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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
August 27, 1999
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 August 27, 1999, 52,349,829 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 August 27, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item 1. Condensed Consolidated Financial Statements and Notes Thereto
Statements of Income for the Quarter and Nine Months Ended
August 27, 1999 and August 31, 1998 I-1
Balance Sheets at August 27, 1999 and November 30, 1998 I-2
Statements of Cash Flows for the Nine Months Ended
August 27, 1999 and August 31, 1998 I-4
Notes to Financial Statements I-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk I-20
</TABLE>
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PART II. OTHER INFORMATION
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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
QUARTER AND NINE MONTHS ENDED AUGUST 27, 1999 AND AUGUST 31, 1998
(In thousands except share data)
(UNAUDITED)
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Quarter Ended Nine Months Ended
August 27, August 31, August 27, August 31,
1999 1998 1999 1998
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Revenue $ 595,414 $ 497,795 $ 1,584,550 $ 1,318,905
Cost of revenue (563,665) (476,488) (1,507,656) (1,256,501)
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 31,749 21,307 76,894 62,404
General and administrative expenses (4,704) (6,260) (19,110) (17,729)
Goodwill amortization (4,105) (894) (8,400) (2,677)
- ---------------------------------------------------------------------------------------------------------------------
Operating income 22,940 14,153 49,384 41,998
Investment income 529 1,254 2,684 4,717
Interest expense (1,745) (299) (4,734) (670)
Other income (expense), net (1,399) 2,095 10,411 2,239
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests
in income of consolidated subsidiaries 20,325 17,203 57,745 48,284
Income tax expense (7,263) (7,624) (21,529) (21,399)
Minority interests in income of consolidated
subsidiaries (792) - (1,264) -
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 12,270 $ 9,579 $ 34,952 $ 26,885
=====================================================================================================================
Income per share
Basic $.23 $.18 $.66 $.50
Diluted .23 .18 .66 .49
- ---------------------------------------------------------------------------------------------------------------------
Common shares used to compute income per share
Basic 52,397,033 53,807,802 52,876,256 54,065,857
Diluted 52,567,747 53,815,103 53,029,357 54,341,098
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</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 AUGUST 27, 1999 (UNAUDITED) AND NOVEMBER 30, 1998
(In thousands except share data)
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ASSETS 1999 1998
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<S> <C> <C>
Current assets
Cash and cash equivalents $ 38,466 $ 67,054
Accounts receivable, including retentions of $19,294 and $18,627 202,705 175,513
Unbilled receivables 127,263 74,552
Inventories, net of progress payments 17,139 -
Refundable income taxes 576 780
Investments in and advances to construction joint ventures 87,103 70,855
Deferred income taxes 45,698 26,489
Other 7,306 12,479
- ---------------------------------------------------------------------------------------------------------------
Total current assets 526,256 427,722
- ---------------------------------------------------------------------------------------------------------------
Investments and other assets
Securities available for sale, at fair value 41,801 45,985
Investments in mining ventures 66,796 67,967
Assets held for sale - 14,169
Cost in excess of net assets acquired, net of accumulated
amortization of $17,710 and $9,330 347,281 112,994
Deferred income taxes 53,164 30,965
Other 17,101 8,077
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Total investments and other assets 526,143 280,157
- ---------------------------------------------------------------------------------------------------------------
Property and equipment, at cost
Construction equipment 166,678 179,337
Land and improvements 7,983 6,993
Buildings and improvements 16,831 6,341
Equipment and fixtures 78,772 63,534
- ---------------------------------------------------------------------------------------------------------------
Total property and equipment 270,264 256,205
Less accumulated depreciation (154,164) (175,933)
- ---------------------------------------------------------------------------------------------------------------
Property and equipment, net 116,100 80,272
- ---------------------------------------------------------------------------------------------------------------
Total assets $1,168,499 $ 788,151
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
I-2
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LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
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Current liabilities
Accounts payable $ 77,023 $ 56,388
Subcontracts payable, including retentions of $21,643 and $22,843 52,204 59,857
Billings in excess of cost and estimated earnings on uncompleted contracts 70,770 40,959
Estimated costs to complete long-term contracts 68,973 49,228
Accrued salaries, wages and benefits 69,648 58,939
Income taxes payable 2,112 1,535
Other accrued liabilities 32,054 36,118
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 372,784 303,024
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Non-current liabilities
Long-term debt 100,000 -
Postretirement benefit obligation 81,039 53,456
Accrued workers' compensation 32,518 39,625
Pension and deferred compensation liabilities 99,013 16,390
Environmental remediation obligations 6,853 4,753
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Total non-current liabilities 319,423 114,224
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Contingencies and commitments (Note 5)
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Minority interests 85,609 -
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Stockholders' equity
Preferred stock, 10,000,000 shares authorized - -
Common stock, par value $.01, authorized 100,000,000 shares;
issued 54,359,265 and 54,334,898 544 544
Capital in excess of par value 248,665 248,277
Stock purchase warrants 6,554 6,555
Retained earnings 166,363 131,411
Treasury stock, 2,009,436 and 982,488 shares, at cost (23,124) (12,960)
Accumulated other comprehensive income:
Cumulative translation adjustments, net of income tax benefit (7,871) (3,050)
Unrealized net gain on securities available for sale, net of income tax liability 222 796
Minimum pension liability adjustment, net of income tax benefit (670) (670)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 390,683 370,903
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,168,499 $788,151
==============================================================================================================
</TABLE>
I-3
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MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 27, 1999 AND AUGUST 31, 1998
(In thousands)
(UNAUDITED)
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1999 1998
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Operating activities
Net income $ 34,952 $ 26,885
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation of property and equipment 16,632 17,129
Amortization of goodwill 8,400 2,659
Deferred income taxes 8,592 16,329
Minority interest in net income of consolidated subsidiaries 2,043 -
Equity in net income of mining ventures less dividends received (5,824) (5,551)
Gain on sale of assets (9,203) -
Other investments and assets, net (5,549) (2,095)
Increase in net operating assets (40,588) (17,458)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,455 37,898
- --------------------------------------------------------------------------------------------------------------
Investing activities
Property and equipment acquisitions (30,907) (15,582)
Property and equipment disposals 3,852 4,026
Purchases of securities available for sale (8,337) (18,743)
Sale and maturities of securities available for sale 11,706 12,990
Purchase of businesses, net of cash acquired (123,280) (4,037)
Proceeds from sales of businesses 25,914 2,758
Other investing activities - (950)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (121,052) (19,538)
- --------------------------------------------------------------------------------------------------------------
Financing activities
Net proceeds from revolving line of credit 100,000 -
Purchase of treasury stock (10,164) (12,023)
Distributions to minority interests (3,275) -
Redemption of redeemable preferred stock, Series A - (18,000)
Financing fees and other net (3,552) 877
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 83,009 (29,146)
- --------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (28,588) (10,786)
Cash and cash equivalents at beginning of period 67,054 53,215
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 38,466 $ 42,429
==============================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $4,598 $ 670
Income tax paid (refunded), net 3,874 (4,135)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
I-4
<PAGE>
MORRISON KNUDSEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In 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, 1998. The comparative consolidated balance sheet and
related disclosures at November 30, 1998 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 financial position, results of operations and cash
flows for the interim periods presented. The results of operations for the
quarter ended August 27, 1999 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 NEW FISCAL YEAR
The Corporation's fiscal year has historically ended on November 30.
Effective December 1, 1998, the Corporation adopted a 52/53 week fiscal year
ending on the Friday closest to November 30. The change in reporting period has
not materially affected comparability between the presented reporting periods.
3. COMPREHENSIVE INCOME
Effective December 1, 1998, the Corporation adopted Statement of Financial
Standards No. 130 Reporting Comprehensive Income which establishes standards for
the reporting and display of comprehensive income. Comprehensive income for the
quarter and nine months ended August 27, 1999 and August 31, 1998 was as
follows:
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Comprehensive income (Unaudited) (Unaudited)
Quarter ended August 27, 1999 August 31, 1998
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Net income $12,270 $ 9,579
Other comprehensive income, before tax:
Foreign currency translation adjustments 228 1,043
Net unrealized gains (losses) on securities:
Net unrealized gains (losses) arising during the period (178) 527
Less: Reclassification adjustment for gains included in net income (121) (3)
Income tax benefit related to items of other comprehensive income 49 374
- -----------------------------------------------------------------------------------------------------------
Comprehensive income $12,248 $11,520
===========================================================================================================
</TABLE>
I-5
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Comprehensive income (Unaudited) (Unaudited)
Nine months ended August 27, 1999 August 31, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $34,952 $26,885
Other comprehensive income, before tax:
Foreign currency translation adjustments (7,525) (1,360)
Net unrealized gains (losses) on securities:
Net unrealized gains (losses) arising during the period (815) 586
Less: Reclassification adjustment for gains included in net income (124) (3)
Income tax benefit related to items of other comprehensive income 3,069 676
- ------------------------------------------------------------------------------------------------------------
Comprehensive income $29,557 $26,784
============================================================================================================
</TABLE>
4. VENTURES
The Corporation's share of results of operations from 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.
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(Unaudited)
Combined financial position of construction joint ventures August 27, 1999 November 30, 1998
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Current assets $385,261 $407,790
Property and equipment, net 44,418 52,698
Current liabilities (262,572) (269,813)
- ------------------------------------------------------------------------------------------------------------
Net assets $167,107 $190,675
============================================================================================================
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Combined results of operations of construction joint ventures (Unaudited) ( Unaudited)
Nine months ended August 27, 1999 August 31, 1998
- ------------------------------------------------------------------------------------------------------------
Revenue $851,760 $904,274
Cost of revenue (796,272) (771,544)
- ------------------------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 55,488 $132,730
============================================================================================================
</TABLE>
I-6
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Corporation's share of results of operations of
construction joint ventures (Unaudited) (Unaudited)
Nine months ended August 27, 1999 August 31, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $336,832 $326,945
Cost of revenue (315,523) (283,637)
- ------------------------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 21,309 $ 43,308
============================================================================================================
</TABLE>
Mining ventures:
At August 27, 1999, the Corporation had ownership interests in two mining
ventures, MIBRAG mbH (33%) and Westmoreland Resources, Inc. (20%). The
Corporation provides contract mining services to these ventures.
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(Unaudited)
Combined financial position of mining ventures August 27, 1999 November 30, 1998
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Current assets $209,024 $313,607
Non-current assets 100,226 123,286
Property and equipment, net 636,286 594,916
Current liabilities (70,574) (87,824)
Long-term debt (326,324) (356,767)
Other non-current liabilities (333,485) (369,823)
- --------------------------------------------------------------------------------------------------------------
Net assets $215,153 $217,395
==============================================================================================================
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Combined results of operations of mining ventures (Unaudited) (Unaudited)
Nine months ended August 27, 1999 August 31, 1998
- --------------------------------------------------------------------------------------------------------------
Revenue $251,463 $220,869
Cost of revenue (230,209) (201,235)
- --------------------------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 21,254 $ 19,634
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
Corporation's share of results of operations of mining ventures (Unaudited) (Unaudited)
Nine months ended August 27, 1999 August 31, 1998
- --------------------------------------------------------------------------------------------------------------
Revenue $77,738 $69,886
Cost of revenue (71,142) (63,703)
- --------------------------------------------------------------------------------------------------------------
Gross profit (excludes indirect overhead cost) $ 6,596 $ 6,183
==============================================================================================================
</TABLE>
The Corporation received dividend distributions of $772 and $632 from mining
ventures during the nine months ended August 27, 1999 and August 31, 1998,
respectively.
I-7
<PAGE>
5. CONTINGENCIES AND COMMITMENTS
Summitville environmental matters:
From July 1985 to June 1989, Industrial Constructors Corp. ("ICC"), 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).
In 1996, the United States of America and the State of Colorado commenced an
action under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") against Robert Friedland, one of the PRPs, to recover
the remediation costs incurred and to be incurred at the Site. No other parties
were named as defendants in the original complaint in this action. On April 30,
1999, Mr. Friedland filed a third-party complaint in this action naming ICC and
nine other PRPs as defendants alleging that such defendants are jointly and
severally liable for such costs and requesting that the same be equitably
allocated. On August 10, 1999, ICC filed an answer to Mr. Friedland's third-
party complaint denying the allegations set forth therein.
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 27, 1999.
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 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 due to 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.
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 27,
1999 and November 30, 1998, $47,703 and $37,157, respectively, in face amount of
such letters of credit were outstanding. The Corporation has pledged securities
available for sale as collateral for its reimbursement obligations with respect
to $3,000 in face amount of certain letters of credit that were outstanding at
August 27, 1999.
I-8
<PAGE>
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 $5,327 for the
bonds. Management believes a loss on the guarantee is not probable and,
accordingly, no accrual has been made.
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 2:98CV-0327S. The complaint
alleges fraud in the sale of shares of MK Gold Corporation by Old MK to Leucadia
and seeks rescission of the sale and restitution of $22,500. Leucadia contends
that the Corporation knew or believed that a non-competition agreement between
the Corporation and MK Gold was unenforceable and failed to disclose that belief
to Leucadia. The non-competition agreement is the subject of separate litigation
between MK Gold and the Corporation. On January 5, 1999, the two cases were
consolidated for trial. A trial date has not been set.
Certain current and former officers, employees and directors of the
Corporation were named defendants in an action filed in the United States
District Court for the District of Idaho: John B. Blyler and Malcolm J. Corse v.
William J. Agee, et. al., Civil Action No. 97-0332-S-BLW. The complaint
alleges, among other things, that the defendants breached certain fiduciary
duties.
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 GESCO BUSINESSES
On March 22, 1999, the Corporation and British Nuclear Fuels, Ltd. ("BNFL")
acquired the Government and Environmental Services Division ("GESCO Businesses")
from CBS Corporation (formerly known as Westinghouse Electric Corporation)
pursuant to an Asset Purchase Agreement dated June 25, 1998 (the "GESCO
Acquisition"). The GESCO Businesses provide a wide range of products, services
and technologies in the government services and nuclear industries throughout
the world.
Concurrent with the GESCO Acquisition, the following two separate companies
were formed to acquire the operations of the GESCO Businesses:
1. Westinghouse Government Services Company, LLC ("WGS"), a limited
liability company that provides defense-related operations and
management services for the U.S. Departments of Energy and Defense,
including the production of tritium for national weapons programs and
high-level waste solidification, and employs over 11,200 employees.
2. Westinghouse Government Environmental Services Company, LLC ("WGES"), a
limited liability company that provides non-defense related governmental
and environmental services, including environmental remediation and
waste management services, and employs approximately 2,500 employees.
The respective rights and obligations of the Corporation and BNFL with
respect to WGS and WGES are set forth in the Amended and Restated Consortium
Agreement (the "Consortium Agreement") dated March 19, 1999 and in certain other
documents referred to therein. Pursuant to the Consortium Agreement and such
other documents, 60%
I-9
<PAGE>
of the profits, losses and cash flows of WGS and WGES are allocated to the
Corporation and 40% of the profits, losses and cash flows are allocated to BNFL.
WGS and WGES constitute the Corporation's Westinghouse Government Services
Group.
The estimated aggregate purchase price of the GESCO Businesses was
approximately $212,741 (subject to the resolution of certain adjustments
provided for in the Asset Purchase Agreement) consisting of cash paid to CBS of
approximately $201,060 and acquisition costs of approximately $11,681. The
Corporation's share of the estimated aggregate purchase price was $127,645 and
was funded primarily through borrowings from the Corporation's bank credit
facilities. The acquisition of the GESCO Businesses is being accounted for as a
purchase business combination. The Corporation's results of operations,
financial position and cash flows include the Westinghouse Government Services
Group on a consolidated basis and reflect BNFL's 40% minority interest in the
Group and a third party's 35% minority interest in Safe Sites of Colorado, LLC,
a subsidiary of the Group.
The aggregate purchase price has been allocated to the net assets acquired,
with the remainder recorded as excess cost over net assets acquired on the basis
of preliminary estimates of fair values as follows:
<TABLE>
<CAPTION>
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<S> <C>
Working capital $ 4,972
Investments and other assets 8,405
Property plant and equipment 25,496
Postretirement benefit obligation (27,000)
Pension liabilities (80,400)
Other non-current liabilities and minority interest (11,349)
Excess cost over net assets acquired 292,617
- --------------------------------------------------------------------------------
Total acquisition costs $212,741
================================================================================
- --------------------------------------------------------------------------------
Corporation's share of purchase price $127,645
BNFL's share of purchase price 85,096
- --------------------------------------------------------------------------------
$212,741
================================================================================
</TABLE>
These estimates of fair values were determined by the Corporation's
management based primarily on information provided by CBS Corporation and the
management of the GESCO Businesses. The final allocation of the purchase price
will be based on a complete evaluation of the assets and liabilities of the
GESCO Businesses. Finalization of these matters could have a material effect on
the purchase price allocation and, with respect to certain employee benefit
obligations, could take more than a year to compute.
The following unaudited pro forma information presents the consolidated
results of operations of the Corporation as if the GESCO Acquisition had taken
place on December 1, 1997, after giving effect to certain adjustments, including
amortization of goodwill over twenty years, depreciation expense, interest
expense, amortization of new credit facility fees and related tax effects. These
pro forma results of operations have been prepared for illustrative purposes
only and do not purport to be indicative of operating results that would have
resulted had the GESCO Acquisition occurred on the dates indicated, or of future
operating results.
I-10
<PAGE>
<TABLE>
<CAPTION>
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(Unaudited) (Unaudited)
Nine months ended August 27, 1999 August 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue $1,707,547 $1,640,563
Net income 40,921 24,725
Basic income per share .77 .46
Diluted income per share .77 .45
- --------------------------------------------------------------------------------
</TABLE>
7. CREDIT FACILITIES
On March 19, 1999, the Corporation replaced its prior bank credit facility
with new uncollateralized revolving credit facilities providing an aggregate
amount of $250,000 of borrowing capacity available to acquire the GESCO
Businesses, for general corporate purposes, to support working capital
requirements and to support letters of credit and other potential acquisitions.
On April 26, 1999, the new credit facilities were increased to $325,000
consisting of a $195,000 five-year facility which provides for both revolving
borrowings and the issuance of letters of credit, and a $130,000 one-year
facility which provides for revolving borrowings which may be converted, at the
Corporation's option, to a term loan having a maturity of one year after the
then current expiration of such facility. The term of each facility may be
extended annually for an additional year by mutual agreement of the banks and
the Corporation. The facilities' covenants require the maintenance of financial
ratios, and place limitations on guarantees, liens, investments, dividends and
other matters.
The facilities provide for interest on loans, payable quarterly, at the
applicable LIBOR rate or the base rate, as defined, plus an additional margin.
The additional margin ranges from 1.25% to 2.00% for the LIBOR rate and 0.25% to
1.00% for the base rate, based on the ratio of earnings before interest, taxes,
depreciation and amortization to the Corporation's funded debt. The effective
interest rate as of August 27, 1999 was 6.98%. On March 19, 1999, the
Corporation paid $3,700 in underwriting fees to the banks and is required to pay
annual and quarterly commitment and letter of credit fees.
8. SALES OF BUSINESSES
During the quarter ended May 28, 1999, the Corporation sold a foreign non-
core subsidiary of Old MK and a domestic concrete and aggregate business and
recognized pretax gains of $2,297 and $6,433, respectively. Proceeds from the
sales of both businesses totaled $25,914.
9. INCOME TAXES
As a result of the GESCO Acquisition and related projections of additional
future annual income, management evaluated the likelihood of the future
realization of the tax benefits of deductible temporary differences and net
operating losses relating to Old MK. During the second quarter of 1999, this
evaluation resulted in a $50,000 increase in deferred tax assets by way of a
reduction in the related valuation allowance, and a $50,000 decrease in recorded
goodwill relating to Old MK. The Corporation reduced the effective income tax
rate to 35.8% and 35.7% in the second and third quarters of 1999, respectively,
from 41.5% in the first quarter of 1999 as a result of the GESCO Acquisition and
the resulting (1) reduction of non-deductible goodwill amortization expense
relating to the acquisition of Old MK, (2) eligibility of foreign tax credits
from prior years and (3) additional pretax income expected from the GESCO
Businesses, resulting in a lower proportion of non-deductible expenses to pretax
income.
I-11
<PAGE>
10. SUPPLEMENTAL BALANCE SHEET INFORMATION - INVENTORIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
August 27, 1999
<S> <C>
- --------------------------------------------------------------------------------
Raw materials $ 3,476
Work in process 33,235
Finished goods 4,043
- --------------------------------------------------------------------------------
40,754
Progress payments (23,615)
- --------------------------------------------------------------------------------
Inventories, net of progress payments $ 17,139
================================================================================
</TABLE>
11. RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5 Reporting on the Costs of Start-Up
Activities. The SOP provides guidance on the financial reporting of start-up
costs and organization costs and requires costs of start-up activities and
organization costs to be expensed as incurred. The SOP also amends the Audit and
Accounting Guide Construction Contractors by requiring pre-contract costs that
are start-up costs to be expensed as incurred. The Corporation is currently
evaluating the effect of SOP 98-5 on future results of operations and financial
position. Implementation of SOP 98-5 is effective for the Corporation in the
first quarter of 2000.
I-12
<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 "may," "will," "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan," "could," "should,"
"potential" or "continue" or the negative or other variations thereof, as well
as other statements regarding matters that are not historical fact, are or may
constitute 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 AND NINE MONTHS ENDED AUGUST 27, 1999 COMPARED TO
THE QUARTER AND NINE MONTHS ENDED AUGUST 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Quarter Ended Nine Months Ended
August 27, August 31, August 27 August 31,
(In millions) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Revenue $595.4 $497.8 $1,584.6 $1,318.9
Gross profit 31.7 21.3 76.9 62.4
General and administrative expenses (4.7) (6.3) (19.1) (17.7)
Goodwill amortization (4.1) (.9) (8.4) (2.7)
Investment income .5 1.3 2.7 4.7
Interest expense (1.7) (.3) (4.7) (.7)
Other income (expense) (1.4) 2.1 10.4 2.2
Income before income tax and minority interests 20.3 17.2 57.7 48.3
Income tax expense (7.3) (7.6) (21.5) (21.4)
Minority interests (.8) - (1.3) -
Net income 12.3 9.6 35.0 26.9
======================================================================================================
</TABLE>
Revenue and gross profit:
Revenue for the quarter and nine months ended August 27, 1999 increased 20%
over the comparable periods of 1998 principally due to the GESCO Acquisition and
the resulting consolidation of the Westinghouse Government Services Group (WGSG)
results of operations beginning in March 1999. The incremental revenue of WGSG
was partially offset by a decline in revenue from the near completion of a few
large Industrial Process and Operations and Maintenance contracts in MK
Engineers and Constructors Group during the quarter.
Gross profit for the quarter and nine months ended August 27, 1999 increased
$10.4 million and $14.5 million, respectively, over the same periods of 1998.
Gross profit as a percent of revenue was 5.3% and 4.8% for the quarter and nine
months ended August 27, 1999 compared to 4.3% and 4.7% for the same periods of
1998.
I-13
<PAGE>
The increase in gross profit was primarily due to the inclusion of the
earnings of WGSG in the Corporation's consolidated results of operations
beginning March 1999. Gross profit was impacted by $1.0 for the quarter and $4.2
million for the nine months ended August 27, 1999 from the recognition of
additional cost of revenue associated with a purchase accounting adjustment
which occurred at the acquisition date in connection with a $4.2 million write
up of inventories to fair value in connection with the GESCO Acquisition. Year-
to-date, WGSG gross profit was also affected by costs incurred on a significant
contract proposal. Due to a relatively significant proportion of performance-
based incentive fees in its contracts, earnings expectations of WGSG are heavily
weighted to the fourth quarter. The Corporation recognizes performance-based
incentive fees when awarded by the client.
Gross profit increased for the MK Engineers and Constructors Group for the
quarter and nine months ended August 27, 1999 over the comparable periods of
1998 as a result of favorable performance of the Industrial Process and Federal
Programs Divisions and reduced overhead, despite significant contract proposal
costs incurred during the first two quarters of 1999. 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 for the MK Contractors Group increased slightly for the quarter
ended August 27, 1999, but decreased slightly for the nine months ended August
27, 1999 compared to the first nine months of 1998 due to additional costs
incurred in pursuing design-build projects, a change in the estimate to complete
a large profitable fixed-price project and in the first quarter of 1998, the
milestone achievement for initial profit recognition on the project under the
Corporation's accounting policies. The Corporation recognized a loss in the
second quarter of 1998 related to start up difficulties associated with a fixed-
price contract.
The Corporation's operating margins may vary between periods due to changes
in the mix and timing of cost-plus and fixed-price contracts and the inherent
risks and rewards in fixed-price contracting. Operating margins can differ from
expectations, and the Corporation may experience unexpected gains or losses on
contracts. Through geographic, customer and risk diversification, the
Corporation strives to manage the level of risks associated with its contracts.
At August 27, 1999, backlog of $3,212 million was comprised of $1,508
million (43%) from fee-type contracts and $1,704 million (57%) from fixed-price
contracts and the Corporation's share from mining ventures.
General and administrative expenses:
General and administrative expenses for the three months ended August 27,
1999 declined $1.6 million from the comparable period of 1998 primarily due to
allocation of certain expenses to WGSG. General and administrative expenses for
the nine months ended August 27, 1999 were higher than the comparable period the
previous year principally due to additional compensation expense related to a
key executive retirement and a key executive recruitment in early 1999.
Goodwill:
Amortization of cost in excess of net assets acquired ("goodwill") for the
quarter and nine months ended August 27, 1999 increased $3.2 million and $5.7
million, respectively, from the comparable periods of 1998 due to the
amortization of goodwill related to the GESCO Acquisition (the "GESCO
goodwill"), which is being amortized over a period of twenty years. Annual
amortization of the GESCO goodwill is currently estimated at $14.6 million,
subject to possible adjustments to the recorded amount of GESCO goodwill related
to the finalization of the allocation of the purchase price to the fair value of
the net assets acquired.
Investment income:
Investment income for the quarter and nine months ended August 27, 1999
declined due to less available cash to invest in a short-term asset management
account. Additionally, investment income for the nine months ended
I-14
<PAGE>
August 27, 1999 declined from the comparable period of 1998 due to interest
recognized in 1998 on claims for U.S. federal income tax refunds received in
January 1998.
Interest expense:
Interest expense for the quarter and nine months ended August 27, 1999
increased $1.4 million and $4.0 million, respectively, due to interest expense
incurred and amortization of prepaid bank fees associated with the Corporation's
revolving credit facilities which were primarily used to fund the GESCO
Acquisition in March 1999. In addition, during the nine months ended August 27,
1999, $1.0 million of prepaid fees associated with the Corporation's previous
credit facility were written off.
Other income (expense):
Other income (expense) of $(1.4) million for the quarter ended August 27,
1999 reflects legal costs incurred in connection with non-core business issues.
In the third quarter of 1998, the Corporation recognized $2.1 million of income
associated with the settlement of the defined benefit pension plan obligation.
During the nine months ended August 27, 1999, the Corporation sold two non-core
subsidiaries and recognized pretax gains of $8.7 million. Additionally, a $2.2
million gain was recognized from the favorable resolution of certain
contingencies relating to the sale of a former subsidiary of Old MK.
Income tax expense:
The effective tax rate for the quarter and nine months ended August 27, 1999
was 35.7% and 37.3%, respectively, compared to 44.3% for the comparable periods
of 1998, principally due to the eligibility of foreign tax credits (as opposed
to deductions) for use against U.S. federal income taxes 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
non-deductible expenses.
The Corporation reduced the effective income tax rate beginning in the
second quarter of 1999 which may continue for the remainder of 1999 as a result
of the GESCO Acquisition and the resulting (1) reduction of non-deductible
goodwill amortization expense relating to the acquisition of Old MK, (2)
eligibility of foreign tax credits from prior years and (3) additional pretax
income expected from the GESCO Businesses, resulting in a lower proportion of
non-deductible expenses to pretax income. The anticipated effective tax rate for
the remainder of 1999 is subject to, among other things, the Corporation's
ability to meet or exceed estimated pretax earnings levels for 1999. The foreign
tax credits from prior years are expected to be fully utilized in 1999 and will
not continue into 2000.
Minority interests:
Minority interests in the income of consolidated subsidiaries of $.8 million
and $1.3 million for the quarter and nine months ended August 27, 1999 consist
of BNFL's 40% minority interest in the earnings of the GESCO Businesses and a
third party's 35% minority interest in the earnings of Safe Sites of Colorado,
LLC, a subsidiary of the GESCO Businesses. The GESCO Businesses were acquired
March 22, 1999.
FINANCIAL CONDITION
The Corporation has three principal sources of near-term liquidity: (1)
existing cash and cash equivalents; (2) cash generated by its operations; and
(3) revolving loan borrowings under its bank credit facilities. Management
believes the Corporation's liquidity and capital resources should be sufficient
to meet its reasonably foreseeable working capital, capital expenditure and
other anticipated cash requirements.
I-15
<PAGE>
- --------------------------------------------------------------------------------
Liquidity and capital resources (in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
August 27, 1999 August 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Beginning of period $ 67,054 $ 53,215
End of period 38,466 42,429
- --------------------------------------------------------------------------------
Nine months ended
August 27, 1999 August 31, 1998
- --------------------------------------------------------------------------------
Net cash provided (used) in:
Operating activities $ 9,455 $ 37,898
Investing activities (121,052) (19,538)
Financing activities 83,009 (29,146)
- --------------------------------------------------------------------------------
</TABLE>
Cash and cash equivalents decreased $28.6 million to $38.5 million at August
27, 1999 from $67.1 million at November 30, 1998. Operating activities provided
$9.5 million during the nine months ended August 27, 1999 for joint-venture
investment, incentive and bonus plan payments and working capital requirements
relating to construction and engineering contracts. Cash provided by operating
activities during the comparable period of 1998 included $25.2 million of income
tax refunds and interest thereon. Cash provided from or used in operating
activities from period to period is affected by the mix, stage of completion and
commercial terms of engineering and construction contracts which are reflected
in changes in net operating assets and liabilities. Cash flow for the nine
months ended August 27, 1999 also reflects $123.3 million of cash consideration
paid to CBS Corporation and other acquisition costs paid in connection with the
GESCO Acquisition, net of cash acquired, $27.1 million of purchases of property
and equipment net of disposals, $3.4 million of cash received for the net sales
and maturities of securities available for sale and $25.9 million received from
the sales of two businesses. Financing activities included $100.0 million net
borrowings under the Corporation's credit facilities, $10.2 million used for
repurchase of 1,026,900 shares of the Corporation's common stock for treasury
and $3.3 million of distributions to minority interests in the operations of
WGSG.
The Corporation received authorization in January 1998 to repurchase, in
open market transactions, block trades or otherwise up to 2.0 million shares of
the Corporation's outstanding common stock designed to counteract the dilutive
effect of the issuance of stock under its stock option plans, and up to 2.765
million of its warrants to purchase common stock. As of the third quarter of
1999, all 2.0 million shares of common stock had been repurchased. In July 1999,
the Corporation received authorization to repurchase an additional 2.0 million
shares of the Corporation's outstanding common stock for the same purposes and
conditions as the initial authorization. Subject to market conditions and other
factors, these purchases may be continued, discontinued and resumed from time to
time without prior notice. It is anticipated that future purchases will be
funded with available cash and cash equivalents and operating cash flows.
The Corporation anticipates net capital expenditures for major construction
equipment of approximately $15 million during the remainder of 1999 for normal
replacement and to meet near-term equipment requirements for new work.
On March 19, 1999, the Corporation replaced its prior $200 million bank
credit facility with new uncollateralized revolving credit facilities providing
an aggregate amount of $250 million of borrowing capacity used to acquire the
GESCO Businesses. On April 26, 1999, the new credit facilities were increased to
$325 million consisting of a $195 million five-year facility which provides for
both revolving borrowings and the issuance of letters of credit, and a $130
million one-year facility which provides for revolving borrowings which may be
converted, at the Corporation's option, into a term loan maturing one year after
the then current expiration date of such facility. Depending on conditions in
capital markets and other factors, the Corporation may consider the possible
issuance of other long-term debt or other securities.
I-16
<PAGE>
The Corporation may, from time to time, pursue opportunities to complement
existing operations through business combinations and participation in ventures,
which may require additional financing and utilization of the Corporation's
capital resources.
BACKLOG
Backlog of all uncompleted contracts at August 27, 1999 was $3,212 million,
compared with $2,680 million at November 30, 1998. New work awarded in the
quarter and nine months ended August 27, 1999 totaled $744 million and $1,482
million compared with $401 million and $1,344 million for the quarter and nine
months ended August 31, 1998.
THE YEAR 2000 ISSUE
The Year 2000 issue results from the development of computer programs and
electronic circuitry that use two digits rather than four to define calendar
years. These programs may fail to differentiate between calendar years in the
twenty-first century and calendar years in the twentieth century (e.g., they may
recognize a date using "00" as the year 1900 rather than the year 2000). If not
corrected, the Year 2000 issue could result in complete system failures or
miscalculations causing significant disruption of normal business activities.
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 or error due to
the Year 2000 issue.
The Corporation has developed and implemented a strategic 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 IT
systems, non-IT devices and supply chain relationships 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. Progress reports on the Year
2000 Project are presented regularly to the Corporation's senior management and
periodically to the Audit Committee of the Board of Directors.
Because of the scope of its operations, the Corporation believes it is
impractical to seek to eliminate all potential Year 2000 problems before they
arise. As a result, the Corporation expects that its Year 2000 assessments and
corrections will include ongoing remedial efforts into the year 2000. The
Corporation has used a risk-based analysis of its operations to identify those
items that are critical to the Corporation and at risk. Critical items have been
identified through the "inventory" phase of the Year 2000 Project.
As of September 30, 1999, the Corporation has substantially completed the
"inventory," "assessment," "remediation" and "testing/validation" phases with
regard to its critical IT systems and non-IT devices, and expects to complete
these phases with respect to the one remaining critical system by November 1999.
As part of the Year 2000 Project regarding IT systems, the Corporation has
implemented new or upgraded Year 2000 compliant systems for financial
information, human resources and payroll.
I-17
<PAGE>
The Corporation is corresponding with its major clients and joint-venture
and other business partners, and with all vendors and subcontractors that have
been determined through practical risk assessment techniques to be critical to
the Corporation, in order to determine the Year 2000 readiness or progress of
those entities and to assess any related risk to the Corporation.
As part of the Year 2000 Project, the Corporation is developing contingency
plans to address potential Year 2000 disruptions to the Corporation's core
business processes. Such plans have not yet been fully developed, and the
Corporation will continue to develop them as necessary to address Year 2000
risks from internal, external and infrastructure sources. Contingency plans are
expected to be finalized by November 1999.
The Corporation's Year 2000 Project utilizes both internal and external
resources. The total cost of the Corporation's activities to achieve Year 2000
readiness is currently estimated at approximately $20 million. As of August 27,
1999, the direct costs incurred by the Corporation to remediate Year 2000 issues
were approximately $17.5 million.
WGSG continues implementing its separate Year 2000 Program, which addresses
IT and non-IT systems and supplier relationships. The program includes the
following phases: (1) inventory, (2) assessment, (3) planning, (4) renovation,
(5) validation, (6) implementation and (7) contingency planning. The Year 2000
Program for mission critical IT systems was completed in August 1999. All non-
mission critical systems are expected to be completed by October 1999. The total
cost for the WGSG to become Year 2000 ready is currently estimated at
approximately $40 million, which is substantially funded by the federal
government.
Although the Corporation believes that its Year 2000 readiness efforts are
designed to appropriately identify and address those Year 2000 issues that are
within the Corporation's control, there can be no assurance that the
Corporation's efforts will be fully effective. The newness and complexity of the
issues presented and the Corporation's dependence on the technical skills and
preparedness of third parties are among the factors that could cause the
Corporation's efforts to be less than fully effective. Moreover, Year 2000
issues present many risks that are simply beyond the Corporation's control, such
as the potential effects of Year 2000 issues on the economy in general and on
the Corporation's business partners, vendors, subcontractors and customers in
particular.
While the Corporation believes that the impact of any individual Year 2000
failure will most likely be localized and limited to specific facilities or
operations, the Corporation is not yet able to assess the likelihood of
significant business interruptions occurring in one or more of its operations
around the world. Such interruptions could prevent the Corporation, at least
temporarily, from delivering contractual services. 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 timely
achieve Year 2000 readiness could adversely affect the Corporation's business
operations, which could have a material adverse effect on the Corporation's
business, financial condition and results of operations.
The foregoing disclosure is based upon the Corporation's current
expectations, estimates and projections, which could ultimately be found to be
inaccurate. Because of uncertainties and circumstances beyond the Corporation's
control, the actual effects of Year 2000 issues on the Corporation may be
different than the foregoing assessment. See "Note Regarding Forward-Looking
Information."
ENVIRONMENTAL CONTINGENCY
The United States Environmental Protection Agency has notified the
Corporation and approximately 20 other parties that each is a potentially
responsible party 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.
I-18
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants has issued Statement
of Position ("SOP") 98-5 Reporting on the Costs of Start-Up Activities. See Note
11. "Recently Issued Accounting Standards" of Notes to Condensed Consolidated
Financial Statements for the impact, if any, that this recently issued standard
is expected to have on the Corporation's financial statements upon adoption.
I-19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(In thousands)
The Corporation's exposure to market risk for changes in interest rates
relates primarily to the Corporation's short- and long-term investment portfolio
and debt obligations. The Corporation's short-term investment portfolio consists
primarily of highly liquid instruments with maturities of one month or less. The
Corporation's long-term investment portfolio consists primarily of high-quality
debt instruments with maturities under 10 years and an average maturity of 3.5
years. These long-term instruments are held to fund potential workers
compensation, general liability and auto liability obligations of the
Corporation. The Corporation seeks to match the maturities of these instruments
as closely as possible with its anticipated workers compensation obligations and
to hold these instruments to maturity in order to minimize market risk exposure,
but may sell such securities in response to changes in market interest rates,
needs for liquidity or changes in the availability of and the yield on
alternative investments. As of August 27, 1999, the Corporation had $12,219 of
short-term investments classified as cash equivalents and $41,801 in its long-
term investment portfolio.
The Corporation may, from time to time, effect borrowings under its bank
credit facility for general corporate purposes, including working capital
requirements, capital expenditures and acquisitions. Borrowings under the bank
credit facility of $100,000 at August 27, 1999 bear interest at the applicable
LIBOR or base rate plus an additional margin and, therefore, the Corporation is
subject to fluctuations in interest rates.
I-20
<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 June 7, 1999, the Corporation filed a current report on Form 8-K/A
to amend certain items, financial statements, exhibits and other
portions under Item 7 of its current report on Form 8-K dated April 6,
1999 which disclosed the acquisition of certain governmental and
nuclear services businesses from CBS Corporation.
The Corporation filed a current report on Form 8-K on August 6, 1999 to
disclose that Ambrose L. Schwallie was elected executive vice president
of Morrison Knudsen Corporation and named president and chief executive
officer of the Corporation's Westinghouse Government Services Group,
replacing James L. Gallagher who retired September 1, 1999. It was also
disclosed that Joseph J. Buggy, formerly executive vice president of
the Westinghouse Savannah River Company, was promoted to fill
Schwallie's position of president of Westinghouse Savannah River
Company.
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: October 5, 1999
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.
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 nine months ended August 27,
1999, and is qualified in its entirety by reference to such condensed
consolidated financial statements and financial statement footnotes:
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-27-1999
<CASH> 38,466
<SECURITIES> 0
<RECEIVABLES> 202,705
<ALLOWANCES> (5,219)
<INVENTORY> 17,139
<CURRENT-ASSETS> 526,256
<PP&E> 270,264
<DEPRECIATION> (154,164)
<TOTAL-ASSETS> 1,168,499
<CURRENT-LIABILITIES> 372,784
<BONDS> 100,000
0
0
<COMMON> 544
<OTHER-SE> 390,139
<TOTAL-LIABILITY-AND-EQUITY> 1,168,499
<SALES> 55,344
<TOTAL-REVENUES> 1,584,550
<CGS> 53,977
<TOTAL-COSTS> (1,507,656)
<OTHER-EXPENSES> (27,510)
<LOSS-PROVISION> 2,312
<INTEREST-EXPENSE> (4,734)
<INCOME-PRETAX> 57,745
<INCOME-TAX> (21,529)
<INCOME-CONTINUING> 34,952
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,952
<EPS-BASIC> .66
<EPS-DILUTED> .66
</TABLE>
