 2003. The Company is currently
assessing the impact of the adoption of FIN 46 on those entities
acquired before February 1, 2003. No significant interests in entities
have been acquired after January 31, 2003. The Company does not
anticipate the adoption of FIN 46 to have a material effect on its
consolidated financial position or results of operations. The
preliminary assessment is that the Company's investment in construction
joint ventures does not qualify as a variable interest entity.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("SFAS 150"). This Statement establishes standards for how
certain financial instruments with characteristics of both liabilities
and equity are classified and measured by the issuer. SFAS 150 will be
effective for the Company's next fiscal year beginning December 28,
2003. The aggregate redemption value of the Company's mandatorily
redeemable common stock will be required to be presented as a liability.
Changes in the aggregate redemption value of mandatorily redeemable
common stock will be recorded as a charge to the income statement and
will effectively eliminate net income.
3. Acquisitions:
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 payment for such minority
interest was $17 million. Proforma effects of the ME acquisition were
not material to the results of operations for the three and nine months
ended September 30, 2002.
6
PETER KIEWIT SONS', INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
4. Change in Accounting Principle:
Effective December 29, 2002, the Company adopted, as required, the
provisions of Statement of Financial Accounting Standards No. 143 (SFAS
143), "Accounting for Asset Retirement Obligations." SFAS 143
establishes new reporting standards of accounting for the Company's
reclamation liability associated with its coal mining operation. The new
reporting standards require retirement obligations to be measured at
fair value and displayed as a liability when incurred. Associated asset
retirement costs are capitalized as part of the carrying amount of long-
lived assets and subsequently are expensed over the assets' useful
lives. Prior to implementing SFAS 143, reclamation liability was
provided without regard to the time value of money.
The cumulative effect of implementing SFAS 143 resulted in an increase
in net income of $3 million or $.10 per share for the nine months ended
September 30, 2003.
The following unaudited pro forma information reflects the Company's
results for the three and nine months ended September 30, 2003 and 2002
as if the change had been retroactively applied:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
(dollars in millions, except per share data)
Net income $ 32 $ 79 $ 76 $ 129
====== ====== ====== ======
Net earnings per share:
Basic $ 1.12 $ 2.58 $ 2.63 $ 4.28
====== ====== ====== ======
Diluted $ 1.08 $ 2.46 $ 2.53 $ 4.08
====== ====== ====== ======
The following unaudited, pro-forma financial information reflects the
Company's reclamation liability at December 28, 2002 as if the change
had been retroactively applied:
December 28,
2002
----------------
(dollars in millions)
Reported reclamation liability, current and
noncurrent $ 11
Adjustment for SFAS 143 (5)
--------------
Adjusted reclamation liability, current and
Noncurrent $ 6
==============
Reclamation liabilities incurred, reclamation performed subject to SFAS
143 and accretion expense were each less than $.5 million for the nine
months ended September 30, 2003.
7
PETER KIEWIT SONS', INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
5. 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 Nine Months Ended
September 30, September 30,
---------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
(dollars in millions, except per share data)
Net income available to common
stockholders $ 32 $ 79 $ 79 $ 129
Add: Interest expense, net of tax effect,
associated with convertible
debentures * 1 * 1
----- ----- ----- ------
Net income for diluted shares $ 32 $ 80 $ 79 $ 130
===== ===== ===== ======
Total number of weighted average shares outstanding used
to compute basic earnings per share
(in thousands) 28,546 30,471 28,746 30,074
Additional dilutive shares assuming
conversion of convertible
debentures 1,256 1,612 1,267 1,615
----- ----- ----- ------
Total number of shares used to compute
diluted earnings per share 29,802 32,083 30,013 31,689
====== ====== ====== ======
Net income:
Basic earnings per share $ 1.12 $ 2.59 $ 2.73 $ 4.30
===== ===== ===== =====
Diluted earnings per share $ 1.08 $ 2.46 $ 2.63 $ 4.10
===== ===== ===== =====
* Interest expense attributable to convertible debentures was less
than $.5 million
8
PETER KIEWIT SONS', INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
6. Goodwill and Intangible Assets:
Amortized intangibles consist of the following at September 30, 2003 and
December 28, 2002:
September 30, 2003 December 28, 2002
----------------------- -----------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------- --------------- ------------
(dollars in millions)
Coal contracts $ 59 $ (12) $ 59 $ (9)
Other 3 - 3 -
------ ------- ------ -------
$ 62 $ (12) $ 62 $ (9)
======= ========= ======== =========
For the three months ended September 30, 2003 and 2002, amortization
expense recognized on intangibles was $1 million and $1 million,
respectively. Amortization expense recognized on intangibles for the
nine months ended September 30, 2003 and 2002 was $3 million and $3
million, respectively.
There were no changes in goodwill during the nine months ended
September 30, 2003 from the net carrying amount of $27 million at
December 28, 2002.
7. 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 nine
months ended September 30, 2003 and 2002 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
2003 2002 2003 2002
------ ------ ------ ------
(dollars in millions)
Net income $ 32 $ 79 $ 79 $ 129
Other comprehensive income, before tax:
Unrealized gains (losses) arising
during period (3) (1) 2 (6)
Foreign currency translation
adjustments 5 (5) 10 (2)
Income tax (expense) benefit related to
items of other comprehensive
income (1) 2 (5) 3
------ ------ ------ ------
Comprehensive income $ 33 $ 75 $ 86 $ 124
====== ====== ====== ======
9
PETER KIEWIT SONS', INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
8. 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, mass transit and rail); power,
heat, cooling; commercial buildings; sewage and solid waste; water
supply/dams; petroleum; mining; and telecommunication infrastructure.
Sources of revenue for the "other" category consist primarily of the
Company's coal sales.
Intersegment sales are recorded at cost. Operating income 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 Consolidated Statement
of Earnings and not included in operating income. 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
September 30, 2003 September 30, 2002
-------------------- --------------------
Construction Other Construction Other
------------ ----- ------------ -----
(dollars in millions)
Revenue - external customers $ 892 $ 12 $ 1,121 $ 11
========= ===== ========= =====
Depreciation and amortization $ 18 $ 3 $ 20 $ 2
========= ===== ========= =====
Operating income $ 51 $ 2 $ 123 $ 2
========= ===== ========= =====
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
-------------------- --------------------
Construction Other Construction Other
------------ ----- ------------ -----
(dollars in millions)
Revenue - external customers $ 2,578 $ 35 $ 2,786 $ 33
========= ===== ========== =====
Depreciation and amortization $ 56 $ 13 $ 54 $ 7
========= ===== ========== =====
Operating income $ 105 $ 7 $ 204 $ 9
========= ===== ========== =====
10
PETER KIEWIT SONS', INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
9. Other Matters:
On November 19, 2002, a suit was filed in the District Court, City and
County of Broomfield, Colorado for an unspecified amount of damages by
Gary Haegle, derivatively on behalf of Level 3 Communications, Inc.
("Level 3"), against Walter Scott, Jr., James Q. Crowe, R. Douglas
Bradbury, Charles C. Miller, III, Kevin V. O'Hara, Mogens C. Bay,
William L. Grewcock, Richard Jaros, Robert E. Julian, David C. McCourt,
Kenneth E. Stinson, Michael B. Yanney, Colin V. K. Williams
(collectively, the "Level 3 Directors") and PKS. The suit alleges that
the Level 3 Directors breached their fiduciary duty with respect to
various transactions between Level 3 and PKS, and that PKS aided and
abetted the Level 3 Directors in their alleged breach of fiduciary duty.
The suit also alleges that PKS exercised improper control over certain
of the Level 3 Directors. PKS believes that the factual allegations and
legal claims made against it are without merit and intends to vigorously
defend them.
As previously disclosed, on August 7, 2003, BBC-MEC, a Joint Venture
(the "Joint Venture"), and its two joint venture partners, including
Mass. Electric Construction Co., a subsidiary of PKS, received "target
letters" from the U.S. Department of Justice and the United States
Attorney for the District of Connecticut ("DOJ"), notifying the Joint
Venture and its joint venture partners that each is a target of a
criminal investigation in connection with a certain portion of the work
performed by the Joint Venture to electrify a high speed rail line from
New Haven, Connecticut, to Boston, Massachusetts. The target letters
specified potential violations of various federal statutes based on
allegations of misconduct in connection with a portion of the work, and
invited the parties to meet with the DOJ and attempt to resolve the
matter. The parties did meet on October 23, 2003, and the DOJ was
provided with pertinent information that it might not have otherwise
previously considered in its investigation. The Joint Venture and its
joint venture partners also agreed to cooperate in further testing of
certain portions of the work. The Joint Venture and its joint venture
partners continue to believe they have not violated any law in
connection with the work. The DOJ is also conducting a parallel civil
investigation relating to certain proposed change orders and
modifications that were issued in conjunction with the work. Again, the
Joint Venture and its joint venture partners believe that the change
orders and modifications are appropriate and in accordance with the
contract's terms and conditions, and are cooperating in the
investigation. The Company is currently unable to determine the impact
of these investigations upon the future financial position, results of
operations or cash flows of either the Company or the Joint Venture.
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.
During the nine months ended September 30, 2003, the Company recognized
additional operating income from $16 million of claim settlements on
sole contract and joint venture projects. During the nine months ended
September 30, 2003, the Company also recognized additional operating
income from a $23 million reduction in a sole contract job loss after an
agreement was reached with the project owner.
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 September 30, 2003,
the Company had outstanding letters of credit of approximately $152
million.
10. Subsequent Event:
On October 15, 2003, the Company sold its interest in an investment
limited partnership for $18 million. The carrying value of the
investment at September 30, 2003 was $18 million.
11
PETER KIEWIT SONS', INC.
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 - Third Quarter 2003 vs. Third Quarter 2002
Revenue.
Revenue for the third quarter of 2003 consisted of $627 million from
sole contracts, $265 million from joint ventures and $12 million from other
sources, primarily coal sales. Total revenues decreased $228 million or
20.1% from the same period in 2002. The decrease was primarily attributable
to the completion of significant projects located in Canada and the southwest
and southeast regions of the United States.
Contract backlog was $3.6 billion and $4.2 billion at September 30, 2003
and December 28, 2002, respectively. The decrease in backlog is primarily
due to less new work awarded during the nine months ended September 30, 2003
than the historical average for the same period. Backlog included $2.2
billion for sole contracts and $1.4 billion for the Company's share of joint
ventures at September 30, 2003. Foreign operations, located primarily in
Canada, represent 6.9% of backlog at September 30, 2003. Domestic projects
are spread geographically throughout the U.S. The Company's share of a
highway contract in Colorado and bridge contracts in California and
Washington make up 40% of total backlog at September 30, 2003.
Margin.
Margins for the third quarter of 2003 consisted of $71 million from sole
contracts, $30 million from joint ventures and $4 million from other sources.
Total margin decreased $68 million or 39.3% from the same period in 2002.
Total margin as a percentage of revenue for the third quarter of 2003
decreased to 11.6% compared to 15.3% in 2002. The decreased margin
percentage is primarily attributable to a decrease in claim settlements and
significant increases in job cost overruns. The margin decreases were
partially offset by a reduction in job losses.
General and Administrative Expenses.
General and administrative expenses for the third quarter of 2003
increased $9 million from the same period in 2002. As a percentage of
revenue, general and administrative expenses for the third quarter of 2003
increased to 6.4% compared to 4.3% for the same period in 2002. Overall, the
Company experienced an increase in general and administrative expenses,
primarily compensation and travel, as a result of several operating offices
expanding to markets outside of their previous territories and an increase in
profit sharing expense.
Gain on Sale of Operating Assets.
Net gains on the disposition of property, plant and equipment and other
assets during the third quarter of 2003 increased $5 million from the same
period in 2002. Gain on sale of operating assets is affected to a large
degree by market conditions and the specific types and quantity of pieces of
equipment sold.
12
Investment Income and Equity Earnings, net.
Investment income and equity earnings decreased $1 million for the third
quarter of 2003 from the same period in 2002. During the third quarter 2002,
the Company recognized a $4 million unrealized holding gain on an investment
in stock warrants which was partially offset by a $2 million unrealized
holding loss on an investment in an investment limited partnership.
Interest Expense.
During the third quarter of 2003, the Company recognized $4 million of
look back interest expense (interest related to the timing of revenue
recognition for income tax purposes for completed construction projects).
Other, net.
Other income is comprised primarily of mine management fee income. The
Company's fee is a percentage of adjusted operating income of coal mines
managed, as defined in a mine management agreement. Fees for these services
for the third quarter of 2003 and 2002 were $1 million and $2 million,
respectively.
Provision for Income Taxes.
The effective income tax rates for the third quarter of 2003 and 2002
were 39% and 40%, respectively. In 2002, the rate differs from the federal
statutory rate of 35% primarily due to state income taxes and costs
capitalized for tax purposes in anticipation of a corporate conversion to a
limited partnership. In 2003, the rate decreased as the Company abandoned
its pursuit of a potential conversion to a limited partnership and expects to
deduct the accumulated costs during 2003 which were previously capitalized
for tax purposes.
Results of Operations - Nine Months 2003 vs. Nine Months 2002
Revenue.
Revenue for the nine months ended September 30, 2003 consisted of $1,751
million from sole contracts, $827 million from joint ventures and $35 million
from other sources, primarily coal sales. Total revenues decreased $206
million or 7.3% from the same period in 2002. The decrease was primarily
attributable to the completion of significant projects located in Canada and
the southwest and southeast regions of the United States.
Margin.
Margins for the nine months ended September 30, 2003 consisted of $174
million from sole contracts, $83 million from joint ventures and $13 million
from other sources. Total margin decreased $78 million or 22.4% from the
same period in 2002. Total margin as a percentage of revenue for the nine
months ended September 30, 2003 decreased to 10.3% compared to 12.3% in 2002.
The decreased margin percentage is primarily attributable to an increase in
job losses. The margin decreases were partially offset by an increase in
claim settlements.
General and Administrative Expenses.
General and administrative expenses for the nine months ended September
30, 2003 increased $23 million from the same period in 2002. As a percentage
of revenue, general and administrative expenses for the nine months ended
September 30, 2003 increased to 6.6% compared to 5.3% for the same period in
2002. Overall, the Company experienced an increase in general and
administrative expenses, primarily compensation and travel, as a result of
several operating offices expanding to markets outside of their previous
territories and an increase in profit sharing expense.
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Gain on Sale of Operating Assets.
Net gains on the disposition of property, plant and equipment and other
assets during the nine months ended September 30, 2003 and 2002 were each $15
million. Gain on sale of operating assets is affected to a large degree by
market conditions and the specific types and quantity of pieces of equipment
sold.
Investment Income and Equity Earnings, net.
Investment income and equity earnings increased $18 million for the nine
months ended September 30, 2003 from the same period in 2002. The Company
sold its investment in stock warrants during the nine months ended
September 30, 2003 and recognized a $6 million gain (comprised of a $3
million gain on the sale and an unrealized gain of $3 million due to change
in market value prior to the sale) as compared to an $8 million unrealized
holding loss for the same period in 2002. During the nine months ended
September 30, 2002, the Company also recognized a $3 million unrealized
holding loss on an investment in an investment limited partnership.
Interest Expense.
During the nine months ended September 30, 2003, the Company recognized
$4 million of look back interest expense (interest related to the timing of
revenue recognition for income tax purposes for completed construction
projects).
Other, net.
Other income is comprised primarily of mine management fee income. The
Company's fee is a percentage of adjusted operating income of coal mines
managed, as defined in a mine management agreement. Fees for these services
for the nine months ended September 30, 2003 and 2002 were $3 million and $5
million, respectively. The decrease was primarily attributed to a decrease
in operating income related to restructuring charges incurred at one of the
mines during the nine months ended September 30, 2003.
Provision for Income Taxes.
The effective income tax rates for the nine months ended September 30,
2003 and 2002 were 39% and 40%, respectively. In 2002, the rate differs from
the federal statutory rate of 35% primarily due to state income taxes and
costs capitalized for tax purposes in anticipation of a corporate conversion
to a limited partnership. In 2003, the rate decreased as the Company
abandoned its pursuit of a potential conversion to a limited partnership and
expects to deduct the accumulated costs during 2003 which were previously
capitalized for tax purposes.
Financial Condition - September 30, 2003 vs. December 28, 2002
Cash and cash equivalents increased $12 million to $287 million at
September 30, 2003 from $275 million at December 28, 2002. The increase
reflects net cash provided by operations of $150 million and effect of
exchange rates of $7 million, offset by net cash used in investing activities
of $48 million and $97 million used in financing activities.
Net cash provided by operating activities for the nine months ended
September 30, 2003 increased by $139 million to $150 million as compared to
the same period in 2002. This increase was primarily due to the collection
of accounts receivable on certain significant projects and an increase in
distributions from construction joint ventures. 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 nine months ended
September 30, 2003 decreased by $54 million to $48 million as compared to the
same period in 2002. This decrease was due primarily to proceeds received
from the sale of stock warrants during 2003 of $22 million, a decrease in
purchases of securities of $21 million, a $17 million decrease in
acquisitions and a decrease of cash used for capital expenditures of $5
million. This decrease was partially offset by a reduction in proceeds from
sales and maturities of available-for-sale securities of $10 million.
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Capital spending varies due to the nature and timing of jobs awarded.
Management does not expect any material changes to capital spending.
Acquisitions depend largely on market conditions.
Net cash used in financing activities for the nine months ended
September 30, 2003 increased by $62 million to $97 million as compared to the
same time period in 2002. This increase was primarily due to the timing of
common stock sales, which did not occur until October 2003, and an increase
in repurchases of common stock of $34 million due primarily to stockholder
retirements.
Liquidity.
During the nine months ended September 30, 2003 and 2002, the Company
expended $95 million and $117 million, respectively, on capital expenditures
and acquisitions, net of cash acquired. The Company anticipates that its
future cash requirements for capital expenditures and acquisitions will not
change significantly from these historical amounts. Cash generated by joint
ventures, while readily available, historically is not distributed to
partners until the liabilities and commitments of the joint ventures have
been substantially satisfied. Other long-term liquidity uses include the
payment of income taxes and the payment of dividends. As of September 30,
2003, 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
$10 million. PKS paid dividends during the nine months ended September 30,
2003 and 2002 of $22 million and $21 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 satisfactory terms. The Company believes that, to the
extent necessary, it will likewise be able to borrow funds on acceptable
terms for the foreseeable future.
Other.
The Company recognized revenue of $3 million and $33 million for the
three and nine months ended September 30, 2002, respectively, and $2 million
and $4 million for the three and nine months ended September 30, 2003,
respectively, in connection with construction, mine management and other
services provided by the Company to Level 3 Communications, Inc. As of
December 28, 2002 and September 30, 2003, accounts receivable from Level 3
Communications, Inc. were $30 million and $-, respectively. Two members of
the Company's board of directors are currently also directors of Level 3
Communications, Inc.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
The Company holds a diversified portfolio of investments that includes
cash, high quality commercial paper with maturities of less than 90 days, US
Government debt obligations and money market, stock and bond mutual funds.
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.
As of September 30, 2003, the Company was a limited partner in an
investment limited partnership. The Company sold its investment in the
investment limited partnership during October 2003 for $18 million. The
carrying value of the investment at September 30, 2003 was $18 million.
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Item 4. Controls and Procedures.
As required by Exchange Act Rule 13a-15(b), PKS management, including
the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation as of the end of the period covered by this report, of the
effectiveness of the Company's disclosure controls and procedures as defined
in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
this report. As required by Exchange Act Rule 13a-15(d), PKS' management,
including the Chief Executive Officer and Chief Financial Officer, also
conducted an evaluation of the Company's internal control over financial
reporting to determine whether any changes occurred during the quarter
covered by this report that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting. Based on that evaluation, there has been no such change during the
quarter covered by this report.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As previously disclosed, on August 7, 2003, BBC-MEC, a Joint Venture
(the "Joint Venture"), and its two joint venture partners, including Mass.
Electric Construction Co., a subsidiary of PKS, received "target letters"
from the U.S. Department of Justice and the United States Attorney for the
District of Connecticut ("DOJ"), notifying the Joint Venture and its joint
venture partners that each is a target of a criminal investigation in
connection with a certain portion of the work performed by the Joint Venture
to electrify a high speed rail line from New Haven, Connecticut, to Boston,
Massachusetts. The target letters specified potential violations of various
federal statutes based on allegations of misconduct in connection with a
portion of the work, and invited the parties to meet with the DOJ and attempt
to resolve the matter. The parties did meet on October 23, 2003, and the DOJ
was provided with pertinent information that it might not have otherwise
previously considered in its investigation. The Joint Venture and its joint
venture partners also agreed to cooperate in further testing of certain
portions of the work. The Joint Venture and its joint venture partners
continue to believe they have not violated any law in connection with the
work. The DOJ is also conducting a parallel civil investigation relating to
certain proposed change orders and modifications that were issued in
conjunction with the work. Again, the Joint Venture and its joint venture
partners believe that the change orders and modifications are appropriate and
in accordance with the contract's terms and conditions, and are cooperating
in the investigation.
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.
31.1 Rule 15d-14(a) Certification of Chief Executive Officer
31.2 Rule 15d-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated June 25, 2003 reporting the dismissal
of PKS from an action brought by Kansas City Power & Light, which Report was
filed with the Securities and Exchange Commission on July 2, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2003 PETER KIEWIT SONS', INC.
/s/ Michael J. Piechoski
Michael J. Piechoski
Vice President and Chief Financial Officer
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