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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
FEBRUARY 28, 1998
Commission File Number 1-12054
MORRISON KNUDSEN CORPORATION
A Delaware Corporation
IRS Employer Identification No. 33-0565601
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83729
208 / 386-5000
At February 28, 1998, 54,184,261 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
THREE MONTHS ENDED FEBRUARY 28, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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PAGE
Item 1. Condensed Consolidated Financial Statements and Notes Thereto
<S> <C>
Statements of Income for the Three Months Ended
February 28, 1998 and 1997 I-1
Balance Sheets at February 28, 1998 and November 30,
1997 I-2
Statements of Cash Flows for the Three Months Ended
February 28, 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-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 6. Exhibits and Reports on Form 8-K II-1
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SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997 (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
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<CAPTION>
1998 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------
Revenue $ 385,041 $ 389,530
Cost of revenue (366,065) (371,426)
- -----------------------------------------------------------------------------------
Gross profit 18,976 18,104
General and administrative expenses (5,406) (5,505)
Goodwill amortization (887) (905)
- -----------------------------------------------------------------------------------
Operating income 12,683 11,694
Investment income 2,288 2,050
Interest expense (194) (257)
Other income (expense), net (4) (67)
- -----------------------------------------------------------------------------------
Income before income taxes 14,773 13,420
Income tax expense (6,551) (6,416)
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Net income $ 8,222 $ 7,004
===================================================================================
Basic and diluted income per share $.15 $.13
- -----------------------------------------------------------------------------------
Common shares used to compute income per share - Basic 54,225,848 53,825,117
Diluted 54,382,566 54,014,692
- -----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
I-1
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MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AT FEBRUARY 28, 1998 (UNAUDITED) AND NOVEMBER 30, 1997
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
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ASSETS 1998 1997
- ------------------------------------------------------------------------------------------
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CURRENT ASSETS
Cash and cash equivalents $ 68,862 $ 53,215
Accounts receivable, including retentions of $24,550 and $26,970 160,369 187,311
Unbilled receivables 77,066 74,514
Refundable income taxes 4,479 14,331
Investments in and advances to construction joint ventures 43,195 29,270
Deferred income taxes 28,355 30,173
Other 14,639 16,200
- ------------------------------------------------------------------------------------------
Total current assets 396,965 405,014
- ------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Securities available for sale, at fair value 42,352 39,314
Investments in mining ventures 58,748 57,439
Assets held for sale 16,042 13,301
Cost in excess of net assets acquired, net of accumulated
amortization of $6,642 and $5,755 135,263 136,150
Deferred income taxes 29,304 31,183
Other 7,179 7,594
- ------------------------------------------------------------------------------------------
Total investments and other assets 288,888 284,981
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PROPERTY AND EQUIPMENT, AT COST
Construction equipment 168,196 172,154
Land and improvements 6,993 6,993
Buildings and improvements 5,824 6,276
Equipment and fixtures 54,614 53,483
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Total property and equipment 235,627 238,906
LESS ACCUMULATED DEPRECIATION (157,352) (158,657)
- ------------------------------------------------------------------------------------------
Property and equipment, net 78,275 80,249
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Total assets $ 764,128 $ 770,244
==========================================================================================
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The accompanying notes are an integral part of the financial statements.
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LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
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CURRENT LIABILITIES
Accounts payable $ 42,738 $ 53,448
Subcontracts payable, including retentions of $17,200 and $20,266 37,634 42,513
Billings in excess of cost and estimated earnings on uncompleted contracts 32,176 25,176
Advances from customers 11,816 8,987
Estimated costs to complete long-term contracts 70,399 73,103
Accrued salaries, wages and benefits 48,094 52,618
Income taxes payable -- 1,371
Other accrued liabilities 42,752 42,679
- --------------------------------------------------------------------------------------------------
Total current liabilities 285,609 299,895
- --------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Postretirement benefit obligation 53,837 53,689
Accrued workers' compensation 35,609 34,088
Pension and deferred compensation liabilities 15,281 15,334
Environmental remediation obligations 6,107 6,107
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Total non-current liabilities 110,834 109,218
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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 18,000
- --------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized; 1,800,000
redeemable shares of Series A issued and outstanding
Common stock, par value $.01, authorized 100,000,000 shares;
issued 54,299,367 and 54,299,160 543 543
Capital in excess of par value 247,889 247,820
Stock purchase warrants 6,556 6,557
Retained earnings 102,080 93,858
Treasury stock, 115,106 and 57,806 shares, at cost (1,297) (685)
Cumulative translation adjustments, net of income tax benefit (6,733) (5,512)
Unrealized gain on securities available for sale, net 647 550
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Total stockholders' equity 349,685 343,131
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Total liabilities and stockholders' equity $764,128 $770,244
==================================================================================================
</TABLE>
I-3
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MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997 (UNAUDITED)
(THOUSANDS OF DOLLARS)
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1998 1997
- ----------------------------------------------------------------------------------------
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OPERATING ACTIVITIES
Net income $ 8,222 $ 7,004
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation of property and equipment 6,930 6,899
Amortization of goodwill 887 905
Deferred income taxes 3,697 3,770
Equity in net income of mining ventures less dividends received (2,920) (3,053)
Other investments and assets 2,145 2,665
(Increase) decrease in net operating assets 8,795 (25,129)
- ----------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 27,756 (6,939)
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment acquisitions (6,752) (2,917)
Property and equipment disposals 1,849 691
Purchases of securities available for sale (5,734) (3,026)
Sale and maturities of securities available for sale 2,793 1,054
Purchase of business (3,663) --
Collection of notes receivable -- 750
Other investing activities -- (425)
- ----------------------------------------------------------------------------------------
Net cash used in investing activities (11,507) (3,873)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchase of treasury stock (612) --
Other 10 --
- ----------------------------------------------------------------------------------------
Net cash used by financing activities (602) --
- ----------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 15,647 (10,812)
Cash and cash equivalents at beginning of period 53,215 48,310
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 68,862 $ 37,498
========================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 194 $ 248
Income tax paid (refunded), net (6,354) 1,112
- ----------------------------------------------------------------------------------------
</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 three months ended February
28, 1998 are not necessarily indicative of the operating results to be expected
for the full year.
The preparation of the Corporation's 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 1997, the Financial Accounting Standards Board issued Statement No. 131
Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131"). SFAS No. 131 requires publicly-held companies to report segment and other
information which is utilized by the chief operation decision maker and to
reconcile the segment information to financial statement amounts. SFAS No. 131
is effective for the Corporation for the year ending November 30, 1999.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132 Employers' Disclosures about Pension and Other Postretirement Benefits-
an Amendment of FASB Statements No. 87, 88 and 106 ("SFAS No. 132"). SFAS No.
132 revises disclosure requirements relating to pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The adoption of SFAS No. 132 is effective for the Corporation for the year
ending November 30, 1999.
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.
I-5
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(UNAUDITED)
COMBINED FINANCIAL POSITION OF CONSTRUCTION JOINT VENTURES FEBRUARY 28, 1998 NOVEMBER 30, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 379,662 $ 364,752
Property and equipment, net 36,029 33,223
Current liabilities (324,005) (324,092)
- -------------------------------------------------------------------------------------------------------------
Net assets $ 91,686 $ 73,883
=============================================================================================================
- -------------------------------------------------------------------------------------------------------------
COMBINED RESULTS OF OPERATIONS OF CONSTRUCTION JOINT VENTURES (UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, 1998 FEBRUARY 28, 1997
- -------------------------------------------------------------------------------------------------------------
Revenue $ 260,951 $ 155,309
Cost of revenue (214,581) (123,113)
- -------------------------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 46,370 $ 32,196
=============================================================================================================
- -------------------------------------------------------------------------------------------------------------
CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF CONSTRUCTION
JOINT VENTURES (UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, 1998 FEBRUARY 28, 1997
- -------------------------------------------------------------------------------------------------------------
Revenue $ 93,789 $ 62,608
Cost of revenue (78,879) (53,818)
- -------------------------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 14,910 $ 8,790
=============================================================================================================
</TABLE>
MINING VENTURES: At February 28, 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.
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(UNAUDITED)
COMBINED FINANCIAL POSITION OF MINING VENTURES FEBRUARY 28, 1998 NOVEMBER 30, 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 278,898 $ 302,237
Non-current assets 107,487 117,447
Property and equipment, net 511,229 498,310
Current liabilities (92,423) (101,241)
Long-term debt (268,826) (267,026)
Other non-current liabilities (347,061) (365,058)
- ----------------------------------------------------------------------------------------
Net assets $ 189,304 $ 184,669
========================================================================================
</TABLE>
I-6
<PAGE>
<TABLE>
<CAPTION>
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COMBINED RESULTS OF OPERATIONS OF MINING VENTURES (UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 82,045 $107,574
Cost of revenue (70,664) (97,878)
- -------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 11,381 $ 9,696
===========================================================================================
- -------------------------------------------------------------------------------------------
CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF MINING VENTURES (UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, 1998 1997
- -------------------------------------------------------------------------------------------
Revenue $ 25,576 $ 34,546
Cost of revenue (22,023) (31,493)
- -------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 3,553 $ 3,053
===========================================================================================
</TABLE>
The Corporation received dividend distributions of $632 from mining ventures
during the three months ended February 28, 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.
Westmoreland filed a Joint Plan of Reorganization on February 2, 1998 with the
U.S. Bankruptcy Court. Westmoreland's plan provides that (i) the United Mine
Workers of America Pension and Benefit Fund will share in a distribution of cash
and secured notes totaling up to $7,500 and up to 20% of new common stock of
reorganized Westmoreland and (ii) allowed claims will be resolved through a
variety of methods including cash payments with interest. Such plan is subject
to a number of conditions including approval and possible amendment by
Westmoreland's creditors and the Bankruptcy Court. Moreover, no assurance can be
given that Westmoreland will be successful in reorganizing its affairs pursuant
to the Chapter 11 bankruptcy proceedings. At February 28, 1998, the carrying
amount of the Corporation's ownership interest in Westmoreland Resources was
$6,553, and the Corporation's proportionate share of Westmoreland Resources'
revenue and earnings included in the accompanying condensed consolidated
statement of income for the three months ended February 28, 1998 was $1,392 and
$362, 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 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,
I-7
<PAGE>
no remediation costs have been accrued at February 28, 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. In 1997, the Corporation and the staff of TNRCC
entered into a modified agreement that resolved the contract disputes which had
previously arisen. The modified agreement was not approved by the TNRCC and the
TNRCC notified the Corporation in early February 1998 that it was terminating
its contract with the Corporation. The Corporation anticipates additional
negotiations 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), and
if the TNRCC does so, the Corporation will assert its 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. 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 agreement with
the client or that claims settlement will mitigate the 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 February 28, 1998, $47,130 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 February 28, 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
$5,000 for the bonds. No loss on the guarantee is probable and, accordingly, no
accrual has been made by the Corporation.
OTHER: The Corporation and certain current and former officers and directors are
named defendants in two 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 is presently on appeal. 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. 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.
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.
I-8
<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
QUARTER ENDED FEBRUARY 28, 1998 COMPARED TO THE QUARTER ENDED FEBRUARY 28, 1997
<TABLE>
<CAPTION>
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(IN MILLIONS) 1998 1997
- -------------------------------------------------------
<S> <C> <C>
Revenue $385.0 $389.5
Gross profit 19.0 18.1
General and administrative expenses (5.4) (5.5)
Goodwill amortization (.9) (.9)
Investment income 2.2 2.0
Interest expense (.2) (.3)
Other income (expense), net -- (.1)
=======================================================
</TABLE>
REVENUE AND GROSS PROFIT: Revenue for the quarter ended February 28, 1998
decreased slightly from the comparable period in 1997 principally due to 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. These
reductions of revenue were substantially offset by an increase in work executed
on several engineering and construction contracts. Gross profit, as a percentage
of revenue, was 4.9% for the first quarter of 1998 compared to 4.6% for the
first quarter of 1997.
Due to inherent risks and rewards in fixed-price contracting, the
Corporation's operating margins often vary between periods and the Corporation
experiences gains and losses on contracts. The Corporation strives to offset the
risks inherent in its contracts through geographic, customer and risk
diversification.
At February 28, 1998, backlog of $3,823 million was comprised of $2,148
million (56%) revenue from fee-type contracts and $1,675 million (44%) revenue
from fixed-price contracts and share of revenue from mining ventures.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses of $5.4
million for the quarter ended February 28, 1998 decreased slightly from $5.5
million reported for the quarter ended February 28, 1997. General and
administrative costs are expected to increase during the year as the Corporation
implements new computer information systems for financial, human resources and
payroll systems which is 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 $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.
GOODWILL: Goodwill amortization for the first quarter of 1998 of $.9 million was
substantially the same as the comparable period of 1997. Goodwill amortization
for 1998 is estimated to be $3.5 million.
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INVESTMENT INCOME: Investment income for the first quarter of 1998 increased $.2
million compared to the comparable period of 1997 due to an increase in interest
recognized on claims for U.S. federal income tax refunds received in January
1998.
INTEREST EXPENSE: Interest expense for the first quarter of 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 first quarter of 1998 was 44%
compared to 48% in the first quarter 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.
I-10
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FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------
FEBRUARY 28,
1998 1997
- -------------------------------------------------------
CASH AND CASH EQUIVALENTS:
<S> <C> <C>
Beginning of period $ 53,215 $48,310
End of period 68,862 37,498
- -------------------------------------------------------
THREE MONTHS ENDED
FEBRUARY 28,
1998 1997
- -------------------------------------------------------
NET CASH PROVIDED (USED) IN:
Operating activities $ 27,756 $(6,939)
Investing activities (11,507) (3,873)
Financing activities (602) --
- -------------------------------------------------------
</TABLE>
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 February 28, 1998 increased $15.6 million to
$68.9 million from $53.2 million at November 30, 1997. Operating activities
generated $27.8 million in cash during the three month period ended February 28,
1998, compared with cash utilized by operations of $6.9 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 during the
period. 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 three months ended February 28, 1998 was also
impacted by $5.0 million for acquisitions of net property and equipment, $2.9
million in net purchases of securities held for sale and $3.7 million used for
the purchase of a ready-mix concrete business. In addition, the Corporation
purchased 57,300 shares of its common stock for treasury for $.6 million.
On April 15, 1998, the Corporation will redeem all Series A preferred stock
outstanding totaling $18 million.
The Corporation anticipates net capital expenditures for major construction
equipment of approximately $22 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.
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 February 28, 1998 was $3,823 million,
compared with $3,704 million at November 30, 1997. New work awarded in the three
months ended February 28, 1998 totaled $504 million compared with $323 million
for the three months ended November 30, 1997.
I-11
<PAGE>
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 Statements No. 131
Disclosures about Segments of an Enterprise and Related Information and No. 132
Employers' Disclosures about Pension and Other Postretirement Benefits-an
Amendment of FASB Statements No. 87, 88 and 106. See Note 3. "Recently Issued
Accounting Standards" of Notes to Condensed Consolidated Financial Statements
for the impact, if any, that recently issued accounting standards are expected
to have on the Corporation's financial statements upon adoption.
I-12
<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 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 January 15, 1996, the Corporation filed a current report on Form 8-
K to disclose the termination of discussions between the Corporation
and the Chairman of the Board of Directors of the Corporation
regarding a proposed acquisition of an interest in Montana Resources,
Inc. The Corporation also announced that the Board of Directors
authorized the purchase from time to time of up to 2,000,000 shares of
its common stock and up to 2,765,000 of its warrants to purchase
common stock.
On January 16, 1998, the Corporation filed a current report on Form 8-
K to disclose that a verbal agreement had been reached with the
Internal Revenue Service with respect to the interest rate calculation
in connection with certain tax refunds, including those that relate to
the Corporation's Series A preferred stock.
The Corporation filed a current report on Form 8-K on January 23, 1998
to disclose that certain Foreign Tax Credit Refunds (as defined) had
been received from the Internal Revenue Service sufficient to redeem
the Series A preferred stock on April 15, 1998 to holders of record of
shares as of the close of business on March 31, 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: April 6, 1998
II-1
<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.
E-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT FOOTNOTES OF MORRISON KNUDSEN CORPORATION FOR THE THREE MONTHS ENDED
FEBRUARY 28, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT FOOTNOTES:
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<CASH> 68,862
<SECURITIES> 0
<RECEIVABLES> 160,369
<ALLOWANCES> (4,734)
<INVENTORY> 0
<CURRENT-ASSETS> 396,965
<PP&E> 235,627
<DEPRECIATION> (157,352)
<TOTAL-ASSETS> 764,128
<CURRENT-LIABILITIES> 285,609
<BONDS> 0
18,000
0
<COMMON> 543
<OTHER-SE> 349,142
<TOTAL-LIABILITY-AND-EQUITY> 764,128
<SALES> 4,261
<TOTAL-REVENUES> 385,041
<CGS> (3,921)
<TOTAL-COSTS> (372,358)
<OTHER-EXPENSES> 2,284
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> (194)
<INCOME-PRETAX> 14,773
<INCOME-TAX> (6,551)
<INCOME-CONTINUING> 8,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,222
<EPS-PRIMARY> 0
<EPS-DILUTED> .15
</TABLE>
