UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number
March 31, 1999 000-23943
PETER KIEWIT SONS', INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1842817
(State of Incorporation) (I.R.S. Employer Identification No.)
Kiewit Plaza, Omaha Nebraska 68131
(Address of principal executive offices) (Zip Code)
(402) 342-2052
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the registrant's classes of
common stock as of May 17, 1999:
Title of Class Shares Outstanding
Common Stock, $0.01 par value 33,455,576
PETER KIEWIT SONS', INC.
Index
Page
_____________________________________________________________________________
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Statements of Earnings for the three months
ended March 31, 1999 and 1998 1
Consolidated Condensed Balance Sheets as of March 31, 1999 and
December 26, 1998 2
Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 3 Quantitative and Qualitative Disclosure About Market Risk 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 13
Signatures 13
Index to Exhibits 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Earnings
(unaudited)
Three Months Ended
March 31,
------------------
(dollars in millions, except per share data) 1999 1998
- ---------------------------------------------------------------------------
Revenue $ 779 $ 732
Cost of Revenue (736) (703)
----- -----
43 29
General and Administrative Expenses (43) (38)
----- -----
Operating Loss - (9)
Other Income (Expense):
Investment Income, net 4 3
Interest Expense, net (1) -
Other, net 17 12
----- -----
20 15
----- -----
Earnings Before Income Taxes 20 6
Provision for Income Taxes (8) (2)
----- -----
Net Earnings $ 12 $ 4
===== =====
Net Earnings per Share:
Basic $ .35 $ .11
===== =====
Diluted $ .34 $ .11
===== =====
_____________________________________________________________________________
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
March 31, December 26,
1999 1998
(dollars in millions) (unaudited)
_____________________________________________________________________________
Assets
Current Assets:
Cash and cash equivalents $ 262 $ 227
Marketable securities 12 9
Receivables, less allowance of $5 and $5 421 454
Unbilled contract revenue 74 88
Contract costs in excess of related revenue 39 26
Investment in construction joint ventures 189 190
Deferred income taxes 71 64
Other 20 15
------ ------
Total Current Assets 1,088 1,073
Property, plant and equipment, less accumulated
depreciation and amortization of $481 and $482 245 208
Other Assets 97 96
------ ------
$1,430 $1,377
====== ======
Liabilities and Redeemable Common Stock
Current Liabilities:
Accounts payable, including
retainage of $48 and $47 $ 193 $ 182
Short-term borrowings 42 -
Current portion of long-term debt 24 8
Accrued costs on construction contracts 122 125
Billings in excess of related costs and earnings 139 132
Accrued insurance costs 81 81
Income taxes payable 10 -
Other 50 63
------ ------
Total Current Liabilities 661 591
Long-term debt, less current portion 11 13
Other liabilities 71 70
Minority interest 12 12
----- -----
Total Liabilities 755 686
Redeemable Common Stock ($534 million aggregate
redemption value):
Common stock, par $0.01; 33,596,348 and
35,692,820 shares outstanding - -
Additional paid-in capital 151 161
Accumulated other comprehensive income (21) (22)
Retained earnings 545 552
------ ------
Total Redeemable Common Stock 675 691
------ ------
$1,430 $1,377
====== ======
____________________________________________________________________________
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
(dollars in millions) 1999 1998
_____________________________________________________________________________
Cash flows from operations:
Net cash provided by operations $ 76 $ 104
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities - 5
Purchases of marketable securities (3) (3)
Proceeds from sales of property, plant and equipment 13 4
Acquisitions - (2)
Distributions from investees 4 4
Capital expenditures (16) (21)
---- ----
Net cash used in investing activities (2) (13)
Cash flows from financing activities:
Long-term debt borrowing (payment), net (2) 5
Repurchases of common stock (29) (30)
Dividends paid (8) (6)
Exchange of Class C Stock for Class D Stock, net - (122)
---- ----
Net cash used in financing activities (39) (153)
---- -----
Net increase (decrease) in cash and cash equivalents 35 (62)
Cash and cash equivalents at beginning of period 227 232
---- -----
Cash and cash equivalents at end of period $262 $ 170
==== =====
Noncash investing activities:
Issuance of debt for materials acquisitions $ 42 $ -
==== =====
_____________________________________________________________________________
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Notes to Consolidated Condensed Financial Statements
1. Basis of Presentation:
Peter Kiewit Sons', Inc. (the "Company") was formed by its former parent,
Level 3 Communications, Inc. (formerly Peter Kiewit Sons', Inc.) ("Level
3"), in connection with a transaction (the "Transaction") intended to
separate the construction and materials businesses and the diversified
business of Level 3 into two independent companies. On March 31, 1998,
pursuant to the terms of a Separation Agreement between the Company, Level 3
and certain other parties (the "Separation Agreement"), Level 3 consummated
the Transaction by: (i) transferring 100 shares of the $100 par value common
stock ("KCG Stock") of Kiewit Construction Group Inc. ("KCG"),
representing all of the issued and outstanding shares of KCG Stock, as well
as certain other assets and liabilities related to the construction and
materials businesses which together comprised the Construction and Mining
Group (the "Construction & Mining Group"), to the Company in exchange for
30,711,680 shares of the $.01 par value common stock of the Company ("Common
Stock") (125 million shares authorized) and (ii) distributing 100% of its
shares of the Common Stock to the holders of Level 3's $0.0625 par value
Class C Construction & Mining Group Restricted Redeemable Convertible
Exchangeable Common Stock ("Class C Stock") as of March 31, 1998, in
exchange for such shares of Class C Stock. Prior to the Transaction, the
Company was a wholly-owned subsidiary of Level 3. As a result of the
Transaction, the Company is now owned by the former holders of Level 3's
Class C Stock. Prior to consummation of the Transaction, Level 3's Class C
Common stock was convertible to Level 3's Class D Common Stock ("Class D
Stock"). As the Construction & Mining Group comprised all of the net assets
and operations of the Company, at the time of the Transaction, the
Construction & Mining Group is the Company's predecessor. Thus, the term
"the Company", as used herein, refers to Peter Kiewit Sons', Inc., its
predecessor, and its consolidated subsidiaries.
The consolidated condensed balance sheet of the Company at December 26, 1998
has been condensed from the Company's audited balance sheet as of that date.
All other financial statements contained herein are unaudited and, in the
opinion of management, contain all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of financial position
and results of operations for the periods presented. The Company's
accounting policies and certain other disclosures are set forth in the notes
to the consolidated financial statements contained in the Company's Annual
Report on Form 10-K.
Receivables at March 31, 1999 and December 26, 1998 include approximately
$106 million and $86 million of retainage on uncompleted projects, the
majority of which is expected to be collected within one year. Included in
the retainage amounts are $27 million and $26 million of securities which are
being held by the owners of various construction projects in lieu of
retainage. Also included in accounts receivable are $15 million and $15
million of securities held by the owners which are now due as the contracts
are completed. These securities are carried at fair value which is
determined based on quoted market prices for the securities on hand or for
similar investments. Net unrealized holding gains and losses, if any, are
reported as a separate component of accumulated other comprehensive income,
net of tax.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
When appropriate, items within the consolidated condensed financial
statements have been reclassified in the previous periods to conform to
current year presentation.
2. Earnings Per Share:
Basic earnings per share have been computed using the weighted average number
of shares outstanding during each period. Diluted earnings give effect to
convertible debentures considered to be dilutive common stock equivalents.
Dilutive potential common shares are calculated in accordance with the "if
converted" method. This method assumes that the after-tax interest expense
associated with the debentures is an addition to income and the debentures
are converted into equity with the resulting common shares being aggregated
with the weighted average shares outstanding.
Three Months Ended
March 31,
1999 1998
_________________
Net earnings available to common shareholders
(in millions) $ 12 $ 4
Add: Interest expense, net of tax effect, associated with
convertible debentures * *
------ ------
Net earnings for diluted shares $ 12 $ 4
======= =======
Total number of weighted average shares outstanding
used to compute basic earnings per share (in thousands) 33,872 32,216
Additional dilutive shares assuming conversion of
convertible debentures 707 372
------- -------
Total number of shares used to compute diluted earnings
per share 34,579 32,588
======= =======
Net earnings
Basic earnings per share $ .35 $ .11
======= =======
Diluted earnings per share $ .34 $ .11
======= =======
* Interest expense attributable to convertible debentures was less than $.5
million.
On January 11, 1999, the Company declared a four-for-one stock split in the
form of a stock dividend of three shares of Common Stock for each share
issued and outstanding, payable on January 15, 1999. All share and per share
amounts for all periods presented have been retroactively restated to reflect
the stock split.
3. Comprehensive Income:
Comprehensive income includes net income, unrealized gains (losses) on
securities, and foreign currency translation adjustments, which are charged
or credited to the cumulative translation account within Redeemable Common
Stock. Comprehensive income for the three months ended March 31, 1999 and
1998 was as follows:
Three Months Ended
March 31,
1999 1998
__________________
Net Earnings $12 $ 4
Other comprehensive income, before tax:
Foreign currency translation adjustments 2 2
Unrealized gains arising during period - 3
Income tax expense related to items of
other comprehensive income (1) (2)
--- ---
Comprehensive Income $13 $ 7
=== ===
4. Segment Data:
The Company is managed and operated in two segments, Construction and
Materials. The Construction segment performs services for a broad range of
public and private customers primarily in North America. Construction
services are performed in the following construction markets: transportation
(including highways, bridges, airports, railroads and mass transit),
commercial buildings, water supply, sewage and waste disposal, dams, mining,
power, heating and cooling, and oil and gas. The Materials segment primarily
operates in Arizona and Oregon. This segment produces construction materials
including ready-mix concrete, asphalt and sand and gravel, landscaping
materials and railroad ballast.
Intersegment sales are recorded at cost. Operating earnings (loss) is
comprised of net sales less all identifiable operating expenses, allocated
general and administrative expenses, depreciation and amortization. Interest
income, interest expense and income taxes have been excluded from segment
operations. The management fee earned by the Company for providing coal mine
management services to Level 3 is excluded from the segment information that
follows as it is included in other income on the Statement of Earnings and
not included in operating earnings. This fee is earned, however, by the
Materials segment and was $7 million for each the first quarters of 1999 and
1998.
March 31, March 31,
1999 1998
(dollars in millions) Construction Materials Construction Materials
_____________________________________________________________________________
Revenue
External customers $ 682 $ 97 $ 661 $ 71
Intersegment - - - 2
_____ _____ _____ _____
Total Revenues 682 97 661 73
Elimination of
intersegment revenues - - - (2)
----- ----- ----- -----
Total consolidated revenues $ 682 $ 97 $ 661 $ 71
Operating Earnings $ (6) $ 6 $ (11) $ 2
5. Other Matters:
In connection with the Transaction, the Company and Level 3 entered into
various agreements including a Separation Agreement, a Tax Sharing Agreement
and an amended Mine Management Agreement.
The Separation Agreement provides for the allocation of certain risks and
responsibilities between Level 3 and the Company and for cross-
indemnifications that are intended to allocate financial responsibility to
the Company for liabilities arising out of the construction business and to
allocate to Level 3 financial responsibility for liabilities arising out of
the non-construction businesses. The Separation Agreement also provides for
the payment, by the Company, of a majority of the third party costs and
expenses associated with the Transaction.
Under the Tax Sharing Agreement, with respect to periods, or portions
thereof, ending on or before the closing date of the Transaction, Level 3 and
the Company generally will be responsible for paying the taxes relating to
such periods, including any subsequent adjustments resulting from the
redetermination of such tax liabilities by the applicable taxing authorities,
that are allocable to the non-construction businesses and construction
businesses, respectively. The Tax Sharing Agreement also provides that Level
3 and the Company will indemnify the other from certain taxes and expenses
that would be assessed if the Transaction was determined to be taxable, but
solely to the extent that such determination arose out of the breach by Level
3 or the Company, respectively, of certain representations made to the
Internal Revenue Service in connection with the ruling issued with respect to
the Transaction or made in the Tax Sharing Agreement. If the Transaction was
determined to be taxable for any other reason, those taxes ("Transaction
Taxes") would be allocated 50% to Level 3 and 50% to the Company. Finally,
under certain circumstances, Level 3 would make certain liquidated damage
payments to the Company if the Transaction was determined to be taxable in
order to take into account the fact that the Transaction is taxable to the
holders of Common Stock.
Additionally, the Mine Management Agreement, pursuant to which the Company
provides mine management and related services to Level 3's coal mining
operations, was amended to provide the Company with a right of offer in the
event that Level 3 were to determine to sell any or all of its coal mining
properties. Under the right of offer, Level 3 would be required to offer to
sell those properties to the Company at the price that Level 3 would seek to
sell the properties to a third party. If the Company were to decline to
purchase the properties at that price, Level 3 would be free to sell them to
a third party for an amount greater than or equal to that price. If Level 3
were to sell the properties to a third party, thus terminating the Mine
Management Agreement, it would be required to pay the Company an amount equal
to the discounted present value of the Mine Management Agreement, determined,
if necessary, by an appraisal process.
On February 28, 1999, the Company purchased the remaining 60% of a materials
operation in the Portland, Oregon/Vancouver, Washington area. A note was
issued to the 60% owner for the purchase price and subsequently paid off on
April 1, 1999. Goodwill recognized on the purchase is being amortized over
20 years. Had the results of operations of this acquisition been
consolidated for the periods presented, there would have been no material
impact to the Company's results.
The Company and certain other defendants are party to certain litigation
involving repairs to runways at Denver International Airport. In December
1998, a jury determined that the defendants were liable for compensatory and
punitive damages. The Company intends to appeal the verdict. Management
believes that any resulting liability, beyond that provided, should not
materially affect the Company's financial position, future results of
operations or future cash flows.
The Company is involved in various other lawsuits and claims incidental to
its business. Management believes that any resulting liability, beyond that
provided, should not materially affect the Company's financial position,
future results of operations or future cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations - First Quarter 1999 vs. First Quarter 1998
This document contains forward looking statements and information that are
based on the beliefs of management as well as assumptions made by and
information currently available to the Company. When used in this document,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current
views of the Company with respect to future events and are subject to certain
risks or uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this document.
Revenue from each of the Company's segments was (in millions):
Three Months Ended
March 31,
1999 1998
------------------
Construction $682 $661
Materials 97 71
____ ----
$779 $732
==== ====
Construction. Construction revenue for the first quarter of 1999 increased
$21 million or 3% from the same period in 1998. The increase is due to
several large highway and fiber optic cable projects reaching the peak of
their construction phase.
Contract backlog at March 31, 1999 was $4.7 billion of which 6% is
attributable to foreign operations located primarily in Canada. Domestic
projects are spread geographically throughout the U.S.
Margins on construction projects for the first quarter of 1999 increased to
5.1% in 1999 compared to 3.8% in 1998. This is also due to several large
projects which were either in the mobilization or start up phases in 1998 and
are now at the peak of their construction phase.
Materials. Materials revenue for the first quarter of 1999 increased $26
million or 36% from the same time period in 1998. A continued strong market
for material products in the southwest, resulting in additional unit sales of
asphalt and ready mix concrete, accounted for much of the increase. A mild
winter also increased sales in the Wyoming operations.
Margins on materials operations increased by $4 million or 100% in 1999. The
demand in the southwest combined with the mild Wyoming winter helped to
increase margins. The elimination of losses taken in 1998 for the Oak
Mountain Coal operations also contributed to the increase.
General and Administrative Expenses. General and administrative expenses, as
a percentage of revenues, remained relatively the same.
Investment Income, net. Investment income in 1999 was higher than 1998.
Cash used in conversions of Class C Stock to Level 3's Class D Stock prior to
the consummation of the Transaction caused a decline in the average
investment portfolio balance in 1998.
Other, net. Other income is primarily comprised of mine management fee
income from Level 3 and gains and losses on the disposition of property,
plant and equipment and other assets. The increase is primarily due to gains
recognized on the sale of equipment.
The Company manages certain coal mines for Level 3. Fees for these services
were $7 million in 1999, $7 million in 1998. The Company's fee is a
percentage of adjusted operating earnings of the coal mines. The mines
managed by the Company for Level 3 earn the majority of their revenues under
long-term contracts. The remainder of the mines' sales are made on the spot
market where prices are substantially lower than those of the long-term
contracts. As the long-term contracts expire over the next two to five
years, adjusted operating earnings at the mines will decrease substantially,
thereby similarly decreasing the management fee earned by the Company.
Additionally, the Minerals Management Service and Montana Department of
Revenue have issued assessments to the Level 3 mines for the underpayment of
royalties and production taxes. Level 3 is vigorously contesting the
assessments. If Level 3 pays these assessments, the payments could
materially decrease future mine management fees, but will not affect fees
previously received.
Provision for income taxes. The effective income tax rates in 1999 and 1998
are slightly different than the federal statutory rate of 35% due to state
income tax provisions.
Financial Condition - March 31, 1999 vs. December 26, 1998
The Company's working capital decreased $55 million or 11% since December 26,
1998. The decrease is due primarily to the debt incurred and assumed through
the materials acquisition.
Sources of cash primarily included $76 million of cash provided by
operations, $13 million in proceeds from the sale of property, plant and
equipment and $4 million in distributions from equity method investees. Uses
of cash primarily included stock repurchases of $29 million, dividends of $8
million, purchases of marketable securities of $3 million and net repayment
of debt of $2 million.
The Company anticipates investing between $50 and $100 million annually in
its construction and materials businesses. In addition to normal spending,
the Company expects to make significant investments in new construction joint
ventures in 1999. The Company continues to explore opportunities to acquire
additional businesses. Other long-term liquidity uses include the payment of
income taxes and the payment of dividends, including a $.25 per share
dividend declared in April and paid in May 1999. The Company's current
financial condition and borrowing capacity together with anticipated cash
flows from operations should be sufficient for immediate cash requirements
and future investing activities.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting standards for derivative
instruments and for hedging activities. This statement is effective for all
fiscal years beginning after June 15, 1999. Management does not expect
adoption of this statement to materially affect the Company's financial
statements as the Company has no significant derivative instruments or
hedging activities.
Year 2000 Update
General. The Company's Year 2000 Effort (the "Effort") is proceeding on
schedule. The Effort is comprised of two components: Internal, which
includes updating and replacing all computer systems which are not Year 2000
compliant, and External, which requires developing strategies to protect the
Company from disruptions caused by third parties not being Year 2000
compliant.
Internal. All material internal systems have been tested for Year 2000
compliance and are currently functioning. As a result, the Company does not
believe that a contingency plan with regard to the Internal component of the
Effort is necessary. The Effort did not delay any other information system
projects as several systems were already scheduled to be revised.
External. The primary External factor which could interrupt the Company's
operations is the inability of third party owners to pay the Company on a
timely basis for work performed as a result of their Year 2000 problem. A
large portion of the Company's domestic construction work is with federal,
state and local government agencies. If these agencies are unable to make
payments due to their own Internal Year 2000 problems, the Company could
experience cash flow problems.
Another potentially significant External factor which could interrupt the
Company's operations is the inability of major equipment suppliers to supply
the Company with the equipment needed to complete various construction
projects as a result of their Year 2000 problems. Other major purchasing
components, primarily permanent materials, have alternative procurement
sources, in the event that the primary supplier encounters problems.
Costs. The total cost associated with the Effort is not expected to be
material to the Company's financial position. The estimated total cost of the
Effort is approximately $5 million, of which $4.6 million has been spent to
date.
Risks. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in large part from the uncertainty of the Year 2000 readiness of
third party suppliers and owners, the Company is unable to determine at this
time whether the consequences of External Year 2000 failures will have a
material impact on the Company's results of operations, liquidity or
financial condition. The Effort is expected to significantly reduce the
Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its material
third party suppliers and owners. The Company believes that, with the
implementation of new business systems and completion of the Effort as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
Forward Looking Statements. The discussion of the Company's efforts and
management's expectations relating to the Year 2000 problem are forward-
looking statements. The Company's ability to achieve Year 2000 compliance
and the costs associated therewith could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
the ability of third party suppliers and customers to bring their systems
into Year 2000 compliance, and unanticipated problems identified in the
implementation of the Effort.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K:
Exhibit
Number
27
Description
Financial Data Schedule
(b) Reports on Form 8-K.
Current Report on Form 8-K dated March 4, 1999, reporting the
appointment of Mogens C. Bay to the Board of Directors of the Company, which
Report was filed with the Securities and Exchange Commission on March 4,
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PETER KIEWIT SONS', INC.
Date: May 17, 1999 /s/ Kenneth M. Jantz
----------------------------
Kenneth M. Jantz
Vice President and Principal
Financial Officer
PETER KIEWIT SONS', INC.
INDEX TO EXHIBITS
Exhibit
No.
27 Financial Data Schedule (For electronic filing purposes only)
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