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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 Quarter Ended
May 31, 1998
Commission File Number 1-12054
LOGO MORRISON KNUDSEN CORPORATION
A Delaware Corporation
IRS Employer Identification No. 33-0565601
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83729
208 / 386-5000
At May 31, 1998, 54,081,496 shares of the registrant's $.01 par value common
stock were outstanding.
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
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MORRISON KNUDSEN CORPORATION
Quarterly Report Form 10-Q for the
Quarter Ended May 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Condensed Consolidated Financial Statements and Notes Thereto
Statements of Income for the Three and Six Months Ended
May 31, 1998 and 1997 I-1
Balance Sheets at May 31, 1998 and November 30, 1997 I-2
Statements of Cash Flows for the Six Months Ended
May 31, 1998 and 1997 I-4
Notes to Financial Statements I-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 6. Exhibits and Reports on Form 8-K II-2
SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED MAY 31, 1998 AND 1997 (UNAUDITED)
(In thousands except share data)
<TABLE>
<CAPTION>
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Three Months Ended Six Months Ended
May 31, May 31,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenue $ 436,069 $ 414,225 $ 821,110 $ 803,755
Cost of revenue (413,948) (395,019) (780,013) (766,445)
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Gross profit 22,121 19,206 41,097 37,310
General and administrative expenses (6,063) (5,881) (11,469) (11,386)
Goodwill amortization (896) (891) (1,783) (1,796)
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Operating income 15,162 12,434 27,845 24,128
Investment income 1,175 1,435 3,463 3,485
Interest expense (177) (218) (371) (475)
Other income (expense), net 148 (60) 144 (127)
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Income before income taxes 16,308 13,591 31,081 27,011
Income tax expense (7,224) (6,172) (13,775) (12,588)
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Net income $ 9,084 $ 7,419 $ 17,306 $ 14,423
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Basic and diluted income per share $.17 $.14 $.32 $.27
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Common shares used to compute income
per share - Basic 54,166,797 53,916,810 54,195,425 53,872,581
Diluted 54,448,303 54,166,643 54,408,912 53,994,426
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</TABLE>
The accompanying notes are an integral part of the financial statements.
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MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AT MAY 31, 1998 (UNAUDITED) AND NOVEMBER 30, 1997
(Thousands of dollars except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
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<S> <C> <C>
Current assets
Cash and cash equivalents $ 50,296 $ 53,215
Accounts receivable, including retentions of $25,631 and $26,970 181,383 187,311
Unbilled receivables 78,617 74,514
Refundable income taxes 5,408 14,331
Investments in and advances to construction joint ventures 51,189 29,270
Deferred income taxes 25,514 30,173
Other 13,440 16,200
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Total current assets 405,847 405,014
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Investments and other assets
Securities available for sale, at fair value 44,749 39,314
Investments in mining ventures 61,340 57,439
Assets held for sale 14,432 13,301
Cost in excess of net assets acquired, net of accumulated
amortization of $7,528 and $5,755 134,377 136,150
Deferred income taxes 26,368 31,183
Other 7,003 7,594
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Total investments and other assets 288,269 284,981
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Property and equipment, at cost
Construction equipment 159,955 172,154
Land and improvements 6,993 6,993
Buildings and improvements 5,637 6,276
Equipment and fixtures 58,078 53,483
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Total property and equipment 230,663 238,906
Less accumulated depreciation (153,448) (158,657)
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Property and equipment, net 77,215 80,249
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Total assets $ 771,331 $ 770,244
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</TABLE>
The accompanying notes are an integral part of the financial statements.
I-2
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<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
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<S> <C> <C>
Current liabilities
Accounts payable $ 47,471 $ 53,448
Subcontracts payable, including retentions of $14,926 and $20,266 33,837 42,513
Billings in excess of cost and estimated earnings on uncompleted contracts 47,163 25,176
Advances from customers 9,897 8,987
Estimated costs to complete long-term contracts 64,478 73,103
Accrued salaries, wages and benefits 58,387 52,618
Income taxes payable -- 1,371
Other accrued liabilities 41,751 42,679
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Total current liabilities 302,984 299,895
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Non-current liabilities
Postretirement benefit obligation 53,798 53,689
Accrued workers' compensation 37,173 34,088
Pension and deferred compensation liabilities 15,271 15,334
Environmental remediation obligations 5,605 6,107
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Total non-current liabilities 111,847 109,218
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Contingencies and commitments (Note 5)
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Redeemable preferred stock, issued 1,800,000 shares of Series A -- 18,000
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Stockholders' equity
Preferred stock, 10,000,000 shares authorized; zero and 1,800,000
redeemable shares of Series A issued and outstanding
Common stock, par value $.01, authorized 100,000,000 shares;
issued 54,301,102 and 54,299,160 543 543
Capital in excess of par value 247,810 247,820
Stock purchase warrants 6,555 6,557
Retained earnings 111,164 93,858
Treasury stock, 219,606 and 57,806 shares, at cost (2,568) (685)
Cumulative translation adjustments, net of income tax benefit (7,710) (5,512)
Unrealized gain on securities available for sale, net 706 550
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Total stockholders' equity 356,500 343,131
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Total liabilities and stockholders' equity $771,331 $770,244
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</TABLE>
I-3
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MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31, 1998 AND 1997 (UNAUDITED)
(Thousands of dollars)
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income $ 17,306 $ 14,423
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation of property and equipment 12,312 12,097
Amortization of goodwill 1,773 1,796
Deferred income taxes 9,474 8,384
Equity in net income of mining ventures less dividends received (4,453) (4,740)
Other investments and assets (540) --
Increase in net operating assets (4,422) (41,558)
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Net cash provided (used) by operating activities 31,450 (9,598)
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Investing activities
Property and equipment acquisitions (12,489) (6,740)
Property and equipment disposals 4,415 2,308
Purchases of securities available for sale (10,377) (5,676)
Sale and maturities of securities available for sale 5,098 2,511
Purchase of business (3,663) --
Sale of business 2,758 --
Collection of notes receivable -- 1,500
Other investing activities -- (326)
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Net cash used in investing activities (14,258) (6,423)
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Financing activities
Redemption of redeemable preferred stock, Series A (18,000) --
Purchase of treasury stock (2,463) --
Other financing activities 352 2,162
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Net cash provided (used) by financing activities (20,111) 2,162
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Decrease in cash and cash equivalents (2,919) (13,859)
Cash and cash equivalents at beginning of period 53,215 48,310
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Cash and cash equivalents at end of period $ 50,296 $ 34,451
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Supplemental disclosure of cash flow information:
Interest paid $ 371 $ 475
Income tax paid (refunded), net (4,035) 9,111
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</TABLE>
The accompanying notes are an integral part of the financial statements.
I-4
<PAGE>
MORRISON KNUDSEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of dollars except share data)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements and related notes
of Morrison Knudsen Corporation and subsidiaries (the "Corporation") should be
read in conjunction with the audited consolidated financial statements and
related notes included in the Corporation's Annual Report on Form 10-K for the
year ended November 30, 1997. The comparative consolidated balance sheet and
related disclosures at November 30, 1997 have been derived from the audited
balance sheet and financial statement footnotes. The accompanying condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring adjustments, that in the opinion of management are necessary for a
fair presentation of the results of operations and cash flows for the interim
periods presented. The results of operations for the six months ended May 31,
1998 are not necessarily indicative of the operating results to be expected for
the full year.
The preparation of the Corporation's condensed consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the balance sheet dates and the reported amounts of
revenue and cost during the reporting periods. Actual results could differ in
the near term from those estimates. Due to uncertainties inherent in the process
of estimating actual amounts of revenue and costs on long-term contracts,
results may vary from estimates in the near term.
2. ADOPTION OF ACCOUNTING PRINCIPLE
Effective December 1, 1997, the Corporation adopted Statement of Financial
Accounting Standards No. 128 Earnings per Share ("SFAS No. 128") which specifies
the standards for computing and presenting basic and diluted earnings per share
("EPS"). The Corporation's stock purchase warrants are antidilutive for the
periods presented. EPS amounts for prior periods have been retroactively
adjusted to conform with SFAS No. 128.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities and is effective for the Corporation for the
three months ending February 28, 2000. The Corporation currently has no
derivative instruments or hedging activities.
4. VENTURES
The Corporation's share of results of operations of construction joint ventures
and mining ventures presented below excludes any allocation of division or group
level indirect overhead cost. Such costs are included in cost of revenue in the
Corporation's consolidated statement of income.
Construction joint ventures: The Corporation participates in joint ventures,
generally as sponsor and manager of the projects, which are formed to bid,
negotiate and complete specific projects. The size, scope and duration of joint
venture projects vary among periods.
<TABLE>
<CAPTION>
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(Unaudited)
Combined financial position of construction joint ventures May 31, 1998 November 30, 1997
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<S> <C> <C>
Current assets $ 388,226 $ 364,752
Property and equipment, net 48,784 33,223
Current liabilities (317,310) (324,092)
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Net assets $ 119,700 $ 73,883
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</TABLE>
I-5
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<TABLE>
<CAPTION>
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Combined results of operations of construction joint ventures (Unaudited) (Unaudited)
Six months ended May 31, 1998 May 31, 1997
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<S> <C> <C>
Revenue 591,214 $ 300,607
Cost of revenue (500,394) (251,602)
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Gross profit (excludes indirect overhead cost) $ 90,820 $ 49,005
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Corporation's share of results of operations of construction
joint ventures (Unaudited) (Unaudited)
Six months ended May 31, 1998 May 31, 1997
- --------------------------------------------------------------------------------------------------
Revenue $ 209,073 $ 125,878
Cost of revenue (180,562) (110,442)
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Gross profit (excludes indirect overhead cost) $ 28,511 $ 15,436
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</TABLE>
Mining ventures: At May 31, 1998, the Corporation had ownership interests in
two mining ventures, MIBRAG mbH (33%) and Westmoreland Resources, Inc.
("Westmoreland Resources") (20%). The Corporation provides contract mining
services to these ventures.
<TABLE>
<CAPTION>
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(Unaudited)
Combined financial position of mining ventures May 31, 1998 November 30, 1997
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<S> <C> <C>
Current assets $ 260,209 $ 302,237
Non-current assets 122,848 117,447
Property and equipment, net 521,538 498,310
Current liabilities (76,326) (101,241)
Long-term debt (279,401) (267,026)
Other non-current liabilities (351,338) (365,058)
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Net assets $ 197,530 $ 184,669
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</TABLE>
I-6
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<TABLE>
<CAPTION>
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Combined results of operations of mining ventures (Unaudited) (Unaudited)
Six months ended May 31, 1998 1997
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<S> <C> <C>
Revenue $ 156,088 $ 198,848
Cost of revenue (139,665) (181,214)
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Gross profit (excludes indirect overhead cost) $ 16,423 $ 17,634
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</TABLE>
<TABLE>
<CAPTION>
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Corporation's share of results of operations of mining ventures (Unaudited) (Unaudited)
Six months ended May 31, 1998 1997
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<S> <C> <C>
Revenue $ 48,705 $ 63,443
Cost of revenue (43,615) (57,901)
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Gross profit (excludes indirect overhead cost) $ 5,090 $ 5,542
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</TABLE>
The Corporation received dividend distributions of $632 from mining ventures
during the six months ended May 31, 1998.
On December 23, 1996, Westmoreland Coal and four subsidiaries, including
Westmoreland Resources, filed for protection under Chapter 11 of the United
States Bankruptcy Code. The debtor corporations ("Westmoreland") are in
possession of their respective properties and assets and are operating as
debtors in possession pursuant to the provisions of the Bankruptcy Code. On
April 15, 1998, Westmoreland and the creditors (the 1974 UMWA Pension Plan, the
1992 UMWA Benefit Plan and the UMWA Combined Fund (the "Funds")) both filed
separate amended joint plans of reorganization and disclosure statements.
Westmoreland withdrew its plan on June 11, 1998 without prejudice to its ability
to refile its plan. The Funds have received Bankruptcy Court approval to solicit
votes on the Funds' plan of reorganization. A confirmation hearing on the Funds'
plan has been set for August 25, 1998. The Funds' plan provides for the
assumption of Westmoreland's mining contracts with the Corporation. It further
provides for the cancellation of all existing shareholders' interests including
the Corporation's 20% interest in Westmoreland Resources. New equity would be
issued to the Funds. There are a number of contingencies to the confirmation of
the Funds' plan. Accordingly, the outcome of the treatment of equity interest
and mining contracts with Westmoreland Resources is uncertain. No assurance can
be given that Westmoreland will be successful in reorganizing its affairs
pursuant to the Chapter 11 bankruptcy proceedings. At May 31, 1998, the carrying
amount of the Corporation's ownership interest in Westmoreland Resources was
$6,764, and the Corporation's proportionate share of Westmoreland Resources'
revenue and earnings included in the accompanying condensed consolidated
statement of income for the six months ended May 31, 1998 was $4,987 and $572,
respectively. The Corporation believes that the outcome of the bankruptcy
proceedings will not have a material adverse effect on its financial position or
results of operations.
5. CONTINGENCIES AND COMMITMENTS
Summitville environmental matters: From July 1985 to June 1989, a subsidiary of
the Corporation performed certain contract mining services at the Summitville
mine near Del Norte, Colorado. The United States Environmental Protection Agency
(the "EPA") has notified the Corporation and approximately 20 other parties that
each is a
I-7
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potentially responsible party ("PRP") with regard to hazardous substances
generated or disposed of at the Summitville Mine Superfund Site (the "Site").
The EPA has not commenced any litigation or other proceedings against the
Corporation. The Corporation has had only preliminary discussions with the EPA
but has been informally advised that the EPA does not consider the Corporation
eligible for a de minimis settlement (the basis for settlement by several PRPs
considered to have contributed less than 3% volume and toxicity of the hazardous
substances at the Site).
According to a report published in August 1996, the EPA estimated that the
total remediation costs incurred and to be incurred at the Site will be
$120,000. The Corporation is not a party to any agreement regarding an
allocation of responsibility, and the EPA has not made an allocation of
responsibility among the PRPs. The Corporation's share, if any, of the
aggregate environmental liability associated with the Site is not presently
determinable and depends upon, among other things, the manner in which liability
may be allocated to or among the Corporation or other PRPs associated with the
Site, the efficacy of any defenses that the Corporation or such other PRPs may
have to any assertion of liability, the willingness and ability of such other
PRPs to discharge such liability as may be allocated to them and the outcome of
any negotiations or settlement discussions between the Corporation and the EPA
and/or such other PRPs. Accordingly, no remediation costs have been accrued at
May 31, 1998.
Management believes that the ultimate resolution of this matter could have a
material adverse effect on the Corporation's financial position and could
materially and adversely effect its results of operations and cash flows in one
or more periods.
Contract-related matters: In 1995, Old MK entered into a fixed-price contract
with the Texas Natural Resource Conservation Commission ("TNRCC") for
construction of a solvent-extraction facility and treatment of contaminated soil
at a Superfund site in Texas. The TNRCC notified the Corporation in early
February 1998 that it was terminating its contract with the Corporation. The
Corporation is currently negotiating with the TNRCC over demobilization and
claim issues. The TNRCC may seek to recover up to $13,619 of advances by drawing
on an outstanding letter of credit issued at the request of the Corporation (and
under which the Corporation would have an obligation to reimburse the issuer for
any amounts so drawn). If the TNRCC does so, the Corporation intends to assert
claims for additional revenue for customer-caused delays, changed conditions and
other excess costs. The Corporation's estimated costs with regard to the
contract assume the letter of credit will not be drawn upon. However, the
ultimate outcome of these matters cannot currently be determined with certainty.
In the fourth quarter of 1997, the Corporation assumed sponsorship of a large,
fixed-price joint venture contract due to the bankruptcy of the previous sponsor
and recorded a $3,900 pretax loss because of the uncertainties on the project,
including unpaid client-directed change orders and potential project claims.
Management believes that acceptable pricing will be achieved by further
negotiation with the client on remaining open change orders or that claims
settlement will mitigate pricing exposure. However, the ultimate outcome cannot
be currently determined with certainty and may not occur in the near term.
Letters of credit: In the normal course of business, the Corporation causes
letters of credit to be issued in connection with contract performance
obligations which are not reflected in the balance sheet. The Corporation is
obligated to reimburse the issuer of such letters of credit for any payments
made thereunder. At May 31, 1998, $46,841 in face amount of such letters of
credit were outstanding, including a $13,619 letter of credit issued in
connection with the contract performance obligation to TNRCC discussed above. At
November 30, 1997, $41,297 in face amount of such letters of credit were
outstanding. The Corporation has pledged securities available for sale as
collateral for its reimbursement obligations in respect of $6,106 in face amount
of certain letters of credit at May 31, 1998.
In connection with a 1989 sale of Old MK's ownership interest of a
shipbuilding subsidiary, the Corporation assumed a guarantee of port facility
bonds of $21,000 through 2002. The former subsidiary has collateralized the
bonds with certain assets and has established a sinking fund of approximately
$5,065 for the bonds. No loss on the guarantee is probable and, accordingly, no
accrual has been made by the Corporation.
Other: In May 1998, Leucadia National Corporation filed an action against the
Corporation and certain officers and directors in The United States District
Court for the District of Utah, Civil Action Number 2:97CV-0327C. The complaint
alleges fraud in the sale of shares of MK Gold Corporation by Old MK to Leucadia
on May 12, 1995. Leucadia contends that the Corporation knew or believed that a
non-compete agreement between the Corporation and MK Gold was unenforceable and
failed to disclose that belief to Leucadia. The non-compete agreement is the
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subject of separate litigation between MK Gold and the Corporation. The
plaintiff seeks rescission of the sale and restitution of $22,500.
The Corporation and certain current and former officers and directors are
named defendants in two previously reported legal actions: John B. Blyler and
Malcolm J. Corse v. William J. Agee, et. al., Civil Action No. 97-0332-S-BLW;
and Martin Radwell v. Dennis R. Washington, et. al., Civil Action No. 15934. The
complaints allege, among other things, that the defendants breached certain
fiduciary duties. Additionally, a previously reported action filed in 1995 by
former shareholders of TMS, Inc. which was acquired by Old MK in December 1992
has been dismissed and the dismissal has been upheld on appeal.
The Corporation, as successor to Old MK (Commission File No. 1-8889), is
subject to a formal investigation by the Pacific Regional Office of the SEC
regarding the management and operations of Old MK, primarily its former Transit
and MK Rail businesses, prior to September 12, 1996. The Corporation continues
to cooperate with the Commission's staff in connection with this investigation.
Although the ultimate outcome of these matters cannot be predicted with
certainty, management believes that the outcome of these actions, individually
or collectively, will not have a material adverse impact on the Corporation's
financial position, results of operations or cash flows.
In addition to the foregoing, there are other claims, lawsuits, disputes with
third parties, investigations and administrative proceedings against the
Corporation and its subsidiaries relating to matters in the ordinary course of
its business activities that are not expected to have a material adverse effect
on the Corporation's financial position, results of operations or cash flows.
6. SUBSEQUENT EVENTS -- ACQUISITION OF WESTINGHOUSE ELECTRIC COMPANY
On June 26, 1998 the Corporation announced the formation of a joint venture with
British Nuclear Fuels, Ltd. ("BNFL") to acquire the Westinghouse Electric
Company ("Westinghouse") from CBS Corporation. The purchase price for the
acquisition is approximately $1.2 billion, including $238 million in cash and
the assumption of approximately $950 million in specified liabilities,
commitments and obligations. The Corporation's share of the purchase price is
approximately $168 million in cash, plus the assumption of less than $30 million
of liabilities. The joint venture is led by Morrison Knudsen as majority owner,
controlling 60% of the new entity, and BNFL, through a U.S. holding company,
owning 40%. The transaction is subject to regulatory approvals and is expected
to close by the end of 1998.
Westinghouse provides a wide range of products, services and technologies in
the government services and nuclear industries throughout the world.
Westinghouse's Energy Systems Business Unit ("ESBU") is a worldwide leader in
commercial nuclear power technology with emphasis on service, fuel and
instrumentation and control technologies for the world's 400-plus operating
nuclear power plants. ESBU is also heavily involved in the development of new
plant technology and expects to achieve final design approval from the Nuclear
Regulatory Commission for its advanced, passive nuclear power plant, the AP600,
later this year. ESBU has approximately 4,000 employees.
Westinghouse's Government and Environment Services Company ("GESCO") manages
highly complex facilities for the Department of Energy and the Department of
Defense, provides new ship reactor plants and advanced designs for the Nuclear
Navy, and provides special-material canisters for spent nuclear fuel and
dismantled nuclear weapons. GESCO also provides a wide range of services at
government installations, including the production of tritium for national
weapons programs and high-level waste solidification. GESCO employs over 17,000
employees, including those at government-owned, contractor-operated locations.
The documentation governing the joint venture and certain new entities to be
created in connection therewith will provide for, among other things, an
allocation of the economic effects of the ownership and operation of
Westinghouse's three principal businesses. Although the Corporation will have
the controlling interest in Westinghouse: (i) the results of operations of the
ESBU business will generally be allocated 6% to the Corporation and 94% to BNFL
through a management agreement; (ii) the results of operations of the Navy
businesses of GESCO will generally be allocated 92% to the Corporation and 8% to
BNFL; and (iii) the results of operations of the government and environmental
services business of GESCO will generally be allocated 50% to the Corporation
and 50% to the BNFL.
The Corporation intends to fund its share of the purchase price for
Westinghouse and the working capital requirements of the Westinghouse businesses
using financing facilities to be entered into in addition to the Corporation's
available cash. The terms of such financing facilities have not yet been
finalized.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q and other reports and statements filed by
Morrison Knudsen Corporation from time to time with the Securities and Exchange
Commission (collectively, "SEC Filings") contain or may contain forward-looking
statements. When used in SEC Filings, the words "anticipate," "believe,"
"estimate," "expect," "future," "intend," "plan," "should," and similar
expressions identify such forward-looking statements. Such forward-looking
statements are necessarily based on various assumptions and estimates and are
inherently subject to various risks and uncertainties, including, in addition to
any risks and uncertainties disclosed in the text surrounding such statements or
elsewhere in the SEC Filings, risks and uncertainties relating to the possible
invalidity of the underlying assumptions and estimates and possible changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including the Corporation's customers, suppliers, business
partners and competitors and legislative, regulatory, judicial and other
governmental authorities and officials. Should the Corporation's assumptions or
estimates prove to be incorrect, or should one or more of these risks or
uncertainties materialize, actual amounts, results, events and circumstances may
vary significantly from those reflected in such forward-looking statements.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED MAY 31, 1998 COMPARED TO THE
THREE AND SIX MONTHS ENDED MAY 31, 1997
<TABLE>
<CAPTION>
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Three Months Six Months
Ended May 31, Ended May 31,
(In millions) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Revenue $436.1 $414.2 $821.1 $803.8
Gross profit 22.1 19.2 41.1 37.3
General and administrative expenses (6.1) (5.9) (11.5) (11.4)
Goodwill amortization (.9) (.9) (1.8) (1.8)
Investment income 1.2 1.4 3.5 3.5
Interest expense (.2) (.2) (.4) (.5)
Other income (expense) .2 -- .2 --
Income before income taxes 16.3 13.6 31.1 27.0
Income tax expense (7.2) (6.2) (13.8) (12.6)
Net income 9.1 7.4 17.3 14.4
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</TABLE>
Revenue and gross profit: Revenue for the quarter ended May 31, 1998 increased
slightly from the comparable period in 1997 principally due to an increase in
work executed by the Corporation's Operations & Maintenance Division. These
increases of revenue were substantially offset by a lower demand for coal
production and power generation from the MIBRAG mbH mining venture in Germany
and the completion of a mining contract in 1997. Gross profit, as a percentage
of revenue, was 5.1% and 5.0% for the three and six months ended May 31, 1998
compared to 4.6% for the three and six months ended May 31, 1997. The increase
in gross margin reflects a higher content of larger, more complex engineering
and construction projects which generally have larger profit margins as
partially offset by the recognition of a loss related to start up difficulties
associated with a fixed-price construction contract. Gross profit for the three
and six months ended May 31, 1997 was impacted by provisions for losses
estimated at completion for contracts in progress of $5.8 and $9.5 million,
respectively.
Due to inherent risks and rewards in fixed-price contracting, the
Corporation's operating margins often vary
I-10
<PAGE>
between periods and the Corporation experiences unexpected gains and losses on
contracts. The Corporation strives to offset the risks inherent in its contracts
through geographic, customer and risk diversification.
At May 31, 1998, backlog of $3,826 million was comprised of $1,934 million
(51%) of revenue from fee-type contracts and $1,892 million (49%) of revenue
from fixed-price contracts and the Corporation's share of revenue from mining
ventures.
General and administrative expenses: General and administrative expenses of
$11.5 million for the six months ended May 31, 1998 increased slightly from
$11.4 million reported for the six months ended May 31, 1997. General and
administrative costs are expected to increase during the remainder of 1998 as
the Corporation implements new computer information systems for financial, human
resources and payroll systems which are scheduled to be completed in various
stages over a three-year period. Training, reengineering and the amortization
costs related to such implementation are expected to be approximately $2 million
annually for each of the next seven years. The Corporation expects the
implementation to ultimately improve the efficiency and cost of its financial
systems.
Investment income: Investment income for the three months ended May 31, 1998
decreased $.2 to $1.2 million compared to the comparable period of 1997 due to a
decrease in interest recognized from U.S. federal income tax refunds received in
January 1998 and a note receivable paid in October 1997. These reductions in
investment income were partially offset by increased interest recognized on
corporate cash in a short-term asset management account.
Interest expense: Interest expense for the three and six months ended May 31,
1998 decreased slightly from the comparable period of 1997. Interest expense
consists primarily of periodic amortization of prepaid underwriting fees and
quarterly commitment fees in connection with the Corporation's five-year, $200
million revolving loan and letter of credit facility.
Income tax expense: The effective tax rate for the three and six months ended
May 31, 1998 was 44.3% compared to 45.4% and 46.6% in the comparable periods of
1997 principally due to a decrease in foreign tax expense and a lower proportion
of non-deductible expenses to pretax income. The effective tax rate is higher
than the U.S. federal statutory rate of 35% because of state income taxes and
foreign income taxes not currently eligible for use as credits against U.S.
federal income taxes.
FINANCIAL CONDITION
Liquidity and capital resources (in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------
May 31,
1998 1997
- ---------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Beginning of period $ 53,215 $48,310
End of period 50,296 34,451
- ---------------------------------------------------
<CAPTION>
Six Months Ended
May 31,
1998 1997
- ---------------------------------------------------
<S> <C> <C>
Net cash provided (used) in:
Operating activities $ 31,450 $(9,598)
Investing activities (14,258) (6,423)
Financing activities (20,111) 2,162
- ---------------------------------------------------
</TABLE>
I-11
<PAGE>
The Corporation has three principal sources of near-term liquidity: (i)
existing cash and cash equivalents; (ii) cash generated by operations and (iii)
available revolving loan borrowings. Management believes the Corporation's
liquidity and capital resources should be sufficient to meet its reasonably
foreseeable needs for working capital, capital expenditures and other
anticipated cash requirements.
Cash and cash equivalents at May 31, 1998 decreased $2.9 million to $50.3
million from $53.2 million at November 30, 1997. Operating activities generated
$31.5 million in cash during the six month period ended May 31, 1998, compared
with cash utilized by operations of $9.6 million during the same period in 1997.
The increase in cash generated from operations is due primarily to $25.2 million
of income tax refunds and interest thereon received in January 1998, and a net
decrease in other operating assets and liabilities of $14.8 million. Cash
provided or used from operating activities from period to period is affected by
the mix, stage of completion and commercial terms of engineering and
construction contracts and is reflected in changes in net operating assets and
liabilities. Cash flow for the six months ended May 31, 1998 was also impacted
by $8.1 million for acquisitions of net property and equipment, $5.3 million in
net purchases of securities held for sale, $3.7 million used for the purchase of
a ready-mix concrete business and $2.8 million of cash proceeds from the sale of
a business. In addition, the Corporation purchased 210,800 shares of its common
stock for treasury for $2.5 million.
On April 15, 1998, the Corporation redeemed all of its outstanding Series A
preferred stock in exchange for cash payments totaling $18 million.
The Corporation anticipates net capital expenditures for major construction
equipment of approximately $12.0 million during the remainder of 1998 for normal
replacement and to meet near-term equipment requirements for new work.
As discussed in Note 5 "Contingencies and Commitments -- Contract-related
matters," in connection with a fixed-price contract for the construction of a
solvent extraction facility and treatment of contaminated soil at a Superfund
site in Texas, the TNRCC may seek to recover up to $13.6 million of advances by
drawing on an outstanding letter of credit under which the Corporation would
have an obligation to reimburse the issuer for any amounts drawn.
As discussed in Note 6 "Subsequent Events -- Acquisition of Westinghouse
Electric Company," the Corporation intends to finance its initial cash
investment in the joint venture formed to acquire Westinghouse, in the amount of
$168 million, and its share of the working capital requirements of the
Westinghouse businesses, using committed financing facilities to be entered into
in addition to the Corporation's available cash and existing lines of credit.
The terms of such financing facilities have not yet been finalized. The
Corporation will generally be responsible for funding, and will generally be
entitled to receive, the cash used and provided, respectively, by the
Westinghouse businesses in accordance with the allocations of the results of
operations of such businesses described in Note 6.
The Corporation may, from time to time, pursue opportunities to complement
existing operations through business combinations and ownership interests in
ventures, which may require additional financing and utilization of the
Corporation's capital resources, and may materially affect the Corporation's
financial position, results of operations and cash flows.
Depending upon conditions in the capital markets and other factors, the
Corporation may from time to time consider the possible issuance of long-term
debt or other securities or other capital market transactions.
BACKLOG
Backlog of all uncompleted contracts at May 31, 1998 was $3,826 million,
compared with $3,704 million at November 30, 1997. New work awarded in the six
months ended May 31, 1998 totaled $943 million compared with $812 million for
the six months ended May 31, 1997.
THE YEAR 2000 ISSUE
The Year 2000 issue results from computer programs and circuitry that do not
differentiate between the year 1900 and the year 2000 because they are written
using two- rather than four-digit dates to define the applicable year. If not
corrected, many computer applications and date-sensitive devices could fail or
create erroneous results by or at January 1, 2000. The Year 2000 issue affects
virtually all companies and organizations, including the Corporation.
I-12
<PAGE>
The Corporation has developed, published and implemented a strategic plan (the
"Year 2000 Project"), the goal of which is to assure that the Corporation will
achieve Year 2000 readiness in time to avoid significant Year 2000 failures. The
Corporation is proceeding with its assessment of the Year 2000 readiness issues
for its computer applications and business processes, those of its facilities,
equipment and joint ventures, to assure their continued functionality. The
Corporation is also continuing its assessment of the readiness of external
entities, such as subcontractors, suppliers, vendors, customers and creditors,
that interface with the Corporation. Completion of the Year 2000 Project is
expected by September 30, 1999.
In addition, the Corporation continues its implementation of new or upgraded
financial, human resource and payroll systems, each of which are designed to be
Year 2000 compliant and are expected to be implemented early enough to avoid
Year 2000 failures.
The total cost of the Corporation's other activities to achieve Year 2000
readiness are currently unknown, but are currently being assessed. The
Corporation does not expect the costs associated with these procedures to be
material. While the Corporation believes that its efforts will achieve Year 2000
readiness in time to avoid significant Year 2000 failures, the impact on
business operations of failure by the Corporation to achieve readiness or
failure by external entities which the Corporation cannot control, such as
vendors, to achieve readiness, could materially affect future financial results,
or cause reported financial information not to be necessarily indicative of
future operating results or future financial condition.
ENVIRONMENTAL CONTINGENCY
The United States Environmental Protection Agency ("EPA") has notified the
Corporation and approximately 20 other parties that each is a potentially
responsible party ("PRP") with regard to hazardous substances generated or
disposed of at the Summitville Mine Superfund Site. See Note 5 "Contingencies
and Commitments -- Summitville environmental matters" of Notes to Condensed
Consolidated Financial Statements.
ADOPTION OF ACCOUNTING PRINCIPLE
Effective December 1, 1997, the Corporation adopted Statement of Financial
Accounting Standards No. 128 Earnings per Share ("SFAS No. 128") which specifies
the standards for computing and presenting basic and diluted EPS. EPS amounts
for prior periods have been retroactively adjusted to conform with SFAS No. 128.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 133 Accounting
for Derivative Instruments and Hedging Activities. See Note 3, "Recently Issued
Accounting Standards" of Notes to Condensed Consolidated Financial Statements
for the impact, if any, that this recently issued accounting standard is
expected to have on the Corporation's financial statements upon adoption.
I-13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information regarding legal proceedings set forth under the caption "Other"
in Note 5 "Contingencies and Commitments" of Notes to Condensed Consolidated
Financial Statements is incorporated by reference in response to this Item 1.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the Corporation's stockholders was held on April 8,
1998 at Boise, Idaho.
(b) At the annual meeting, stockholders of record on February 27, 1998 were
entitled to vote 54,241,561 shares of common stock and 1,799,984 shares of
Series A preferred stock (entitled to 1/10,000 of a vote, or an equivalent
of 180 voting shares) for an aggregate of 54,241,741 equivalent shares. A
combined total of 51,146,197 shares were represented at the meeting. The
results of voting at the annual meeting are summarized below:
(1) The approval of the Amendment to the Corporation's Certificate of
Incorporation to eliminate provisions with respect to class
designations for directors, and to add provisions to elect annually
and to allow the removal of directors at any time, with or without
cause, by majority vote of the stockholders of the Corporation:
For 39,439,044
Against 336,825
Abstain 67,435
Broker Non-Vote 11,302,893
(2) Nominees for terms of office to continue until the annual meeting of
stockholders in 1999:
For Withheld
David H. Batchelder 50,758,087 388,110
Leonard R. Judd 50,755,358 390,839
William C. Langley 50,771,737 374,460
Robert S. Miller, Jr. 50,774,745 371,452
Dorn Parkinson 50,241,171 905,026
Terry W. Payne 50,776,802 369,395
John D. Roach 50,769,339 376,858
Robert A. Tinstman 50,758,326 387,871
Dennis R. Washington 50,774,044 372,153
(3) Ratification of the appointment of Coopers & Lybrand L.L.P. as
independent auditors of the Corporation for the fiscal year ending
November 30, 1998:
For 51,035,896
Against 50,777
Abstain 59,524
II-1
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Filed in Part I
None
Filed in Part II
The Exhibits to this Quarterly Report on Form 10-Q are listed in the
Exhibit Index contained elsewhere in this Quarterly Report.
(b) Reports on Form 8-K
On April 15, 1998, the Corporation filed a current report on Form 8-K to
disclose that on April 15, 1998 a final distribution was made with
respect to the Corporation's Series A Preferred stockholders of record as
of the close of business on March 31, 1998. The holders of the Series A
Preferred Stock received an amount per share of $10.10285 representing
their pro rata portion of (i) the $18,000,000 deposited into the Foreign
Tax Credit Sinking Fund and (ii) all interest earned on such total amount
from January 23, 1998 through March 31, 1998. All shares of Series A
Preferred Stock have been canceled and are no longer outstanding and no
longer have the status of shares of Series A Preferred Stock as of the
close of business on April 15, 1998.
All other items required under Part II are omitted because they are not
applicable.
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.
MORRISON KNUDSEN CORPORATION
/S/ Anthony S. Cleberg
-----------------------------------------------------
Executive Vice President and Chief Financial Officer,
in his respective capacities as such
Date: June 30, 1998
II-2
<PAGE>
MORRISON KNUDSEN CORPORATION
EXHIBIT INDEX
Copies of exhibits will be supplied upon request. Exhibits will be provided at
a fee of $.25 per page requested.
Exhibits marked with an asterisk are filed herewith, the remainder
of the exhibits have heretofore been filed with the Commission and
are incorporated by reference.
Exhibit
Number Exhibits
- ------ --------
27.* Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<CASH> 50,296
<SECURITIES> 0
<RECEIVABLES> 181,383
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 405,847
<PP&E> 230,663
<DEPRECIATION> (153,448)
<TOTAL-ASSETS> 771,331
<CURRENT-LIABILITIES> 302,984
<BONDS> 0
0
0
<COMMON> 543
<OTHER-SE> 355,957
<TOTAL-LIABILITY-AND-EQUITY> 771,331
<SALES> 0
<TOTAL-REVENUES> 821,110
<CGS> 0
<TOTAL-COSTS> (780,013)
<OTHER-EXPENSES> 144
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (371)
<INCOME-PRETAX> 31,081
<INCOME-TAX> (13,775)
<INCOME-CONTINUING> 17,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,306
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
