UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended April 1, 2005
		OR
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from                   to

 

Commission File Number 0-14292

 

DURATEK, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware		22-2427618
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
10100 Old Columbia Road, Columbia, Maryland		21046
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (410) 312-5100

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ý
No  o

 

Number of shares outstanding of each of the issuer’s classes of common stock as of May 2, 2005:

 

Class of stock		Number of shares
Common stock, par value $0.01 per share		14,729,642

 

 

DURATEK, INC.

 

TABLE OF CONTENTS

 

Part I	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of April 1, 2005 and December 31, 2004
	Consolidated Statements of Operations for the Three Months Ended April 1, 2005 and March 28, 2004
	Consolidated Statements of Cash Flows for the Three Months Ended April 1, 2005 and March 28, 2004
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
Part II	Other Information
Item 1.	Legal Proceedings
Item 6.	Exhibits
	Signatures

 

 

Forward-Looking Information

 

In response to “safe harbor” provisions contained in the Private Securities Litigation Reform Act of 1995, we discuss in our Form 10-Q many important factors that have affected and in the future could affect our actual results.  These factors could cause our future financial results to differ from those expressed in any forward-looking statements made by us.  Many of these factors have been discussed in our prior filings with the Securities and Exchange Commission and are included in the “Risk Factors” and other disclosures contained in our Annual Report on Form 10-K.

 

Forward-looking statements may include words such as “will,” “should,” “could,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” and other similar expressions.  The list of factors contained in our Annual Report on Form 10-K does not constitute all factors which you should consider prior to making an investment decision in our securities.  You should also not assume that the information contained herein is complete or accurate in all respects after the date of this filing.  We disclaim any duty to update the statements contained herein.

 

 

Part I   Financial Information

 

Item 1.  Financial Statements

 

DURATEK, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(in thousands of dollars, except per share amounts)

 

		April 1,			December 31,
		2005			2004
		(unaudited)			*
Assets
Current assets:
Cash		$	7,077		$	23,296
Accounts receivable, net of allowance for doubtful accounts of $137 in 2005 and $158 in 2004		34,040			30,997
Cost and estimated earnings in excess of billings on uncompleted contracts		19,700			16,715
Prepaid expenses and other current assets		11,872			13,708
Total current assets		72,689			84,716
Retainage		552			1,257
Property, plant and equipment, net		65,831			66,151
Goodwill		72,129			72,129
Other intangible assets		3,503			3,747
Decontamination and decommissioning trust fund		18,727			19,050
Other assets		24,223			21,487
Total assets		$	257,654		$	268,537
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt		$	858		$	858
Accounts payable		7,414			15,643
Due to State of South Carolina		7,919			6,073
Accrued expenses and other current liabilities		18,789			24,646
Unearned revenues		11,545			14,694
Waste processing and disposal liabilities		5,583			6,980
Total current liabilities		52,108			68,894
Long-term debt, less current portion		83,927			84,142
Facility and equipment decontamination and decommissioning liabilities		40,345			40,419
Other noncurrent liabilities		7,394			6,756
Total liabilities		183,774			200,211
Stockholders’ equity:
Preferred stock – $0.01 par value; authorized 4,740,000 shares; none issued		—			—
Series B junior participating preferred stock, $0.01 par value; 100,000 shares authorized; none issued		—			—
Common stock – $0.01 par value; authorized 35,000,000 shares; issued 16,328,321 shares at April 1, 2005 and  16,236,781 shares at December 31, 2004		163			162
Capital in excess of par value		87,477			86,784
Deferred compensation employee stock trust		1,323			1,323
Accumulated deficit		(4,183		)	(9,043		)
Treasury stock at cost, 1,770,306 shares at April 1, 2005 and December 31, 2004		(10,900		)	(10,900		)
Total stockholders’ equity		73,880			68,326
Total liabilities and stockholders’ equity		$	257,654		$	268,537

 

* The Consolidated Balance Sheet as of December 31, 2004 has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

See accompanying notes to consolidated financial statements.

 

2

 

 

DURATEK, INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations

 

(in thousands, except per share amounts)

 

		Three months ended
		April 1,			March 28,
		2005			2004
		(unaudited)
Revenues		$	70,612		$	64,182
Cost of revenues		52,880			48,250
Gross profit		17,732			15,932
Selling, general and administrative expenses		8,413			8,647
Income from operations		9,319			7,285
Interest expense		(1,489		)	(2,356		)
Other income, net		73			72
Income before income taxes and equity in income of joint ventures		7,903			5,001
Income taxes		3,046			2,000
Income before equity in income of joint ventures		4,857			3,001
Equity in income of joint ventures		3			84
Net income		4,860			3,085
Preferred stock dividends		—			(12		)
Net income attributable to common stockholders		$	4,860		$	3,073
Weighted average common stock outstanding:
Basic		14,664			13,878
Diluted		15,268			14,572
Income per share:
Basic		$	0.33		$	0.22
Diluted		$	0.32		$	0.21

 

See accompanying notes to consolidated financial statements.

 

3

 

DURATEK, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

(in thousands of dollars)

 

		Three months ended
		April 1,			March 28,
		2005			2004
		(Unaudited)
Cash flows from operating activities:
Net income		$	4,860		$	3,085
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		2,613			2,707
Stock compensation expense		—			74
Equity in income of joint ventures, net of distributions		(8		)	(126		)
Changes in operating assets and liabilities:
Accounts receivable		(3,043		)	1,748
Costs and estimated earnings in excess of billings on uncompleted contracts		(5,915		)	(2,389		)
Prepaid expenses and other current assets		2,511			(1,099		)
Accounts payable and accrued expenses and other current Liabilities		(12,454		)	(6,448		)
Unearned revenues		(3,149		)	(1,695		)
Waste processing and disposal liabilities		(1,397		)	(2,414		)
Facility and equipment decontamination and decommissioning liabilities		250			235
Retainage		63			260
Other		585			475
Net cash used in operating activities		(15,084		)	(5,587		)
Cash flows from investing activities:
Additions to property, plant and equipment		(1,345		)	(1,719		)
Other		(34		)	(22		)
Net cash used in investing activities		(1,379		)	(1,741		)
Cash flows from financing activities:
Proceeds from issuance of common stock		676			2,036
Repayments of long-term debt		(215		)	—
Deferred financing costs paid		(127		)	—
Repayments of capital lease obligations		(90		)	(70		)
Preferred stock dividends paid		—			(60		)
Net cash provided by financing activities		244			1,906
Net decrease in cash		(16,219		)	(5,422		)
Cash, beginning of period		23,296			35,174
Cash, end of period		$	7,077		$	29,752

 

Supplemental disclosure of non-cash financing activities:

 

During the three months ended April 1, 2005, we entered into $666 in capital lease agreements to finance the purchase of computer equipment.

 

See accompanying notes to consolidated financial statements.

 

4

 

DURATEK INC.

 

Notes to Consolidated Financial Statements

 

(in thousands of dollars, except share amounts)

 

1.                                      Principles of Consolidation and Basis of Presentation

 

(a)         Principles of Consolidation

 

The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries.  Investments in joint ventures in which we do not have control or majority ownership are accounted for under the equity method.  All significant intercompany balances and transactions have been eliminated in consolidation.

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and revenues and expenses recognized during the reporting period.  All adjustments (consisting of normal recurring accruals) that, in the opinion of management, are necessary for the fair presentation of this interim financial information have been included. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results could differ significantly from those estimates.  Results of interim periods are not necessarily indicative of results to be expected for the year as a whole.  The effect of seasonal business fluctuations and the occurrence of many costs and expenses in annual cycles require certain estimations in the determination of interim results.  The information contained in these interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2004.

 

We recognize our tax provision based on an estimated annual effective tax rate for the year for federal and state income tax.

 

(b)         Fiscal Quarters

 

Our fiscal year ends on December 31.  Prior to 2005, the first three fiscal quarters of each year ended on the Sunday nearest to the last day of each such calendar quarter.  In 2005 and going forward, the first three fiscal quarters end on the Friday nearest to the last day of each such calendar quarter.  The interim financial results presented herein are as of April 1, 2005 and for the quarters ended April 1, 2005 and March 28, 2004.

 

(c)          Reclassifications

 

Certain amounts for 2004 have been reclassified to conform to the presentation for 2005.

 

2.                                      Stock Option Plan

 

We apply the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, to account for our fixed-plan stock options.  Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price.  Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (as amended by SFAS No. 148,

 

5

 

Accounting for Stock Based Compensation - Transition and Disclosure), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans.  As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic-value-based method of accounting described above, and have adopted only the disclosure requirements of SFAS No. 123.  The following table illustrates the effect on net income attributable to common shareholders if the fair-value-based method had been applied to all outstanding and unvested awards in each year:

 

		Three months ended
		April 1, 2005			March 28, 2004
Net income		$	4,860		$	3,085
Add:  stock-based employee compensation expense included in reported net income, net of taxes		—			44
Deduct:  total stock-based employee compensation expense determined under fair-value-based method for all awards, net of taxes		342			321
Pro forma net income		4,518			2,808
Deduct: preferred stock dividends		—			12
Deduct: pro forma net income attributable to common stockholders		$	4,518		$	2,796
Income per share:
Basic - as reported		$	0.33		$	0.22
Basic - pro forma		$	0.31		$	0.20
Diluted - as reported		$	0.32		$	0.21
Diluted - pro forma		$	0.30		$	0.19

 

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the three months ended April 1, 2005 and March 28, 2004:

 

		Three months ended
		April 1,			March 28,
		2005			2004
Risk free interest rate		4.46		%	3.85		%
Expected volatility		61		%	63		%
Expected life		8 years			8 years
Contractual life		10 years			10 years
Expected dividend yield		0		%	0		%
Fair value of options granted		$	16.33		$	9.80

 

6

 

3.                                      Goodwill and Other Intangible Assets

 

Goodwill represents the excess of costs over fair value of assets of businesses acquired.  Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually.  Intangible assets with estimable useful lives are amortized over their respective estimated useful lives, and reviewed for impairment whenever events or circumstances indicate that the carrying value of such assets may not be recoverable.

 

Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.  An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.  During the first quarters of 2005 and 2004, we tested our goodwill in accordance with the standard and concluded that no impairment charge was required.

 

Other intangible assets subject to amortization consist principally of amounts assigned to operating rights related to the Barnwell, South Carolina low-level radioactive waste disposal facility, covenants not-to-compete, and costs incurred to obtain patents.  We do not have any other intangible assets that are not subject to amortization.  Other intangible assets as of April 1, 2005 and December 31, 2004 consist of the following:

 

				As of April 1, 2005						As of December 31, 2004
		Amortization period		Gross carrying amount			Accumulated amortization			Gross carrying amount			Accumulated amortization
Amortizing intangible assets:
Barnwell operating rights		8 yrs		$	7,340		$	(4,358	)	$	7,340		$	(4,129	)
Patents		20 yrs		1,554			(1,059		)	1,553			(1,045		)
Covenants-not-to-compete		17 yrs		102			(76		)	102			(74		)
Total				$	8,996		$	(5,493	)	$	8,995		$	(5,248	)

 

Aggregate amortization expense for amortizing intangible assets was $245 for the three months ended April 1, 2005 and March 28, 2004.  Estimated annual amortization expense for the five years beginning January 1, 2005 is $979 for fiscal years ended December 31, 2005 through December 31, 2007, $521 for fiscal year ended December 31, 2008, and $60 for fiscal year ended December 31, 2009.

 

7

 

4.                                      Cost and Estimated Earnings in Excess of Billings on Uncompleted Contracts

 

Cost and estimated earnings in excess of billings on uncompleted contracts represent amounts recognized as revenue that have not been billed.  Contracts typically provide for the billing of costs incurred and estimated earnings on a monthly basis or based on contract milestone.  We have cost and estimated earnings in excess of billings on uncompleted contracts of $33,764 as of April 1, 2005, of which $19,700 is expected to be collected within the next 12 months and is classified as a current asset.  As of April 1, 2005, cost and estimated earnings in excess of billings on uncompleted contracts that will not be collected within the next 12 months of $14,064 is included in other assets in our consolidated balance sheets.  As of December 31, 2004, cost and estimated earnings in excess of billings on uncompleted contracts was $27,849, of which $16,715 was expected to be collected within the next 12 months and was classified as a current asset.  As of December 31, 2004, cost and estimated earnings in excess of billings on uncompleted contracts that will not be collected within the next 12 months of $11,134 is included in other assets in our consolidated balance sheets.

 

5.                                      Retainage

 

Retainage represents amounts billable but withheld, due to contract provisions, until the satisfaction of contract provisions.  As of April 1, 2005, we had retainage balances of $6,906, of which $6,354 was expected to be collected within the next 12 months and is included in prepaid expense and other current assets in the consolidated balance sheets.  As of December 31, 2004, we had retainage balances of $6,969, of which $5,712 was expected to be collected within the next 12 months and was included in prepaid expense and other current assets in the consolidated balance sheets.

 

6.                                      Decontamination and Decommissioning Liabilities

 

We are responsible for the cost to decontaminate and decommission (“D&D”) our facilities and equipment in Tennessee and South Carolina and certain equipment used at customer sites.  These costs will generally be paid upon the closure of these facilities or the disposal of this equipment.  We are also obligated, under our license granted by the State of South Carolina and the Atlantic Interstate Low-Level Radioactive Waste Compact Implementation Act (the “Atlantic Waste Compact Act”), for costs associated with the ultimate closure of the Barnwell Low-Level Radioactive Waste Disposal Facility in South Carolina and our buildings and equipment located at the Barnwell site (“Barnwell closure”).  Under the terms of the Atlantic Waste Compact Act and our license with the State of South Carolina, we are required to maintain a trust fund to cover the Barnwell closure obligation, which limits our obligation to the amount of the trust fund.  During the first quarter of 2005, the Barnwell closure liability decreased due to decommissioning activity at the Barnwell low-level radioactive waste disposal facility.

 

Our D&D liabilities consist of the following as of April 1, 2005 and December 31, 2004:

 

		April 1, 2005			December 31, 2004
Facilities & equipment Asset Retirement Obligation		$	21,619		$	21,369
Barnwell closure		18,726			19,050
		$	40,345		$	40,419

 

8

 

We recognized accretion expense of $250 for the quarter ended April 1, 2005 and $236 for the quarter ended March 28, 2004.

 

The following is a reconciliation of our facilities & equipment ARO from January 1, 2005 to April 1, 2005:

 

Balance at January 1, 2005		$	21,369
Accretion expense		250
Balance at April 1, 2005		$	21,619

 

We update our closure and remediation cost estimates for D&D on an annual basis.  These estimates are based on current technology, regulations, and burial rates.  We are unable to reasonably estimate the impact that changes in technology, regulations, and burial rates will have on the ultimate costs. Future changes in these factors could have a material impact on these estimates.

 

7.                                      Long-Term Debt

 

Long-term debt as of April 1, 2005 and December 31, 2004 consisted of the following:

 

		April 1,			December 31,
		2005			2004
Bank Credit Facility:
Term note, interest payable quarterly, due December 16, 2009		$	84,785		$	85,000
Less: current portion of long-term debt		858			858
		$	83,927		$	84,142

 

Effective February 23, 2005, the bank credit facility was amended to lower the applicable margin on borrowings under the bank credit facility.  For term loans, the applicable margin is 2.00% for prime rate loans and 3.25% for LIBOR loans.  For revolving loans, the applicable margin is determined based on our leverage ratio and can range from 2.00% to 2.50% for prime rate loans and from 3.25% to 3.75% for LIBOR loans.  The term loan must be prepaid to the extent of any excess cash flows, as defined in the bank credit facility.  The bank credit facility requires us to maintain certain financial ratios and contains restrictions on our ability to pay cash dividends and limitations on our ability to make acquisitions.  As of April 1, 2005, we were in compliance with the provisions of the bank credit facility, including all financial covenant requirements.  The bank credit facility is secured by substantially all of our assets and the assets of our direct and indirect subsidiaries.  As of April 1, 2005, the total available borrowings under the revolving line of credit was $22,407.  As of April 1, 2005, $84,785 of the six-year term loans remained outstanding from the $115,000 term loans issued in December 2003.  During the first quarter of 2005, we made $215 in scheduled repayments on the term loans.

 

9

 

8.                                      Derivative Financial Instrument

 

We entered into an interest rate swap agreement effective on July 22, 2003, to partially mitigate our exposure to fluctuations in interest rates relating to our outstanding variable rate debt.  The contract’s notional amount was $55,949 at inception and declines each quarter over the life of the contract in proportion to our reduction in the outstanding balance of the related long-term debt under the prior credit facility.  The bank credit facility requires us to have in place an interest rate protection arrangement for an aggregate notional amount of at least 40% of the aggregate outstanding principal amount of the term loans until June 30, 2006.  This interest rate swap agreement is not designated as an accounting hedge.  The contract’s notional amount was $23,015 at April 1, 2005.  Under the terms of the contract, we pay a fixed rate of 1.895% and receive LIBOR, which resets every 90 days.  The contract matures on June 30, 2006.  The fair value of the contract, which was based upon the fair value estimate by a financial institution, is approximately $283 at April 1, 2005, which is included in prepaid expenses and other current assets in the consolidated balance sheets.

 

9.                                      Net Income Per Share

 

Basic net income per share is calculated by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted net income per share is calculated by dividing net income by the diluted weighted average common shares, which reflect the potential dilution of stock options and convertible redeemable preferred stock that could share in our income.  The reconciliation of amounts used in the computation of basic and diluted net income per share for the three months ended April 1, 2005 and March 28, 2004 consists of the following:

 

		Three months ended
(in thousands, except per share amounts)		April 1, 2005			March 28, 2004
Numerator:
Net income attributable to common stockholders		$	4,860		$	3,073
Add: Income impact of assumed conversions - preferred stock dividends		—			12
Net income		$	4,860		$	3,085
Denominator:
Weighted average shares outstanding		14,664			13,878
Effect of dilutive securities:
Incremental shares from assumed conversion of:
Employee stock options		604			594
Convertible redeemable preferred stock		—			100
		604			694
Diluted weighted average common shares outstanding		15,268			14,572
Income per common share:
Basic		$	0.33		$	0.22
Diluted		$	0.32		$	0.21

 

 

There were no anti-dilutive securities as of April 1, 2005 and March 28, 2004.

 

10

 

10.                               Segment Reporting

 

We have three primary segments: (i) Federal Services, (ii) Commercial Services, and (iii) Commercial Processing and Disposal. We evaluate the segments’ operating income results to measure performance.  The following is a brief description of each of the segments:

 

(a)                      Federal Services (“FS”) Segment

 

Our FS segment provides the following services for the United States Department of Energy (“DOE”) and other government entities:

 

•                  radioactive and hazardous waste characterization;

•                  storage, processing, packaging, transportation, and disposal services;

•                  nuclear facility commissioning, operations, and decommissioning;

•                  technology and engineering expertise; and

•                  on-site environmental remediation services on large government projects.

 

(b)                      Commercial Services (“CS”) Segment

 

Our CS segment provides a broad range of technologies and services to nuclear power plants, government and industrial facilities, universities, and research/pharmaceutical laboratories, including:

 

•                  on-site liquid and solid waste processing;

•                  transportation logistics (including casks, brokerage services, and large component disposition);

•                  radiological emergency response;

•                  area, building, and site characterization and decommissioning;

•                  instrumentation calibration and rental; and

•                  training (transportation, regulatory compliance/environmental, safety, and health).

 

We also provide technical support services to our commercial clients including project management, engineering, radiation protection support, and environmental consulting.

 

(c)                       Commercial Processing and Disposal (“CPD”) Segment

 

Our CPD segment operates two facilities in Tennessee and two facilities in South Carolina.  At the Tennessee facilities, we use multiple technologies to volume reduce and package customer waste for final disposition such as:

 

•                  incineration;

•                  compaction;

•                  metal melting and decontamination; and

•                  survey and release.

 

At the South Carolina facilities, we perform the following operations:

 

•                  operate a low level radioactive waste disposal facility in Barnwell, South Carolina for the State of South Carolina;

•                  materials processing and packing for disposal; and

•                  specialty waste processing for nuclear power plants.

 

11

 

		As of and for the Three Months Ended April 1, 2005
											Unallocated
		FS			CS			CPD			Items			Consolidated
Revenues from external customers (1)		$	30,971		$	19,940		$	19,701		$	—		$	70,612
Income from operations		5,017			2,685			1,617			—			9,319
Interest expense		—			—			—			(1,489		)	(1,489		)
Other income, net		—			—			—			73			73
Income taxes		—			—			—			3,046			3,046
Equity in income of joint ventures		23			—			—			(20		)	3
Net income		5,040			2,685			1,617			(4,482		)	4,860
Depreciation and amortization expense		125			579			1,602			307			2,613
Goodwill		32,671			31,316			8,142			—			72,129
Other long-lived assets  (2)		1,406			23,596			42,238			2,094			69,334
Capital expenditures for additions to property, plant and equipment		252			785			207			101			1,345
Total assets		78,412			72,211			90,654			16,377			257,654

 

		As of and for the Three Months Ended March 28, 2004
											Unallocated
		FS			CS			CPD			Items			Consolidated
Revenues from external customers (1)		$	27,392		$	15,387		$	21,403		$	—		$	64,182
Income from operations		3,229			2,085			1,971			—			7,285
Interest expense		—			—			—			(2,356		)	(2,356		)
Other income, net		—			—			—			72			72
Income taxes		—			—			—			2,000			2,000
Equity in income of joint ventures		104			—			—			(20		)	84
Net income		3,333			2,085			1,971			(4,304		)	3,085
Depreciation and amortization expense		108			554			1,715			330			2,707
Goodwill		32,244			30,411			8,142			—			70,797
Other long-lived assets  (2)		1,319			23,631			46,672			1,841			73,463
Capital expenditures for additions to property, plant and equipment		30			367			491			831			1,719
Total assets		70,659			68,333			98,313			40,936			278,241

 

(1)          Intercompany revenues have been eliminated.  Revenues by segment represent revenues earned based on third party billings to customers.

(2)          Other long-lived assets include property, plant and equipment and other intangible assets.

 

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11.                         Commitments and Contingencies

 

(a) Financial Assurance Instruments

 

We are required to post, from time to time, standby letters of credit and surety bonds to meet certain customer contract requirements.  We do not directly post financial assurance instruments or other guarantees for our subcontractors.  As of April 1, 2005, we had outstanding assurance instruments of $21,852, including $7,593 in letters of credit and $14,259 in surety bonds, which expire at various contract completion dates.  We have entered into certain indemnification agreements with the providers of the surety bonds, which would require funding only if we failed to perform under the contracts being insured and the surety bond issuer was obligated to make payment to the insured parties.  The letters of credit are issued under our bank credit facility up to $15,000 as a sub limit to the $30,000 revolving line of credit.  In addition, the bank credit facility limits the total amount of outstanding supplemental letters of credit, as defined in the credit facility, and surety bonds to $35,000. Therefore, we are able to issue up to $50,000 in financial assurance instruments under our credit facility.

 

(b) Legal Proceedings

 

On February 6, 2004, we were named as a defendant in an adversary proceeding in the United States Bankruptcy Court for the District of Delaware by the Official Committee of Unsecured Creditors of The IT Group, Inc. (The “IT Group”), et al for the avoidance and recovery of money paid to us by The IT Group, Inc. for up to a year before The IT Group filed Chapter 11 Bankruptcy on January 16, 2004.  The complaint alleges that because certain members of The Carlyle Group were members of the Board of Directors of both The IT Group and Duratek, Inc., we received preferential treatment regarding payments from The IT Group.  The total amount of payments listed in the complaint is $6,900.  We believe that the claim of the Unsecured Creditors of The IT Group is without merit.  We submitted a memorandum on June 25, 2004 to the Official Committee of Unsecured Creditors identifying certain defenses we have that eliminate our liability.  On March 31, 2005, the Official Committee of Unsecured Creditors of the IT Group, Inc. filed an amended complaint that lowered the amount of the claim against Duratek to $3,555.  We will continue to vigorously defend ourselves. The case is currently in the discovery period.

 

On December 2, 1999, our wholly owned subsidiary, Scientific Ecology Group, Inc. (“SEG”) (now named Duratek Services, Inc.), was named as a defendant in an adversary proceeding in the United States Bankruptcy Court for the District of Massachusetts.  The Chapter 11 Trustee, on behalf of the debtor Molten Metal Technology, Inc. (“MMT”) and its creditors, filed an adversary “Complaint to Avoid Fraudulent Transfer” naming as defendants Viacom Inc., the successor to CBS Corporation and Westinghouse Electric Corporation (“Westinghouse”), and SEG.  The complaint alleged that the sale of Westinghouse’s interest in a joint venture to MMT resulted in a fraudulent conveyance due to MMT’s release of SEG from obligations to pay $8,000 to equalize capital expenditures and additional amounts for MMT’s share of profits, and MMT’s assumption of at least $1,500 of SEG’s liabilities, are avoidable because MMT did not receive reasonably equivalent value for the transfers.  On or about February 11, 2005, Westinghouse, Duratek, and the Trustee entered into an agreement to settle the adversary proceeding in exchange for a payment by Viacom to the Trustee in the amount of $4,500.  As part of this settlement agreement, Duratek will pay nothing and will receive a full release from

 

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the Trustee, as will Westinghouse.  Viacom and Duratek have executed a separate agreement in which Viacom has agreed to make all payments to the Trustee and not to seek indemnity or contribution from Duratek; this agreement also contains mutual releases between Viacom and Duratek.  On March 11, 2005, the court approved the settlement, fully resolving this claim.

 

Refer to our Annual Report on Form 10-K for the year ended December 31, 2004 for a discussion of other legal proceedings.

 

12.                               New Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board (“FASB”) enacted Statement of Financial Accounting Standards 123—revised 2004 (“SFAS 123R”), “Share-Based Payment” which replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.”  SFAS 123R requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income.

 

We are required to adopt SFAS 123R as of the beginning of our first annual period beginning after June 15, 2005.  The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition.  See note 2 for the pro forma net income and net income per share amounts, for the first quarters of 2005 and 2004, as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards.  Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to have a significant adverse impact on our consolidated statements of income and net income per share.

 

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Item 2.             Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements concerning our business and operations.  Forward-looking statements are based on our current beliefs and expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected.  We discuss these risks and uncertainties in Item 1 under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2004.  We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report.  Hereinafter, the terms “Duratek,” “we,” “our,” or the “Company” and similar terms refer to Duratek, Inc. and its subsidiaries, unless the context indicates otherwise.  The following discussion should be read in conjunction with our consolidated financial statements and the notes in our Annual Report on Form 10-K for the year ended December 31, 2004.  Our year ends on December 31, while the first three fiscal quarters of each year end on the Friday nearest to the last day of each such calendar quarter.  Prior to 2005, our first three fiscal quarters of each year ended on the Sunday nearest to the last day of each such calendar quarter.  The quarterly financial results presented herein are for the three months ended April 1, 2005 and March 28, 2004.

 

Overview

 

We operate in a complex environment due to the nature of our customers and our projects.  These factors are described throughout our Annual Report on Form 10-K.  Due to the size and nature of many of our contracts, the estimation of overall risk, revenue and cost at completion is complicated and subject to many variables.  Depending on the contract, this poses challenges to our executive management team in overseeing contract performance and in evaluating the timing of the recognition of revenues and project costs, both initially and when there is a change in project status.  Thus, our executive management team spends considerable time in evaluating and structuring key contracts, in monitoring project performance, and in assessing the financial impact of many of our contracts.  Due to the complexity in the revenue recognition for our projects, executive financial management is particularly attentive to developments in individual contracts that may affect the timing and measurement of revenues and related costs.   Also, our executive management team spends considerable time in identifying new contract opportunities.

 

We continue to aggressively manage our projects to minimize risk and the financial impact on us.  More information on risks and our efforts to manage risks are available in Item 1 under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

The following is a summary of significant events in the first quarter of 2005 that had an impact on our financial results and thus received considerable financial management attention and scrutiny:

 

•                  In the first quarter of 2005, we adjusted the schedule and cost assumption that are used to determine our incentive fees for a significant project in the Federal Services segment.  We are a subcontractor on this project and are following the estimates that were revised by our prime contractor in March 2005.  This resulted in a contract-to-date revenue increase of $2.4 million.

 

•                  Reduction in the effective tax rate to 38.5% in the first quarter of 2005 from 40.0% in the first quarter of 2004 as a result of lower state income tax, which resulted in a lower tax provision of $0.1 million.

 

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We provide services to commercial and government customers in the United States that ensures safe and secure radioactive materials disposition and nuclear facility operations.  We possess a breadth of capabilities, technologies, assets, facilities, and qualified technical personnel that enable us to provide a full array of safe and secure radioactive materials disposition services.  Our services include decommissioning services, nuclear facility operations, radioactive material characterization, processing, transportation, accident containment and restoration services, and final disposal.  Our operations are organized into three primary segments: (i) Federal Services (“FS”), (ii) Commercial Services (“CS”), and (iii) Commercial Processing and Disposal (“CPD”).  Our revenues are derived almost equally from government and commercial customers.  See Part I., Item 1. Note 10 to our Notes to Consolidated Financial Statements contained in this report for a description of our three segments.

 

We measure financial performance for each operating segment based on income from operations, which consists of revenues less direct expenses and selling, general and administrative (“SG&A”) expenses.  SG&A expenses for each segment includes specific expenses for the management, support, and business development functions of the segment as well as an allocation of our corporate SG&A expense.  Our corporate SG&A expenses include company-wide management, support, and business development functions and are allocated to each segment based on their pro-rata share of direct expenses incurred.  We have included in this item a comparative period-to-period analysis of SG&A expenses incurred by each segment and the impact of corporate SG&A expense that has been allocated to each segment, and an analysis of corporate SG&A expense.

 

Critical Accounting Policies

 

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.  On an on-going basis, we evaluate our estimates, including those related to cost to complete long-term contracts, the cost to D&D facilities and equipment, the recoverability of long-lived assets including goodwill, and contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from our estimates.  We discuss our most critical accounting policies in our Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

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Results of Operations

 

Three Months Ended April 1, 2005 (“first quarter of 2005”) as Compared to Three Months Ended March 28, 2004 (“first quarter of 2004”).

 

The table below sets forth certain consolidated statement of operations information for the three months ended April 1, 2005 and March 28, 2004.

 

		Three months ended						Increase (decrease)
		April 1,			March 28,
		2005			2004			Dollar			Percent
(in thousands of dollars)		(unaudited)
Revenues		$	70,612		$	64,182		$	6,430		10.0	%
Cost of revenues		52,880			48,250			4,630			9.6	%
Gross profit		17,732			15,932			1,800			11.3	%
Percent of revenues		25.1		%	24.8		%
Selling, general and administrative expenses		8,413			8,647			(234		)	(2.7%	)
Percent of revenues		11.9		%	13.5		%
Income from operations		9,319			7,285			2,034			27.9	%
Percent of revenues		13.2		%	11.4		%
Interest expense		(1,489		)	(2,356		)	867
Other income, net		73			72			1
Income taxes		3,046			2,000			1,046
Equity in income of joint ventures		3			84			(81		)
Net income		4,860			3,085			1,775
Preferred stock dividends		—			(12		)	12
Net income attributable to common stockholders		$	4,860		$	3,073		$	1,787

 

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