<PAGE>
SECURITIES AND EXCHANGE COMMISISON
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
June 2, 2000
Commission File Number 1-12054
[LOGO](R) MORRISON KNUDSEN CORPORATION
A Delaware Corporation
IRS Employer Identification No. 33-0565601
MORRISON KNUDSEN PLAZA, BOISE, IDAHO 83729
208/386-5000
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At June 2, 2000, 52,361,920 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 June 2, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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PAGE
PART I
<S> <C>
Item 1. Condensed Consolidated Financial Statements and Notes Thereto
Statements of Income for the Quarter and Six Months Ended
June 2, 2000 and May 28, 1999 I-1
Balance Sheets at June 2, 2000 and December 3, 1999 I-2
Statements of Cash Flows for the Six Months Ended I-4
June 2, 2000 and May 28, 1999
Statements of Comprehensive Income for the Quarter and
Six Months Ended June 2, 2000 and May 28, 1999 I-5
Notes to Financial Statements I-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk I-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 6. Exhibits and Reports on Form 8-K II-1
</TABLE>
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
QUARTER AND SIX MONTHS ENDED JUNE 2, 2000 AND MAY 28, 1999
(In thousands except per share data)
<TABLE>
<CAPTION>
(UNAUDITED)
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Quarter Ended Six Months Ended
June 2, May 28, June 2, May 28,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenue $ 579,716 $ 567,826 $ 1,152,561 $ 989,136
Cost of revenue (546,508) (543,466) (1,094,608) (943,991)
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Gross profit 33,208 24,360 57,953 45,145
General and administrative expenses (6,132) (6,432) (11,497) (14,406)
Goodwill amortization (4,111) (3,529) (8,287) (4,295)
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Operating income 22,965 14,399 38,169 26,444
Investment income 646 1,063 1,395 2,155
Interest expense (2,546) (2,822) (4,876) (2,989)
Other income, net 574 9,583 617 11,810
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Income before income taxes and minority interests in
loss of consolidated subsidiaries 21,639 22,223 35,305 37,420
Income tax expense (8,413) (7,960) (13,732) (14,266)
Minority interests in income of consolidated subsidiaries (1,556) (472) (857) (472)
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Net income $ 11,670 $ 13,791 $ 20,716 $ 22,682
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Income per share
Basic $ .22 $ .26 $ .40 $ .43
Diluted $ .22 $ .26 $ .40 $ .43
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Common shares used to compute income per share
Basic 52,350 53,006 52,350 53,121
Diluted 52,438 53,163 52,419 53,265
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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 JUNE 2, 2000 (UNAUDITED) AND DECEMBER 3, 1999
(In thousands except per share data)
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ASSETS 2000 1999
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<S> <C> <C>
Current assets
Cash and cash equivalents $ 33,357 $ 29,640
Accounts receivable, including retentions of $17,798 and $19,704 208,560 215,523
Unbilled receivables 116,299 124,793
Inventories, net of progress payments of $24,695 and $21,926 26,255 20,096
Refundable income taxes 2,890 3,055
Investments in and advances to construction joint ventures 60,933 82,551
Deferred income taxes 36,870 41,043
Other 13,252 15,262
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Total current assets 498,416 531,963
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Investments and other assets
Securities available for sale, at fair value 41,425 41,640
Investments in mining ventures 66,920 69,063
Cost in excess of net assets acquired, net of accumulated
amortization of $30,193 and $21,906 320,041 351,869
Deferred income taxes 43,664 48,606
Other 23,170 21,114
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Total investments and other assets 495,220 532,292
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Property and equipment, at cost
Construction equipment 191,494 183,806
Land and improvements 7,949 7,970
Buildings and improvements 16,691 17,154
Equipment and fixtures 85,868 81,694
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Total property and equipment 302,002 290,624
Less accumulated depreciation (169,117) (158,856)
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Property and equipment, net 132,885 131,768
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Total assets $ 1,126,521 $ 1,196,023
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</TABLE>
The accompanying notes are an integral part of the financial statements.
I-2
<PAGE>
<TABLE>
<CAPTION>
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LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
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<S> <C> <C>
Current liabilities
Accounts payable $ 82,075 $ 105,007
Subcontracts payable, including retentions of $10,410 and $18,469 33,433 42,624
Billings in excess of cost and estimated earnings on uncompleted contracts 46,761 53,739
Estimated costs to complete long-term contracts 75,078 72,815
Accrued salaries, wages and benefits, including compensated absences
of $14,040 and $24,721 47,476 65,759
Income taxes payable 948 1,079
Other accrued liabilities 27,870 44,072
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Total current liabilities 313,641 385,095
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Non-current liabilities
Long-term debt 99,900 100,000
Postretirement benefit obligation 79,243 80,685
Accrued workers' compensation 36,108 36,181
Pension and deferred compensation liabilities 89,064 100,116
Environmental remediation obligations 5,371 6,016
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Total non-current liabilities 309,686 322,998
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Contingencies and commitments (Note 5)
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Minority interests 84,737 84,840
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Stockholders' equity
Preferred stock, par value $.01, 10,000 shares authorized - -
Common stock, par value $.01, authorized 100,000 shares;
issued 54,370 and 54,359 544 544
Capital in excess of par value 248,910 248,720
Stock purchase warrants 6,550 6,554
Retained earnings 200,412 179,696
Treasury stock, 2,009 shares, at cost (23,111) (23,124)
Accumulated other comprehensive loss (14,848) (9,300)
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Total stockholders' equity 418,457 403,090
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Total liabilities and stockholders' equity $1,126,521 $1,196,023
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</TABLE>
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<PAGE>
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 2, 2000 AND MAY 28, 1999
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
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2000 1999
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<S> <C> <C>
Operating activities
Net income $ 20,716 $ 22,682
Adjustments to reconcile net income to cash provided (used)
by operating activities:
Depreciation of property and equipment 15,453 10,534
Amortization of goodwill 8,287 4,295
Deferred income taxes 9,115 3,268
Minority interest in net income of consolidated subsidiaries 1,396 472
Equity in income of mining ventures less dividends received (3,103) (2,333)
Gain on sale of assets (93) (9,176)
Other investments and assets, net 1,702 (8,970)
Increase in net operating assets (32,834) (32,967)
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Net cash provided (used) by operating activities 20,639 (12,195)
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Investing activities
Property and equipment acquisitions (18,321) (18,968)
Property and equipment disposals 2,043 2,109
Purchases of securities available for sale (17,726) (4,776)
Sale and maturities of securities available for sale 17,182 7,081
Purchase of businesses, net of cash acquired - (123,110)
Proceeds from the sales of businesses - 25,914
Other investing activities (638) -
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Net cash used in investing activities (17,460) (111,750)
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Financing activities
Net proceeds (repayments) on long-term revolving line of credit (100) 100,000
Contributions from (distributions to) minority interests 531 (1,867)
Purchase of treasury stock - (6,657)
Other 107 221
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Net cash provided by financing activities 538 91,697
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Increase (decrease) in cash and cash equivalents 3,717 (32,248)
Cash and cash equivalents at beginning of period 29,640 67,054
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Cash and cash equivalents at end of period $ 33,357 $ 34,806
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Supplemental disclosure of cash flow information:
Interest paid $ 4,467 $ 2,846
Income tax paid, net 869 3,059
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</TABLE>
The accompanying notes are an integral part of the financial statements.
I-4
<PAGE>
MORRISON KNUDSEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
QUARTER AND SIX MONTHS ENDED JUNE 2, 2000 AND MAY 28, 1999
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
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Quarter Ended Six Months Ended
June 2, May 28, June 2, May 28,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net income $11,670 $13,791 $20,716 $22,682
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Other comprehensive loss, net of tax:
Foreign currency translation adjustments (1,676) (2,517) (5,263) (4,982)
Unrealized gains (losses) on marketable securities:
Unrealized net holding gains (losses) arising
during period 94 (122) (176) (389)
Less: Reclassification adjustment for net gains
realized in net income (109) - (109) (2)
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Other comprehensive loss, net of tax (1,691) (2,639) (5,548) (5,373)
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Comprehensive income $ 9,979 $11,152 $15,168 $17,309
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</TABLE>
The accompanying notes are an integral part of the financial statements.
I-5
<PAGE>
MORRISON KNUDSEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars
except per 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 December 3, 1999. The comparative consolidated balance sheet and
related disclosures at December 3, 1999 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 or six months ended June 2, 2000 are not necessarily indicative of the
operating results to be expected for the full year, and future operating results
will not necessarily be comparable to historical operating results as a result
of the Corporation's acquisition of the Raytheon Engineers & Constructors
business from Raytheon Company on July 7, 2000. (See Note 8. below.)
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 from those estimates. On an
ongoing basis, management reviews its estimates based on information that is
currently available. Changes in facts and circumstances may result in revised
estimates.
2. ADOPTION OF ACCOUNTING PRINCIPLES
On December 4, 1999, the Corporation adopted 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 to be expensed
as incurred. The SOP also amends SOP 81-1 Accounting for Performance of
Construction/Production Contracts by requiring pre-contract costs to be expensed
as incurred. The adoption of SOP 98-5 had no material effect on the
Corporation's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 Accounting for Certain Transactions Involving Stock
Compensation-an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The adoption
of certain provisions of FIN 44 did not have a material effect on the
Corporation's financial position and results of operations. The Corporation is
currently evaluating the effect of the remaining provisions of FIN 44 on the
Corporation's financial position and results of operations.
3. 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 statements of income.
I-6
<PAGE>
Construction joint ventures:
The Corporation participates in construction 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 June 2, 2000 December 3, 1999
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<S> <C> <C>
Current assets $ 297,707 $ 372,772
Property and equipment, net 36,938 39,524
Current liabilities (206,515) (232,416)
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Net assets $ 128,130 $ 179,880
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<CAPTION>
Combined results of operations of construction joint ventures (Unaudited) (Unaudited)
Six months ended June 2, 2000 May 28, 1999
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Revenue $ 513,538 $ 568,346
Cost of revenue (478,538) (525,546)
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Gross profit (excludes indirect overhead cost) $ 35,000 $ 42,800
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<CAPTION>
Corporation's share of results of operations of construction
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joint ventures (Unaudited) (Unaudited)
Six months ended June 2, 2000 May 28, 1999
------------------------------------------------------------------------------------------------------------------------
Revenue $ 221,741 $ 218,409
Cost of revenue (206,596) (202,997)
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Gross profit (excludes indirect overhead cost) $ 15,145 $ 15,412
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</TABLE>
Mining ventures:
At June 2, 2000, the Corporation had ownership interests in two mining
ventures, MIBRAG mbH (33%) and Westmoreland Resources, Inc. (20%). The
Corporation also provides contract mining services to these ventures.
<TABLE>
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(Unaudited)
Combined financial position of mining ventures June 2, 2000 December 3, 1999
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<S> <C> <C>
Current assets $ 153,732 $ 215,424
Non-current assets 96,754 100,808
Property and equipment, net 580,388 612,714
Current liabilities (62,982) (68,198)
Long-term debt (261,261) (320,113)
Other non-current liabilities (294,862) (320,104)
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Net assets $ 211,769 $ 220,531
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<CAPTION>
Combined results of operations of mining ventures (Unaudited) (Unaudited)
Six months ended June 2, 2000 May 28, 1999
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Revenue $ 148,527 $ 179,382
Cost of revenue (133,636) (168,725)
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Gross profit (excludes indirect overhead cost) $ 14,891 $ 10,657
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</TABLE>
I-7
<PAGE>
<TABLE>
<CAPTION>
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Corporation's share of results of operations of mining ventures (Unaudited) (Unaudited)
Six months ended June 2, 2000 May 28, 1999
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<S> <C> <C>
Revenue $ 46,974 $ 54,885
Cost of revenue (42,271) (51,780)
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Gross profit (excludes indirect overhead cost) $ 4,703 $ 3,105
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</TABLE>
The Corporation received dividend distributions from the mining ventures of
$1,600 during the six months ended June 2, 2000 and $772 during the six months
ended May 28, 1999.
4. ACQUISITION OF WESTINGHOUSE BUSINESSES
On March 22, 1999, the Corporation and BNFL Nuclear Services, Inc. ("BNFL")
acquired operations of the government and environmental services businesses
("Westinghouse businesses") of CBS Corporation. The acquisition of the
Westinghouse businesses is being accounted for as a purchase business
combination.
The Corporation completed the final allocation of the purchase price to the
net assets acquired during the quarter ended June 2, 2000, resulting primarily
in a reduction of employee benefit obligations of $18,050 with a corresponding
reduction in cost in excess of net assets acquired.
The following unaudited pro forma information presents the consolidated
results of operations of the Corporation as if the acquisition of the
Westinghouse businesses had taken place on December 1, 1998, after giving effect
to certain adjustments, including amortization of goodwill on a straight-line
basis 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
acquisition of the Westinghouse businesses occurred on December 1, 1998, or of
future operating results.
--------------------------------------------------------------------------------
Six months ended May 28, 1999
--------------------------------------------------------------------------------
Revenue $1,068,792
Net income $20,487
Basic income per share .39
Diluted income per share .38
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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 and
construction services at the Summitville mine near Del Norte, Colorado. In 1996,
the Environmental Protection Agency (the "EPA") and the State of Colorado (the
"State") commenced an action under CERCLA in the United States District Court
for the District of Colorado against Mr. Robert Friedland, a potentially
responsible party (a "PRP"), to recover the response costs incurred and to be
incurred at the Summitville Mine Superfund Site (the "Site"). No other parties
were named as defendants in the original complaints in this action. On April 30,
1999, Mr. Friedland filed a third-party complaint naming ICC and nine other
defendants, alleging that such defendants are jointly and severally liable for
such costs and requesting that the response costs be equitably allocated. On
October 1, 1999, the EPA and the State filed amended complaints, naming ICC and
six other parties as defendants in addition to Mr. Friedland. On August 10,
1999, ICC filed an answer to Mr. Friedland's third-party complaint and, on
December 23, 1999, ICC filed answers to the EPA's and the State's amended
complaints, in each case denying the allegations set forth in the complaints.
The EPA and the State have estimated that the total response costs incurred
and to be incurred at the Site will approximate $150,000. ICC is not a party to
any agreement regarding the allocation of responsibility, and neither
I-8
<PAGE>
the EPA nor the State have made an allocation of responsibility among the
defendants. ICC'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 ICC or
other defendants, the efficacy of any defenses that ICC or such other defendants
may have to any assertion of liability, the willingness and ability of such
other defendants to discharge such liability as may be allocated to them and the
outcome of any negotiations or settlement discussions between ICC and the EPA,
the State and/or such other defendants. Accordingly, no response costs have been
accrued at June 2, 2000.
Management believes that ICC has sound factual and legal defenses to
liability in this matter. However, the ultimate resolution of this matter could
have a material adverse effect on ICC's financial position and could materially
and adversely affect its results of operations and cash flows in one or more
periods. Because ICC's financial position and results of operations are
consolidated with those of the Corporation, the ultimate resolution of this
matter could have a material adverse effect on the Corporation's financial
position and could materially and adversely affect its results of operations and
cash flows in one or more periods.
Other environmental matters:
The Corporation has been identified as a PRP and is contingently liable for
remediation liabilities in connection with the former transit business of a
predecessor of the Corporation ("Old MK"). The Corporation is obligated to
indemnify the buyer of the transit business for remediation costs and has
therefore accrued $3,000. Management believes that the ultimate outcome of the
matter will not have a material adverse effect on the Corporation's financial
position, results of operations or cash flows.
The Corporation has responsibility for decommissioning a nuclear licensed
site. The Corporation has entered into an agreement with the U.S. Navy whereby
the U.S. Navy will be responsible for 75% of the cost of decommissioning. At
June 2, 2000, the Corporation had accrued approximately $1,000 for its share of
the decommissioning costs.
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 June 2,
2000 and December 3, 1999, $43,200 and $47,586, 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
June 2, 2000.
In connection with a 1989 sale of an ownership interest in a shipbuilding
subsidiary by Old MK, 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 $5,469 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 ("Leucadia") filed an action in
the United States District Court for the District of Utah against the
Corporation and certain officers and directors. 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 Old MK
knew or believed that a non-competition agreement between Old MK 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. MK Gold is seeking recovery of alleged damages of
approximately $10,000. On January 5, 1999, the two cases were consolidated for
trial. The cases are scheduled for trial beginning April 2, 2001.
I-9
<PAGE>
Certain current and former officers, employees and directors of the
Corporation were named defendants in an action filed by two former participants
in the Old MK 401(k) plan and Employee Stock Ownership Plan in the United States
District Court for the District of Idaho. The complaint alleges, among other
things, that the defendants breached certain fiduciary duties. On July 12, 2000,
the Court denied plaintiffs' motion to reconsider a prior summary judgment in
favor of certain defendants and granted summary judgment with respect to certain
other defendants with the result that the Corporation and all current and former
officers, employees and directors have been dismissed from the action. The Court
also certified the case as a class action. The remaining defendants in this
proceeding are the two plan committees and two companies (to which the
Corporation has certain indemnification obligations) involved in administration
of the plans.
Although the ultimate outcome of these matters discussed in the two
preceding paragraphs cannot be predicted with certainty, management believes
that the outcome of these actions, individually or collectively, will not have a
material adverse impact on the Corporation's financial position, results of
operations or cash flows.
In addition to the foregoing, there are other claims, lawsuits, disputes
with third parties, investigations and administrative proceedings against the
Corporation and its subsidiaries relating to matters in the ordinary course of
its business activities that are not expected to have a material adverse effect
on the Corporation's financial position, results of operations or cash flows.
6. SEGMENT INFORMATION
During the periods presented, the Corporation operated through three
operating units, each of which comprised a separate reportable business segment:
Engineers & Constructors Group, Government Services Group and Contractors Group.
The reportable segments were separately managed, served different markets and
customers, and differed in their expertise, technology and resources necessary
to perform their services.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the Corporation's Annual
Report on Form 10-K for the year ended December 3, 1999. The Corporation
evaluates performance and allocates resources based on segment operating income.
Segment operating income is total segment revenue reduced by segment cost of
revenue and goodwill amortization identifiable to the segment. Goodwill
amortization related to the acquisition of Old MK is not allocated to the
segments. Corporate and other operating loss consists principally of general and
administrative expense.
Concurrently with the Corporation's acquisition of the Raytheon Engineers &
Constructors business of Raytheon Company on July 7, 2000 (see Note 8. below),
the Corporation reorganized into five new operating segments: Power,
Infrastructure & Mining, Government, Industrial/Process and Petroleum &
Chemicals. See Note 8. "Subsequent Events - Acquisition of Raytheon Engineers &
Constructors." The Corporation will report under the new segments commencing
with the quarter ending September 1, 2000.
I-10
<PAGE>
<TABLE>
<CAPTION>
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Quarter Ended Six Months Ended
Revenue (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Quarters ended June 2, 2000 May 28, 1999 June 2, 2000 May 28, 1999
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<S> <C> <C> <C> <C>
Engineers & Constructors
External $208,320 $167,108 $ 383,718 $339,906
Intersegment 188 776 201 1,091
Government Services
External 194,546 209,642 378,684 277,509
Intersegment - - - -
Contractors
External 176,850 191,076 390,159 371,721
Intersegment 552 232 552 372
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Total segments 580,456 568,834 1,153,314 990,599
Elimination of intersegments (740) (1,008) (753) (1,463)
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Total consolidated revenues $579,716 $567,826 $ 1,152,561 $989,136
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</TABLE>
<TABLE>
<CAPTION>
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Quarter Ended Six Months Ended
Operating income (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Quarters ended June 2, 2000 May 28, 1999 June 2, 2000 May 28, 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross profit
Engineers & Constructors $ 6,698 $ 6,068 $14,130 $10,051
Government Services 14,855 8,802 22,001 13,784
Contractors 12,296 9,982 23,075 20,391
Corporate and other (641) (492) (1,253) 919
---------------------------------------------------------------------------------------------------------------------------------
Total gross profit 33,208 24,360 57,953 45,145
---------------------------------------------------------------------------------------------------------------------------------
Corporate general and
administrative expense (6,132) (6,432) (11,497) (14,406)
---------------------------------------------------------------------------------------------------------------------------------
Goodwill amortization
Government Services (3,590) (3,090) (7,247) (3,090)
Contractors (101) (8) (199) (20)
Corporate and other (420) (431) (841) (1,185)
---------------------------------------------------------------------------------------------------------------------------------
Total goodwill amortization (4,111) (3,529) (8,287) (4,295)
---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss)
Engineers & Constructors 6,698 6,068 14,130 10,051
Government Services 11,265 5,712 14,754 10,694
Contractors 12,195 9,974 22,876 20,371
Corporate and other (7,193) (7,355) (13,591) (14,672)
---------------------------------------------------------------------------------------------------------------------------------
Total operating income $22,965 $14,399 $38,169 $26,444
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Corporation is currently evaluating the effect SFAS No. 133 will have on future
results of operations, financial position and cash flows. Implementation of SFAS
No. 133 is required commencing with the first quarter of 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101") which summarizes the SEC staff's
position on selected revenue recognition issues. The
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<PAGE>
Corporation is currently evaluating what effect, if any, SAB 101 may have on its
existing revenue recognition policies, principally with respect to performance-
based incentives. Implementation of SAB 101 is required commencing with the
first quarter of 2001.
8. SUBSEQUENT EVENTS
Acquisition of Raytheon Engineers & Constructors:
On July 7, 2000, pursuant to a Stock Purchase Agreement, dated as of April
14, 2000 (the "Stock Purchase Agreement"), among Raytheon Company ("Raytheon"),
Raytheon Engineers & Constructors International, Inc., a wholly-owned subsidiary
of Raytheon ("RECI" and, together with Raytheon, the "Sellers"), and the
Corporation, the Corporation purchased the capital stock of the subsidiaries of
RECI (the "RECI Subsidiaries") and certain other assets of RECI (the "Acquired
RECI Assets") and assumed certain liabilities of RECI. Prior to such purchase,
RECI provided engineering, design, procurement, construction, operation,
maintenance and other services on a worldwide basis, and had annual revenues of
approximately $2,700,000 for the year ending December 31, 1999.
The cash purchase price paid at the closing of the acquisition ("Closing")
for the capital stock and other assets purchased was $53,000, together with the
assumption of net liabilities of approximately $450,000. The cash purchase price
paid at Closing was calculated based on the estimated amount of the April 30,
2000 Adjusted Non-Current Net Assets and Adjusted Net Working Capital (as such
terms are defined in the Stock Purchase Agreement) acquired by the Corporation.
The respective amounts of Adjusted Non-Current Net Assets and Adjusted Net
Working Capital are subject to post-Closing finalization and related adjustments
to the price paid at Closing. In addition, if the net amount of cash advanced or
paid by the Sellers for the use or benefit of the purchased business between
April 30, 2000 and Closing is greater than or less than the amount of cash
transferred by the purchased business for the use or benefit of the Sellers
during such period, the Corporation will pay the Sellers an amount equal to such
excess or the Sellers will pay the Corporation an amount equal to such
deficiency, as applicable.
The Stock Purchase Agreement provided that RECI would retain all
non-restricted cash and cash equivalents held by RECI and the RECI Subsidiaries
as of the close of business on April 30, 2000 ("Cut-Off Date Cash Balances"). At
Closing, for purposes of administrative convenience, the RECI Subsidiaries
retained all cash held by them and the Corporation paid to the Sellers
approximately $30,800, which amount is subject to post-Closing verification by
the Corporation and adjustment in the event such amount is not equal to the
Cut-Off Date Cash Balances held by RECI Subsidiaries.
RECI retained, among other assets, all of RECI's interest in and rights
with respect to specified contracts. In addition, with respect to four specified
construction projects, the Stock Purchase Agreement contemplated that the
contracts relating to such projects would be transferred to RECI and the Sellers
and the RECI Subsidiaries party thereto would enter into subcontracts pursuant
to which the RECI Subsidiaries would perform, on a cost-reimbursed basis, all of
RECI's obligations under such contracts. Because the customer consents required
to transfer such contracts to RECI had not been received as of Closing, such
RECI Subsidiaries remain the contract party and continue to be directly
obligated to the customers and other third parties under the contracts relating
to such four projects. However, at Closing, the Corporation, the Sellers and
certain of the RECI Subsidiaries entered into agreements intended to transfer
the benefits and burdens of such contracts to the Sellers, to make the Sellers
the real parties in interest with respect to those contracts and to otherwise
effect the arrangements contemplated by the Stock Purchase Agreement. Under the
agreements entered into at Closing, the Corporation has agreed to cause the RECI
Subsidiaries to complete the four specified projects for the Sellers' account
following Closing, and the Sellers have agreed to reimburse the costs incurred
by the Corporation and the RECI Subsidiaries in doing so and to share equally
with the Corporation any positive variance between actual costs and estimated
costs. The Sellers have agreed to indemnify the Corporation against any losses,
claims or liabilities under the contracts relating to such projects, except
losses, claims or liabilities resulting from the gross negligence or willful
misconduct of the Corporation (against which the Corporation will indemnify the
Sellers).
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The Corporation estimates approximately $25,000 will be spent for systems
integration related to the acquisition over the next three years.
Credit facilities and acquisition financing:
Prior to the acquisition of the Raytheon Engineers & Constructors business,
the Corporation had uncollateralized revolving credit facilities providing an
aggregate borrowing capacity of $325,000, of which $99,900 was outstanding at
June 2, 2000. On July 7, 2000, in order to finance such acquisition, refinance
such existing bank credit facilities, fund working capital requirements and pay
related fees and expenses, the Corporation (i) obtained new senior secured
credit facilities, providing for an aggregate of $1,000,000 of term loans and
revolving borrowing capacity (the "New Credit Facilities") and (ii) issued and
sold $300,000 aggregate principal amount of 11% senior notes due July 1, 2010
(the "Senior Notes"). The terms of the New Credit Facilities and Senior Notes
are briefly summarized below:
New Credit Facilities: The New Credit Facilities provide for, on the terms
and subject to the conditions thereof, (i) two senior secured term loan
facilities in an aggregate principal amount of up to $500,000, including a
multi-draw Tranche A term loan facility in an aggregate principal amount of
$100,000 that will mature July 7, 2005 and a Tranche B term loan facility in an
aggregate principal amount of $400,000 that will mature July 7, 2007, and (ii) a
five-year senior secured revolving credit facility in an aggregate principal
amount of up to $500,000, all of which will also be available in the form of
letters of credit. Initial borrowings under the New Credit Facilities totaled
$400,000, representing the full amount available under the Tranche B term loan
facility. The initial borrowing rate under the Tranche B term loan facility is
at the applicable LIBOR or base rate plus an additional margin, currently at
3.25% and 2.25%, respectively. The additional margins, which are determined
based on an agreed pricing grid, may increase or decrease from time to time as
the ratio of debt to EBITDA (as such term is defined) increases or decreases.
The credit agreement under which the New Credit Facilities were made available
contains affirmative, negative and financial covenants and specifies events of
default which are typical for a credit agreement governing credit facilities of
the size, type and tenor of the New Credit Facilities. Among the covenants are
those limiting the ability of the Corporation and certain of its subsidiaries to
incur debt or liens, provide guarantees, make investments and pay dividends or
repurchase shares.
Senior Notes: The Senior Notes are unsecured senior obligations that mature
on July 1, 2010. Interest on the Senior Notes accrues at the rate of 11% per
annum and is payable semiannually in arrears on January 1 and July 1, commencing
January 1, 2001. The Senior Notes rank equally with the Corporation's existing
and future senior unsecured indebtedness. The Senior Notes effectively rank
junior to all of the Corporation's secured indebtedness and to all liabilities
of the subsidiaries of the Corporation that are not guarantors of the Senior
Notes. The Senior Notes rank senior to any future subordinated indebtedness of
the Corporation. The Senior Notes are guaranteed on a senior basis by certain
subsidiaries of the Corporation (the "Subsidiary Guarantors"). The indenture,
dated as of July 7, 2000, between the Corporation and United States Trust
Company of New York, as trustee, under which the Senior Notes were issued
contains affirmative, restrictive and financial covenants and specifies events
of default which are typical for an indenture governing an issue of high-yield
senior unsecured notes. Among the covenants are those limiting the ability of
the Corporation and certain of its subsidiaries to incur debt, create liens,
make investments and pay dividends or repurchase shares. The Senior Notes were
sold to Credit Suisse First Boston Corporation ("CSFB"), BMO Nesbitt Burns Corp.
("BMO Nesbitt Burns") and U.S. Bancorp Libra, a division of U.S. Bancorp
Investments Inc. ("US Bancorp Libra"), as the initial purchasers, pursuant to a
purchase agreement, dated as of June 28, 2000, as amended, among the
Corporation, the Subsidiary Guarantors, CSFB, BMO Nesbitt Burns and U.S. Bancorp
Libra. The Senior Notes are subject to registration with the SEC on the terms
and subject to the conditions of a registration rights agreement, dated June 28,
2000, as amended, among the Corporation, the Subsidiary Guarantors, CSFB, BMO
Nesbitt Burns and U.S. Bancorp Libra.
I-13
<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 (the "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.
OVERVIEW
The acquisition of the Raytheon Engineers & Constructors business on July
7, 2000 discussed below doubled the size of the Corporation in terms of revenues
and backlog. As a result, management believes the historical information
presented in this Quarterly Report on Form 10-Q does not purport to represent
what the Corporation's results of operations, financial position or cash flows
would have been for the historical periods presented had the Corporation in fact
owned the acquired business for those periods, and is not indicative of the
results of operations, financial position or cash flows the Corporation may
report in the future.
RECENT DEVELOPMENTS
Acquisition of Raytheon Engineers & Constructors:
On July 7, 2000, pursuant to a Stock Purchase Agreement, dated as of April
14, 2000 (the "Stock Purchase Agreement"), among Raytheon Company ("Raytheon"),
Raytheon Engineers & Constructors International, Inc., a wholly-owned subsidiary
of Raytheon ("RECI" and, together with Raytheon, the "Sellers"), and the
Corporation, the Corporation purchased the capital stock of the subsidiaries of
RECI (the "RECI Subsidiaries") and certain other assets of RECI (the "Acquired
RECI Assets") and assumed certain liabilities of RECI. Prior to the acquisition,
RECI provided engineering, design, procurement, construction, operation,
maintenance and other services on a worldwide basis, and had annual revenues of
approximately $2.7 billion.
The cash purchase price paid at the closing of the acquisition ("Closing")
for the capital stock and other assets purchased was $53.0 million, together
with the assumption of net liabilities of approximately $450 million. The cash
purchase price paid at Closing was calculated based on the estimated amount of
the April 30, 2000 Adjusted Non-Current Net Assets and Adjusted Net Working
Capital (as such terms are defined in the Stock Purchase Agreement) acquired by
the Corporation. The respective amounts of Adjusted Non-Current Net Assets and
Adjusted Net Working Capital are subject to post-Closing finalization and
related adjustments to the price paid at Closing. In addition, if the net amount
of cash advanced or paid by the Sellers for the use or benefit of the purchased
business between April 30, 2000 and Closing is greater than or less than the
amount of cash transferred by the purchased business for the use or benefit of
the Sellers during such period, the Corporation will pay the Sellers an amount
equal to such excess or the Sellers will pay the Corporation an amount equal to
such deficiency, as applicable.
The Stock Purchase Agreement provided that RECI would retain all
non-restricted cash and cash equivalents held by RECI and the RECI Subsidiaries
as of the close of business on April 30, 2000 ("Cut-Off Date Cash
I-14
<PAGE>
Balances"). At Closing, for purposes of administrative convenience, the RECI
Subsidiaries retained all cash held by them and the Corporation paid to the
Sellers approximately $30.8 million, which amount is subject to post-Closing
verification by the Corporation and adjustment in the event such amount is not
equal to the Cut-Off Date Cash Balances held by RECI Subsidiaries.
RECI retained, among other assets, all of RECI's interest in and rights
with respect to specified contracts. In addition, with respect to four specified
construction projects, the Stock Purchase Agreement contemplated that the
contracts relating to such projects would be transferred to RECI and the Sellers
and the RECI Subsidiaries party thereto would enter into subcontracts pursuant
to which the RECI Subsidiaries would perform, on a cost-reimbursed basis, all of
RECI's obligations under such contracts. Because the customer consents required
to transfer such contracts to RECI had not been received as of Closing, such
RECI Subsidiaries remain the contract party and continue to be directly
obligated to the customers and other third parties under the contracts relating
to such four projects. However, at Closing, the Corporation, the Sellers and
certain of the RECI Subsidiaries entered into agreements intended to transfer
the benefits and burdens of such contracts to the Sellers, to make the Sellers
the real parties in interest with respect to those contracts and to otherwise
effect the arrangements contemplated by the Stock Purchase Agreement. Under the
agreements entered into at Closing, the Corporation has agreed to cause the RECI
Subsidiaries to complete the four specified projects for the Sellers' account
following Closing, and the Sellers have agreed to reimburse the costs incurred
by the Corporation and the RECI Subsidiaries in doing so and to share equally
with the Corporation any positive variance between actual costs and estimated
costs. The Sellers have agreed to indemnify the Corporation against any losses,
claims or liabilities under the contracts relating to such projects, except
losses, claims or liabilities resulting from the gross negligence or willful
misconduct of the Corporation (against which the Corporation will indemnify the
Sellers).
The Corporation estimates approximately $25 million will be spent for
systems integration over the next three years.
Acquisition financing:
On July 7, 2000, in order to finance the acquisition of the Raytheon
Engineers & Constructors business, refinance the Corporation's existing bank
credit facilities, fund working capital requirements and pay related fees and
expenses, the Corporation (i) obtained new senior secured credit facilities,
providing for an aggregate of $1.0 billion of term loans and revolving borrowing
capacity (the "New Credit Facilities") and (ii) issued and sold $300.0 million
aggregate principal amount of 11% senior notes due July 1, 2010 (the "Senior
Notes").
RESULTS OF OPERATIONS
QUARTER AND SIX MONTHS ENDED JUNE 2, 2000 COMPARED TO
THE QUARTER AND SIX MONTHS ENDED MAY 28, 1999
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
(In millions) June 2, 2000 May 28, 1999 June 2, 2000 May 28, 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $579.7 $567.8 $1,152.6 $989.1
Gross profit 33.2 24.4 58.0 45.1
General and administrative expenses (6.1) (6.4) (11.5) (14.4)
Goodwill amortization (4.1) (3.5) (8.3) (4.3)
Investment income .6 1.1 1.4 2.2
Interest expense (2.5) (2.8) (4.9) (3.0)
Other income, net .6 9.6 .6 11.8
Income tax expense (8.4) (8.0) (13.7) (14.3)
Minority interests (1.6) (.5) (.9) (.5)
Net income 11.7 13.8 20.7 22.7
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
I-15
<PAGE>
Revenue and gross profit:
Revenue for the quarter and six months ended June 2, 2000 increased 2% and
17% to $579.7 million and $1,152.6 million, respectively, from the comparable
periods of 1999. Revenue for the second quarter increased due to a significant
increase in volume of work performed on industrial/process and energy contracts
in the Engineers & Constructors Group, partially offset by a decline in revenue
in the Government Services Group from a reduction in scope of three remediation
contracts and a decline in the Contractors Group from the completion of several
heavy civil projects. In addition to the foregoing, revenue for the six months
ended June 2, 2000 increased significantly as a result of the acquisition of the
Westinghouse businesses and the concurrent formation of the Corporation's
Westinghouse Government Services Group ("WGSG") on March 22, 1999. The results
of operations for WGSG are included in the Corporation's results of operations
for the six months ended June 2, 2000 but were absent for the period December 1,
1998 to March 21, 1999.
Gross profit increased $8.8 million and $12.9 million for the quarter and
six months ended June 2, 2000 primarily due to improved performance-based
incentives earned in the Government Services Group and improved performance on a
number of heavy civil, mining and international projects in the Contractors
Group. The Corporation's gross profit as a percent of revenue improved to 5.7%
and 5.0% for the quarter and six months ended June 2, 2000, respectively,
compared to 4.3% and 4.6% for the comparable period of 1999. Except for a small
decline in gross margin by the Engineers & Constructors Group in the second
quarter of 2000, all groups experienced an increase in gross margin for the
quarter and six months ended June 2, 2000 compared to the same periods in 1999.
The diversification of the Corporation's business may cause gross margins
to vary between periods due to inherent risks and rewards on fixed-price
contracts causing unexpected gains and losses on contracts. Gross margins may
also vary between periods due to changes in the mix and timing of contracts
executed by the Corporation, which contain various risk and profit profiles and
are subject to uncertainties inherent in the estimation process.
At June 2, 2000, backlog of $3,149 million was comprised of $1,248 million
(40%) from fee-type contracts and $1,901 million (60%) from fixed-price
contracts and the Corporation's share from mining ventures.
General and administrative expense:
General and administrative expense of $11.5 million for the six months
ended June 2, 2000 declined $2.9 million from the comparable period of 1999 due
to $1.7 million of additional compensation expense incurred in 1999 related to a
key executive retirement and a key executive recruitment, and a reduction in
benefit expenses in 2000.
Goodwill amortization:
Amortization of cost in excess of net assets acquired ("goodwill") for the
quarter and six months ended June 2, 2000 was $4.1 million and $8.3 million, an
increase of $.6 million and $4.0 million, respectively, from the comparable
periods of 1999. The increases are due to the amortization of goodwill arising
from the acquisition of the Westinghouse businesses, which amortization began on
March 22, 1999, the date of acquisition.
Investment income:
Investment income for the quarter and six months ended June 2, 2000
declined $.5 million and $.8 million, respectively, from the comparable periods
in 1999 as a result of there being less cash available for investment in a
corporate short-term asset management account due primarily to working capital
requirements.
I-16
<PAGE>
Interest expense:
Interest expense declined $.3 million and increased $1.9 million for the
quarter and six months ended June 2, 2000, respectively, from the comparable
periods of 1999. Interest expense for the quarter and six months ended May 28,
1999 includes interest attributable to additional borrowings in March 1999 which
were primarily used to fund the acquisition of the Westinghouse businesses. In
addition, during the second quarter of 1999, $1.0 million of prepaid bank fees
associated with the Corporation's previous credit facility were written off.
During the third quarter ending September 1, 2000, the Corporation will
write off $3.0 million of deferred bank fees related to the revolving credit
facilities that were refinanced and $2.8 million of commitment costs of an
unused bridge loan facility in connection with the July 7, 2000 purchase of the
Raytheon Engineers & Constructors business and the related acquisition financing
and refinancing of the Corporation's prior lines of credit.
Other income, net:
Other income was $.6 million for the quarter and six months ended June 2,
2000 compared to $9.6 million and $11.8 million, respectively, for the quarter
and six months ended May 28, 1999. The second quarter of 1999 included pretax
gains of $2.3 million and $6.4 million from the respective sales of a foreign
non-core subsidiary of Old MK and a domestic concrete and aggregate business.
During the first quarter of 1999, the Corporation recognized a $2.2 million gain
resulting 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 six months ended June 2, 2000
was 38.9% compared to 35.8% and 38.1% for the comparable periods of 1999 due to
a slightly higher proportion of non-deductible expenses to pretax income. In the
second quarter of 1999, the Corporation realized a reduction in the effective
income tax rate due to the eligibility of foreign tax credits from prior years.
Minority interests:
Minority interests in the income of consolidated subsidiaries for the
quarter and six months ended June 2, 2000 increased to $1.6 million and $.9
million, respectively, compared to $.5 million for the quarter and six months
ended May 28, 1999 due to an increase in income from the Westinghouse
businesses, which were acquired on March 22, 1999. Minority interests consist of
the 40% minority interest of BNFL Nuclear Services, Inc. in the income of WGSG
and a 35% minority interest in the income of Safe Sites of Colorado, LLC, a
subsidiary of WGSG.
OPERATING SEGMENT RESULTS
(In millions)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Revenue Quarter Ended Six Months Ended
Quarter and six months ended June 2, 2000 May 28, 1999 June 2, 2000 May 28, 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Engineers & Constructors Group $208.5 $167.9 $383.9 $341.0
Government Services Group 194.5 209.6 378.7 277.5
Contractors Group 177.4 191.3 390.7 372.1
Intersegment and other (.7) (1.0) (.7) (1.5)
-------------------------------------------------------------------------------------------------------------------------------
Total revenue $579.7 $567.8 $1,152.6 $989.1
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
I-17
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Operating Income Quarter Ended Six Months Ended
Quarter and six months ended June 2, 2000 May 28, 1999 June 2, 2000 May 28, 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Engineers & Constructors Group $ 6.7 $ 6.0 $ 14.1 $ 10.0
Government Services Group 11.3 5.7 14.8 10.7
Contractors Group 12.2 10.0 22.9 20.4
Intersegment and other (1.1) (.9) (2.1) (.3)
--------------------------------------------------------------------------------------------------------------------------------
Total segment operating income 29.1 20.8 49.7 40.8
--------------------------------------------------------------------------------------------------------------------------------
General and administrative expense (6.1) (6.4) (11.5) (14.4)
--------------------------------------------------------------------------------------------------------------------------------
Total operating income $23.0 $14.4 $ 38.2 $ 26.4
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Engineers & Constructors Group:
Revenue for the quarter and six months ended June 2, 2000 increased 24% and
13%, respectively, to $208.5 million and $383.9 million, respectively, from the
comparable periods of 1999 as a result of an increase in volume of work
performed on industrial/process and energy contracts. The increase in volume
resulted in an increase in operating income of $.7 million and $4.1 million for
the quarter and six months ended June 2, 2000 over the same periods in 1999.
Government Services Group:
Revenue for the quarter and six months ended June 2, 2000 declined 7% to
$194.5 million and increased 36% to $378.7 million, respectively, compared to
the same periods in 1999. The decline in revenue for the second quarter of 2000
was principally due to the reduction in scope of three remediation contracts
partially offset by an increase in volume on a large chemical demilitarization
project. The significant increase in revenue for the six months ended June 2,
2000 is the result of the acquisition of the Westinghouse businesses, which were
acquired in March 1999. Operating income for the quarter and six months ended
June 2, 2000 increased $5.6 million and $4.1 million, respectively, from the
comparable periods of 1999 due to improved performance-based incentives earned,
partially offset by increased overhead and bid and proposal costs. Revenue and
operating income of WGSG for the quarter and six months ended June 2, 2000 was
$132.0 million and $246.0 million and $5.5 million and $2.3 million,
respectively. Revenue and operating income of WGSG for the quarter and six
months ended May 28, 1999 were $117.0 million and $.9 million, respectively.
Contractors Group:
The Contractors Group revenue declined 7% to $177.4 million and increased
5% to $390.7 million for the quarter and six months ended June 2, 2000,
respectively, compared to the same periods in 1999. The decline in revenue for
the quarter was principally the result of the wind-up or completion of several
major heavy civil highway construction contracts and a large dam project which
were in the full stage of construction during the second quarter of 1999,
partially offset by several new transportation and water resource contracts, a
large marine project and two large mining contracts. A significant volume of
work was performed on many of these new contracts in the first quarter of 2000
resulting in an overall increase in revenue for the six months ended June 2,
2000 compared to the same period in 1999.
Operating income increased $2.2 million and $2.5 million for the quarter
and six months ended June 2, 2000 from the comparable periods of 1999. Operating
income increased during the second quarter of 2000 due to the improved
performance from mining operations and a $4.0 million settlement on an
international contract. In addition, operating income increased for the six
months ended June 2, 2000 due to an increase in volume and the positive
performance on a number of heavy civil projects in the first quarter of 2000,
including a settlement related to a fixed-price contract resulting in the
reversal of $3.9 million provision for loss, partially offset by a decline in
income from mining operations during the first quarter of 2000 due to the
favorable resolution of royalty issues on certain mining properties and issues
of a mining venture in the first quarter of 1999.
I-18
<PAGE>
Intersegment and other:
Intersegment and other consists primarily of the results of operations of
the Corporation's captive self-insurance subsidiary and goodwill amortization
associated with the acquisition of Old MK.
SEGMENT NEW WORK
Information relating to new work, which represents additions to backlog for
a period, is presented below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
(In millions) Quarter Ended Six Months Ended
Quarter and six months ended June 2, 2000 May 28, 1999 June 2, 2000 May 28, 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Engineers & Constructors Group $207 $159 $459 $393
Government Services Group 66 47 181 53
Contractors Group 211 106 333 292
-------------------------------------------------------------------------------------------------------------------------------
Total revenue $484 $312 $973 $738
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL CONDITION AND LIQUIDITY
The Corporation has three principal sources of liquidity: (1) existing cash
and cash equivalents; (2) cash generated by its operations; and (3) the New
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.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Liquidity and capital resources (in thousands) June 2, 2000 May 28, 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents
Beginning of period $29,640 $67,054
End of period 33,357 34,806
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six months ended
June 2, 2000 May 28, 1999
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by:
Operating activities $20,639 $ (12,195)
Investing activities (17,460) (111,750)
Financing activities 538 91,697
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash and cash equivalents increased $3.7 million to $33.3 million at June
2, 2000 from $29.6 million at December 3, 1999. The increase reflects net cash
provided by operating activities and financing activities of $20.6 million and
$.5 million, offset by net cash used in investing activities of $17.4 million.
The net cash provided by operating activities during the six months ended June
2, 2000 was $20.6 million compared to a net use of $12.2 million during the same
period of 1999, primarily as a result of additional construction joint-venture
cash requirements and other working capital requirements for construction and
engineering contracts in 1999. The Corporation experienced a reduction in
working capital and construction joint-venture investment during the first six
months of 2000 as a result of the wind-up of several construction and
engineering contracts. Cash provided or used by operating activities is affected
to a large degree by the mix, timing, state of completion and commercial terms
of the Corporation's contracts, which are reflected in changes in net operating
assets and liabilities.
Net cash used in investing activities for the six months ended June 2, 2000
included $16.3 million of net purchases of property and equipment and $.5
million of net purchases of marketable securities. Net cash provided by
financing activities included $.5 million of contributions from minority
interests from the operations of WGSG. Cash flow for the six months ended May
28, 1999 reflects $123.1 million of cash consideration paid to CBS Corporation
and other acquisition costs paid in connection with the acquisition of the
Westinghouse businesses, net of cash acquired, $16.9 million of net purchases of
property and equipment, $2.3 million of cash received for the net sales and
maturities of securities available for sale and $25.9 million received from the
sales
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of two businesses. Financing activities included $100.0 million of net
borrowings under the Corporation's then-existing credit facilities, $6.7 million
used for the repurchase of 712,700 shares of the Corporation's common stock for
treasury and $1.9 million of distributions paid on account of minority interests
in the operations of WGSG.
The Corporation anticipates capital expenditures during the remainder of
2000 of approximately $27 million principally for normal replacement of major
construction equipment and to meet near-term equipment requirements for new
work.
In July 1999, the Corporation received authorization to repurchase, in open
market transactions, block trades or otherwise up to 2 million shares of the
Corporation's outstanding common stock. The Corporation also has authorization
to repurchase up to 2.765 million of its warrants to purchase common stock. As
of June 2, 2000, the Corporation had not repurchased any shares under the
authorizations. Subject to market conditions and other factors, purchases of
shares may be commenced, discontinued and resumed from time to time without
prior notice. The repurchase by the Corporation of its common stock is
restricted under the New Credit Facilities and the indenture relating to the
Senior Notes.
Credit facilities and acquisition financing:
At June 2, 2000, the Corporation had uncollateralized revolving credit
facilities providing an aggregate borrowing capacity of $325.0 million, of which
$99.9 million was outstanding. On July 7, 2000, in order to finance the
acquisition of RECI, refinance the Corporation's then-existing bank credit
facilities, fund working capital requirements and pay related fees and expenses,
the Corporation entered into the New Credit Facilities, providing for an
aggregate of $1.0 billion of secured term loans and revolving borrowing
capacity, and issued and sold $300.0 million aggregate principal amount of its
Senior Notes. The terms of the New Credit Facilities and Senior Notes are
briefly summarized below:
New Credit Facilities: The New Credit Facilities provide for, on the terms
and subject to the conditions thereof, (i) two senior secured term loan
facilities in an aggregate principal amount of up to $500.0 million, including a
multi-draw Tranche A term loan facility in an aggregate principal amount of
$100.0 million that will mature July 7, 2005 and a Tranche B term loan facility
in an aggregate principal amount of $400.0 million that will mature July 7,
2007, and (ii) a five-year senior secured revolving credit facility in an
aggregate principal amount of up to $500.0 million, all of which will also be
available in the form of letters of credit. Initial borrowings under the New
Credit Facilities totaled $400.0 million, representing the full amount available
under the Tranche B term loan facility. The initial borrowing rate under the
Tranche B term loan facility is at the applicable LIBOR or base rate plus an
additional margin, currently at 3.25% and 2.25%, respectively. The additional
margins, which are determined based on an agreed pricing grid, may increase or
decrease from time to time as the ratio of debt to EBITDA (as such term is
defined) increases or decreases. The credit agreement under which the New Credit
Facilities were made available contains affirmative, negative and financial
covenants and specifies events of default which are typical for a credit
agreement governing credit facilities of the size, type and tenor of the New
Credit Facilities. Among the covenants are those limiting the ability of the
Corporation and certain of its subsidiaries to incur debt or liens, provide
guarantees, make investments and pay dividends or repurchase shares.
Senior Notes: The Senior Notes are unsecured senior obligations that mature
on July 1, 2010. Interest on the Senior Notes accrues at the rate of 11% per
annum and is payable semiannually in arrears on January 1 and July 1, commencing
January 1, 2001. The Senior Notes rank equally with the Corporation's existing
and future senior unsecured indebtedness. The Senior Notes effectively rank
junior to all of the Corporation's secured indebtedness and to all liabilities
of the subsidiaries of the Corporation that are not guarantors of the Senior
Notes. The Senior Notes rank senior to any future subordinated indebtedness of
the Corporation. The Senior Notes are guaranteed on a senior basis by certain
subsidiaries of the Corporation (the "Subsidiary Guarantors"). The indenture,
dated as of July 7, 2000, between the Corporation and United States Trust
Company of New York, as trustee, under which the Senior Notes were issued
contains affirmative, restrictive and financial covenants and specifies events
of default which are typical for an indenture governing an issue of high-yield
senior unsecured notes. Among the
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covenants are those limiting the ability of the Corporation and certain of its
subsidiaries to incur debt, create liens, make investments and pay dividends or
repurchase shares. The Senior Notes were sold to Credit Suisse First Boston
Corporation ("CSFB"), BMO Nesbitt Burns Corp. ("BMO Nesbitt Burns") and U.S.
Bancorp Libra, a division of U.S. Bancorp Investments Inc. ("US Bancorp Libra"),
as the initial purchasers, pursuant to a purchase agreement, dated as of June
28, 2000, as amended, among the Corporation, the Subsidiary Guarantors, CSFB,
BMO Nesbitt Burns and U.S. Bancorp Libra. The Senior Notes are subject to
registration with the SEC on the terms and subject to the conditions of a
registration rights agreement, dated June 28, 2000, as amended, among the
Corporation, the Subsidiary Guarantors, CSFB, BMO Nesbitt Burns and U.S. Bancorp
Libra.
The Corporation is subject to foreign currency translation and exchange
issues, primarily with regard to its mining venture, MIBRAG mbH, in Germany. At
June 2, 2000, the cumulative adjustments for translation losses net of related
income tax benefits was $5.3 million. The Corporation realized a pretax gain on
foreign currency exchange transactions of $122 thousand for the six months ended
June 2, 2000. The Corporation endeavors to enter into contracts with foreign
customers with repayment terms in U.S. currency in order to mitigate foreign
exchange risk.
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 June 2, 2000 was $3,149 million,
compared with $3,328 million at December 3, 1999. New work awarded in the
quarter and six months ended June 2, 2000 totaled $484 million and $973 million
compared with $312 million and $738 million for the quarter and six months ended
May 28, 1999.
CONTINGENCIES AND COMMITMENTS
The United States Environmental Protection Agency and the State of Colorado
have filed complaints against a subsidiary of the Corporation and six other
parties to recover response costs incurred and to be incurred at the Summitville
Mine Superfund Site. See Note 5. "Contingencies and Commitments" of Notes to
Condensed Consolidated Financial Statements for additional matters.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 133
Accounting for Derivative Instruments and Hedging Activities. The SEC issued
Staff Accounting Bulletin No. 101 on revenue recognition. See Note 7. "Recently
Issued Accounting Standards" of Notes to Condensed Consolidated Financial
Statements for a discussion of the impact, if any, that these standards are
expected to have on the Corporation's financial statements.
The Financial Accounting Standards Board issued FASB Interpretation No. 44
Accounting for Certain Transactions Involving Stock Compensation-an
interpretation of APB Opinion No. 25 ("FIN 44"). See Note 2. "Adoption of
Accounting Principles" of Notes to Condensed Consolidated Financial Statements.
The Corporation is currently evaluating the effect of the remaining provisions
of FIN 44 on the Corporation's financial position and results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(In thousands of dollars)
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 of less than 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 the related obligations and to hold these
instruments to maturity in order to minimize market risk exposure, but may, from
time to time, sell them in response to market rates, needs for liquidity or
changes in availability of and the yield on alternative investments. As of June
2, 2000, the Corporation had $130 of short-term investments classified as cash
equivalents and $41,425 in its long-term investment portfolio.
The Corporation may, from time to time, effect borrowings under bank credit
facilities or otherwise for general corporate purposes, including working
capital requirements, capital expenditures and acquisitions. Borrowings under
the New Credit Facilities, including the initial borrowings on July 7, 2000 of
$400,000, bear interest at the applicable LIBOR or base rate plus an additional
margin and, therefore, the Corporation is subject to fluctuations in interest
rates.
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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 July 13, 2000, the Corporation filed a current report on Form 8-K
dated July 7, 2000 reporting certain information pursuant to Item 2,
Item 5 and Item 7 of Form 8-K with respect to the completion of the
Corporation's acquisition of the Raytheon Engineers & Constructors
business from Raytheon Company, related financing transactions, changes
in the composition of the Corporation's Board of Directors and in
management personnel, and the Board's approval of the change of the
name of the Corporation to "Washington Group International, Inc.,"
subject to stockholder approval.
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
__________________________________
Anthony S. Cleberg
Executive Vice President and
Chief Financial Officer,
in his respective capacities as such
Date: July 17, 2000
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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.
Exhibit
Number Exhibits
4.1 Indenture, dated as of July 7, 2000, between the Corporation and United
States Trust Company of New York, as trustee (incorporated herein by
reference to Exhibit 4.1 to the Current Report on Form 8-K filed by the
Corporation on July 13, 2000).
10.1 Credit Agreement, dated as of July 7, 2000, among the Corporation, the
lenders named therein, Credit Suisse First Boston, New York branch, as
administrative agent, collateral agent and an issuing bank and as
arranger, Bank of Montreal, as syndication agent, and Bank of America,
N.A. and U.S. Bank National Association, as documentation agents
(incorporated herein by reference to Exhibit 10.2 to the Current Report
on Form 8-K filed by the Corporation on July 13, 2000).
10.2 Registration Rights Agreement, dated as of June 28, 2000, as amended
among the Corporation, the guarantors identified therein, Credit Suisse
First Boston Corporation, BMO Nesbitt Burns Corp. and U.S. Bancorp
Libra, a division of U.S. Bancorp Investments, Inc. (incorporated
herein by reference to Exhibit 10.2 to the Current Report on Form 8-K
filed by the Corporation on July 13, 2000).
27. * Financial Data Schedule.
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