SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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
April 4, 2003
Commission File Number 1-12054
WASHINGTON GROUP INTERNATIONAL, INC.
A Delaware Corporation
IRS Employer Identification No. 33-0565601
720 PARK BOULEVARD, BOISE, IDAHO 83712
208 / 386-5000
The registrant 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 has been subject to such filing requirements for the past 90 days.
ýYes oNo
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
ý Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
ý Yes o No
At April 4, 2003, 25,000,000 shares of the registrant’s $.01 par value common stock were outstanding.
WASHINGTON GROUP INTERNATIONAL, INC.
Quarterly Report on Form 10-Q for the
Quarterly Period Ended April 4, 2003
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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NOTE REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements. You can identify forward-looking statements by the use of terminology such as “may,” “will,” “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” “could,” “should,” “potential” or “continue,” or the negative or other variations thereof, as well as other statements regarding matters that are not historical fact. These forward-looking statements include, among others, statements concerning:
• Our business strategy and competitive advantages
• Our expectations as to potential revenues from designated markets or customers
• Our expectations as to profits, cash flows, return on invested capital and net income
• Our expectations as to new work and backlog
• The markets for our services and products
• Our anticipated capital expenditures and funding requirements
Forward-looking statements are only predictions. The forward-looking statements in this report are subject to risks and uncertainties, including, among others, the risks and uncertainties identified in this report and other operational, business, industry, market, legal and regulatory developments, which could cause actual events or results to differ materially from those expressed or implied by the forward-looking statements. The most important factors that could prevent us from achieving the expectations expressed include, but are not limited to, our failure to:
• Satisfy the restrictive covenants imposed by our indebtedness
• Raise sufficient working capital on acceptable terms and on a timely basis
• Maintain relationships with key customers, partners, sureties and suppliers
• Manage and avoid delays or cost overruns in existing and future contracts
• Successfully bid for, and enter into, new contracts on satisfactory terms
• Successfully negotiate claims and change orders
• Manage and maintain our operations and financial performance and the operations and financial performance of our current and future operating subsidiaries and joint ventures
• Respond to competitors in our existing and planned markets
• Respond effectively to regulatory, legislative and judicial developments, including any legal or regulatory proceedings, affecting our existing contracts, including contracts concerning environmental remediation and restoration
• Obtain and maintain any required governmental authorizations, franchises and permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions
• Realize anticipated reductions in overhead and other costs
I-1
Some other factors that may affect our businesses, financial position or results of operations include:
• Accidents and conditions, including industrial accidents, labor disputes, geological conditions, environmental hazards, weather and other natural phenomena
• Special risks of international operations, including uncertain political and economic environments, acts of terrorism or war, potential incompatibilities with foreign joint venture partners, foreign currency fluctuations and controls, civil disturbances and labor issues
• Special risks of contracts with the government, including the failure of applicable governing authorities to take necessary actions to secure or maintain funding for particular projects with us, the unilateral termination of contracts by the government, reimbursement obligations to the government for funds previously received and other regulatory risks
• Maintenance of government-compliant cost systems
• The economic well-being of our private and public customer base and its ability and intentions to invest capital in engineering and construction activities
For a description of additional risk factors that may affect our businesses, financial position or results of operations, see “Business - Risk Factors” in Part I, Item 1 of our annual report on Form 10-K for the fiscal year ended January 3, 2003.
I-2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
WASHINGTON GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(UNAUDITED)
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Successor Company |
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Predecessor Company |
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Three
months ended |
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Two months
ended |
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One month
ended |
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Revenue |
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$ |
657,465 |
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$ |
607,030 |
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$ |
349,912 |
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Cost of revenue |
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(619,965 |
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(579,138 |
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(338,792 |
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Gross profit |
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37,500 |
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27,892 |
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11,120 |
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Equity in net earnings of unconsolidated affiliates |
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8,762 |
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3,573 |
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3,109 |
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General and administrative expenses |
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(10,111 |
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(8,058 |
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(4,180 |
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Restructuring charges |
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— |
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— |
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(625 |
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Operating income |
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36,151 |
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23,407 |
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9,424 |
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Investment income |
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366 |
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— |
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400 |
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Interest expense (a) |
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(6,945 |
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(4,538 |
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(1,193 |
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Other income (expense), net |
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(73 |
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2,644 |
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(563 |
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Income before reorganization items, income taxes, minority interests and extraordinary item |
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29,499 |
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21,513 |
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8,068 |
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Reorganization items (Note 8) |
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— |
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— |
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(72,057 |
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Income tax (expense) benefit |
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(12,832 |
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(9,055 |
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20,078 |
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Minority interests in income of consolidated subsidiaries |
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(3,887 |
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(2,941 |
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(1,132 |
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Net income (loss) before extraordinary item |
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12,780 |
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9,517 |
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(45,043 |
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Extraordinary item - gain on debt discharge, net of tax of $343,539 (Note 8) |
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— |
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— |
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567,193 |
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Net income |
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$ |
12,780 |
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$ |
9,517 |
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$ |
522,150 |
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Net income per share |
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Basic and diluted |
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$ |
.51 |
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$ |
.38 |
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— |
(b) |
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Common shares used |
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Basic |
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25,000 |
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25,000 |
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— |
(b) |
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Diluted |
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25,022 |
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25,000 |
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— |
(b) |
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The accompanying notes are an integral part of the consolidated financial statements.
(a) Contractual interest expense not recorded during bankruptcy proceedings for the one month ended February 1, 2002 was $7,090.
(b) Net income per share is not presented for this period, as it is not meaningful because of the revised capital structure of the Successor Company upon emergence from bankruptcy protection.
I-3
WASHINGTON GROUP INTERNATIONAL, INC.
(In thousands except per share data)
(UNAUDITED)
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Successor Company |
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April 4, 2003 |
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January 3, 2003 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
126,635 |
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$ |
171,192 |
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Accounts receivable, including retentions of $22,201 and $23,546, respectively |
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259,854 |
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261,925 |
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Unbilled receivables |
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128,192 |
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131,043 |
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Investments in and advances to construction joint ventures |
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7,773 |
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23,271 |
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Deferred income taxes |
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70,022 |
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74,223 |
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Assets held for sale |
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22,002 |
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23,543 |
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Other |
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46,792 |
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45,897 |
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Total current assets |
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661,270 |
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731,094 |
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Investments and other assets |
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Equity in unconsolidated affiliates |
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115,890 |
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99,356 |
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Goodwill |
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383,136 |
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387,254 |
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Deferred income taxes |
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49,689 |
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51,219 |
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Other assets |
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24,383 |
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27,210 |
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Total investments and other assets |
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573,098 |
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565,039 |
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Property and equipment |
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Construction equipment |
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115,084 |
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124,099 |
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Land and improvements |
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5,950 |
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5,950 |
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Buildings and improvements |
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12,422 |
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12,377 |
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Equipment and fixtures |
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25,852 |
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25,233 |
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Total property and equipment |
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159,308 |
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167,659 |
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Less accumulated depreciation |
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(55,763 |
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(48,428 |
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Property and equipment, net |
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103,545 |
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119,231 |
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Total assets |
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$ |
1,337,913 |
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$ |
1,415,364 |
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The accompanying notes are an integral part of the consolidated financial statements.
I-4
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Successor Company |
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April 4, 2003 |
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January 3, 2003 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable and subcontracts payable, including retentions of $20,408 and $19,623, respectively |
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$ |
122,375 |
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$ |
165,618 |
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Billings in excess of cost and estimated earnings on uncompleted contracts |
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186,701 |
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202,600 |
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Accrued salaries, wages and benefits, including compensated absences of $49,456 and $43,580, respectively |
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109,039 |
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136,214 |
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Other accrued liabilities |
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75,044 |
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82,513 |
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Liabilities held for sale |
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11,294 |
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8,167 |
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Total current liabilities |
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504,453 |
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595,112 |
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Non-current liabilities |
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Self-insurance reserves |
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64,512 |
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69,934 |
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Pension and post-retirement benefit obligations |
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99,016 |
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97,453 |
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Total non-current liabilities |
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163,528 |
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167,387 |
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Contingencies and commitments |
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Minority interests |
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58,234 |
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56,115 |
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Stockholders’ equity |
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Preferred stock, par value $.01, 10,000 shares authorized |
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— |
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— |
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Common stock, par value $.01, 100,000 shares authorized; 25,000 shares issued |
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250 |
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250 |
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Capital in excess of par value |
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521,103 |
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521,103 |
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Stock purchase warrants |
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28,647 |
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28,647 |
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Retained earnings |
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50,481 |
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37,701 |
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Accumulated other comprehensive income |
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11,217 |
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9,049 |
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Total stockholders’ equity |
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611,698 |
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596,750 |
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Total liabilities and stockholders’ equity |
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$ |
1,337,913 |
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$ |
1,415,364 |
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I-5
WASHINGTON GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
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Successor Company |
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Predecessor Company |
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Three
months ended |
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Two months
ended |
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One month
ended |
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|||
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Operating activities |
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Net income |
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$ |
12,780 |
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$ |
9,517 |
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$ |
522,150 |
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Reorganization items |
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— |
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— |
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36,979 |
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Adjustments to reconcile net income to cash provided (used) by operating activities: |
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Reorganization items |
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Cash paid for reorganization items |
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(2,461 |
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— |
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(20,548 |
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Fresh-start adjustments |
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— |
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— |
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35,078 |
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Extraordinary item - gain on debt discharge |
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— |
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— |
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(567,193 |
) |
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Depreciation of property and equipment |
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9,984 |
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10,497 |
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5,612 |
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Amortization of prepaid loan fees |
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3,025 |
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2,641 |
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624 |
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Normal profit |
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(752 |
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(8,558 |
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(3,518 |
) |
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Deferred income taxes |
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8,681 |
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5,525 |
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(10,109 |
) |
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Minority interests in income of consolidated subsidiaries, before income taxes |
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6,378 |
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4,763 |
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2,094 |
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Equity in net earnings of unconsolidated affiliates less dividends received |
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(8,188 |
) |
3,456 |
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(3,109 |
) |
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Loss (gain) on sale of assets, net |
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(416 |
) |
195 |
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227 |
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Decrease (increase) in net operating assets and other |
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(76,771 |
) |
(32,417 |
) |
8,301 |
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Net cash provided (used) by operating activities |
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(47,740 |
) |
(4,381 |
) |
6,588 |
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Investing activities |
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Property and equipment acquisitions |
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(2,074 |
) |
(3,569 |
) |
(3,903 |
) |
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Property and equipment disposals |
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8,043 |
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1,201 |
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2,339 |
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Net cash provided (used) by investing activities |
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5,969 |
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(2,368 |
) |
(1,564 |
) |
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Financing activities |
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Payment on senior secured credit facilities |
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— |
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— |
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(20,000 |
) |
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Financing and bonding fees |
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— |
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— |
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(34,749 |
) |
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Net borrowings (repayments) from credit agreement |
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— |
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(15,000 |
) |
40,000 |
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Distributions to minority interests, net |
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(2,786 |
) |
(675 |
) |
(227 |
) |
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Net cash used by financing activities |
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(2,786 |
) |
(15,675 |
) |
(14,976 |
) |
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Decrease in cash and cash equivalents |
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(44,557 |
) |
(22,424 |
) |
(9,952 |
) |
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Cash and cash equivalents at beginning of period |
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171,192 |
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128,201 |
|
138,153 |
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Cash and cash equivalents at end of period |
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$ |
126,635 |
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$ |
105,777 |
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$ |
128,201 |
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Supplemental disclosure of cash flow information: |
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Interest paid |
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$ |
3,878 |
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$ |
1,506 |
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$ |
451 |
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Income tax paid (refunded), net |
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2,058 |
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(1,574 |
) |
975 |
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The accompanying notes are an integral part of the consolidated financial statements.
I-6
WASHINGTON GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(UNAUDITED)
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Successor Company |
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Predecessor Company |
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Three months
ended |
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Two months
ended |
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One month
ended |
|
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Net income |
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$ |
12,780 |
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$ |
9,517 |
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$ |
522,150 |
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Other comprehensive income, net of tax: |
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|
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Foreign currency translation adjustments |
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2,168 |
|
703 |
|
80 |
|
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Amounts reclassified to net income in fresh-start reporting |
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— |
|
20,268 |
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Other comprehensive income, net of tax |
|
2,168 |
|
703 |
|
20,348 |
|
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Comprehensive income |
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$ |
14,948 |
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$ |
10,220 |
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$ |
542,498 |
|
The accompanying notes are an integral part of the consolidated financial statements.
I-7
WASHINGTON GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
The terms “we,” “us” and “our” as used in this quarterly report refer to Washington Group International, Inc. (“Washington Group”) and its consolidated subsidiaries unless otherwise indicated. On May 14, 2001, Washington Group and several but not all of its subsidiaries filed for Chapter 11 bankruptcy protection. On January 25, 2002, we emerged from bankruptcy protection. See Note 4, “Reorganization Case and Fresh-start Reporting” in our annual report on Form 10-K for the fiscal year ended January 3, 2003.
1. DESCRIPTION OF THE BUSINESS
We are an international provider of a broad range of design, engineering, construction, construction management, facilities and operations management, environmental remediation and mining services to diverse public and private sector clients, including (1) engineering, construction and operations and maintenance services in nuclear and fossil power markets; (2) diverse engineering and construction and construction management services for the highway and bridge, airport and seaport, dam, tunnel, water resource, railway and commercial building markets; (3) engineering, design, procurement, construction and construction management services to industrial companies; (4) contract mining, technical and engineering services for the metals, precious metals, coal, minerals and minerals processes markets; (5) comprehensive nuclear and other environmental and hazardous substance remediation services for governmental and private-sector clients and (6) weapons and chemical demilitarization programs for governmental and private-sector clients. In providing these services, we enter into four basic types of contracts: fixed-price or lump-sum contracts providing for a fixed price for all work to be performed, fixed-unit-price contracts providing for a fixed price for each unit of work to be performed, target-price contracts providing for an agreed upon price whereby we absorb cost escalation to the extent of our expected fee or profit and are reimbursed for costs which continue to escalate beyond our expected fee and cost-type contracts providing for reimbursement of costs plus a fee. Both anticipated income and economic risk are greater under fixed-price and fixed-unit-price contracts than under cost-type contracts. Engineering, construction management and environmental and hazardous substance remediation contracts are typically awarded pursuant to a cost-type contract.
We were originally incorporated in Delaware on April 28, 1993 under the name Kasler Holding Company. In April 1996, we changed our name to Washington Construction Group, Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation, which we refer to in this report as “Old MK,” and changed our name to Morrison Knudsen Corporation. On March 22, 1999, we and BNFL Nuclear Services, Inc. (“BNFL”), an unrelated entity, acquired the government and environmental services businesses of CBS Corporation (now Viacom, Inc.). We refer to these businesses as the “Westinghouse Businesses.” The Westinghouse Businesses currently constitute our Westinghouse Government Services Group (“WGSG”), which is primarily a part of our Energy & Environment business unit. On July 7, 2000, we purchased from Raytheon Company and Raytheon Engineers & Constructors International, Inc. (“RECI” and, collectively with Raytheon Company, the “Sellers”), the capital stock of the subsidiaries of RECI and specified other assets of RECI and assumed specified liabilities of RECI. The businesses that we purchased, which we refer to in this report as “RE&C,” provide engineering, design, procurement, construction, operation, maintenance and other services on a global basis. Following the acquisition, on September 15, 2000, we changed our name to Washington Group International, Inc.
On May 14, 2001, due to near-term liquidity problems resulting from our acquisition of RE&C, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code. On December 21, 2001, the bankruptcy court entered an order confirming the Second Amended Joint Plan of Reorganization of Washington Group International, Inc., et. al., as modified (the “Plan of Reorganization”). The Plan of Reorganization became effective and we emerged from bankruptcy protection on January 25, 2002. For a more detailed discussion of the RE&C acquisition and the resulting bankruptcy, see Note 3, “Acquisition” and Note 4, “Reorganization Case and Fresh-start Reporting” of the Notes to Consolidated Financial Statements in Item 8 of our annual report on Form 10-K for the fiscal year ended January 3, 2003.
I-8
2. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements include the accounts of Washington Group and all of its majority-owned subsidiaries and certain construction joint ventures. Investments in non-consolidated construction joint ventures and certain unconsolidated affiliates are accounted for using the equity method. For non-consolidated construction joint ventures, our proportionate share of revenue, cost of revenue and gross profit is included in the consolidated statements of income. Equity in net earnings of unconsolidated affiliates is accounted for under the equity method. All significant intercompany transactions and accounts have been eliminated in consolidation.
These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our annual report on Form 10-K for the fiscal year ended January 3, 2003. The comparative balance sheet and related disclosures at January 3, 2003 have been derived from the audited balance sheet and consolidated footnotes referred to above.
In our opinion, the accompanying unaudited interim consolidated financial statements reflect all adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.
The results of operations for the interim periods presented in these unaudited interim consolidated financial statements are not necessarily indicative of results to be expected for the full year. Future operating results may not be comparable to historical operating results as a result of our filing for protection under Chapter 11 of the U.S. Bankruptcy Code on May 14, 2001, our subsequent emergence therefrom on January 25, 2002 and the implementation of fresh-start reporting on February 1, 2002. Our bankruptcy proceedings and our adoption of fresh-start reporting have materially affected comparability among the reporting periods presented.
As of February 1, 2002, we adopted fresh-start reporting pursuant to the guidelines provided by the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. In connection with the adoption of fresh-start reporting, a new entity was created for financial reporting purposes with assets, liabilities and a capital structure having carrying values as of February 1, 2002, and subsequent periods are not comparable to prior periods. In the accompanying financial statements and notes to financial statements, the periods presented through February 1, 2002 have been designated “Predecessor Company,” and the periods ending subsequent to February 1, 2002 have been designated “Successor Company.”
Our fiscal year is the 52/53 weeks ending on the Friday closest to December 31.
The preparation of our consolidated financial statements in conformity with generally accepted accounting principles necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and costs during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on information that is currently available. Changes in facts and circumstances may cause us to revise estimates.
Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.
Stock-based compensation
We have used the intrinsic value method to account for stock-based employee compensation under the recognition and measurement principles of Accounting Principles Bulletin (“APB”) Opinion No. 25, Accounting
I-9
for Stock Issued to Employees, and related interpretations for all periods presented. The following table illustrates the pro forma effect on net income and income per share if we had applied the fair value recognition provisions of the Financial Accounting Standards Board (“FASB”) Statement No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), to stock-based employee compensation.
|
|
|
Successor Company |
|
Predecessor Company |
|
|||||
|
|
|
Three
months |
|
Two months |
|
One month |
|
|||
|
|
|
|
|
|
||||||
|
|
|
|
|
|
||||||
|
Net income (loss) before extraordinary item as reported |
|
$ |
12,780 |
|
$ |
9,517 |
|
$ |
(45,043 |
) |
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (1) |
|
(3,471 |
) |
(14,477 |
) |
10,995 |
|
|||
|
Tax effects |
|
1,355 |
|
5,651 |
|
(4,291 |
) |
|||
|
Pro forma net income (loss) before extraordinary item |
|
$ |
10,664 |
|
$ |
691 |
|
$ |
(38,339 |
) |
|
Net income (loss) per share before extraordinary item (2) |
|
|
|
|
|
|
|
|||
|
As reported – basic and diluted |
|
$ |
.51 |
|
$ |
.38 |
|
$ |
— |
|
|
Pro forma – basic and diluted |
|
.43 |
|
.03 |
|
— |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net income as reported |
|
$ |
12,780 |
|
$ |
9,517 |
|
$ |
522,150 |
|
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (1) |
|
(3,471 |
) |
(14,477 |
) |
10,995 |
|
|||
|
Tax effects |
|
1,355 |
|
5,651 |
|
(4,291 |
) |
|||
|
Pro forma net income |
|
$ |
10,664 |
|
$ |
691 |
|
$ |
528,854 |
|
|
Net income per share (2) |
|
|
|
|
|
|
|
|||
|
As reported – basic and diluted |
|
$ |
.51 |
|
$ |
.38 |
|
$ |
— |
|
|
Pro forma – basic and diluted |
|
.43 |
|
.03 |
|
— |
|
|||
(1) We present pro forma compensation cost as if all stock options granted are expected to vest, with pro forma recognition of actual forfeitures as they occur. Our emergence from bankruptcy protection in January 2002 and the resulting cancellation of all of our previously-existing stock options therefore gave rise to a reversal of compensation expense on a pro forma basis for the one month ended February 1, 2002. Upon emergence from bankruptcy protection, we granted options that vested immediately. Due to this vesting, a significant portion of the total pro forma compensation cost associated with these options is presented as an expense on a pro forma basis during the two months ended March 29, 2002.
(2) Net income per share is not presented for the Predecessor Company period, as it is not meaningful because of the revised capital structure of the Successor Company.
3. ACCOUNTING STANDARDS
Recently issued accounting standards
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or in which equity investors do not bear the residual economic risks. The interpretation applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an
I-10
interest after that date. It applies in the fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that was acquired before February 1, 2003. We have determined that it is not reasonably possible that we will be required to consolidate or disclose information about a variable interest entity upon the effective date of FIN 46.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS No. 149”), which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). The new guidance amends SFAS No. 133 for decisions made (1) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133, (2) in connection with other FASB projects dealing with financial instruments and (3) regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of “underlying” and the characteristics of a derivative that contains financing components. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below, and for hedging relationships designated after June 30, 2003.
The provisions of SFAS No. 149 relating to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of “when-issued” securities or other securities that do not yet exist should be applied to existing contracts, as well as new contracts entered into after June 30, 2003. We are currently assessing, but have not yet determined the impact of SFAS No. 149 on our financial statements.
4. VENTURES
Construction joint ventures
We participate in non-consolidated construction joint ventures that are formed to bid, negotiate and complete specific projects. The non-consolidated construction joint ventures are measured on the consolidated balance sheet as equity method investments, and our proportionate share of revenue, cost of revenue and gross profit is included in the income statement. The size, scope and duration of joint-venture projects vary among periods. The tables below represent the financial information of our non-consolidated construction joint ventures in which we hold a 50% or less controlling interest.
|
Combined financial position of |
|
April 4, 2003 |
|
January 3, 2003 |
|
||
|
Current assets |
|
$ |
247,239 |
|
$ |
273,719 |
|
|
Property and equipment, net |
|
4,391 |
|
8,194 |
|
||
|
Current liabilities |
|
(237,234 |
) |
(246,873 |
) |
||
|
Net assets |
|
$ |
14,396 |
|
$ |
35,040 |
|
|
|
|
Successor Company |
|
Predecessor Company |
|
|||||
|
Combined results of operations of |
|
Three
months |
|
Two months |
|
One month |
|
|||
|
Revenue |
|
$ |
162,358 |
|
$ |
123,777 |
|
$ |
43,751 |
|
|
Cost of revenue |
|
(149,472 |
) |
(117,927 |
) |
(42,436 |
) |
|||
|
Gross profit |
|
$ |
12,886 |
|
$ |
5,850 |
|
$ |
1,315 |
|
I-11
|
|
|
Successor Company |
|
Predecessor Company |
|
|||||
|
Washington Group’s share of |
|
Three
months |
|
Two months |
|
One month |
|
|||
|
Revenue |
|
$ |
65,655 |
|
$ |
51,939 |
|
$ |
17,790 |
|
|
Cost of revenue |
|
(59,671 |
) |
(49,446 |
) |
(17,387 |
) |
|||
|
Gross profit |
|
$ |
5,984 |
|
$ |
2,493 |
|
$ |
403 |
|
Unconsolidated affiliates
At April 4, 2003, we held ownership interests in several unconsolidated affiliates, the most significant of which are two incorporated mining ventures: MIBRAG mbH (50%) and Westmoreland Resources, Inc. (“Westmoreland Resources”) (20%), which are accounted for under the equity method. We provide contract mining services to these ventures. The tables below represent the financial information of our unconsolidated affiliates in which we hold a 50% or less controlling interest.
|
Combined financial position of |
|
April 4, 2003 |
|
January 3, 2003 |
|
||
|
Current assets |
|
$ |
196,383 |
|
$ |
201,779 |
|
|
Non-current assets |
|
563,833 |
|
538,880 |
|
||
|
Property and equipment, net |
|
470,507 |
|
450,604 |
|
||
|
Current liabilities |
|
(61,757 |
) |
(50,365 |
) |
||
|
Long-term debt, non-recourse to parents |
|
(259,136 |
) |
(272,120 |
) |
||
|
Other non-current liabilities |
|
(662,789 |
) |
(662,454 |
) |
||
|
Net assets |
|
$ |
247,041 |
|
$ |
206,324 |
|
|
|
|
Successor Company |
|
Predecessor Company |
|
|||||
|
Combined results of operations of |
|
Three
months |
|
Two months |
|
One month |
|
|||
|
Revenue |
|
$ |
101,735 |
|
$ |
52,760 |
|
$ |
28,403 |
|
|
Cost of revenue |
|
(83,833 |
) |
(45,084 |
) |
(21,508 |
) |
|||
|
Gross profit |
|
$ |
17,902 |
|
$ |
7,676 |
|
$ |
6,895 |
|
5. BUSINESS HELD FOR SALE
During 2001, we elected to pursue the sale of the process technology development portion of our petroleum and chemical business (the “Technology Center”). On April 18, 2003, we sold the Technology Center to Stone & Webster Inc., a subsidiary of The Shaw Group Inc. Stone & Webster Inc. agreed to pay $17,700 in cash, subject to certain adjustments. Operating results for the Technology Center are included as part of the “Intersegment and other unallocated operating costs” in Note 9, “Operating Segment, Geographic and Customer Information.”
For financial reporting purposes, the assets and liabilities of the business held for sale have been classified as “Assets held for sale” and “Liabilities held for sale” in the Consolidated Balance Sheets. The table below provides detail of the assets and liabilities of the Technology Center as of April 4, 2003 and January 3, 2003.
I-12
|
|
|
Successor Company |
|
||||
|
|
|
April 4, 2003 |
|
January 3, 2003 |
|
||
|
ASSETS |
|
|
|
|
|
||
|
Accounts receivable and unbilled receivables |
|
$ |
6,626 |
|
$ |
8,198 |
|
|
Goodwill |
|
13,782 |
|
13,782 |
|
||
|
Property and equipment, net of accumulated depreciation |
|
511 |
|
485 |
|
||
|
Other assets |
|
1,083 |
|
1,078 |
|
||
|
Total assets held for sale |
|
$ |
22,002 |
|
$ |
23,543 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES |
|
|
|
|
|
||
|
Accounts payable and subcontracts payable |
|
$ |
1,369 |
|
$ |
840 |
|
|
Billings in excess of cost and estimated earnings on uncompleted contracts |
|
3,624 |
|
4,351 |
|
||
|
Other liabilities |
|
6,301 |
|
2,976 |
|
||
|
Total liabilities held for sale |
|
$ |
11,294 |
|
$ |
8,167 |
|
Operating results of businesses held for sale, including the Electro-Mechanical Division (“EMD”) sold in October 2002, are as follows:
|
|
|
Successor Company |
|
Predecessor Company |
|
|||||
|
|
|
Three
months ended |
|
Two months
ended |
|
One month
ended |
|
|||
|
Revenue |
|
$ |
8,783 |
|
$ |
32,098 |
|
$ |
17,088 |
|
|
Net income (loss) |
|
(300 |
) |
1,637 |
|
960 |
|
|||
6. CREDIT FACILITIES
DIP Facility
On May 14, 2001, we filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. On the same day, we entered into a Secured Super-Priority Debtor-in-Possession Revolving Credit Facility (the “DIP Facility”) with some of our subsidiaries as guarantors, for a commitment of $195,000 with the ability to increase the total commitment to $350,000. On June 5, 2001, the DIP Facility lenders approved an increase in the total commitment from $195,000 to $220,000. The DIP Facility was to be used (1) to finance the costs of restructuring and (2) for ongoing working capital, general corporate purposes and letter of credit issuance. The borrowing rate under the DIP Facility was the prime rate, plus an additional margin of 4.0%. The DIP Facility carried other fees, including commitment fees and letter of credit fees, normal and customary for such credit agreements. As of January 24, 2002, we had no outstanding debt and $32,800 of outstanding letters of credit under the DIP Facility. As discussed below, the DIP Facility was replaced by the Senior Secured Revolving Credit Facility on January 25, 2002.
Senior Secured Revolving Credit Facility
In connection with our emergence from bankruptcy protection on January 25, 2002, we entered into a Senior Secured Revolving Credit Facility, providing for an aggregate of $350,000 of revolving borrowing and letter of credit capacity. The Senior Secured Revolving Credit Facility provides for an amount up to $350,000 in the aggregate of loans and other financial accommodations allocated pro rata between two facilities as follows: a Tranche A facility in the amount of $208,350 and a Tranche B facility in the amount of $141,650. The scheduled termination date for the Senior Secured Revolving Credit Facility is thirty months from January 24, 2002, and it may be increased up to a total of $375,000 with the approval of the lenders.
The Senior Secured Revolving Credit Facility was entered into (1) to replace approximately $32,800 in letters of credit issued under the DIP Facility; (2) to retire our DIP Facility and repay any DIP Facility balance (of which
I-13
there was none); (3) to replace or backstop approximately $120,842 in letters of credit issued under our pre-petition financing facilities entered into to acquire RE&C; (4) to make payments to the pre-petition senior secured lenders and Mitsubishi Heavy Industries pursuant to our Plan of Reorganization; (5) to finance the costs of restructuring; and (6) for ongoing working capital, general corporate purposes and letter of credit issuance. Borrowings under the Senior Secured Revolving Credit Facility are required to be allocated between the two tranches on a proportional split based upon the size of each tranche. The borrowing rate under the Senior Secured Revolving Credit Facility is, for Tranche A, the applicable LIBOR, which has a stated floor of 3%, plus an additional margin of 5.5%, and for Tranche B, LIBOR plus an additional margin of 5.5%. As of April 4, 2003, the effective LIBOR borrowing rate was 8.5% for Tranche A and 6.8% for Tranche B. The Senior Secured Revolving Credit Facility carries other fees, including commitment fees and letter of credit fees, normal and customary for such credit agreements. The Senior Secured Revolving Credit Facility contains affirmative, negative and financial covenants, including minimum net worth, capital expenditures, maintenance of certain financial and operating ratios, and specified events of default which are typical for a credit agreement governing credit facilities of the size, type and tenor of the Senior Secured Revolving Credit Facility. The Senior Secured Revolving Credit Facility also contains affirmative and negative covenants limiting our ability and the ability of certain of our subsidiaries to incur debt or liens, provide guarantees, make investments and pay dividends. There were no amounts borrowed or outstanding under the Senior Secured Revolving Credit Facility at April 4, 2003. Also at April 4, 2003, the borrowing capacity net of outstanding letters of credit was $188,442.
7. RESTRUCTURING CHARGES
During 2001, we initiated restructuring actions to improve operational effectiveness and efficiency and reduce expenses globally relative to employment levels and excess facilities consistent with the Plan of Reorganization. A liability was recorded for employee termination benefits, impairment charges and enhanced pension benefits. The severance costs represented expected reductions in work force for management, professional, administrative and operational overhead. During January 2002, charges of $625 for employee terminations were accrued. As part of the Plan of Reorganization in January 2002, restructuring liabilities of $14,155 representing the remaining balance recorded as part of the acquisition of RE&C and consisting of non-cancelable lease obligations were discharged. Our restructuring plan is complete. The remaining liability at April 4, 2003 represents facility closure costs.
The following presents restructuring charges accrued and costs incurred:
|
|
|
Successor Company |
|
Predecessor Company |
|
|||||
|
|
|
Three
months ended |
|
Two months
ended |
|
One month
ended |
|
|||
|
Accrued liability at beginning of period |
|
$ |
11,987 |
|
$ |
24,718 |
|
$ |
44,072 |
|
|
Charges and liabilities accrued: |
|
|
|
|
|
|
|
|||
|
Severance and other employee costs |
|
— |
|
— |
|
625 |
|
|||
|
Cash expenditures, net of sub-tenant rental income |
|
(870 |
) |
(5,156 |
) |
(5,824 |
) |
|||
|
Liabilities discharged in bankruptcy |
|
— |
|
— |
|
(14,155 |
) |
|||
|
Accrued restructuring liability at end of period |
|
$ |
11,117 |
|
$ |
19,562 |
|
$ |
24,718 |
|
8. REORGANIZATION ITEMS AND EXTRAORDINARY ITEM
Reorganization items
As previously disclosed, on January 25, 2002, the Plan of Reorganization became effective and we emerged from bankruptcy protection. In connection therewith, the following reorganization items were recorded in the one month ended February 1, 2002:
I-14
|
|
|
One month
ended |
|
|
|
Professional fees and other expenses related to bankruptcy proceedings |
|
$ |
36,072 |
|
|
Impairment of assets of rejected contracts |
|
907 |
|
|
|
Adjustments to fair values in fresh-start reporting |
|
35,078 |
|
|
|
Total reorganization items |
|
$ |
72,057 |
|
Extraordinary item
During the one month ended February 1, 2002, pursuant to our Plan of Reorganization, we recorded a gain on debt discharge of $1,460,732 related to liabilities compromised from our reorganization, less the value of new common stock and warrants issued of $550,000, net of income taxes of $343,539. See Note 4, “Reorganization Case and Fresh-start Reporting” in our annual report on Form 10-K for the fiscal year ended January 3, 2003.
9. OPERATING SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
We operate through six business units, each of which comprises a separate reportable business segment: Power, Infrastructure, Mining, Industrial/Process, Energy & Environment and Defense. The reportable segments are separately managed, serve different markets and customers, and differ in their expertise, technology and resources necessary to perform their services.
Power provides engineering, construction and operations and maintenance services in both fossil and nuclear power markets for turnkey new power plant construction, plant expansion, retrofit and modification, decontamination and decommissioning, general planning, siting and licensing and environmental permitting.
Infrastructure provides diverse engineering and construction and construction management services for highways and bridges, airports and seaports, tunnels and tube tunnels, railroad and transit lines, water storage and transport, water treatment, site development and hydroelectric facilities. The business unit generally performs as a general contractor or as a joint venture partner with other contractors on domestic and international projects.
Mining provides contract-mining, engineering, resource evaluation, geologic modeling, mine planning, simulation modeling, equipment selection, production scheduling and operations management to coal, industrial minerals and metals markets globally.
Industrial/Process provides engineering, design, procurement, construction services and total facilities management for general manufacturing, pharmaceutical and biotechnology, metals processing, institutional buildings, food and consumer products, automotive, aerospace, telecommunications and pulp and paper industries.
Defense provides a complete range of technical services to the U.S. Department of Defense, including operations and management services, environmental and chemical demilitarization services, waste handling and storage, architectural engineering services and engineering, procurement and construction services for the armed forces.
Energy & Environment provides services to the U.S. Department of Energy, which is responsible for maintaining the nation’s nuclear weapons stockpile and performing environmental cleanup and remediation. The business unit also provides the U.S. government with construction, contract management, supply-chain management, quality assurance, administrative and environmental cleanup and restoration services. Energy & Environment provides safety management consulting and waste and environmental technology and engineered products, including radioactive waste containers and technical support services.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance and allocate resources based on segment operating income.
I-15
Segment operating income is total segment revenue reduced by segment cost of revenue and includes equity in net earnings of unconsolidated affiliates. Corporate and other expense consists principally of general and administrative expenses.
|
|
|
Successor Company |
|
Predecessor Company |
|
|||||
|
|
|
Three
months ended |
|
Two months
ended |
|
One month
ended |
|
|||
|
Revenue |
|
|
|
|
|
|
|
|||
|
Power |
|
$ |
176,206 |
|
$ |
163,791 |
|
$ |
85,551 |
|
|
Infrastructure |
|
121,694 |
|
138,890 |
|
79,924 |
|
|||
|
Mining |
|
14,452 |
|
8,583 |
|
5,326 |
|
|||
|
Industrial/Process |
|
119,741 |
|
108,380 |
|
64,271 |
|
|||
|
Defense |
|
131,182 |
|
97,707 |
|
62,107 |
|
|||
|
Energy & Environment |
|
88,092 |
|
86,608 |
|
50,357 |
|
|||
|
Intersegment, eliminations and other |
|
6,098 |
|
3,071 |
|
2,376 |
|
|||
|
Total revenues |
|
$ |
657,465 |
|
$ |
607,030 |
|
$ |
349,912 |
|
|
Gross profit (loss) |
|
|
|
|
|
|
|
|||
|
Power |
|
$ |
7,449 |
|
$ |
6,283 |
|
$ |
199 |
|
|
Infrastructure |
|
6,854 |
|
8,686 |
|
3,028 |
|
|||
|
Mining |
|
(233 |
) |
(107 |
) |
100 |
|
|||
|
Industrial/Process |
|
2,912 |
|
1,774 |
|
631 |
|
|||
|
Defense |
|
13,722 |
|
3,575 |
|
1,956 |
|
|||
|
Energy & Environment |
|
8,212 |
|
10,175 |
|
5,568 |
|
|||
|
Intersegment and other unallocated operating costs |
|
(1,416 |
) |
(2,494 |
) |
(362 |
) |
|||
|
Total gross profit |
|
$ |
37,500 |
|
$ |
27,892 |
|
$ |
11,120 |
|
|
Equity in net earnings of unconsolidated affiliates |
|
|
|
|
|
|
|
|||
|
Power |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Infrastructure |
|
— |
|
— |
|
— |
|
|||
|
Mining |
|
8,574 |
|
3,573 |
|
3,109 |
|
|||
|
Industrial/Process |
|
382 |
|
— |
|
— |
|
|||
|
Defense |
|
— |
|
— |
|
— |
|
|||
|
Energy & Environment |
|
(194 |
) |
— |
|
— |
|
|||
|
Intersegment and other |
|
— |
|
— |
|
— |
|
|||
|
Total equity in net earnings of unconsolidated affiliates |
|
$ |
8,762 |
|
$ |
3,573 |
|
$ |
3,109 |
|
|
Operating income (loss) |
|
|
|
|
|
|
|
|||
|
Power |
|
$ |
7,449 |
|
$ |
6,283 |
|
$ |
199 |
|
|
Infrastructure |
|
6,854 |
|
8,686 |
|
3,028 |
|
|||
|
Mining |
|
8,341 |
|
3,466 |
|
3,209 |
|
|||
|
Industrial/Process |
|
3,294 |
|
1,774 |
|
631 |
|
|||
|
Defense |
|
13,722 |
|
3,575 |
|
1,956 |
|
|||
|
Energy & Environment |
|
8,018 |
|
10,175 |
|
5,568 |
|
|||
|
Intersegment and other unallocated operating costs |
|
(1,416 |
) |
(2,494 |
) |
(987 |
) |
|||
|
General and administrative expenses, corporate |
|
(10,111 |
) |
(8,058 |
) |
(4,180 |
) |
|||
|
Total operating income |
|
$ |
36,151 |
|
$ |
23,407 |
|
$ |
9,424 |
|
10. TAXES ON INCOME
The effective tax rates for the three months ended April 4, 2003, two months ended March 29, 2002 and one month ended February 1, 2002 were 43.5%, 42.1% and 38.2%, respectively. The components of the effective tax rate for the various periods are shown in the table below:
I-16
|
|
|
Successor Company |
|
Predecessor Company |
|
||
|
Total revenue |
|
Three
months ended |
|
Two months
ended |
|
One month
ended |
|
|
Federal tax rate |
|
35.0 |
% |
35.0 |
% |
35.0 |
% |
|
State tax |
|
4.9 |
|
4.2 |
|
2.8 |
|
|
Nondeductible items |
|
2.8 |
|
1.9 |
|
.4 |
|
|
Foreign tax |
|
.8 |
|
1.0 |
|
— |
|
|
Effective tax rate |
|
43.5 |
% |
42.1 |
% |
38.2 |
% |
11. CONTINGENCIES AND COMMITMENTS
Contract related matters
We have contracts with the U.S. government, the allowable costs of which are subject to adjustments upon audit and negotiation by various agencies of the U.S. government. Audits by the U.S. government and negotiations of indirect costs are substantially complete through 2000. Audits by the U.S. government of 2001 indirect costs are in progress. We are also in the process of preparing cost impact statements as required under U.S. Cost Accounting Standards for 1999 through 2002, which are subject to audit by the U.S. government and negotiation. We have also prepared and submitted to the government cost impact statements for 1989 through 1998 for which we believe no adjustments are necessary. We believe that the results of the indirect costs audits and negotiations and the cost impact statements will not result in a material change to our financial position, results of operations or cash flows.
Letters of credit
In the normal course of business, we cause letters of credit to be issued in connection with contract performance obligations that are not required to be reflected in the balance sheet. We are obligated to reimburse the issuer of such letters of credit for any payments made thereunder. At April 4, 2003 and January 3, 2003, $199,558 and $207,110, respectively, in face amount of letters of credit were outstanding. We have pledged cash and cash equivalents as collateral for our reimbursement obligations with respect to $38,000 in face amount of specified letters of credit that were outstanding at April 4, 2003. At April 4, 2003, $161,558 of the outstanding letters of credit were issued under the Senior Secured Revolving Credit Facility.
Guarantees
We have guaranteed the indemnity obligations of WGSG relating to the sale of EMD to Curtiss-Wright Corporation in October 2002 for the potential occurrence of specified events, including breaches of representations and warranties and/or failure to perform certain covenants or agreements. Generally, the indemnification provisions expire within three years and are capped at $20,000. In addition, the indemnity provisions relating to environmental conditions obligate WGSG to pay Curtiss-Wright Corporation up to a maximum $3,500 for environmental losses they incur over $5,000. WGSG is also responsible for environmental losses that exceed $1,300 related to a specified parcel of the sold property. If WGSG is unable to perform its indemnity obligations, BNFL has agreed to indemnify us for 40% of losses we incur as a result of our guarantee. We believe that the indemnification provisions will not have a material adverse effect on our financial position, results of operations or cash flows.
Other
Some current and former officers, employees and directors of Washington Group were named defendants in an action filed by two former participants in the Old MK 401(k) Plan and Employee Stock Ownership Plan in the U.S. District Court for the District of Idaho. The complaint alleges, among other things, that the defendants breached certain fiduciary duties. On July 12, 2000, the court denied plaintiffs’ motion to reconsider a prior
I-17
summary judgment in favor of specified defendants and granted summary judgment with respect to specified other defendants. As a result, Washington Group and all current and former officers, employees and directors have been dismissed from the action. The court also certified the case as a class action. The remaining defendants in this proceeding are the two plan committees and two companies (to which we had indemnification obligations that were discharged in our bankruptcy proceedings) involved in administration of the plans.
In about 1998, Washington Infrastructure, Inc., formerly known as Raytheon Infrastructure, Inc., a wholly-owned subsidiary from the acquisition of RE&C, contracted with the School Construction Authority of the City of New York (the “Authority”) to provide construction management and inspection services in connection with the construction of a new school facility. The Authority brought suit against the prime contractor to correct deficiencies in materials and/or workmanship. The prime contractor agreed to perform rework and absorb the cost of approximately $4,500 to end the dispute with the Authority. As part of the settlement, the Authority also agreed to assign to the prime contractor any claims it had against us arising from the defective work. Thereafter, the prime contractor sued the Authority alleging claims for betterment, sued us alleging negligent inspection and sued a number of other parties.
Government contracts are subject to specific procurement regulations, contract provisions and a variety of other requirements relating to the formation, administration, performance and accounting of these contracts. As a result of our government contracting, claims for civil or criminal fraud may be brought by the government for violations of those regulations, requirements and statutes. See the disclosure at pages I-11 and I-12 of our annual report on Form 10-K for the fiscal year ended January 3, 2003 under the caption “Business - Risk Factors” for a discussion of these risks.
From the spring of 1996 through the spring of 2001, we were the environmental remediation contractor for the U.S. Army Corps of Engineers (the “Corps”) with respect to remediation at the Tar Creek Superfund site at a former mining area in northeast Oklahoma. The Corps had contracted with the U.S. Environmental Protection Agency to remove lead contaminated soil in residential areas from more than 2,000 sites and replace it with clean fill material. In February 2000, various federal investigators working with the U.S. Attorney’s Office for the Northern District of Oklahoma executed search warrants and seized our local project records. Allegations made at the time included claims that the project had falsified truck load tickets and had claimed compensation for more loads than actually were hauled, or had indicated that full loads had been hauled when partial loads actually were carried, as well as claims that the project had sought compensation for truckers and injured workers who were directed to remain at the job site, but not to work. The criminal investigation relating to the execution of the search warrants remains pending. Through claims filed in our bankruptcy proceedings and conversations with lawyers from the Civil Division of the U.S. Department of Justice, we have learned that a qui tam lawsuit has been filed against us under the federal False Claims Act by private citizens alleging fraudulent or false claims by us for payments we received in connection with the Tar Creek remediation project. We believe that there was no wrongdoing by us or our employees at this project.
In 2002, the Inspector General for the U.S. Agency for International Development (“USAID”) requested documentation about and made inquiries into the contractual relationships between one of our U.S. joint ventures and a local construction company in Egypt. The focus of the inquiry, which is ongoing, is whether the structure of our business relationships with Egyptian companies violated USAID contract regulations with respect to source, origin and nationality requirements. In March 2003, we were notified by the Department of Justice that it is considering recommending civil litigation against us under the False Claims Act and at common law in connection with the matters being investigated by USAID. The Department of Justice is looking at potential violations of the USAID source, origin and nationality regulations in connection with five of our projects located in Egypt which were financed by USAID beginning in 1996. We are responding to the inquiries from USAID and the Department of Justice, and are cooperating with the investigation.
Although the ultimate outcome of the matters discussed above cannot be predicted with certainty, we believe that the outcome of these actions, individually or collectively, will not have a material adverse impact on our financial position, results of operations or cash flows.
I-18
In addition to the foregoing, there are other claims, lawsuits, disputes with third parties, investigations and administrative proceedings against us relating to matters in the ordinary course of our business activities that are not expected to have a material adverse effect on our financial position, results of operations or cash flows.
I-19
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a global engineering and construction company serving clients through six business units: Power, Infrastructure, Mining, Industrial/Process, Defense and Energy & Environment.
We are subject to numerous factors, which have an impact on our ability to win new work. The Power business unit is dependent on the domestic demand for new power generating facilities and the modification of existing power facilities. Infrastructure is affected by the availability of public sector funding for transportation projects and availability of bonding. Mining is affected by demand for coal and other extractive resources. The Industrial/Process business unit is affected in general by the growth prospects in the U.S. economy and more directly by the capital spending plans of its large customer base. Finally, the Defense and Energy & Environment business units are almost entirely dependent on the spending levels of the U.S. government, in particular, the Departments of Defense and Energy.
We believe the following accounting issues and policies are the most significant and critical to a complete understanding of our results of operations.
New work represents the monetary value of a contract entered into with a client that is binding on both parties and reflects the revenue or equity in net earnings of unconsolidated affiliates expected to be recognized from that contract.
Backlog represents the total accumulation of new work awarded less the amount of revenue or equity in net earnings of unconsolidated affiliates recognized to date on contracts at a specific point in time; therefore, it comprises the total value of awarded contracts that are not complete and the revenue or equity in net earnings of unconsolidated affiliates that is expected to be reflected over the remaining life of the projects in process. Backlog is the key predictor of future earnings potential. Although backlog reflects business that we consider to be firm, cancellations or reductions may occur and may reduce backlog and future revenues. We have a significant number of clients that consistently extend or add to the scope of existing contracts. We do not include any estimate of this ongoing work in backlog until awarded.
There are three unique aspects of our approach to new work and backlog:
• Government contracts - Most of our government contracts cover several years. However, they are subject to annual appropriations by Congress. To account for the risk that future amounts may not be appropriated, we only include the most immediate two years of forecast revenue in our backlog. Therefore, as time passes and appropriations occur, additional new work is recorded on existing government contracts. At April 4, 2003, government funded contracts comprised approximately 37% of our total backlog.
• Mining contracts - Mining contracts span varying periods of time up to the life of the resource. For new work and backlog purposes, we limit the amount recorded to five years. Similar to our practices with government contracts, as time passes, we recognize additional new work as commitments for that future work are firmed up. At April 4, 2003, mining contracts comprised approximately 10% of our total backlog.
• At risk and agency contracts - The amount of new work and related backlog recognized depends on whether the contract or project is determined to be an “at-risk” or “agency” relationship between the client and us. Determination of the relationship is based on characteristics of the contract or the relationship with the client. For “at-risk” relationships, the expected gross revenue is included in new work and backlog. For relationships where we act as an agent for our client, only the expected net fee
I-20
revenue is included in new work and backlog. At April 4, 2003, agency contracts comprised approximately 6% of our total backlog.
Revenue recognition is generally recognized on the “percentage-of-completion” method for construction-type contracts. Revenue is recognized as work is performed and award and other fees are earned for cost-type and operation and maintenance-type contracts. There are various means of determining revenue under the percentage-of-completion method. Most of our fixed-price and target-price contracts use a cost-to-cost approach, where revenue is earned in proportion to costs incurred divided by total costs expected to be incurred. However, if a project includes significant materials or equipment costs, we require that the percentage-of-completion method be based on labor hours, labor dollars or some other appropriate approximation of physical completion rather than on a strict percentage of costs incurred. For certain long-term contracts involving mining and environmental and hazardous substance remediation, completion is measured on estimated physical completion or units of production.
Revenue recognition on certain fixed-price and target-price construction contracts begins when progress is sufficient to estimate the probable outcome. We generally do not recognize any profit on fixed-price or target-price contracts until the project is at least 20% complete.
We have a number of contracts and subcontracts with various agencies of the U.S. government that extend beyond one year and for which government funding has not yet been approved. All contracts with agencies of the U.S. government and some commercial and foreign contracts are subject to unilateral termination at the option of the customer. In the event of a termination, we would not receive projected revenues associated with the terminated portion of such contracts.
With respect to award fees associated with U.S. government contracts, we recognize only an estimated award fee based on historical performance until the client has confirmed the final award fee. Performance-based incentive fees are recognized when actually awarded by the client.
Revenue recognition for construction and engineering contracts also depends on whether the contract or project is determined to be an “at risk” or an “agency” relationship between the client and us. Determination of the relationship is based on characteristics of the contract or the relationship with the client. For “at risk” relationships, the gross revenue and the costs of materials, services, payroll, benefits, non-income tax and other costs are recognized in the income statement. For “agency” relationships, where we act as an agent for our client, only fee revenue is recognized, meaning that direct project costs and the related reimbursement from the client are netted.
The use of the percentage-of-completion method for revenue recognition requires that estimates of progress towards completion must be developed to determine the amount of revenue and profit to recognize. Under the percentage-of-completion method, profit margins to be recognized are dependent upon the accuracy of a variety of estimates, including engineering progress, materials quantities, achievement of milestones and other incentives, penalty provisions, labor productivity, cost estimates and others. Such estimates are dependent upon various judgments we make with respect to those factors, and some are difficult to accurately determine until the project is significantly underway. We recognize adjustments to profitability on contracts utilizing the percentage-of-completion method on a cumulative basis, when such adjustments are identified.
We have a history of making reasonably dependable estimates of the extent of progress towards completion, contract revenue and contract completion costs on our long-term engineering and construction contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates.
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are identified. The cumulative effect of revisions to contract revenue and estimated completion costs, including incentive awards, penalties, change orders, claims and anticipated losses, is recorded in the accounting period in which the amounts are known and can be reasonably estimated. Such revisions could occur at any time, and the
I-21
effects could be material. The effects of other changes to estimated contract profit or loss are recognized in the period in which such revisions are identified. They can include such items as the effects of change orders and claims (see also “Change orders and claims” in this section), warranty claims, liquidated damages or other contractual penalties, adjustments for audit findings on U.S. government contracts and contract close-out settlements. Should such items result in reductions to or elimination of previously reported profits, they would be recognized by a charge against current period earnings. Such adjustments could be significant.
Change orders and claims are common on construction contracts when changes occur once contract performance is underway. These changes are to be documented and terms agreed with the client before the work is performed. Also, costs may be incurred in addition to amounts originally estimated under the assumption that the customer will agree to pay for such additional costs. Change orders are included on total estimated contract revenue when it is probable that the change order will result in a bona fide addition to contract value and can be reliably estimated. If it is probable that the change order will result in the contract price exceeding the related costs incurred and that the excess over cost can be reliably estimated, and if realization is assured beyond a reasonable doubt, the original contract price is adjusted to the probable revised contract amount as the costs are recognized. Claims are included on total estimated contract revenue, only to the extent that contract costs related to the claim have been incurred, when it is probable that the claim will result in a bona fide addition to contract value and can be reliably estimated. No profit is recognized on claims until final settlement occurs. This can lead to a situation where losses are recognized when costs are incurred before client agreement is obtained and subsequent income is recognized when signed agreements are negotiated.
Joint ventures and equity investments are utilized when certain contracts are executed jointly through partnerships and joint ventures with unrelated third parties.
• Joint ventures - Much of our work on large construction projects is performed through unincorporated joint ventures with one or more partners. The accounting treatment depends on our ownership percentage of the joint venture. For those in which our ownership exceeds 50% and/or we control the joint venture by contract terms or other means, the assets, liabilities and results of operations of the joint venture are fully consolidated in our financial statements, and the minority interests of third parties are separately deducted in our financial statements. For those construction joint ventures in which our ownership is 50% or less or we do not control the joint venture, we report our pro rata portion of revenue and costs, but the balance sheet reflects only our net investment in the project. Joint ventures that do not involve construction activities, in which our ownership is 50% or less or we do not control the joint venture, are reported using the equity method of accounting.
• Partially-owned subsidiary companies - Like joint ventures, the accounting treatment depends on our ownership percentage of the subsidiary company. For those in which our ownership exceeds 50%, the assets, liabilities and results of operations of the subsidiary company are fully consolidated in our financial statements, and the minority interests of third parties are separately deducted in our financial statements. However, for those in which our ownership is 50% or less, we reflect our proportion of the net income in the results of operations as equity in net earnings of unconsolidated affiliates and our investment on the balance sheet as our net percentage investment in the subsidiary company.
Normal profit is an accounting concept that results from the requirement that an acquiring company record all contracts of an acquiree that are in process at the date of acquisition, including construction contracts, at fair value. As such, an asset for favorable contracts or a liability for unfavorable contracts is recorded in purchase accounting. These assets or liabilities are then reduced based on revenues recorded over the remaining contract lives effectively resulting in the recognition of a reasonable or normal profit margin on contract activity performed subsequent to the acquisition. Because of the acquisition of RE&C and the below market profit status of many of the significant acquired contracts, we recorded significant liabilities in purchase accounting. The reduction of these liabilities has an impact on our recorded net income, but has no impact on our cash flows. Most of the contracts with normal profit attributes are now completed and only minor amounts remain to be recognized.
I-22
Accounts receivable represent amounts billed to clients that have not been paid. One unusual item is client retention. On large fixed-price construction contracts, contract provisions may allow the client to withhold from 5% to 10% of invoices until the project is completed, which may be several months or years. Retention is recorded as a receivable and is separately disclosed in the financial statements.
Unbilled receivables is comprised of costs incurred on projects, together with any profit recognized on projects using the percentage-of-completion method, and represents work performed but not yet billed pursuant to contract terms or billed after the accounting period cut-off occurred.
Billings in excess of cost and estimated earnings on uncompleted contracts represent amounts actually billed to clients, and perhaps collected, in excess of costs and profits incurred on the project and, as such, are reflected as a liability. Also, in specified business segments, we are sometimes able to negotiate substantial advance payments as a contract condition. These advance payments are reflected in billings in excess of cost and estimated earnings on uncompleted contracts. Provisions for losses on contracts, reclamation reserves on mining contracts and reserves for punch-list costs, demobilization and warranty costs on contracts that have achieved substantial completion and reserves for audit and contract closing adjustments on U.S. government contracts are also included in billings in excess of cost and estimated earnings on uncompleted contracts.
Estimate at completion is a financial forecast of a project that indicates the best current estimate of total revenues and profits at the point in time when the project will be completed. If a project estimate at completion indicates that a project will incur a loss, a provision for the entire loss on the contract is recognized at that time.
General and administrative expenses include executive salaries and corporate functions such as legal services, human resources and finance and accounting.
Self-insurance reserves represent reserves established through a program under which we determine the extent to which we self-insure certain business risks. We carry substantial premium-paid, traditional insurance for our various business risks; however, we do self-insure the lower level deductibles for workers’ compensation and general, automobile and professional liability. Most of this self-insurance is handled through Broadway Insurance Company, a wholly-owned captive Bermuda insurance subsidiary. As such, we carry self-insurance reserves on our balance sheet that are reviewed annually by an independent actuary. The current portion of the self-insurance reserves is included in other accrued liabilities.
Minority interest reflects the equity investment by third parties in certain subsidiary companies and joint ventures that we have consolidated in our financial statements, and is comprised primarily of BNFL’s interest in WGSG.
Government contract costs are incurred under some of our contracts, primarily in the Defense and Energy & Environment business units. We have contracts with the U.S. government that contain provisions requiring compliance with the U.S. Federal Acquisition Regulation and the U.S. Cost Accounting Standards. The allowable costs we charge to those contracts are subject to adjustment upon audit and negotiation by various agencies of the U.S. government. Audits and negotiations of indirect costs are substantially complete through 2000. Audits of 2001 indirect costs are in progress. We are also in the process of preparing cost impact statements as required under the U.S. Cost Accounting Standards for 1999 through 2002, which are subject to audit and negotiation. We have also prepared and submitted to the U.S. government cost impact statements for 1989 through 1998 for which we believe no adjustments are necessary. We believe that the results of the indirect cost audits and negotiations and the cost impact statements will not result in a material change to our financial position, results of operations or cash flows.
Pension and post-retirement benefit plans include certain plans for which we assumed sponsorship through (1) the acquisition of the Westinghouse Businesses from CBS Corporation (now Viacom, Inc.) by BNFL and us and (2) our acquisition from the Sellers of RE&C. We assumed sponsorship of contributory defined benefit pension plans that cover employees of WGSG. We make actuarially computed contributions as necessary to adequately fund benefits for these plans. We are also the sponsors of an unfunded plan to provide health care
I-23
benefits for employees of Old MK who retired before July 1, 1993, including their surviving spouses and dependent children. We also provide benefits under company-sponsored retiree health care and life insurance plans for substantially all employees of WGSG. The retiree health care plans require retiree contributions and contain other cost sharing features. The retiree life insurance plan provides basic coverage on a noncontributory basis.
Goodwill is no longer amortized, but is subject to annual impairment tests under the new rules issued in June 2001 by the Financial Accounting Standards Board (“FASB”) in Statements No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). These statements were effective for our fiscal year 2002. Effective February 1, 2002, in conjunction with fresh-start reporting, we adjusted all of our assets and liabilities to estimated fair value. In addition, our income tax attributes include tax deductible goodwill in excess of financial statement goodwill. The tax value of goodwill generates tax deductible amortization although financial statement goodwill is no longer amortized. As goodwill amortization is deducted for income tax purposes, substantially all of the resulting tax benefit reduces financial statement goodwill. Our annual review of the recoverability of goodwill was performed as of October 31, 2002 and indicated that no impairment of goodwill had been experienced.
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) is presented because it is a measure commonly used in financial analysis in credit and equity markets to evaluate operating liquidity. In addition, management includes it in the various performance measures that are routinely produced and analyzed as a measure of liquidity. EBITDA is not a measure of operating performance computed in accordance with generally accepted accounting principles (“GAAP”), and should not be considered as a substitute for earnings from operations, net income or loss, cash flows from operating activities or other statements of operations or cash flow data prepared in conformity with GAAP, or as a GAAP measure of profitability or liquidity. In addition, EBITDA may not be comparable to similarly titled measures of other companies.
Our calculation of adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization, normal profit and exclusion of bankruptcy-related items, as follows:
|
|
|
Three months ended |
|
||||
|
Adjusted EBITDA |
|
April 4, 2003 |
|
March 29, 2002 |
|
||
|
Net income |
|
$ |
12.8 |
|
$ |
531.7 |
|
|
Reorganization items (a) |
|
— |
|
48.4 |
|
||
|
Net gain in bankruptcy |
|
— |
|
(567.2 |
) |
||
|
Net income, after adjustments for bankruptcy items |
|
12.8 |
|
12.9 |
|
||
|
Taxes |
|
12.8 |
|
12.7 |
|
||
|
Interest expense |
|
6.9 |
|
5.7 |
|
||
|
Depreciation and amortization (b) |
|
10.0 |
|
16.1 |
|
||
|
Normal profit |
|
(.7 |
) |
(12.0 |
) |
||
|
Total |
|
$ |
41.8 |
|
$ |
35.4 |
|
(a) Net of tax of $23.7 million for the three months ended March 29, 2002.
(b) Depreciation includes $4.1 million and $7.8 million of depreciation on equipment used on a dam and hydropower project in the Philippines for the three months ended April 4, 2003 and the three months ended March 29, 2002, respectively.
I-24
RECONCILIATION OF PRO FORMA SUMMARY FINANCIAL DATA TO GAAP
|
|
|
Three months ended |
|
||||
|
(In millions) |
|
April 4, 2003 |
|
March 29, 2002 |
|
||
|
Adjusted EBITDA |
|
$ |
41.8 |
|
$ |
35.4 |
|
|
Tax (expense) benefit |
|
(12.8 |
) |
11.0 |
|
||
|
Interest expense |
|
(6.9 |
) |
(5.7 |
) |
||
|
Cash paid for reorganization items |
|
(2.5 |
) |
(20.5 |
) |
||
|
Amortization of prepaid loan fees |
|
3.0 |
|
3.2 |
|
||
|
Deferred income taxes |
|
8.7 |
|
(4.6 |
) |
||
|
Minority interest in income of consolidated subsidiaries |
|
6.4 |
|
6.8 |
|
||
|
Equity in net earnings of unconsolidated affiliates less dividends received |
|
(8.2 |
) |
.3 |
|
||
|
Loss (gain) on sale of assets, net |
|
(.4 |
) |
.4 |
|
||
|
Other operating cash flow items |
|
(76.8 |
) |
(24.1 |
) |
||
|
Net cash provided (used) by operating activities |
|
$ |
(47.7 |
) |
$ |
2.2 |
|
|
Net cash used by operating activities for the two months ended March 29, 2002 |
|
|
|
|
$ |
(4.4 |
) |
|
Plus: Net cash provided by operating activities for the one month ended February 1, 2002 |
|
|
|
6.6 |
|
||
|
Net cash provided by operating activities for the three months ended March 29, 2002 |
|
|
|
$ |
2.2 |
|
|
CONTRACT RENEGOTIATION
Of the twenty-three major RE&C projects that experienced significant contract adjustments, fourteen are now complete and five were eliminated in the insolvency proceedings of Washington International B.V. Of the four remaining projects, two have undergone reformation of the contracts to terms and conditions that permitted us to continue working on the original project and two are continuing under the original terms and conditions. Three projects are in the final stages of completion and one project is still in process.
BUSINESS UNIT NEW WORK AND BACKLOG
New work for each business unit, which represents additions to backlog for the period, is presented below:
|
NEW WORK |
|
Three months ended |
|
||||
|
(In millions) |
|
April 4, 2003 |
|
March 29, 2002 |
|
||
|
Power |
|
$ |
359.8 |
|
$ |
183.5 |
|
|
Infrastructure |
|
25.9 |
|
229.6 |
|
||
|
Mining |
|
27.2 |
|
37.5 |
|
||
|
Industrial/Process |
|
141.1 |
|
169.2 |
|
||
|
Defense |
|
107.1 |
|
164.6 |
|
||
|
Energy & Environment |
|
89.4 |
|
174.4 |
|
||
|
Other |
|
14.7 |
|
8.3 |
|
||
|
Total new work |
|
$ |
765.2 |
|
$ |
967.1 |
|
In the three months ended April 4, 2003, new work awarded to the business held for sale totaled $17.5 million.
I-25
Backlog at April 4, 2003 and January 3, 2003 consisted of:
|
BACKLOG |
|
April 4, 2003 |
|
January 3, 2003 |
|
||
|
Power |
|
$ |
486.0 |
|
$ |
302.4 |
|
|
Infrastructure |
|
670.3 |
|
766.1 |
|
||
|
Mining |
|
283.9 |
|
279.8 |
|
||
|
Industrial/Process |
|
309.9 |
|
357.7 |
|
||
|
Defense |
|
623.4 |
|
647.5 |
|
||
|
Energy & Environment |
|
388.3 |
|
386.8 |
|
||
|
Other |
|
23.4 |
|
14.8 |
|
||
|
Total backlog |
|
$ |
2,785.2 |
|
$ |
2,755.1 |
|
Backlog for the business held for sale at April 4, 2003 totaled $23.4 million.
New work and backlog
During the three months ended April 4, 2003, we recorded $765.2 million of new work awards, $98.9 million more than recognized for revenue and equity in net earnings of unconsolidated affiliates. During the quarter, we reduced backlog by $68.8 million, primarily related to certain joint ventures that had been consolidated in our financial statements and, beginning in 2003, were accounted for using either proportionate consolidation or the equity method of accounting. See “Overview” for our policy on reporting backlog. At April 4, 2003, backlog was $2,785.2 million, an increase of $30.1 million from the beginning of the quarter. Backlog on government contracts includes only two years’ worth of the portions of such contracts that are currently funded or which management is highly confident will be funded. The reported backlog at April 4, 2003 excludes approximately $869.6 million of government contracts in progress for work to be performed beyond the first quarter of 2005.
The Power business unit’s new work awards during the first quarter of 2003 were $359.8 million, of which $177.5 million was derived from a new power generation project, $54.3 million was derived from projects purchased in the RE&C acquisition which were originally fixed-price contracts but which were converted during 2001 to cost-reimbursable contracts (the “Reformed Contracts”), and $103.6 million resulted from power plant modification projects. Under the Reformed Contracts, the Sellers remain responsible for the performance of the contracts and, as such, continue to fund the construction of the projects. We are retained by the Sellers on a cost-reimbursable basis and continue to provide construction management on the projects. The Infrastructure business unit recorded $25.9 million in new work awards during the three months ended April 4, 2003. Three significant expected awards totaling approximately $300 million have been delayed into future periods. The Mining business unit recorded $27.2 million in new work bookings during the three months ended April 4, 2003, primarily from a new contract related to existing contract-mining operations in Idaho and from existing mining contracts. The Industrial/Process business unit recorded $141.1 million in new work, including $66.3 million for integrated services contracts, $37.6 million for industrial projects and $20.2 on biopharmaceutical projects. During the first quarter of 2003, the Defense business unit recorded new work of $107.1 million, of which $105.1 million came through awards on threat reduction projects. The Energy & Environment business unit recorded $89.4 million in new work during the first quarter, generated primarily from new work awards of $45.6 million on energy projects, $19.7 million of new work related to U.S. Department of Energy (“DOE”) management and $24.1 million of new work in commercial operations.
I-26
RESULTS OF OPERATIONS
On January 25, 2002, we emerged from Chapter 11 bankruptcy proceedings and implemented fresh-start reporting effective February 1, 2002 (the “Effective Date”). Accordingly, all assets and liabilities at the Effective Date were adjusted to reflect their respective fair values. The consolidated financial statements after that date are those of a new reporting entity and are not comparable to the pre-emergence periods. However, for purposes of this discussion, the two months ended March 29, 2002 (post-emergence) were combined with the month ended February 1, 2002 (pre-emergence), and reorganization items are presented as bankruptcy-related items, net of tax. The following table is included solely for use in analysis of results of operations and to complement management’s discussion and analysis.
|
|
|
Three months ended |
|
||||
|
RESULTS OF OPERATIONS |
|
April 4, 2003 |
|
March 29,
2002 |
|
||
|
Backlog |
|
|
|
|
|
||
|
Beginning backlog |
|
$ |
2,755.1 |
|
$ |
3,378.7 |
|
|
New work |
|
765.2 |
|
967.1 |
|
||
|
Adjustments |
|
(68.8 |
) |
— |
|
||
|
Revenue and equity in net earnings of unconsolidated affiliates |
|
(666.3 |
) |
(963.6 |
) |
||
|
Ending backlog |
|
$ |
2,785.2 |
|
$ |
3,382.2 |
|
|
Total revenue |
|
$ |
657.5 |
|
$ |
956.9 |
|
|
Gross profit |
|
$ |
37.5 |
|
$ |
39.0 |
|
|
Equity in net earnings of unconsolidated affiliates |
|
8.8 |
|
6.7 |
|
||
|
General and administrative expenses |
|
(10.1 |
) |
(12.3 |
) |
||
|
Restructuring charges |
|
— |
|
(.6 |
) |
||
|
Operating income |
|
36.2 |
|
32.8 |
|
||
|
Investment income |
|
.3 |
|
.4 |
|
||
|
Interest expense |
|
(6.9 |
) |
(5.7 |
) |
||
|
Other income (loss), net |
|
(.1 |
) |
2.2 |
|
||
|
Income before income taxes, minority interests and bankruptcy-related items |
|
29.5 |
|
29.7 |
|
||
|
Income tax expense |
|
(12.8 |
) |
(12.7 |
) |
||
|
Minority interests in income of consolidated subsidiaries |
|
(3.9 |
) |
(4.1 |
) |
||
|
Income before bankruptcy-related items |
|
12.8 |
|
12.9 |
|
||
|
Reorganization items, net of tax |
|
— |
|
(48.4 |
) |
||
|
Extraordinary item - debt discharge, net of tax |
|
— |
|
567.2 |
|
||
|
Net income |
|
$ |
12.8 |
|
$ |
531.7 |
|
I-27
RECONCILIATION OF GAAP TO PRO FORMA SUMMARY FINANCIAL DATA
(In millions)
(UNAUDITED)
|
|
|
Two months
ended |
|
One month
ended |
|
Adjustments |
|
Three
months ended |
|
||||
|
Total revenue |
|
$ |
607.0 |
|
$ |
349.9 |
|
$ |
— |
|
$ |
956.9 |
|
|
Gross profit |
|
27.9 |
|
11.1 |
|
— |
|
39.0 |
|
||||
|
Equity in net earnings of unconsolidated affiliates |
|
3.6 |
|
3.1 |
|
— |
|
6.7 |
|
||||
|
General and administrative expenses |
|
(8.1 |
) |
(4.2 |
) |
— |
|
(12.3 |
) |
||||
|
Restructuring charges |
|
— |
|
(.6 |
) |
— |
|
(.6 |
) |
||||
|
Operating income |
|
23.4 |
|
9.4 |
|
— |
|
32.8 |
|
||||
|
Investment income |
|
— |
|
.4 |
|
— |
|
.4 |
|
||||
|
Interest expense |
|
(4.5 |
) |
(1.2 |
) |
— |
|
(5.7 |
) |
||||
|
Other income (expense), net |
|
2.7 |
|
(.5 |
) |
— |
|
2.2 |
|
||||
|
Income before reorganization items, income taxes, minority interests and extraordinary item |
|
21.6 |
|
8.1 |
|
— |
|
29.7 |
|
||||
|
Reorganization items |
|
— |
|
(72.1 |
) |
72.1 |
|
— |
|
||||
|
Income tax (expense) benefit |
|
(9.1 |
) |
20.1 |
|
(23.7 |
) |
(12.7 |
) |
||||
|
Minority interests in income of consolidated subsidiaries |
|
(3.0 |
) |
(1.1 |
) |
— |
|
(4.1 |
) |
||||
|
Income (loss) before extraordinary item |
|
9.5 |
|
(45.0 |
) |
48.4 |
|
12.9 |
|
||||
|
Extraordinary item - gain on debt discharge, net of income tax benefit of $343.5 |
|
— |
|
567.2 |
|
(567.2 |
) |
— |
|
||||
|
Net income |
|
$ |
9.5 |
|
$ |
522.2 |
|
$ |
(518.8 |
) |
$ |
12.9 |
|
THREE MONTHS ENDED APRIL 4, 2003 COMPARED TO
THREE MONTHS ENDED MARCH 29, 2002
Revenue and operating income
Revenue for the three months ended April 4, 2003 declined 31% from the first quarter of 2002 to $657.5 million primarily as a result of the completion of several major projects in the Power, Infrastructure and Industrial/Process business units. The decline was also caused by the absence of revenue from the operations of EMD in the Energy & Environment business unit, which division was sold in October 2002. While the Power business unit continued work on new power generation projects, including two acquired as part of the RE&C acquisition, two such projects in process in the first quarter of 2002 were completed later in the year and two remaining projects are nearing completion. The Infrastructure business unit experienced a decline in revenue primarily from the substantial completion of certain projects during the first quarter of 2003, including a dam and hydropower project in the Philippines. The Industrial/Process business unit continued to be impacted by the softness of domestic and international economies and the completion of a significant project, but some markets of Industrial/Process continued to be strong, including automotive and biopharmaceuticals.
Operating income increased $3.4 million for the three months ended April 4, 2003 from the comparable period in 2002. Despite the decline in revenue from projects completed or near completion mentioned above, there was minimal impact on income because several of these major projects contributed nominal operating earnings during the first quarter of 2002. In addition, during the first quarter of 2003, the Defense business unit recognized $8.0 million in income as a result of a negotiated settlement on a construction contract. Operating income of the Industrial/Process business unit for the first quarter of 2003 included $2.6 million from settlements
I-28
of outstanding project claims. During the first quarter of 2003, operating income of the Infrastructure business unit decreased $4.8 million from the first quarter of 2002 due to the recognition of $10.0 million of normal profit in the first quarter of 2002 versus $.7 million in 2003. This reduction of normal profit from 2002 was partially offset by the favorable resolution of claims totaling $5.6 million during the first quarter of 2003. Also, operating income for the first quarter of 2003 of the Energy & Environment business unit declined $7.7 million from the first quarter of 2002 due to the absence of income from EMD in the first quarter of 2003. Overall, $.7 million of normal profit was recognized in the first quarter of 2003 compared to $12.0 million in the first quarter of 2002.
Included in operating income for the first quarter of 2002 was the recognition of normal profit of $12.0 million, primarily related to Infrastructure projects. Normal profit was insignificant during the first quarter of 2003.
For a more detailed discussion of our revenue and operating income, see “Business Unit Results” further in our management’s discussion and analysis.
The diversification of our business may cause margins to vary between periods due to the inherent risks and rewards on fixed-price contracts causing unexpected gains and losses on contracts. Margins may also vary between periods due to changes in the mix and timing of contracts executed by us, which contain various risk and profit profiles and are subject to uncertainties inherent in the estimation process.
General and administrative expenses
General and administrative expenses for the three months ended April 4, 2003 were $10.1 million, a decline of $2.2 million from the comparable period in 2002. The reduction was primarily the result of lower information technology software costs and incentive compensation costs incurred during the first quarter of 2003. General and administrative expenses represent the executive and administrative costs not related to operations of our business units.
Interest expense
Interest expense for the first quarter of 2003 consisted of $3.0 million of amortization of bank fees paid at the closing of the Senior Secured Revolving Credit Facility and $3.9 million of cash interest expense consisting primarily of letter of credit fees, commitment fees on undrawn funds, fronting fees and administrative fees paid to the agent bank. Prepaid bank fees are being amortized over the 30-month life of the Senior Secured Revolving Credit Facility, which will expire in July of 2004. Letter of credit fees and commitment fees are recorded as interest expense.
In comparison, interest expense for the first quarter of 2002 consisted of $3.1 million of amortization of bank fees paid at the closing of the Senior Secured Revolving Credit Facility and amortization of bank fees under the previous credit facility and $2.6 million of cash interest expense consisting primarily of letter of credit fees, commitment fees on undrawn and unissued funds, fronting fees and interest on funded debt.
Other income (expense), net
Other income (expense), net for the three months ended April 4, 2003 was insignificant. However, other income (expense) net for the three months ended March 29, 2002 was $2.2 million, which consisted primarily of a $2.8 million distribution received from the conversion of an insurance carrier that provides our employee long-term disability coverage from a mutual insurance company to a stock company. In connection with the demutualization, the distribution was received following the insurance company’s initial public offering during the first quarter of 2002.
I-29
Income tax expense
The effective tax rates for the three months ended April 4, 2003, the two months ended March 29, 2002 and the one month ended February 1, 2002 were 43.5%, 42.1% and 38.2%, respectively. The components of the effective tax rate for the various periods are shown in the table below:
|
|
|
Successor Company |
|
Predecessor Company |
|
||
|
|
|
Three months
ended |
|
Two months
ended |
|
One month
ended |
|
|
Federal tax rate |
|
35.0 |
% |
35.0 |
% |
35.0 |
% |
|
State tax |
|
4.9 |
|
4.2 |
|
2.8 |
|
|
Nondeductible items |
|
2.8 |
|
1.9 |
|
.4 |
|
|
Foreign tax |
|
.8 |
|
1.0 |
|
— |
|
|
Effective tax rate |
|
43.5 |
|
42.1 |
|
38.2 |
|
|
Adjust for effect of bankruptcy and Reorganization items |
|
— |
|
— |
|
7.5 |
|
|
Pro forma effective tax rate |
|
43.5 |
% |
42.1 |
% |
45.7 |
% |
The pro forma effective tax rate represents the tax rate after removing the effects of bankruptcy and reorganization items.
When the effective tax rate is applied to a loss before taxes, a tax benefit results. In these periods, nondeductible expenses decrease the effective tax rate. When the effective tax rate is applied to income before taxes, a tax expense results. In these periods, nondeductible expenses increase the effective tax rate.
Tax payments are anticipated to be substantially less than the related tax provision reported in the financial statements primarily because of tax deductions for goodwill amortization. As of January 3, 2003, we had remaining tax goodwill of approximately $87 million resulting from the acquisition of the Westinghouse Businesses and $618 million resulting from the acquisition of RE&C. The amortization of this tax goodwill is deductible over remaining periods of 11.2 and 12.5 years, respectively, resulting in annual tax deductions of approximately $50 million net of minority interest and application of limitations under the Internal Revenue Code. In effect, we will not pay cash taxes on the first $50 million of federal taxable income before amortization each year.
Minority interests
The majority of our minority interests relates to BNFL’s 40% ownership of our Westinghouse operations that are included in the Energy & Environment business unit. Increases in income of our majority-owned subsidiaries cause an increase in the minority interest share of income from those operations. Likewise, decreases in income of our majority-owned subsidiaries cause a decrease in the minority interest share of income.
Reorganization items
During the one month ended February 1, 2002, we recognized, as part of fresh-start reporting, aggregated charges of $35.1 million before tax benefit for adjustments to reflect all assets and liabilities at their respective fair values. Other reorganization charges during the one month ended February 1, 2002 totaled $37.0 million before tax benefit and consisted primarily of professional fees incurred in connection with the bankruptcy proceedings. Cash paid for reorganization items totaled $2.5 million in the first quarter of 2003 and $20.5 million in the first quarter of 2002.
I-30
Extraordinary item
During the first quarter of 2002, an extraordinary gain of $1,460.7 million was recorded as a result of the discharge of liabilities that resulted from our Plan of Reorganization, partially offset by new common stock and warrants issued of $550.0 million and income taxes of $343.5 million.
BUSINESS UNIT RESULTS
(In millions)
|
|
|
Three months ended |
|
||||
|
|
|
|
|
March 29, 2002 |
|
||
|
Total revenue |
|
April 4, 2003 |
|
(Pro forma) |
|
||
|
Power |
|
$ |
176.2 |
|
$ |
249.3 |
|
|
Infrastructure |
|
121.7 |
|
218.8 |
|
||
|
Mining |
|
14.5 |
|
13.9 |
|
||
|
Industrial/Process |
|
119.7 |
|
172.7 |
|
||
|
Defense |
|
131.2 |
|
159.8 |
|
||
|
Energy & Environment |
|
88.1 |
|
137.0 |
|
||
|
Intersegment and other |
|
6.1 |
|
5.4 |
|
||
|
Total revenue |
|
$ |
657.5 |
|
$ |
956.9 |
|
|
Operating income (loss) |
|
|
|
|
|
||
|
Power |
|
$ |
7.4 |
|
$ |
6.5 |
|
|
Infrastructure |
|
6.9 |
|
11.7 |
|
||
|
Mining |
|
8.4 |
|
6.7 |
|
||
|
Industrial/Process |
|
3.3 |
|
2.4 |
|
||
|
Defense |
|
13.7 |
|
5.5 |
|
||
|
Energy & Environment |
|
8.0 |
|
15.7 |
|
||
|
Intersegment and other unallocated operating costs |
|
(1.4 |
) |
(3.4 |
) |
||
|
Total segment operating income |
|
46.3 |
|
45.1 |
|
||
|
General and administrative expenses, corporate |
|
(10.1 |
) |
(12.3 |
) |
||
|
Total operating income |
|
$ |
36.2 |
|
$ |
32.8 |
|
RECONCILIATION OF GAAP SEGMENT INFORMATION TO
PRO FORMA FINANCIAL INFORMATION
|
TOTAL REVENUE |
|
Two months
ended |
|
One month
ended |
|
Three
months ended |
|
|||
|
Power |
|
$ |
163.8 |
|
$ |
85.5 |
|
$ |
249.3 |
|
|
Infrastructure |
|
138.9 |
|
79.9 |
|
218.8 |
|
|||
|
Mining |
|
8.6 |
|
5.3 |
|
13.9 |
|
|||
|
Industrial/Process |
|
108.4 |
|
64.3 |
|
172.7 |
|
|||
|
Defense |
|
97.7 |
|
62.1 |
|
159.8 |
|
|||
|
Energy & Environment |
|
86.6 |
|
50.4 |
|
137.0 |
|
|||
|
Intersegment, eliminations and other |
|
3.0 |
|
2.4 |
|
5.4 |
|
|||
|
Total consolidated revenues |
|
$ |
607.0 |
|
$ |
349.9 |
|
$ |
956.9 |
|
I-31
|
|
|
|
|
|
|
Three
months ended (Pro forma) |
|
|||
|
OPERATING INCOME |
|
Two months
ended |
|
One month
ended |
|
|
||||
|
Power |
|
$ |
6.3 |
|
$ |
.2 |
|
$ |
6.5 |
|
|
Infrastructure |
|
8.7 |
|
3.0 |
|
11.7 |
|
|||
|
Mining |
|
3.5 |
|
3.2 |
|
6.7 |
|
|||
|
Industrial/Process |
|
1.8 |
|
.6 |
|
2.4 |
|
|||
|
Defense |
|
3.6 |
|
1.9 |
|
5.5 |
|
|||
|
Energy & Environment |
|
10.1 |
|
5.6 |
|
15.7 |
|
|||
|
Intersegment and other unallocated operating costs |
|
(2.5 |
) |
(.9 |
) |
(3.4 |
) |
|||
|
General and administrative expense, corporate |
|
(8.1 |
) |
(4.2 |
) |
(12.3 |
) |
|||
|
Total operating income |
|
$ |
23.4 |
|
$ |
9.4 |
|
$ |
32.8 |
|
Power
Revenue for the first quarter of 2003 declined $73.1 million or 29% from the comparable quarter in 2002. This decrease was primarily due to the completion and winding down of four Reformed Contracts acquired through the RE&C acquisition and the completion of another power plant. The decline in revenue was also attributable to reduced revenue from fossil services. In the first quarter of 2003, $68.0 million of revenue was recognized by two of the still active Reformed Contracts, compared to $117.3 million recognized on four Reformed Contracts in the first quarter of 2002.
Operating income for the first quarter of 2003 increased $.9 million from the comparable period in 2002. Although the four Reformed Contracts were completed, or were near completion, their impact on operating income was minimal. In the first quarter of 2003, $2.3 million in operating income before allocations of related overhead costs was earned by two of the remaining Reformed Contracts compared to $3.9 million for four Reformed Contracts in the comparable quarter of 2002. Operating income in 2003 also included a $3.0 million increase in income due to lower projected costs to complete a steam generator replacement project. Operating income for the first quarter of 2002 included the recognition of $.8 million of normal profit. No normal profit was recognized in 2003.
Infrastructure
Revenue for the first quarter of 2003 declined $97.1 million or 44% from the comparable quarter of 2002 primarily due to the substantial completion of certain projects, including the dam and hydropower project in the Philippines. Significant sources of revenue generated in the first quarter of 2003 included a light rail project in New Jersey and a variety of highway and heavy construction work and engineering services projects. Revenue in the first quarter of 2002 included $89.3 million of revenue recognized on projects acquired in the RE&C acquisition, with the remaining revenue related to construction projects, most of which were obtained before our bankruptcy filing, and engineering services.
Operating income for the first quarter of 2003 declined $4.8 million due to the recognition of $10.0 million of normal profit in 2002 compared to only $.7 million in the first quarter of 2003. The reduction of normal profit recognition from the first quarter of 2002 was partially offset by the favorable resolution in 2003 of two outstanding project claims totaling $2.8 million and the recovery of an additional claim of $2.8 million from a customer’s insurance policy on a closed contract.
Mining
Revenue during the first quarter of 2003 increased slightly to $14.5 million compared to $13.9 in the first quarter of 2002. Operating income for the first quarter of 2003 increased $1.7 million from the comparable quarter of 2002. The MIBRAG mbH mining venture in Germany, which accounts for a significant portion of the
I-32
operating income, had stronger earnings as a result of favorable foreign currency exchange rates, improved contract terms as a result of contract renegotiations in the fourth quarter of 2002 and increased volume of coal sales.
Industrial/Process
Revenue for the first quarter of 2003 declined $53.0 million or 31% compared to the first quarter of 2002. Industrial/Process continued to be impacted by the softness of the domestic and international economies and the completion of a significant process project. However, some sectors of the business unit’s market continued to be strong, including automotive and biopharmaceuticals.
Operating income for the first quarter of 2003 increased $.9 million from the first quarter of 2002. Operating income for the first quarter of 2002 was unfavorably impacted by $3.0 million in costs due to the under absorption of engineering resources as Industrial/Process reorganized to better align professional resources with market conditions. In addition, operating income in the first quarter of 2003 included $2.6 million from settlements of outstanding project claims.
Defense
Revenue for the first quarter of 2003 declined $28.6 million or 18% from the first quarter of 2002 due to the completion of the construction scope of a major project. Threat reduction projects accounted for $129.1 million of the revenue recognized in the first quarter of 2003, as compared to $128.3 million in threat reduction work in the first quarter of 2002.
Operating income for the first quarter of 2003 increased $8.2 million from the first quarter of 2002 as a result of a negotiated settlement of $8.0 million on a construction project. Nearly all of the remainder of operating income generated in the first quarter of 2003 was from the operations of threat reduction projects.
Energy & Environment
Revenue for the first quarter of 2003 declined $48.9 or 36% from the comparable quarter in 2002. The decline in revenue was the result of the absence of revenue from EMD which was sold in October 2002. Revenue recognized from EMD in the first quarter of 2002 totaled $43.3 million. Of the total revenue in 2003, $48.4 million was recognized from performance on energy projects, $12.4 million on DOE management services projects and $27.3 million from energy consulting projects.
Operating income for the first quarter of 2003 declined $7.7 million from the comparable quarter of 2002 primarily due to the absence of operating income from EMD. EMD recognized $7.4 million in operating income in the first quarter of 2002. Operating income for the first quarter of 2003 included $7.7 million from performance of DOE management services projects.
Intersegment and other
Intersegment operating loss for the three months ended April 4, 2003 improved $2.0 million over the comparable period of 2002 primarily due to lower overhead costs incurred at the Technology Center, a business held for sale. In addition, operating costs for 2002 included restructuring charges of $.6 million for the three months ended March 29, 2002, with no such costs in 2003.
I-33
FINANCIAL CONDITION AND LIQUIDITY
|
|
|
Successor Company |
|
Predecessor Company |
|
|||||
|
Liquidity and capital resources |
|
Three
months ended |
|
Two months
ended |
|
One month
ended |
|
|||
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|||
|
Beginning of period |
|
$ |
171.2 |
|
$ |
128.2 |
|
$ |
138.2 |
|
|
End of period |
|
126.6 |
|
105.8 |
|
128.2 |
|
|||
|
|
|
Successor Company |
|
Predecessor Company |
|
|||||
|
|
|
Three
months ended |
|
Two months
ended |
|
One month
ended |
|
|||
|
Net cash provided (used) by: |
|
|
|
|
|
|
|
|||
|
Operating activities |
|
$ |
(47.8 |
) |
$ |
(4.4 |
) |
$ |
6.6 |
|
|
Investing activities |
|
6.0 |
|
(2.3 |
) |
(1.6 |
) |
|||
|
Financing activities |
|
(2.8 |
) |
(15.7 |
) |
(15.0 |
) |
|||
We have three principal sources of near-term liquidity: (1) cash generated by operations, (2) existing cash and cash equivalents and (3) revolving loan borrowings under our Senior Secured Revolving Credit Facility.
Cash and cash equivalents decreased $44.6 million during the quarter ended April 4, 2003 to $126.6 million. This compares to a decrease in cash of $32.4 million in the quarter ended March 29, 2002.
Operating activities
In the quarter ended April 4, 2003, operating activities used $47.8 million of net cash. During the quarter, operating cash was impacted by $68.5 million from incentive compensation payments, payments associated with annual bonding fees and project payments to subcontractors which had previously been advanced by our customers. Operating earnings generated during the quarter partially offset the increase in working capital.
Investing activities
In the quarter ended April 4, 2003, investing activities generated $6.0 million in net cash. In the quarter, $4.2 million in proceeds related to equipment sales from a dam and hydropower project in the Philippines. Additional equipment sales from this project over the balance of the year should approximate $15 to $20 million. Other equipment from this project is being redeployed to a mining project in Canada.
Financing activities
In the quarter ended April 4, 2003, financing activities used $2.8 million of cash associated with payment distributions to partners in joint ventures. This compares to a use of cash of $30.7 million for financing activities in the quarter ended March 29, 2002 primarily for payments made upon emergence from bankruptcy protection.
On April 18, 2003, we sold the Technology Center to Stone & Webster Inc., a subsidiary of The Shaw Group Inc. Stone & Webster Inc. agreed to pay $17.7 million in cash, subject to certain adjustments.
At April 4, 2003, there were $161.6 million in letters of credit outstanding under the Senior Secured Revolving Credit Facility. There were no borrowings under the facility, leaving $188.4 million available for borrowings and letters of credit. This existing credit facility is currently anticipated to be refinanced during the second half of the year. The results of this refinancing will create a charge to income associated with the unamortized balance of the capitalized financing fees. This charge is estimated to be $10 million before tax expense.
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During the three months ended April 4, 2003, there were no material changes in contractual obligations and other commercial commitments from such obligations and commitments as of January 4, 2003. However, during April 2003, outstanding letters of credit declined approximately $43.5 million from the substantial completion of the dam and hydropower project in the Philippines.
During the first quarter of 2003, MIBRAG mbH, our joint venture company that operates lignite coal mines and power plants in Germany, reached an agreement with one of its customers to contribute to a retrofit of the customer’s power plant because the quality of the coal MIBRAG mbH is delivering had fallen below specifications in the coal supply contract. MIBRAG mbH has agreed to contribute 25 million Euros toward the retrofit, with the option of contributing up to an additional 20 million Euros to the retrofit costs or potentially going to arbitration. The coal supply contract was assumed by MIBRAG mbH in the privatization in 1994. MIBRAG mbH believes the German government guaranteed that coal quality was sufficient to fulfill the terms of the contract assumed. Discussions are ongoing with government representatives regarding potential contributions from the government to reduce the contribution of MIBRAG mbH to the retrofit. MIBRAG mbH will amortize the cost over the remaining 17 years of the coal supply contract. In addition, higher coal sales have required a review of the timing of capital expenditures, and some acceleration of expenditures may be required to meet commitments. The combination of these two issues may reduce cash distributions from MIBRAG mbH over the next two to three years.
We believe that our cash flow from operations, existing cash and cash equivalents and available borrowings under our revolving credit facility will be sufficient to meet our reasonably foreseeable liquidity needs. We may, from time to time, pursue opportunities to complement existing operations through business combinations and participation in ventures, which may require additional financing and utilization of our capital resources.
In line with industry practice, we are often required to provide performance and surety bonds to customers under fixed-price contracts. These bonds indemnify the customer should we fail to perform our obligations under the contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. We have an existing bonding facility with capacity to meet our bonding requirements but, as is customary, the issuance of bonds under that facility is at the surety’s sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional cost. While there can be no assurance that bonds will continue to be available on reasonable terms, we believe that we have access to the bonding necessary to achieve our operating goals.
ACCOUNTING STANDARDS
Recently issued accounting standards
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. See Note 3, “Accounting Standards” of Notes to Consolidated Financial Statements in Item 1 of this report for a discussion of the impact, if any, that these standards may have on our financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(In millions of dollars)
Interest rate risk
Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolio and debt obligations. Our short-term investment portfolio consists primarily of highly liquid instruments with maturities of one month or less. Substantially all cash and cash equivalents at April 4, 2003 of $126.6 million were held in short-term investments classified as cash equivalents. Of the $126.6 million in total cash and cash equivalents at April 4, 2003, $70.0 million was restricted for use on the normal operations of our consolidated joint ventures, by projects having contractual cash restrictions and by our self-insurance programs.
From time to time, we effect borrowings under bank credit facilities or otherwise for general corporate purposes, including working capital requirements and capital expenditures. Borrowings under our Senior Secured Revolving Credit Facility, of which there currently are none, bear interest at the applicable LIBOR or prime rate, plus an additional margin and, therefore, are subject to fluctuations in interest rates.
Foreign currency risk
We conduct our business in various regions of the world. Our operations are, therefore, subject to volatility because of currency fluctuations, inflation changes and changes in political and economic conditions in these countries. We are subject to foreign currency translation and exchange issues, primarily with regard to our mining venture, MIBRAG mbH, in Germany. At April 4, 2003, the cumulative adjustments for translation gains net of related income tax expense were $11.8 million. While we endeavor to enter into contracts with foreign customers with repayment terms in U.S. currency in order to mitigate foreign exchange risk, our revenues and expenses are sometimes denominated in local currencies, and our results of operations may be affected adversely as currency fluctuations affect pricing and operating costs or those of our competitors. We engage from time to time in hedging operations, including forward foreign exchange contracts, to reduce the exposure of our cash flows to fluctuations in foreign currency rates. We do not engage in hedging for speculative investment reasons. We can give no assurances that our hedging operations will eliminate or substantially reduce risks associated with fluctuating currencies.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Our chief executive officer and chief financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days prior to the filing date of this quarterly report. Based on their evaluation, our chief executive officer and chief financial officer have each concluded that our disclosure controls and procedures are effective.
Subsequent to the date of evaluation by the chief executive officer and chief financial officer, there have not been any significant changes in our internal controls or in other factors that could significantly affect these controls, including any corrective action with regard to significant deficiencies and material weaknesses.
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We are a defendant in various lawsuits resulting from allegations that third parties sustained injuries and damage from the inhalation of asbestos fibers contained in materials used in construction projects. In addition, based on proofs of claims filed with the court during the pendency of our bankruptcy proceedings, we are aware of other potential asbestos claims against us. We believe that we have substantial third party insurance coverage for a significant portion of these existing and potential claims, and remaining amounts will not have an adverse material impact on our financial position, results of operations or cash flows.
While we expect that additional asbestos claims will be filed against us in the future, we have no basis for estimating the number of claims or individual or cumulative settlement amounts and, accordingly, no provision has been made for future claims. We believe, however, that the outcome of these actions, individually and collectively, will not have a material adverse impact on our financial position, results of operations or cash flows.
We also incorporate by reference the information regarding legal proceedings set forth under the caption “Other” in Note 11, “Contingencies and Commitments” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this report.
Our reorganization case is “In re Washington Group International, Inc. and Related Cases, Docket No. BK-N 01-31627-GWZ, in the U.S. Bankruptcy Court for the District of Nevada. The litigation related to the Old MK 401(k) Plan discussed under the caption “Other” in Note 11, “Contingencies and Commitments” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this report refers to John B. Blyler, et. al., v. William J. Agee, et. al., Case No. CIV97-0332-S-BLW, in the U.S. District Court for the District of Idaho. The litigation brought by the Authority of the City of New York discussed under the caption “Other” in Note 11, “Contingencies and Commitments” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this report refers to Trataros Construction, Inc. et. al. v. The New York City School Construction Authority et. al., Index No. 20213/01, in the Supreme Court of the State of New York, County of Kings.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits to this quarterly report on Form 10-Q are listed in the Exhibit Index contained elsewhere in this quarterly report.
(b) Reports on Form 8-K
On February 4, 2003, we filed a current report on Form 8-K dated February 3, 2003 reporting that Washington Group had extended its bonding arrangement with its surety, Federal Insurance Company, for the year 2003.
On March 5, 2003, we filed a current report on Form 8-K dated March 5, 2003 reporting that Washington Group’s application to list on the NASDAQ National Market® had been approved and that trading of the common stock and warrants of Washington Group would commence on Thursday, March 6, 2003 at 9:30 a.m. Eastern Standard Time.
On March 7, 2003, we filed a current report on Form 8-K dated March 7, 2003 detailing Washington Group’s fiscal year 2002 results.
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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.
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WASHINGTON GROUP INTERNATIONAL, INC. |
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/s/ George H. Juetten |
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George H. Juetten |
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Executive Vice President and Chief Financial Officer, |
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in his respective capacities as such |
Date: May 15, 2003
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER OF
WASHINGTON GROUP INTERNATIONAL, INC.
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen G. Hanks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Washington Group International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the consolidated financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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May 15, 2003 |
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/s/ Stephen G. Hanks |
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Stephen G. Hanks |
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President and Chief Executive Officer |
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER OF
WASHINGTON GROUP INTERNATIONAL, INC.
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, George H. Juetten, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Washington Group International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the consolidated financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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May 15, 2003 |
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/s/ George H. Juetten |
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George H. Juetten |
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Executive Vice President and Chief Financial Officer |
WASHINGTON GROUP INTERNATIONAL, INC.
EXHIBIT INDEX
Copies of exhibits will be provided upon request at a fee of $.25 per page requested.
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Exhibit Description |
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10.1 |
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Washington Group International, Inc. Short-Term Incentive Plan (filed as Appendix D to Washington Group’s Form 14A Definitive Proxy Statement filed on April 8, 2003 and incorporated herein by reference). # |
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10.2 |
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Washington Group Equity and Performance Incentive Plan, Amended and Restated as of November 9, 2002 (filed as Appendix E to Washington Group’s Form 14A Definitive Proxy Statement filed on April 8, 2003 and incorporated herein by reference). # |
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99.1* |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
# Management contract or compensatory plan.
* Filed herewith.
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