<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended Commission File No. 1-12248
September 30, 1996
ICF KAISER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1437073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9300 Lee Highway, Fairfax, Virginia 22031-1207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including are code: (703) 934-3600
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
------- ------
On October 31, 1996, there were 22,361,842 shares of ICF Kaiser
International, Inc. Common Stock, par value $0.01 per share, outstanding.
<PAGE>
ICF KAISER INTERNATIONAL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995........... 3
Consolidated Statements of Operations -
Nine Months Ended September 30, 1996 and 1995...... 4
Consolidated Statements of Operations -
Three Months Ended September 30, 1996 and 1995..... 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995...... 6
Notes to Consolidated Financial Statements......... 7-8
Item 3. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 9-14
Part II - Other Information
Item 1. Legal Proceedings ................................... 14
Item 2. Changes in Securities ............................... 14
Item 3. Defaults Upon Senior Securities ..................... 14
Item 4. Submission of Matters to a Vote of Security Holders . 14
Item 5. Other Information ................................... 14
Item 6. Exhibits and Reports on Form 8-K .................... 14
</TABLE>
<PAGE>
ICF KAISER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 21,022 $ 16,357
Contract receivables, net 234,168 228,239
Prepaid expenses and other current assets 10,780 20,911
Deferred income taxes 11,938 11,934
-------- --------
Total Current Assets 277,908 277,441
-------- --------
Fixed Assets
Furniture, equipment, and leasehold
improvements 48,839 42,909
Less depreciation and amortization (36,595) (33,369)
-------- --------
12,244 9,540
-------- --------
Other Assets
Goodwill, net 50,510 49,259
Investments in and advances to affiliates 12,168 10,213
Due from officers and employees 986 1,053
Other 20,719 22,011
-------- --------
84,383 82,536
-------- --------
$374,535 $369,517
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ - $ 5,041
Accounts payable and subcontractors payable 76,304 86,429
Accrued salaries and employee benefits 59,721 53,060
Accrued interest 4,061 7,414
Other accrued expenses 14,869 18,594
Income taxes payable 399 801
Deferred revenue 14,648 14,327
Other 5,897 7,186
-------- --------
Total Current Liabilities 175,899 192,852
-------- --------
Long-term Liabilities
Long-term debt, less current portion 133,384 120,112
Other 5,679 5,706
-------- --------
139,063 125,818
-------- --------
Commitments and Contingencies
Minority Interests in Subsidiaries 6,441 2,633
Redeemable Preferred Stock, Liquidation
value $20,000 19,940 19,787
Common Stock, par value $.01 per share:
Authorized - 90,000,000 shares
Issued and outstanding - 22,351,209
and 21,263,828 shares 224 213
Additional Paid-in Capital 67,158 64,654
Notes Receivable related to Common Stock (1,732) (1,732)
Retained Earnings (Deficit) (30,805) (32,894)
Cumulative Translation Adjustment (1,653) (1,814)
-------- --------
$374,535 $369,517
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
ICF KAISER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1995
----------- ---------
(Unaudited)
<S> <C> <C>
GROSS REVENUE $1,023,410 $ 731,795
Subcontract and direct material costs (592,295) (377,281)
Equity in income of joint ventures and
affiliated companies 2,532 3,068
----------- ---------
SERVICE REVENUE 433,647 357,582
OPERATING EXPENSES
Direct cost of services and overhead 354,658 298,466
Administrative and general 49,979 38,619
Depreciation and amortization 7,840 7,326
----------- ---------
OPERATING INCOME 21,170 13,171
OTHER INCOME (EXPENSE)
Interest income 944 1,488
Interest expense (12,829) (12,117)
----------- ---------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 9,285 2,542
Income tax provision 840 1,300
----------- ---------
INCOME BEFORE MINORITY INTERESTS 8,445 1,242
Minority interests in net income of
subsidiaries 4,725 1,315
----------- ---------
NET INCOME (LOSS) 3,720 (73)
Preferred stock dividends and accretion 1,631 1,616
----------- ---------
NET INCOME (LOSS) AVAILABLE
FOR COMMON SHAREHOLDERS $ 2,089 $ (1,689)
=========== =========
Primary and Fully Diluted
Net Income (Loss) Per Common Share $ 0.10 $ (0.08)
=========== =========
Primary and Fully Diluted Weighted Average
Common and Common Equivalent Shares
Outstanding 21,955 21,427
=========== =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ICF KAISER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------
1996 1995
----------- ---------
(Unaudited)
<S> <C> <C>
GROSS REVENUE $ 379,971 $ 346,591
Subcontract and direct material costs (241,579) (193,467)
Equity in income of joint ventures and
affiliated companies 388 742
----------- ---------
SERVICE REVENUE 138,780 153,866
OPERATING EXPENSES
Direct cost of services and overhead 113,695 128,953
Administrative and general 17,464 14,391
Depreciation and amortization 2,534 2,625
----------- ---------
OPERATING INCOME 5,087 7,897
OTHER INCOME (EXPENSE)
Interest income 521 468
Interest expense (4,518) (4,091)
----------- ---------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 1,090 4,274
Income tax provision (benefit) (1,455) 1,418
----------- ---------
INCOME BEFORE MINORITY INTERESTS 2,545 2,856
Minority interests in net income of
subsidiaries 1,782 1,315
----------- ---------
NET INCOME 763 1,541
Preferred stock dividends and accretion 539 539
----------- ---------
NET INCOME AVAILABLE
FOR COMMON SHAREHOLDERS $ 224 $ 1,002
=========== =========
Primary and Fully Diluted
Net Income Per Common Share $ 0.01 $ 0.05
=========== =========
Primary and Fully Diluted Weighted Average
Common and Common Equivalent Shares
Outstanding 22,227 21,565
=========== =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ICF KAISER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1996 1995
------------ -----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,720 $ (73)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 7,840 7,326
Provision for losses on contract receivables 1,255 1,382
Provision for deferred income taxes (386) 916
Earnings in excess of cash distributions from
joint ventures and affiliated companies (282) (1,547)
Unusual items, net 1,498 -
Minority interests in net income of subsidiaries 4,725 1,315
Changes in operating assets and liabilities,
net of acquisitions:
Contract receivables, net (7,379) (105,645)
Prepaid expenses and other current assets 2,139 (10,885)
Other assets (1,293) (3,841)
Accounts payable and accrued expenses (4,698) 101,017
Income taxes payable (402) (1,210)
Deferred revenue 546 2,350
Other liabilities (1,510) 380
Other operating activities 156 -
------------ -----------
Net Cash Provided by (Used in) Operating Activities 5,929 (8,515)
------------ -----------
INVESTING ACTIVITIES:
Purchase of fixed assets (4,905) (1,720)
Sale of fixed assets 22 768
Sale of subsidiaries and subsidiary assets - 735
Investments in subsidiaries and affiliates, net of cash acquired (1,241) (2,240)
------------ -----------
Net Cash Used in Investing Activities (6,124) (2,457)
------------ -----------
FINANCING ACTIVITIES:
Borrowings under credit facility agreement 65,000 13,000
Principal payments on credit facility agreement (57,000) (13,000)
Principal payments on other borrowings - (1,238)
Reacquisition of senior subordinated notes and related warrants (46) -
Distribution of income to minority interest (823) -
Subsidiary capital contribution from minority interest - 500
Proceeds from issuances of common stock 313 383
Repurchases of common stock - (256)
Preferred stock dividends (1,965) (975)
Debt issuance costs (449) -
Other financing activities (247) 55
------------ -----------
Net Cash Provided by (Used in) Financing Activities 4,783 (1,531)
------------ -----------
Effect of Exchange Rate Changes on Cash 77 (863)
------------ -----------
Increase (Decrease) in Cash and Cash Equivalents 4,665 (13,366)
Cash and Cash Equivalents at Beginning of Period 16,357 27,967
------------ -----------
Cash and Cash Equivalents at End of Period $ 21,022 $ 14,601
============ ===========
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 16,182 $ 15,712
Cash payments (refunds) for income taxes $ 945 $ (28)
NON-CASH TRANSACTIONS:
Issuance of common stock in connection with acquisitions $ 1,600 $ 765
Issuance of common stock pursuant to an agreement
with a former employee $ 500 $ -
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
ICF KAISER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying consolidated financial statements of ICF Kaiser International,
Inc. and subsidiaries (the Company) (including Kaiser-Hill Company, LLC,
effective July 1, 1995), except for the December 31, 1995 balance sheet, are
unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. These statements should be read in conjunction with the
Company's audited consolidated financial statements and footnotes thereto for
the ten months ended December 31, 1995 and the information included in the
Company's Transition Report to the Securities and Exchange Commission on Form
10-K for the ten months ended December 31, 1995. Certain reclassifications have
been made to the prior period financial statements to conform to the
presentation used in the September 30, 1996 financial statements.
Note B - Significant Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities (see Note F) at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In 1996, the Company accelerated the procedures for obtaining approval from the
U.S. government for the Company's actual costs incurred in current periods. As
a result, in the third quarter of 1996, the Company's consulting group was able
to accelerate its process of billing on certain cost-reimbursement contracts.
The net effect of this accelerated process is the recognition of an additional
$2.3 million of operating income in the third quarter of 1996.
Note C - Minority Interests in Subsidiaries
Certain of the Company's subsidiaries are partially owned by outside parties.
For financial reporting purposes, the assets, liabilities, results of
operations, and cash flows of these subsidiaries are included in the Company's
consolidated financial statements and the outside parties' interests are
reflected as minority interests.
Note D - Net Income (Loss) Per Common Share
Net income (loss) per common share is computed using net income (loss) available
for common shareholders, as adjusted under the modified treasury stock method,
and the weighted average number of common stock and common stock equivalents
outstanding during the periods presented. Common stock equivalents include
stock options and warrants and additional shares which will be or may be issued
in connection with acquisitions. The adjustments required by the modified
treasury stock method and for acquisition-related contingencies were anti-
dilutive for the loss period presented and immaterial to the income periods
presented. Therefore, the adjustments were excluded from earnings per share
computations.
Note E - Long-term Debt
The Company's $40 million revolving credit facility became effective May 7,
1996, replacing the former credit facility which was due to expire October 31,
1996. The new credit facility expires June 30, 1998 and is provided by
CoreStates Bank, as agent bank, and two other banks (the Banks) with terms and
covenants similar to those under the former credit facility. ICF Kaiser
International, Inc. and certain of its subsidiaries, which are guarantors of the
new credit facility, have granted the Banks a security interest in their
accounts receivable and certain other assets. The
7
<PAGE>
new credit facility limits the payments of cash dividends on common stock and
requires the maintenance of specified financial ratios. Total available credit
is determined from a borrowing base calculation based on eligible accounts
receivable (billed and unbilled).
Note F - Contingencies
In the course of the Company's normal business activities, various claims or
charges have been asserted and litigation commenced against the Company arising
from or related to properties, injuries to persons, and breaches of contract, as
well as claims related to acquisitions and dispositions. Claimed amounts may
not bear any reasonable relationship to the merits of the claim or to a final
court award. In the opinion of management, an adequate reserve has been
provided for final judgments, if any, in excess of insurance coverage, that
might be rendered against the Company in such litigation.
The Company may from time to time, either individually or in conjunction with
other government contractors operating in similar types of businesses, be
involved in U.S. government investigations for alleged violations of procurement
or other federal laws and regulations. The Company currently is the subject of
a number of U.S. government investigations and is cooperating with the
responsible government agencies involved. No charges presently are known to
have been filed against the Company by these agencies. Management does not
believe that there will be any material adverse effect on the Company's
financial position, results of operations, or cash flows as a result of these
investigations.
The Company has a substantial number of cost-reimbursement contracts with the
U.S. government, the costs of which are subject to audit by the U.S. government.
As a result of pending audits relating to fiscal years 1986 forward, the
government has asserted, among other things, that certain costs claimed as
reimbursable under government contracts either were not allowable or not
allocated in accordance with federal procurement regulations. The Company is
actively working with the government to resolve these issues. Management has
provided for the potential effect of disallowed costs for the periods currently
under audit and for periods not yet audited, although the amounts at issue have
not been quantified by the government or the Company. This provision will be
reviewed periodically as discussions with the government progress. Based on the
information currently available, management believes the potential effects of
these pending audits will not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
Note G - Unusual Items
During the ten months ended December 31, 1995, the Company recorded $0.5 million
in additional income (net), consisting of the following unusual items: income
in settlement of litigation against the IRS, associated with an affiliate of an
acquired company, net of an accrual for related expenses ($6.8 million); a
charge to accrue the net settlement cost and legal expenses of other litigation
($4.6 million); a charge to accrue for severance for the termination of 110
employees in the engineering and international groups ($1.0 million); and a
charge to accrue for consolidation of office space ($0.7 million). During the
nine months ended September 30, 1996, the net litigation income was received and
$4.2 million of net settlement costs and legal expenses were paid. As of
September 30, 1996, the Company had substantially completed its termination of
employees in the Company's engineering group and its consolidation of office
space. The termination of employees in several foreign offices within the
international group is approximately 50% complete as of September 30, 1996 and
management expects that all actions will be completed by December 31, 1996. As
of September 30, 1996, a $0.1 million accrual remains outstanding associated
with the termination of employees in the international group.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
ICF Kaiser International, Inc. and subsidiaries (the Company) is one of the
nation's largest engineering, construction, program management, and consulting
services companies, providing fully integrated capabilities to clients in four
related market areas: environment, infrastructure, industry, and energy. The
Company provides services to domestic and foreign clients in both the private
and public sectors.
Change in Fiscal Year
The Company changed from a fiscal year ending February 28 to a fiscal year
ending December 31, effective December 31, 1995. As a result, the comparative
period financial statements for the three and nine months ended September 30,
1995 have been restated to conform with the presentation used in the September
30, 1996 financial statements.
Operating Results for Nine Months Ended September 30, 1996 and 1995
The Company's operating income of $21.2 million for the nine months ended
September 30, 1996 was an $8.0 million increase from the $13.2 million of
operating income recorded for the nine months ended September 30, 1995. The
increase in operating income partially resulted from a $3.9 million increase in
operating income from the Company's operations at the Department of Energy's
(DOE) Hanford, Washington site (Hanford), resulting from higher award fees
earned at Hanford in 1996 and activities associated with the final phase of the
Company's work at Hanford (see Business Outlook). An additional $6.8 million of
the increase in operating income was due to earnings (before minority interests)
from the Performance Based Integrating Management Contract at DOE's Rocky Flats
Environmental Technology Site in Colorado (Rocky Flats). The Rocky Flats
contract was awarded in April 1995 to Kaiser-Hill Company, LLC (Kaiser-Hill), a
limited liability company owned equally by ICF Kaiser and CH2M Hill Companies,
Ltd. (CH2M Hill). Work under the Rocky Flats contract began on July 1, 1995.
Operating income for the Company's consulting group increased $1.3 million from
1995 to 1996, primarily due to new contracts and task orders awarded during 1996
and the recognition of revenue resulting from the acceleration in the cost
approval process (see Note B to the consolidated financial statements). Prior
to the third quarter of 1996, the Company had estimated and recorded revenue
based on provisional rates. In 1996, the Company accelerated the procedures for
obtaining approval from the U.S. government for the Company's actual costs
incurred in current periods. As a result, in the third quarter of 1996, the
Company's consulting group was able to accelerate its process of billing on
certain cost-reimbursement contracts.
The Company's operating income also increased $2.3 million for the nine months
ended September 30, 1996 from the comparable period in 1995 as a result of the
1996 closing of an unprofitable business, and $1.1 million due to income from
the Company's increased economic interest in an entity that owns a coal
pulverization facility. Additionally, the Company realized cost savings of
certain corporate functions, resulting in an improvement in operating income in
1996. Finally, operating income from international operations increased $0.8
million, primarily due to improved operating results from the Company's
Australian operations.
Partially offsetting the operating income increases discussed above were
declines of $4.6 million in operating income from engineering and construction
operations and $4.2 million in operating income from other federal programs.
The federal programs group had significant increases in its costs associated
with marketing activities in pursuit of large-scale projects, including
approximately $2.1 million of costs in 1996 associated with the Company's
unsuccessful re-compete bid on the Hanford contract (see Business Outlook) and
significant costs associated with other DOE proposals. The engineering and
construction group also experienced higher costs in 1996 associated with
marketing activities. In addition, the comparative 1995 results for engineering
and construction operations had included operating income from a major transit
project in the Philippines.
9
<PAGE>
Operating Results for Three Months Ended September 30, 1996 and 1995
Operating income for the three months ended September 30, 1996 decreased $2.8
million from the corresponding period in 1995. The net decrease in operating
income was primarily due to a $2.6 million decrease in operating income from
other federal programs operations and a $2.1 million decrease in operating
income from engineering and construction operations, offset by a $0.6 million
increase in earnings from the Rocky Flats contract and a $0.5 million increase
in operating income from consulting operations (which included the recognition
of revenue resulting from the accelerated cost approval process discussed
above).
Business Outlook
The Company's contract backlog was $3.9 billion at September 30, 1996 compared
to $4.4 billion at December 31, 1995. The overall reduction in backlog is
primarily due to Hanford (see below). In September 1996, the Company signed a
contract estimated at $260 million to perform environmental restoration work at
federal installations in the South Pacific Division of the U.S. Army Corps of
Engineers, Sacramento District. The Total Environmental Restoration Contract
(TERC) is for four years, with two, three-year options. The contract is a cost
reimbursement delivery order contract, and the fee structure includes a
combination of cost plus fixed fee, award fee, and incentive fees. An
unsuccessful bidder has filed a protest against the award of the contract to the
Company. As a result, performance under the TERC has been suspended pending
resolution of the protest. The Company believes the protest will not be
successful. In September 1996, the Company also signed a five-year contract,
valued at more than $60 million, to support EPA's Green Lights and ENERGY STAR
programs.
In March 1996, the Company signed a two-year, $102 million contract to provide
engineering and construction services for the initial phase of a mini-mill
project for Nova Hut, a.s., an integrated steel maker based in the Ostrava
region of the Czech Republic. The Company is currently negotiating a contract
with Nova Hut for the next phase of the mini-mill project. Earnings associated
with this contract for the next phase of work are expected to be material to the
Company's operating results. Management expects to complete negotiations on
this contract in the fourth quarter of 1996 or the first quarter of 1997.
The Company is currently negotiating to sell its interest in entities owning and
operating a coal pulverization facility, the earnings and cash flows from which
have been significant to the Company, in order to improve the Company's cash
position in light of substantial near-term cash requirements (see Liquidity and
Capital Resources). The Company anticipates that the closing of such a sale
will occur in the fourth quarter of 1996 or the first quarter of 1997. The sale
is expected to result in a gain in the period in which the sale is finalized.
The Company anticipates that any cash proceeds resulting from the sale that are
not used to satisfy the substantial near-term cash requirements will be
reinvested in the Company's business.
In August 1996, the Company, through its subsidiary, ICF Kaiser Hanford Company,
was informed that the team of which it was a member was unsuccessful in its bid
for DOE's new management and integration contract at Hanford. The new contract
was effective October 1, 1996. The Company's existing contract to perform
services at Hanford expires in March 1997, but was effectively terminated by DOE
on October 1, 1996. As a result, and based on the Company's current assessment
of the closeout of the Hanford contract, management believes the impact on
earnings will be material in the fourth quarter of 1996, as well as future
periods, unless replaced. In response to the reduction and eventual elimination
of the Hanford contract, in August 1996 management initiated a significant
operational efficiency and cost savings program, together with management
changes, with the objective of minimizing the long-term impact associated with
the termination of the Hanford contract. To date, the results of the cost
savings program have been encouraging. Termination of the Hanford contract is
not expected to significantly impact cash flows in the fourth quarter but may
have a significant impact after 1996 if the cost savings program is not
successful (see Liquidity and Capital Resources). Profitable operating results
in the fourth quarter are dependent on the success of the Company's ongoing
marketing efforts (including Nova Hut), results from the cost savings program
discussed above, and an expected gain on sale of the entities with interests in
the coal pulverization facility.
The Company's consulting group showed improvement in operating results between
the three- and nine-month periods ended September 30, 1996 and 1995, aided by
the recognition of revenue resulting from the accelerated cost
10
<PAGE>
approval process (see Operating Results for Nine Months Ended September 30, 1996
and 1995). EPA historically has been the consulting group's principal federal
government customer; for several years the consulting group has been
diversifying its client base to international, private sector, and non-EPA
federal government entities. EPA now accounts for only approximately 50% of the
consulting group's service revenue. In 1996, the consulting group increased its
business development efforts to diversify its client base and expects to make
further progress in diversification in 1997.
As discussed in Operating Results, the Company's domestic engineering and
construction business has not met its financial goals during 1996. As a result,
the Company continues in its efforts to enhance profitability of these
operations. These efforts include both a continuation of cost reduction efforts
and increases in marketing. In conjunction with the cost reduction efforts the
Company has recently completed a realignment of several of its offices,
including the termination of certain underutilized employees (see Note G to the
consolidated financial statements). Management will continue to seek other
opportunities to save costs, and future actions may include additional office
space consolidations and terminations.
Results of Operations
The following table summarizes key elements in the Consolidated Statements of
Operations for the nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1996 1995
------- -------
(dollars in millions)
<S> <C> <C>
Gross revenue $1,023.4 $ 731.8
Service revenue $ 433.6 $ 357.6
Service revenue as a percentage of
gross revenue 42.4% 48.9%
Operating expenses as a percentage of
service revenue:
Direct cost of services and overhead 81.8% 83.5%
Administrative and general 11.5% 10.8%
Depreciation and amortization 1.8% 2.0%
Operating income as a percentage of
service revenue 4.9% 3.7%
</TABLE>
Gross revenue represents services provided to customers with whom the Company
has a primary contractual relationship. Included in gross revenue are costs of
certain services subcontracted to third parties and other reimbursable direct
project costs, such as materials procured by the Company on behalf of its
customers.
Service revenue is derived by deducting the costs of subcontracted services and
direct project costs from gross revenue and adding the Company's share of the
equity in income of unconsolidated joint ventures and affiliated companies. The
Company believes that it is appropriate to analyze operating margins and other
ratios in relation to service revenue because such revenue and ratios reflect
the work performed directly by the Company.
Operating profits (fees) generated by the Hanford and Rocky Flats contracts are
based on performance and not revenue. A change in revenue between periods is
likely to be disproportionate to the change in the fees earned. Consequently,
changes in revenue may have an exaggerated impact on the Company's margins as
measured on a percentage basis. In addition, because Kaiser-Hill is a
consolidated subsidiary of the Company effective July 1, 1995,
11
<PAGE>
operating income includes the portion of income generated under the Rocky Flats
contract attributable to CH2M Hill. CH2M Hill's interest in Kaiser-Hill is
reflected as a minority interest in subsidiaries in the Company's financial
statements (see Note C to the consolidated financial statements.)
Revenue
Gross revenue for the nine months ended September 30, 1996 increased $291.6
million, or 39.8%, to $1,023.4 million. The increase in gross revenue was
primarily attributable to the commencement of work under the Rocky Flats
contract which generated a $291.8 million increase in gross revenue during the
nine months ended September 30, 1996.
Service revenue increased by $76.0 million for the nine-month period ended
September 30, 1996 as compared to the nine-month period ended September 30,
1995. The increase was due primarily to an $82.3 million increase in service
revenue generated under the Rocky Flats contract. Service revenue as a
percentage of gross revenue decreased to 42.4% for the nine months ended
September 30, 1996 from 48.9% for the nine months ended September 30, 1995. The
decrease in service revenue as a percentage of gross revenue is a result of the
nature of the Rocky Flats contract. A significant portion of the gross revenue
derived from the Rocky Flats contract includes the costs of services
subcontracted to third parties.
Operating Expenses
Direct cost of services and overhead increased $56.2 million between the nine-
month periods ended September 30, 1996 and 1995. A $74.4 million increase in
costs on the Rocky Flats contract was partially offset by a $13.0 million
reduction in Hanford costs attributable to federal budget reductions at the
Hanford site. The Company's direct cost of services and overhead as a
percentage of service revenue for the nine months ended September 30, 1996 was
comparable to the same period in the prior year.
Administrative and general expense increased $11.4 million, or 29.4%, between
the nine-month periods ended September 30, 1996 and 1995 and increased from
10.8% to 11.5% as a percentage of service revenue. The increase in these costs
is primarily attributable to the Company's increased commitment to marketing
activities in 1996, including costs associated with new marketing positions
within the Company and proposing and bidding large-scale domestic and foreign
contracts. The increase in administrative and general expenses as a percentage
of service revenue resulting from increased marketing efforts was partially
offset as a result of the increase in service revenue in 1996 from the Rocky
Flats contract which does not have a proportionate increase in administrative
and general expenses.
Income Tax Expense
The Company's income tax provision was $0.8 million for the nine months ended
September 30, 1996 compared with $1.3 million for the nine months ended
September 30, 1995. The income tax provision for the three and nine months
ended September 30, 1996 reflects a partial reversal of the valuation allowance
for certain deferred tax assets. This partial reversal reduced tax expense by
approximately $1.5 million and $2.0 million for the three- and nine-month
periods, respectively. The Company expects to have significant taxable income
in the near-term from the sale of certain subsidiaries (see Business Outlook).
The remaining valuation allowance after this partial reversal in 1996 is for
foreign tax benefits not currently assured of realization. Also, the income tax
provision for the nine months ended September 30, 1996 was computed by excluding
the minority interest in Kaiser-Hill's income because Kaiser-Hill is a flow-
through entity for tax purposes and is partially owned by an outside party.
This had the effect of reducing the Company's effective tax rate. Since Kaiser-
Hill commenced operations on July 1, 1995, its effect on the effective tax rate
was relatively larger in the nine months ended September 30, 1996 than in 1995.
Liquidity and Capital Resources
During the nine months ended September 30, 1996, cash and cash equivalents
increased $4.7 million to $21.0 million. Operating activities generated $5.9
million in cash, primarily from operations at Kaiser-Hill which generated $8.8
12
<PAGE>
million. An additional significant operating source of cash was $7.0 million
received from the Internal Revenue Service (IRS) in settlement of litigation.
Significant operating uses of cash included $15.4 million in interest payments
on the Company's Senior Subordinated Notes (Senior Notes), a $3.7 million
pension payment, and $4.2 million of payments for net settlement costs and legal
expenses of litigation.
The increase in contract receivables, net between December 31, 1995 and
September 30, 1996 was primarily due to an increase in receivables under the
Hanford contract resulting from the closeout of the contract. The decrease in
prepaid expenses and other current assets in 1996 was attributable to collection
from the IRS of $7.0 million, which was accrued in other current assets at
December 31, 1995. The cash received from the IRS settlement is included in
unusual items on the Statement of Cash Flows.
During the nine months ended September 30, 1996, net borrowings under the
Company's revolving credit facility provided $8.0 million in cash (see Note E to
the consolidated financial statements). Borrowings under the credit facility
were used to fund operations (including the pension payment made in September
1996). Other significant uses of cash in investing and financing activities
included purchases of fixed assets ($4.9 million), payment of dividends ($2.0
million), and investments in joint ventures and affiliates ($1.2 million ).
In July 1996, EPA approved the Company's provisional billing rates for the year
ended February 28, 1995. This approval permitted the Company to submit invoices
for billing rate variances on cost-plus contracts with U.S. government agencies
for costs incurred during that year. The Company expects to collect in excess
of $1.5 million on these billings in future periods. In October 1996, the
Company also obtained approval for provisional billing rates for the ten months
ended December 31, 1995 which is expected to result in more than $2.0 million in
additional invoicing.
Effective May 7, 1996, the Company replaced its credit facility. The new $40
million revolving credit facility (Credit Facility) replaced the then-existing
credit facility which was due to expire October 31, 1996. The Credit Facility
expires June 30, 1998 and is provided by CoreStates Bank, as agent bank, and two
other banks (the Banks) with terms and covenants similar to those under the
former credit facility. ICF Kaiser International, Inc. and certain of its
subsidiaries, which are guarantors of the Credit Facility, granted the Banks a
security interest in their accounts receivable and certain other assets. The
Credit Facility limits the payments of cash dividends on common stock and
requires the maintenance of specified financial ratios. Total available credit
is determined from a borrowing base calculation based on eligible accounts
receivable (billed and unbilled). As of September 30, 1996, the Company had
$13.0 million in cash borrowings and $21.3 million of letters of credit
outstanding under the Credit Facility. The letters of credit outstanding under
the Credit Facility are generally required to support performance guarantees,
primarily on international projects. The Company had $5.7 million of additional
credit available under the Credit Facility as of September 30, 1996. As of
November 12, 1996, the Company had $10.0 million of cash borrowings outstanding,
$21.1 million of letters of credit outstanding and the additional credit
available under the Credit Facility was $8.9 million.
The Company's Series 2D Senior Preferred Stock is subject to mandatory
redemption on January 13, 1997 in the amount of $20 million plus accrued
dividends. Cash flows from operations are not expected to be sufficient for the
full redemption of the preferred stock. Therefore, to the extent permitted by
the Banks and the Credit Facility, the Company intends to use a combination of
the following potential transactions to redeem this preferred stock. The
Company is considering a private offering of up to $15 million of additional
senior subordinated notes with terms and conditions identical to the Company's
existing Senior Notes. The existing Senior Notes allow the Company to incur
Additional Indebtedness (as defined in the Indenture dated as of January 11,
1994, governing the Senior Notes) in an amount sufficient to permit this private
placement. In addition, and as discussed in the Business Outlook section, the
Company is currently negotiating the sale of interests in certain entities; the
proceeds of this sale could be used to pay down the outstanding loan balance on
the Credit Facility, thus freeing up capacity that could be used in part for the
redemption of the preferred stock. The Company is also reviewing with the Banks
a possible temporary increase in the Credit Facility under terms that would
permit the use of the Credit Facility for the redemption of the preferred stock.
The Company's ability to redeem the preferred stock when due is subject to the
successful conclusion of some combination of these or other transactions prior
to January 13, 1997.
13
<PAGE>
As explained in Business Outlook, the loss of the Hanford contract may have a
significant impact on the Company's cash flows after 1996 if management's cost
savings and marketing programs are not successful. Management believes the
Company will be successful in its ability to generate adequate cash flows to
fund operations throughout the next twelve months and in reducing overhead costs
within the operating groups and corporate functions. In addition to the cash
requirements of the Company's daily operations and the redemption of the
preferred stock discussed above, the Company has financial obligations in excess
of $8 million due in January 1997 for interest due on the Senior Notes. The
Company expects to meet this interest obligation with either operating cash
flows or borrowings under its Credit Facility.
Part II - Other Information
Item 1. Legal Proceedings
As previously reported in the Transition Report on Form 10-K for the ten
months ended December 31, 1995.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Effective November 8, 1996, the Company announced that it was currently
recruiting a President and Chief Operating Officer to whom all lines of
business, except the Company's consulting group would report. In addition, the
Company announced that it was combining all of its domestic and international
engineering and construction activities under one group which would be headed by
David Watson, currently an Executive Vice President and President of the former
international operations group of the Company. It was announced that the former
head of the engineers group would be moving to a different senior management
position. The departure of the former head of the consulting group was
announced; Dr. Marc Tipermas, a current Executive Vice President, Director of
Corporate Development, and a director of the Company, will assume line
responsibility for the consulting group. Mr. Sudhakar Kesavan, currently a
Senior Vice President of a wholly owned subsidiary, will become head of the
consulting group. The Company explained that the above actions were taken to
streamline its corporate structure, to better meet the changing needs of its
clients, and to cut costs so that its profit objective in 1997 could be met.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this report are listed below:
No. 11 Computation of Primary and Fully Diluted Earnings Per Share
No. 27 Financial Data Schedule
(b) Reports on Form 8-K
None
14
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
ICF KAISER INTERNATIONAL, INC.
(Registrant)
Date: November 14, 1996 /s/ Richard K. Nason
-----------------
Richard K. Nason
Executive Vice President and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
15
<PAGE>
EXHIBIT 11
ICF KAISER INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1996 1995
--------------- ---------------
(Unaudited)
<S> <C> <C>
Net income (loss) available for
common shareholders $ 2,089,000 $ (1,689,000)
============= ==============
Weighted average of common shares
outstanding not included in
amounts below 21,954,783 21,152,168
Weighted average of common shares
issuable pursuant to an agreement
with a former employee - 275,000
------------- --------------
Weighted average of common and
common equivalent shares
outstanding, as adjusted 21,954,783 21,427,168
or or
21,955,000 21,427,000
============= ==============
Net income (loss) per common share $ 0.10 $ (0.08)
============= ==============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
1996 1995
--------------- ---------------
(Unaudited)
<S> <C> <C>
Net income available for
common shareholders $ 224,000 $ 1,002,000
============= ==============
Weighted average of common shares
outstanding not included in
amounts below 22,226,844 21,290,183
Weighted average of common shares
issuable pursuant to an agreement
with a former employee - 275,000
------------- --------------
Weighted average of common and
common equivalent shares
outstanding, as adjusted 22,226,844 21,565,183
or or
22,227,000 21,565,000
============= ==============
Net income per common share $ 0.01 $ 0.05
============= ==============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 21,022,000
<SECURITIES> 0
<RECEIVABLES> 246,821,000
<ALLOWANCES> 12,653,000
<INVENTORY> 0
<CURRENT-ASSETS> 277,908,000
<PP&E> 48,839,000
<DEPRECIATION> 36,595,000
<TOTAL-ASSETS> 374,535,000
<CURRENT-LIABILITIES> 175,899,000
<BONDS> 133,384,000<F1>
19,940,000
0
<COMMON> 224,000
<OTHER-SE> 32,968,000
<TOTAL-LIABILITY-AND-EQUITY> 374,535,000
<SALES> 0
<TOTAL-REVENUES> 1,023,410,000<F2>
<CGS> 0
<TOTAL-COSTS> 354,658,000<F3>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,255,000
<INTEREST-EXPENSE> 12,829,000
<INCOME-PRETAX> 9,285,000
<INCOME-TAX> 840,000
<INCOME-CONTINUING> 3,720,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,720,000
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<FN>
<F1>Excludes current portion of bonds, mortgages, and similar debt.
<F2>Represents gross revenue which includes costs of certain services
subcontracted to third parties and other reimbursable direct project costs,
such as materials procured by the Company on behalf of its customers.
<F3>Excludes subcontract and direct material costs of $592,295,000.
</FN>
</TABLE>
