<PAGE>
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
AUGUST 31, 1998
Commission File Number 1-12054
MORRISON KNUDSEN CORPORATION
A Delaware Corporation
IRS Employer Identification No. 33-0565601
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83712
208 / 386-5000
At August 31, 1998, 53,402,318 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
<PAGE>
MORRISON KNUDSEN CORPORATION
QUARTERLY REPORT FORM 10-Q FOR THE
THREE AND NINE MONTHS ENDED AUGUST 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 Nine Months
Ended August 31, 1998 and 1997 I-1
Balance Sheets at August 31, 1998 and November 30, 1997 I-2
Statements of Cash Flows for the Nine Months Ended
August 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 6. Exhibits and Reports on Form 8-K II-1
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED AUGUST 31, 1998 AND 1997 (UNAUDITED)
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Revenue $ 497,795 $ 434,288 $ 1,318,905 $ 1,238,043
Cost of revenue (476,488) (413,546) (1,256,501) (1,179,991)
- ----------------------------------------------------------------------------------------------------------
Gross profit 21,307 20,742 62,404 58,052
General and administrative expenses (6,260) (5,551) (17,729) (16,937)
Goodwill amortization (894) (895) (2,677) (2,691)
- ----------------------------------------------------------------------------------------------------------
Operating income 14,153 14,296 41,998 38,424
Investment income 1,254 1,773 4,717 5,258
Interest expense (299) (185) (670) (660)
Other income (expense), net 2,095 (970) 2,239 (1,097)
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 17,203 14,914 48,284 41,925
Income tax expense (7,624) (6,679) (21,399) (19,267)
- ----------------------------------------------------------------------------------------------------------
Net income $ 9,579 $ 8,235 $ 26,885 $ 22,658
==========================================================================================================
Income per share
Basic $.18 $.15 $.50 $.42
Diluted .18 .15 .49 .42
- ----------------------------------------------------------------------------------------------------------
Common shares used to compute income
per share - Basic 53,807,802 54,194,111 54,065,857 53,978,704
Diluted 53,815,103 54,544,862 54,341,098 54,129,718
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
I-1
<PAGE>
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AT AUGUST 31, 1998 (UNAUDITED) AND NOVEMBER 30, 1997
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1998 1997
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CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 42,429 $ 53,215
Accounts receivable, including retentions of $29,330 and $26,970 198,350 187,311
Unbilled receivables 73,060 74,514
Refundable income taxes 4,637 14,331
Investments in and advances to construction joint ventures 67,997 29,270
Deferred income taxes 22,143 30,173
Other 8,257 16,200
- --------------------------------------------------------------------------------------
Total current assets 416,873 405,014
- --------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Securities available for sale, at fair value 45,748 39,314
Investments in mining ventures 63,374 57,439
Assets held for sale 14,170 13,301
Cost in excess of net assets acquired, net of accumulated
amortization of $8,416 and $5,755 133,491 136,150
Deferred income taxes 22,884 31,183
Other 8,485 7,594
- --------------------------------------------------------------------------------------
Total investments and other assets 288,152 284,981
- --------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST
Construction equipment 179,571 172,154
Land and improvements 6,993 6,993
Buildings and improvements 5,788 6,276
Equipment and fixtures 58,750 53,483
- --------------------------------------------------------------------------------------
Total property and equipment 251,102 238,906
LESS ACCUMULATED DEPRECIATION (173,764) (158,657)
- --------------------------------------------------------------------------------------
Property and equipment, net 77,338 80,249
- --------------------------------------------------------------------------------------
Total assets $782,363 $770,244
======================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
I-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 59,769 $ 53,448
Subcontracts payable, including retentions of $19,623 and $20,266 46,563 42,513
Billings in excess of cost and estimated earnings on uncompleted contracts 45,162 25,176
Advances from customers 9,678 8,987
Estimated costs to complete long-term contracts 51,703 73,103
Accrued salaries, wages and benefits 52,018 52,618
Income taxes payable -- 1,371
Other accrued liabilities 46,368 42,679
- --------------------------------------------------------------------------------------------------
Total current liabilities 311,261 299,895
- --------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Postretirement benefit obligation 54,038 53,689
Accrued workers' compensation 38,347 34,088
Pension and deferred compensation liabilities 15,325 15,334
Environmental remediation obligations 4,604 6,107
- --------------------------------------------------------------------------------------------------
Total non-current liabilities 112,314 109,218
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CONTINGENCIES AND COMMITMENTS (Note 4)
- --------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK, issued 1,800,000 shares of Series A -- 18,000
- --------------------------------------------------------------------------------------------------
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 54,326,916 and 54,299,160 543 543
Capital in excess of par value 248,145 247,820
Stock purchase warrants 6,554 6,557
Retained earnings 120,743 93,858
Treasury stock, 924,598 and 57,806 shares, at cost (12,134) (685)
Cumulative translation adjustments, net of income tax benefit (6,294) (5,512)
Unrealized gain on securities available for sale, net 1,231 550
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 358,788 343,131
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $782,363 $770,244
==================================================================================================
</TABLE>
I-3
<PAGE>
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 31, 1998 AND 1997 (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 26,885 $ 22,658
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment 17,129 17,550
Amortization of goodwill 2,659 2,691
Deferred income taxes 16,329 6,263
Equity in net income of mining ventures less dividends received (5,551) (7,805)
Other investments and assets (2,095) --
Increase in net operating assets (17,458) (40,190)
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 37,898 1,167
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment acquisitions (15,582) (12,875)
Property and equipment disposals 4,026 2,301
Purchases of securities available for sale (18,743) (10,605)
Sale and maturities of securities available for sale 12,990 4,321
Purchase of businesses (4,037) --
Sale of business 2,758 --
Collection of note receivable -- 2,250
Other investing activities (950) 1,068
- ----------------------------------------------------------------------------------------
Net cash used in investing activities (19,538) (13,540)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Redemption of redeemable preferred stock, Series A (18,000) --
Purchase of treasury stock (12,023) --
Other financing activities 877 3,054
- ----------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (29,146) 3,054
- ----------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (10,786) (9,319)
Cash and cash equivalents at beginning of period 53,215 48,310
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 42,429 $ 38,991
========================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 670 $ 660
Income tax paid (refunded), net (4,135) 10,028
Investments in mining ventures adjustment for cumulative translation
adjustments, net of taxes 903 (5,873)
- ----------------------------------------------------------------------------------------
</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 nine months ended August
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"). EPS amounts for prior periods have been retroactively adjusted to
conform with SFAS No. 128.
3. 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
which are formed to bid, negotiate and complete specific projects. The
Corporation often acts as sponsor and manager of the projects. The size, scope
and duration of joint venture projects vary among periods.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(UNAUDITED)
COMBINED FINANCIAL POSITION OF CONSTRUCTION AUGUST 31, 1998 NOVEMBER 30, 1997
JOINT VENTURES
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Current assets $ 376,339 $ 364,752
Property and equipment, net 53,570 33,223
Current liabilities (264,006) (324,092)
- --------------------------------------------------------------------------------------------------
Net assets $ 165,903 $ 73,883
==================================================================================================
</TABLE>
I-5
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
COMBINED RESULTS OF OPERATIONS OF CONSTRUCTION JOINT VENTURES (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED AUGUST 31, 1998 AUGUST 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 904,274 $ 593,337
Cost of revenue (771,544) (527,974)
- ---------------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 132,730 $ 65,363
===================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------
CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF CONSTRUCTION
JOINT VENTURES (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED AUGUST 31, 1998 AUGUST 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 326,945 $ 232,431
Cost of revenue (283,637) (207,502)
- ---------------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 43,308 $ 24,929
===================================================================================================
</TABLE>
MINING VENTURES: At August 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>
- -------------------------------------------------------------------------------------------------------
(UNAUDITED)
COMBINED FINANCIAL POSITION OF MINING VENTURES AUGUST 31, 1998 NOVEMBER 30, 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 286,491 $ 302,237
Non-current assets 125,466 117,447
Property and equipment, net 543,610 498,310
Current liabilities (86,362) (101,241)
Long-term debt (311,131) (267,026)
Other non-current liabilities (354,469) (365,058)
- -------------------------------------------------------------------------------------------------------
Net assets $ 203,605 $ 184,669
=======================================================================================================
<CAPTION>
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<S> <C> <C>
COMBINED RESULTS OF OPERATIONS OF MINING VENTURES (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED AUGUST 31, 1998 AUGUST 31, 1997
- -------------------------------------------------------------------------------------------------------
Revenue $ 220,869 $ 276,020
Cost of revenue (201,235) (248,727)
- -------------------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 19,634 $ 27,293
=======================================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------------------------
CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF MINING VENTURES (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED AUGUST 31, 1998 AUGUST 31, 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 69,886 $ 87,731
Cost of revenue (63,703) (79,125)
- -------------------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 6,183 $ 8,606
=======================================================================================================
</TABLE>
I-6
<PAGE>
The Corporation received distributions of $632 from mining ventures during the
nine months ended August 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.
Recently, both Westmoreland and the Funds have each withdrawn their plans
without prejudice to their ability to refile a new plan. The Official Equity
Committee appointed by the Office of the U.S. Trustee has filed a motion to
convert these cases to a Chapter 7 liquidation. Westmoreland has filed a motion
to dismiss the bankruptcy proceedings. A hearing is set for both motions on
October 14, 1998. Accordingly, the outcome of the treatment of equity interest
and the Westmoreland mining contracts with the Corporation is uncertain.
Effective at the beginning of July 1998, the Corporation suspended recording its
equity in the income of Westmoreland Resources pending the outcome of the
proceedings. At August 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 (recorded
through June, 1998) included in the accompanying condensed consolidated
statement of income for the nine months ended August 31, 1998 was $5,607 and
$568, 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.
4. 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, no remediation costs have been accrued at
August 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 has reached tentative agreement with the TNRCC over demobilization
and claim issues, but the final agreement is subject to approval by the EPA. The
Corporation has provided for the estimated costs with regard to the contract
assuming that the TNRCC does not draw upon a letter of credit in the amount of
$13,619. The ultimate outcome of these matters cannot be currently 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. The ultimate outcome cannot be currently determined
with certainty and may not occur in the near term.
I-7
<PAGE>
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 August 31, 1998, $49,408 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 $3,443 in face amount
of certain letters of credit at August 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 established a sinking fund
of approximately $5,121 and collateralized the bonds with certain assets. 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
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. The Corporation has reached a tentative settlement agreement
on the Martin Radwell matter which is subject to stockholder approval. The
settlement amount is not material.
The Corporation, as successor to Old MK (Commission File No. 1-8889), was
subject to a formal investigation by the Pacific Regional Office of the
Securities and Exchange Commission ("SEC") regarding the management and
operations of Old MK, primarily its former Transit and MK Rail businesses, prior
to September 12, 1996. On September 2, 1998, the Corporation was advised that
the SEC staff terminated further inquiry into this matter and that no further
action has been recommended to the Commission.
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.
5. 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 Westinghouse Electric Company
("Westinghouse") from CBS Corporation. The transaction is subject to regulatory
approvals and is expected to close in early 1999.
Westinghouse provides a wide range of products, services and technologies in
the government services and nuclear industries throughout the world.
Westinghouse's Government and Environment Services Company ("GESCO") manages
highly complex facilities and programs for the Department of Energy and the
Department of Defense. 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.
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 operating nuclear power
plants. ESBU is also heavily involved in the development of new plant technology
and has received final design approval from the Nuclear Regulatory Commission
for its advanced nuclear power plant, the AP600. ESBU has approximately 4,000
employees.
I-8
<PAGE>
During the quarter, the Corporation was informed by CBS that the Department of
the Navy has chosen another party to perform certain contracts which were to be
part of the acquisition of Westinghouse. CBS has formally protested the award of
those Navy contracts and the outcome of the protest is uncertain. However, if
the protest is unsuccessful, the purchase price for the acquisition of
Westinghouse will be adjusted downward by $38,000 to approximately $1,150,000,
including $200,000 in cash and the assumption of approximately $950,000 in
specified liabilities, commitments and obligations. Under the current proposal,
the Corporation's share of the purchase price would be approximately $120,000 in
cash, plus the assumption of less than $30,000 of liabilities, commitments and
obligations if the contracts described above are not included in the
acquisition.
Under the joint venture agreement, the Corporation will have a 60% ownership
interest in Westinghouse and its economic interests will differ in ESBU and
GESCO. The Corporation's economic interest in ESBU and GESCO is expected to be
6% and 60%, respectively, however, it may change as a result of discussions
among the Corporation, BNFL and the Department of Energy.
The Corporation intends to fund its share of the purchase price for
Westinghouse and the working capital requirements of the Westinghouse businesses
using existing financing facilities and additional financial facilities for
which the Corporation has commitments in addition to the Corporation's available
cash. The terms of such additional financing facilities have not yet been
finalized.
I-9
<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 NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THE
THREE AND NINE MONTHS ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
(IN MILLIONS) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Revenue $497.8 $434.3 $1,318.9 $1,238.0
Gross profit 21.3 20.7 62.4 58.0
General and administrative expenses (6.3) (5.6) (17.7) (16.9)
Goodwill amortization (.9) (.9) (2.7) (2.7)
Investment income 1.3 1.8 4.7 5.3
Interest expense (.3) (.2) (.7) (.7)
Other income (expense) 2.1 (1.0) 2.2 (1.1)
Income before income taxes 17.2 14.9 48.3 41.9
Income tax expense (7.6) (6.7) (21.4) (19.2)
Net income 9.6 8.2 26.9 22.7
- -------------------------------------------------------------------------------
</TABLE>
REVENUE AND GROSS PROFIT: Revenue for the three and nine months ended August 31,
1998 increased $63.5 million to $497.8 million and $80.9 million to $1,318.9
million, respectively, compared to $434.3 million and $1,238.0 for the
comparable periods in 1997. The increases are attributable to greater volume in
the Engineers and Constructors Group. The increases were partially offset by a
lower demand for coal production and power generation from the MIBRAG mbH mining
venture in Germany and completion of a significant long-term mining contract in
the third quarter of 1997.
Gross profit for the three and nine months ended August 31, 1998 increased
over the comparable periods of 1997 primarily because of increased profitability
in the Heavy Civil Construction Group offset by lower demand for coal production
and power generation from the MIBRAG mbH mining venture and completion of a
significant long-term mining contract in the third quarter of 1997. During the
three months ended August 31, 1998, the Corporation wrote off a $3.7 million
investment in a solvent extraction facility and a related contract to treat
contaminated soil and recognized a $5.7 million settlement on an environmental
contract.
Gross profit as a percentage of revenue was 4.3% and 4.7% for the three and
nine months ended August 31, 1998 compared to 4.8% and 4.7% for the comparable
periods in 1997. The reduction in gross margin percentage for the three month
period is principally attributable to a greater proportion of revenue generated
in the Engineers and Constructors Group which generally has lower margins and a
lower proportion of revenue generated from the Mining Group which
I-10
<PAGE>
generally has larger margins.
Due to inherent risks and rewards in fixed-price contracting, the
Corporation's operating margins often vary 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 August 31, 1998, backlog of $3,627 million was comprised of $1,802 million
(50%) of revenue from fee-type contracts and $1,825 million (50%) 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 $6.3
million and $17.7 million for the three and nine months ended August 31, 1998
increased slightly from the comparable periods in 1997 primarily due to
professional consulting fees related to the implementation of new computer
information systems and the reengineering of the Corporation's financial
processes. The Corporation expects the system implementation and reengineering
will improve the efficiency and cost of processing accounting and financial data
through the use of "best-in-class" processes and techniques. It is anticipated
the initial cost savings will be somewhat offset by expenses associated with
training and amortization of new computer software.
INVESTMENT INCOME: Investment income for the three and nine months ended August
31, 1998 decreased slightly compared to the comparable periods 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 income on
corporate cash in a short-term asset management account.
OTHER INCOME (EXPENSE): Other income (expense) of $2.1 million and $2.2 million
for the three and nine months ended August 31, 1998 reflects the recognition of
$2.1 million income associated with the settlement of the defined benefit
pension plan obligation. The income reflected favorable investment returns on
plan assets and reduced settlement costs. Final distribution of plan assets to
eligible plan participants is expected to be made in the fourth quarter of 1998
pending the outcome of the plan's application for determination letter with the
Internal Revenue Service.
INCOME TAX EXPENSE: The effective tax rate for the three and nine months ended
August 31, 1998 was 44% compared to 45% and 46% 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>
- ------------------------------------------------------
AUGUST 31,
1998 1997
<S> <C> <C>
- ------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Beginning of period $ 53,215 $ 48,310
End of period 42,429 38,991
- ------------------------------------------------------
NINE MONTHS ENDED
AUGUST 31,
1998 1997
- ------------------------------------------------------
NET CASH PROVIDED (USED) IN:
Operating activities $ 37,898 $ 1,167
Investing activities (19,538) (13,540)
Financing activities (29,146) 3,054
- ------------------------------------------------------
</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
I-11
<PAGE>
and existing and committed 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 decreased $10.8 million during the nine month period
ended August 31, 1998 from $53.2 million at November 30, 1997 to $42.4 million
at August 31, 1998; this decrease reflects net cash outflows of $48.7 million
from investing activities ($19.2 million) and financing activities ($29.2
million), offset by $37.9 million provided by operations. Investing activities
included net $11.4 million for acquisitions of property and equipment; financing
activities included $18.0 million for redemption of preferred stock and $12.0
million for repurchase of 915,300 shares of the Corporation's common stock for
treasury. Funds provided by operations included $25.2 million from an income tax
refund and related interest; $18.0 million of such refund was required by the
rights, privileges and preferences of the Corporation's preferred stock to be
applied to the redemption of such stock. 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.
As discussed in Note 5 "Acquisition of Westinghouse Electric Company," the
Corporation intends to fund its share of the purchase price for Westinghouse and
the working capital requirements of the Westinghouse businesses using existing
financing facilities and additional financial facilities for which the
Corporation has commitments in addition to the Corporation's available cash. The
terms of such additional financing facilities have not yet been finalized.
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 August 31, 1998 was $3,627 million
compared with $3,704 million at November 30, 1997. New work awarded in the three
and nine months ended August 31, 1998 totaled $401 million and $1,344 million
compared with $513 million and $1,325 million for the three and nine months
ended August 31, 1997. Although backlog reflects business which is considered to
be firm, cancellations or scope adjustments may occur. Backlog has been adjusted
to reflect known project cancellations, deferrals and revisions in project scope
and cost, both upward and downward. During the quarter ended August 31, 1998,
the Corporation reduced backlog by approximately $102 million reflecting the
reduction in scope of an environmental contract for the U.S. government.
THE YEAR 2000 ISSUE
The Year 2000 issue results from computer programs and electronic 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 produce erroneous results when processing dates after December 31, 1999.
The Year 2000 issue affects virtually all companies and organizations, including
the Corporation.
The Corporation employs a number of information technology ("IT") systems in
its operations, including, without limitation, computer networking systems,
financial systems and other similar systems. Throughout its operations, the
Corporation also employs numerous non-IT devices such as building security and
safety devices and other devices containing embedded electronic circuits. Both
IT systems and non-IT devices are subject to potential failure due to the Year
2000 issue.
The Corporation has developed, published and implemented a plan (the "Year
2000 Project") to achieve Year 2000 readiness. The Year 2000 Project's
activities are intended to remediate the Year 2000 issue in all major categories
of systems and electronic devices in use by the Corporation, including both IT
systems and non-IT devices so that the Corporation may continue its operations
without interruption or with minimal disruption. It also includes communication
with critical third parties such as clients, vendors, subcontractors and other
business partners to determine the expected degree of Year 2000 compliance of
those parties, and to monitor their progress towards Year 2000 readiness. The
Year 2000 Project includes the following phases: 1) awareness, 2) inventory, 3)
assessment, 4) remediation, 5) testing/validation and 6) return to production.
I-12
<PAGE>
The Corporation is in the "inventory" and "assessment" phases with regard to
its state of readiness related to non-IT devices containing embedded circuitry
and issues related to third parties with which the Corporation has a material
relationship. The Corporation is in various stages of the "inventory,"
"assessment" and "remediation" phases with regard to its IT systems. In
addition, as part of the Year 2000 Project regarding IT systems, the Corporation
continues implementing new or upgraded Year 2000 compliant systems for
financial, human resource and payroll. The completion date is expected to be
July 1999.
As part of the Year 2000 Project, the Corporation is exploring alternative
solutions and developing contingency plans for handling critical areas in the
event remediation is unsuccessful. Such plans have not yet been fully developed
and the Corporation will continue to develop them as necessary to address each
area of Year 2000 risk. Completion of the Year 2000 Project, including
contingency plans, is expected by September 30, 1999.
The total cost of the Corporation's activities to achieve Year 2000 readiness
are currently estimated at approximately $21 million. As of August 31, 1998, the
direct costs incurred by the Corporation to remediate Year 2000 issues were $4.7
million.
The Corporation's Year 2000 Project is subject to a variety of risks and
uncertainties, some of which, such as the availability of qualified computer
personnel and the Year 2000 preparedness of third parties, are beyond the
Corporation's control. No assurance can be given that the Corporation will
achieve Year 2000 readiness. Furthermore, it has been widely reported that
significant litigation is expected to occur related to business interruptions
caused by Year 2000 failures. It is uncertain whether, or to what extent, the
Corporation will be affected by such litigation. The failure of the Corporation,
its clients (including U.S. government agencies), vendors, joint venture
partners or others upon whom the Corporation relies, to achieve Year 2000
readiness could adversely impact the Corporation's business operations, which
could have a material adverse affect on the Corporation's future financial
results, or cause reported financial information to not necessarily be
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 4 "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.
I-13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information regarding legal proceedings set forth under the caption "Other"
in Note 4 "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
None
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: September 30, 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 unaudited consolidated financial statements and financial statement
footnotes of Morrison Knudsen Corporation for the nine months ended August 31,
1998, and is qualified in its entirety by reference to such consolidated
financial statements and financial statement footnotes:
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Nov-30-1998
<PERIOD-START> Dec-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 42,429
<SECURITIES> 0
<RECEIVABLES> 198,350
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 416,873
<PP&E> 251,102
<DEPRECIATION> (173,764)
<TOTAL-ASSETS> 782,363
<CURRENT-LIABILITIES> 311,261
<BONDS> 0
0
0
<COMMON> 543
<OTHER-SE> 358,245
<TOTAL-LIABILITY-AND-EQUITY> 782,363
<SALES> 0
<TOTAL-REVENUES> 1,318,905
<CGS> 0
<TOTAL-COSTS> (1,256,501)
<OTHER-EXPENSES> 2,239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (670)
<INCOME-PRETAX> 48,284
<INCOME-TAX> (21,399)
<INCOME-CONTINUING> 26,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,885
<EPS-PRIMARY> $.50
<EPS-DILUTED> $.49
</TABLE>
