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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
SEPTEMBER 1, 2000
Commission File Number 1-12054
WASHINGTON GROUP INTERNATIONAL, INC.
(FORMERLY MORRISON KNUDSEN CORPORATION)
A Delaware Corporation
IRS Employer Identification No. 33-0565601
720 PARK BOULEVARD, BOISE, IDAHO 83712
208 / 386-5000
At September 1, 2000, 52,396,548 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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WASHINGTON GROUP INTERNATIONAL, INC.
(FORMERLY MORRISON KNUDSEN CORPORATION)
QUARTERLY REPORT FORM 10-Q FOR THE
QUARTER ENDED SEPTEMBER 1, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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PART I
Item 1. Condensed Consolidated Financial Statements and Notes Thereto
Statements of Operations for the Quarter and Nine Months Ended
September 1, 2000 and August 27, 1999 I-1
Balance Sheets at September 1, 2000 and December 3, 1999 I-2
Statements of Cash Flows for the Nine Months Ended
September 1, 2000 and August 27, 1999 I-4
Statements of Comprehensive Income (Loss) for the Quarter and Nine
Months Ended September 1, 2000 and August 27, 1999 I-5
Notes to Financial Statements I-6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations I-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk I-28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 6. Exhibits and Reports on Form 8-K II-1
SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WASHINGTON GROUP INTERNATIONAL, INC.
(FORMERLY MORRISON KNUDSEN CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 1, 2000 AND AUGUST 27, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
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QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 1, AUGUST 27, SEPTEMBER 1, AUGUST 27,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenue $ 898,783 $ 595,414 $ 2,051,344 $ 1,584,550
Cost of revenue (851,111) (563,665) (1,945,719) (1,507,656)
----------- ----------- ----------- -----------
Gross profit 47,672 31,749 105,625 76,894
General and administrative expenses (12,869) (4,704) (24,366) (19,110)
Goodwill amortization (13,321) (4,105) (21,608) (8,400)
Integration and merger costs (10,056) -- (10,056) --
----------- ----------- ----------- -----------
Operating income 11,426 22,940 49,595 49,384
Investment income 4,433 529 5,828 2,684
Interest expense (12,854) (1,745) (17,730) (4,734)
Other income (expense), net 741 (1,399) 1,358 10,411
----------- ----------- ----------- -----------
Income before income taxes and minority interests in
income of consolidated subsidiaries 3,746 20,325 39,051 57,745
Income tax expense (1,778) (7,263) (15,510) (21,529)
Minority interests in income of consolidated subsidiaries (2,666) (792) (3,523) (1,264)
----------- ----------- ----------- -----------
Net income (loss) $ (698) $ 12,270 $ 20,018 $ 34,952
=========== =========== =========== ===========
Income (loss) per share
Basic $ (.01) $ .23 $ .38 $ .66
Diluted $ (.01) $ .23 $ .38 $ .66
----------- ----------- ----------- -----------
Common shares used to compute income (loss) per share
Basic 52,372 52,397 52,357 52,876
Diluted 52,635 52,568 52,502 53,029
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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WASHINGTON GROUP INTERNATIONAL, INC.
(FORMERLY MORRISON KNUDSEN CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 1, 2000 (UNAUDITED) AND DECEMBER 3, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
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ASSETS 2000 1999
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CURRENT ASSETS
Cash and cash equivalents $ 372,114 $ 29,640
Accounts receivable, including retentions of $59,899 and $19,704 346,690 215,523
Unbilled receivables 434,815 124,793
Inventories, net of progress payments of $27,832 and $21,926 24,030 20,096
Refundable income taxes 2,638 3,055
Investments in and advances to construction joint ventures 71,052 82,551
Deferred income taxes 42,675 41,043
Other 12,384 15,262
----------- -----------
Total current assets 1,306,398 531,963
----------- -----------
INVESTMENTS AND OTHER ASSETS
Securities available for sale, at fair value 41,774 41,640
Investments in mining ventures 64,798 69,063
Cost in excess of net assets acquired, net of accumulated
amortization of $41,557 and $21,906 1,486,092 351,869
Deferred income taxes 50,539 48,606
Other 109,678 21,114
----------- -----------
Total investments and other assets 1,752,881 532,292
----------- -----------
PROPERTY AND EQUIPMENT, AT COST
Construction equipment 303,011 183,806
Land and improvements 8,049 7,970
Buildings and improvements 36,209 17,154
Equipment and fixtures 99,204 81,694
----------- -----------
Total property and equipment 446,473 290,624
LESS ACCUMULATED DEPRECIATION (175,833) (158,856)
----------- -----------
Property and equipment, net 270,640 131,768
----------- -----------
Total assets $ 3,329,919 $ 1,196,023
=========== ===========
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
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CURRENT LIABILITIES
Current portion of long-term debt $ 4,000 $ --
Accounts and subcontracts payable, including retentions
of $55,354 and $18,469 662,322 147,631
Billings in excess of cost and estimated earnings on uncompleted contracts 746,763 53,739
Estimated costs to complete long-term contracts 292,331 72,815
Accrued salaries, wages and benefits 100,726 65,759
Income taxes payable 1,288 1,079
Other accrued liabilities 30,797 44,072
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Total current liabilities 1,838,227 385,095
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NON-CURRENT LIABILITIES
Long-term debt 693,818 100,000
Postretirement benefit obligation 82,538 80,685
Accrued workers' compensation 41,411 36,181
Pension and deferred compensation liabilities 91,621 100,116
Environmental remediation obligations 4,430 6,016
Other non-current liabilities 75,733 --
----------- -----------
Total non-current liabilities 989,551 322,998
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CONTINGENCIES AND COMMITMENTS (NOTE 5)
MINORITY INTERESTS 86,721 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 54,416 and 54,359 544 544
Capital in excess of par value 249,252 248,720
Stock purchase warrants 6,550 6,554
Retained earnings 199,715 179,696
Treasury stock, 2,019 and 2,009 shares, at cost (23,123) (23,124)
Accumulated other comprehensive loss (17,518) (9,300)
----------- -----------
Total stockholders' equity 415,420 403,090
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Total liabilities and stockholders' equity $ 3,329,919 $ 1,196,023
=========== ===========
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WASHINGTON GROUP INTERNATIONAL, INC.
(FORMERLY MORRISON KNUDSEN CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 1, 2000 AND AUGUST 27, 1999
(IN THOUSANDS)
(UNAUDITED)
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2000 1999
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OPERATING ACTIVITIES
Net income $ 20,018 $ 34,952
Adjustments to reconcile net income to cash provided (used)
by operating activities:
Depreciation of property and equipment 26,965 16,632
Amortization of goodwill 21,608 8,400
Deferred income taxes (3,543) 8,592
Minority interest in net income of consolidated subsidiaries 5,792 2,043
Equity in income of mining ventures less dividends received (4,845) (5,824)
Gain (loss) on sale of assets 547 (9,203)
Other investments and assets, net 9,045 (5,549)
Increase in net operating assets (126,413) (40,588)
--------- ---------
Net cash provided (used) by operating activities (50,826) 9,455
--------- ---------
INVESTING ACTIVITIES
Property and equipment acquisitions (28,767) (30,907)
Property and equipment disposals 5,729 3,852
Purchases of securities available for sale (20,978) (8,337)
Sale and maturities of securities available for sale 19,958 11,706
Purchase of businesses, net of cash acquired (152,603) (123,280)
Proceeds from the sales of businesses -- 25,914
--------- ---------
Net cash used in investing activities (176,661) (121,052)
--------- ---------
FINANCING ACTIVITIES
Proceeds from senior notes, less discount of $2,124 297,786 --
Proceeds from senior secured credit facilities 400,000 --
Net proceeds (repayments) on long-term revolving line of credit (100,000) 100,000
Contributions from (distributions to) minority interests 405 (3,275)
Purchase of treasury stock -- (10,164)
Financing fees (28,762) (3,774)
Other financing activities 532 222
--------- ---------
Net cash provided by financing activities 569,961 83,009
--------- ---------
Increase (decrease) in cash and cash equivalents 342,474 (28,588)
Cash and cash equivalents at beginning of period 29,640 67,054
--------- ---------
Cash and cash equivalents at end of period $ 372,114 $ 38,466
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 17,734 $ 4,598
Income tax paid (refunded), net 6,632 (3,874)
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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WASHINGTON GROUP INTERNATIONAL, INC.
(FORMERLY MORRISON KNUDSEN CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
QUARTER AND NINE MONTHS ENDED SEPTEMBER 1, 2000 AND AUGUST 27, 1999
(IN THOUSANDS)
(UNAUDITED)
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QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 1, AUGUST 27, SEPTEMBER 1, AUGUST 27,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net income (loss) $ (698) $ 12,270 $ 20,018 $ 34,952
-------- -------- -------- --------
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (2,867) 161 (8,130) (4,821)
Unrealized gains (losses) on marketable securities:
Unrealized net holding gains (losses) arising
during period 232 (109) 56 (498)
Less: Reclassification adjustment for net gains
realized in net income (33) (74) (142) (76)
-------- -------- -------- --------
Other comprehensive loss, net of tax (2,668) (22) (8,216) (5,395)
-------- -------- -------- --------
Comprehensive income (loss) $ (3,366) $ 12,248 $ 11,802 $ 29,557
======== ======== ======== ========
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
I-5
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WASHINGTON GROUP INTERNATIONAL, INC.
(FORMERLY 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 Washington Group International, Inc. (formerly 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, which was filed under the name Morrison Knudsen Corporation. The
comparative 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 nine months ended September 1, 2000 are
not necessarily indicative of the operating results to be expected for the full
year, and future operating results will not be comparable to historical
operating results as a result of the Corporation's acquisition of the Raytheon
Engineers & Constructors businesses from Raytheon Company on July 7, 2000. See
Note 4. below for a description of the acquisition, of an ongoing comprehensive
review by the Corporation of existing contracts for the purpose of making a
preliminary allocation of the acquisition price to the net assets acquired and
of preliminary adjustments made by the Corporation as a result of that review.
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 as of or for the
quarter and nine months ended September 1, 2000.
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.
CONSTRUCTION JOINT VENTURES:
The Corporation participates in construction joint ventures 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 SEPTEMBER 1, 2000 DECEMBER 3, 1999
----------------- ----------------
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Current assets $ 334,009 $ 372,772
Property and equipment, net 32,173 39,524
Current liabilities (235,307) (232,416)
--------- ---------
Net assets $ 130,875 $ 179,880
========= =========
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COMBINED RESULTS OF OPERATIONS OF CONSTRUCTION JOINT VENTURES (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 1, 2000 AUGUST 27, 1999
----------------- ---------------
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Revenue $ 680,027 $ 851,760
Cost of revenue (655,857) (796,272)
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Gross profit (excludes indirect overhead cost) $ 24,170 $ 55,488
========= =========
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CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF CONSTRUCTION
JOINT VENTURES (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 1, 2000 AUGUST 27, 1999
----------------- ---------------
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Revenue $ 288,589 $ 336,832
Cost of revenue (273,090) (315,523)
--------- ---------
Gross profit (excludes indirect overhead cost) $ 15,499 $ 21,309
========= =========
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MINING VENTURES:
At September 1, 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.
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(UNAUDITED)
COMBINED FINANCIAL POSITION OF MINING VENTURES SEPTEMBER 1, 2000 DECEMBER 3, 1999
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Current assets $ 144,288 $ 215,424
Non-current assets 94,980 100,808
Property and equipment, net 545,592 612,714
Current liabilities (52,966) (68,198)
Long-term debt (246,226) (320,113)
Other non-current liabilities (279,836) (320,104)
--------- ---------
Net assets $ 205,832 $ 220,531
========= =========
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COMBINED RESULTS OF OPERATIONS OF MINING VENTURES (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 1, 2000 AUGUST 27, 1999
----------------- ---------------
<S> <C> <C>
Revenue $ 216,411 $ 251,463
Cost of revenue (192,624) (230,209)
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Gross profit (excludes indirect overhead cost) $ 23,787 $ 21,254
========= =========
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CORPORATION'S SHARE OF RESULTS OF OPERATIONS OF MINING VENTURES (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 1, 2000 AUGUST 27, 1999
----------------- ---------------
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Revenue $ 68,156 $ 77,738
Cost of revenue (60,631) (71,142)
-------- --------
Gross profit (excludes indirect overhead cost) $ 7,525 $ 6,596
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The Corporation received dividend distributions from the mining ventures of
$2,680 during the nine months ended September 1, 2000 and $772 during the nine
months ended August 27, 1999.
4. ACQUISITIONS
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 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:
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(UNAUDITED)
NINE MONTHS ENDED AUGUST 27, 1999
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Revenue $ 1,664,206
Net income 32,982
Basic income per share .62
Diluted income per share .62
</TABLE>
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 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 reported annual revenues of approximately $2,700,000 for
the year ended December 31, 1999.
The purchase price paid at the closing of the acquisition ("Closing") for
the capital stock and other assets purchased ("RE&C businesses") was $53,000 in
cash and the assumption of net liabilities estimated by the Sellers of
approximately $450,000. The cash portion of the 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 (including an audit by
independent accountants) and related adjustments to the price paid at Closing.
In addition, the Corporation paid the Sellers $83,000 representing 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.
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.
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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 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 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,
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).
As part of the acquisition of the RE&C businesses, the Corporation
undertook a comprehensive review of existing contracts that were acquired for
the purpose of making a preliminary allocation of the acquisition price to the
net assets acquired. As part of this review, the Corporation is evaluating,
among other matters, estimates of the cost at completion for long-term contracts
in process as of the acquisition date ("Acquisition Date EAC's"). During this
process, information has come to the attention of management that has raised
questions as to whether the Acquisition Date EAC's need to be adjusted
significantly. The review process involves the analysis of an extensive amount
of supporting data and requires time consuming and careful analysis of
construction projects in various stages of completion. The Corporation has
sought the assistance of the Sellers in understanding the historical
pre-acquisition accounting data of the RECI Subsidiaries relating to the
contracts involved.
In preparing the unaudited consolidated financial information as of
September 1, 2000, the Corporation has used the most recent information and
estimates available from the ongoing review described above. Current information
available to the Corporation indicates that the Acquisition Date EAC's appear to
require substantial adjustment. As a result, the Corporation has reduced the net
assets relating to long-term contracts in the preliminary purchase price
allocation by approximately $325,000 from similar amounts set forth in the
historical pre-acquisition accounting data of the RECI Subsidiaries. The
Corporation also has made reductions in net contract assets in the preliminary
purchase price allocation of approximately $225,000. These further reductions
result from (1) application of the Corporation's method of determining progress
for contracts in process and (2) adjustment of contract balances to fair value
in order to allow for a reasonable profit margin for completing contracts in
process. The preliminary allocation has resulted in cost in excess of net assets
acquired (goodwill) of $1,181,000 being recorded.
The Corporation will adjust the preliminary allocation, as necessary, based
upon remaining procedures to be undertaken during the latter stages of the
review, including receipt of input from the Sellers. Moreover, the Stock
Purchase Agreement provides for preparation of a balance sheet in accordance
with the terms and conditions of the agreement. The agreement further provides
that if the Corporation and the Sellers do not agree on this balance sheet, any
disputed items shall be submitted to a recognized independent firm of
accountants for binding resolution. Given the nature of the matters involved, it
is possible that during the period of the review or as a result of the contract
adjustment provision described above, there will be further adjustments to the
balances set forth herein. Substantial progress has been made in completing the
review, but management cannot presently determine the final conclusions that
will be reached, the impact such conclusions will have on the determination and
allocation of the final purchase price or the resulting impact of those
determinations and allocations on the operating results for periods subsequent
to acquisition.
Because the Corporation cannot yet determine the final impact of the
matters discussed above on pro forma adjustments that would be appropriate for
the nine month periods ended September 1, 2000 and August 27, 1999,
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<PAGE>
it has not presented unaudited pro forma consolidated results of operations of
the Corporation as if the acquisition of the Westinghouse businesses and RE&C
businesses had taken place on December 1, 1998.
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
a number of 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 the EPA
nor the State has made any formal 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 September 1, 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
September 1, 2000, the Corporation had accrued approximately $303 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
I-10
<PAGE>
reimburse the issuer of such letters of credit for any payments made thereunder.
At September 1, 2000 and December 3, 1999, $41,997 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 letters of credit that were
outstanding at September 1, 2000. At September 1, 2000, $38,392 of the
outstanding letters of credit were issued under the $500,000 New Credit Facility
described in Note 8. below.
Between September 1, 2000 and the date of this report, $209,000 in face
amount of replacement letters of credit were issued under the New Credit
Facility. These letters of credit, $177,000 of which secure an advance payment
from a customer in an equal amount, were issued in connection with contract
performance obligations on contracts acquired in the acquisition of the RE&C
businesses.
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 $5,557 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.
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 the 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 quarter ended September 1, 2000, the Corporation reorganized its
business to operate through five operating units, each of which comprised a
separate reportable business segment: Power, Infrastructure & Mining,
Industrial/Process, Government and Petroleum & Chemicals. The reportable
segments were separately managed, served different markets and customers, and
differed in their expertise, technology and resources necessary to perform their
services.
I-11
<PAGE>
Power provides engineering, construction and operations and maintenance
services in both nuclear and fossil power markets for turnkey new power plant
construction, plant expansion, retrofit and modification, decontamination and
decommissioning, general planning, siting and licensing and environmental
permitting.
Infrastructure & Mining provides diverse engineering and construction and
construction management services on highways and bridges, airports and seaports,
tunnels and tube tunnels, railroad and transit lines, water storage and
transport, water treatment, site development, mine operations and hydroelectric
facilities. The group generally performs as a general contractor or as a joint
venture partner with other contractors on domestic and international projects.
Industrial/Process provides engineering, design, procurement, construction
services and total facilities management for general manufacturing,
pharmaceutical and biotechnology, process, metals processing, institutional
buildings, food and consumer products, aerospace, telecommunications and pulp
and paper.
Government provides a complete range of technical services to the U.S.
Departments of Energy and Defense, including operations and management services,
environmental and chemical demilitarization services, waste handling and storage
and weapons stockpile support. Services provided for commercial clients include
design and manufacture of components of nuclear power facilities, safety
management services, waste and environmental technology, design and manufacture
of radioactive waste containers and licensing.
Petroleum & Chemicals provides technology, engineering, procurement and
construction services to the petroleum and chemical industries worldwide. Major
markets include commodity-organic chemicals, polymers, Fischer-Tropsch
chemistry, fertilizers, oleochemicals, petroleum processing and lube oil
processing.
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 asset balances are not measures reported to the chief operating
decision-maker for purposes of making decisions about allocating resources to
segments and assessing performance. Segment operating income is total segment
revenue reduced by segment cost of revenue and goodwill amortization
identifiable to the segment. (See Note 4. above.) Goodwill amortization, except
that related to the acquisition of the Westinghouse businesses, is not allocated
to the segments. Corporate and other expense consists principally of general and
administrative expense. Geographical disclosures of long-lived assets and
operating results are impracticable for the locations above.
I-12
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
REVENUE (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
QUARTERS ENDED SEPTEMBER 1, 2000 AUGUST 27, 1999 SEPTEMBER 1, 2000 AUGUST 27, 1999
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Power
External $ 179,800 $ 14,944 $ 221,196 $ 32,201
Intersegment -- -- -- --
Infrastructure & Mining
External 218,589 195,784 609,412 567,416
Intersegment -- 192 -- 678
Industrial/Process
External 233,281 151,937 575,804 474,675
Intersegment -- (191) -- 811
Government
External 233,614 232,749 612,299 510,258
Intersegment -- -- -- --
Petroleum & Chemicals
External 34,751 -- 34,751 --
Intersegment -- -- -- --
----------- ----------- ----------- -----------
Total segments 900,035 595,415 2,053,462 1,586,039
Corporate and other (1,252) -- (2,118) --
Elimination of intersegments -- (1) -- (1,489)
----------- ----------- ----------- -----------
Total consolidated revenues $ 898,783 $ 595,414 $ 2,051,344 $ 1,584,550
=========== =========== =========== ===========
</TABLE>
I-13
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
OPERATING INCOME (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
QUARTERS ENDED SEPTEMBER 1, 2000 AUGUST 27, 1999 SEPTEMBER 1, 2000 AUGUST 27, 1999
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Gross profit
Power $ 12,963 $ 408 $ 14,962 $ 1,638
Infrastructure & Mining 11,654 12,119 34,728 32,511
Industrial/Process 14,500 3,369 26,631 12,190
Government 8,118 15,654 30,120 29,439
Petroleum & Chemicals 1,287 -- 1,287 --
Corporate and other (850) 199 (2,103) 1,116
--------- --------- --------- ---------
Total gross profit 47,672 31,749 105,625 76,894
--------- --------- --------- ---------
Corporate general and
administrative expense (12,869) (4,704) (24,366) (19,110)
--------- --------- --------- ---------
Goodwill amortization
Power -- -- -- --
Infrastructure & Mining (599) -- (798) (20)
Industrial/Process (63) -- (63) --
Government (3,448) (3,616) (10,694) (6,706)
Petroleum & Chemicals -- -- -- --
Corporate and other (9,211) (489) (10,053) (1,674)
--------- --------- --------- ---------
Total goodwill amortization (13,321) (4,105) (21,608) (8,400)
--------- --------- --------- ---------
Integration and merger costs (10,056) -- (10,056) --
--------- --------- --------- ---------
Operating income (loss)
Power 12,963 408 14,962 1,638
Infrastructure & Mining 11,055 12,119 33,930 32,491
Industrial/Process 14,437 3,369 26,568 12,190
Government 4,670 12,038 19,426 22,733
Petroleum & Chemicals 1,287 -- 1,287 --
Corporate and other (32,986) (4,994) (46,578) (19,668)
--------- --------- --------- ---------
Total operating income $ 11,426 $ 22,940 $ 49,595 $ 49,384
========= ========= ========= =========
</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 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.
I-14
<PAGE>
8. FINANCING ACTIVITIES
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 1, 2000 DECEMBER 3, 1999
----------------- ----------------
<S> <C> <C>
Senior secured credit facilities $400,000 $ --
Senior unsecured notes, net of unamortized discount 297,818 --
Unsecured revolving credit facilities -- 100,000
-------- --------
697,818 100,000
Less current portion 4,000 --
-------- --------
Net long-term debt $693,818 $100,000
======== ========
</TABLE>
Maturities of long-term debt at September 1, 2000 were as follows:
<TABLE>
<S> <C>
2001 $ 4,000
2002 4,000
2003 4,000
2004 4,000
2005 4,000
Thereafter 673,818
--------
$693,818
========
</TABLE>
CREDIT FACILITIES AND ACQUISITION FINANCING:
Prior to the acquisition of the RE&C businesses, 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 revolving
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 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 matures July 7, 2005 and a Tranche B term loan facility in an
aggregate principal amount of $400,000 that matures 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 is 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 the
applicable LIBOR or base rate plus an additional margin, currently at 3.25% and
2.25%, respectively. The effective interest rate was 9.87% at September 1, 2000.
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. On October
5, 2000, the Corporation terminated the Tranche A term loan facility due to its
determination that near term borrowing capacity is sufficient and to eliminate
ongoing related commitment fees.
I-15
<PAGE>
SENIOR NOTES: The Senior Notes are unsecured senior obligations that mature
on July 1, 2010. Interest on the Senior Notes is payable semiannually in arrears
on January 1 and July 1, commencing January 1, 2001. The Senior Notes were sold
in a private offering to qualified institutional buyers. Under a registration
rights agreement for the benefit of the holders of the Senior Notes, the
Corporation is required to offer to exchange the Senior Notes for new Senior
Notes that are registered under the Securities Act of 1933. The Senior Notes
provide for additional interest to the extent and for the period that the
registration process is not completed within the specified periods. The Senior
Notes accrued interest at a rate of 11% per annum through September 20, 2000,
and currently accrue interest at 11.5% per annum. They will continue at that
rate until the Corporation fully complies with the registration requirements of
the registration rights agreement, subject to a further increase in interest
rate of .5% per annum from and after December 20, 2000, until the registration
process is completed. At that time, the Senior Notes will again accrue interest
at the annual rate of 11%. 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 indenture 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 or liens, provide guarantees, make investments and pay dividends or
repurchase shares.
I-16
<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
WASHINGTON GROUP INTERNATIONAL, INC. (FORMERLY 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. IN PARTICULAR, STATEMENTS RELATING TO THE
ONGOING REVIEW OF EXISTING CONTRACTS ACQUIRED IN CONNECTION WITH THE ACQUISITION
OF THE RAYTHEON ENGINEERS & CONSTRUCTORS BUSINESSES ("RE&C BUSINESSES"), THE
PRELIMINARY ALLOCATIONS OF PURCHASE PRICE PAID IN THE ACQUISITION, AWARDS OF NEW
CONTRACTS, ESTIMATES OF FUTURE CAPITAL EXPENDITURES, EXPECTATIONS WITH RESPECT
TO THE IMPACT OF CONTINGENCIES, AND LIQUIDITY ARE 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, THE FUTURE RESULTS
OF THE ONGOING REVIEW OF CONTRACTS ACQUIRED WITH THE RE&C BUSINESSES AS
DESCRIBED HEREIN, THE SUCCESSFUL INTEGRATION OF THE RE&C BUSINESSES, 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 RE&C businesses 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 businesses for those periods, and is not indicative of the results of
operations, financial position or cash flows the Corporation may report in the
future. Furthermore, as described under "Recent Developments - Acquisition of
Raytheon Engineers & Constructors," the Corporation has not yet completed its
review of existing contracts that were acquired or made a final allocation of
the purchase price to the net assets that were acquired. Accordingly, it is not
possible to predict the final conclusions that will be reached upon completion
of the ongoing review or the resulting impact of its conclusions and allocation
of purchase price on results of operations or cash flows for future periods or
financial condition at future dates.
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 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 reported annual revenues of approximately $2,700 million
for the year ended December 31, 1999.
The purchase price paid at the closing of the acquisition ("Closing") for
the capital stock and other assets purchased ("RE&C businesses") was $53 million
in cash and the assumption of net liabilities estimated by the
I-17
<PAGE>
Sellers of approximately $450 million. The cash portion of the 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 (including an audit by
independent accountants) and related adjustments to the price paid at Closing.
In addition, the Corporation paid the Sellers $83 million representing 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.
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 $30.8 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 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 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,
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).
As part of the acquisition of the RE&C businesses, the Corporation
undertook a comprehensive review of existing contracts that were acquired for
the purpose of making a preliminary allocation of the acquisition price to the
net assets acquired. As part of this review, the Corporation is evaluating,
among other matters, estimates of the cost at completion for long-term contracts
in process as of the acquisition date ("Acquisition Date EAC's"). During this
process, information has come to the attention of management that has raised
questions as to whether the Acquisition Date EAC's need to be adjusted
significantly. The review process involves the analysis of an extensive amount
of supporting data and requires time consuming and careful analysis of
construction projects in various stages of completion. The Corporation has
sought the assistance of the Sellers in understanding the historical
pre-acquisition accounting data of the RECI Subsidiaries relating to the
contracts involved.
In preparing the unaudited consolidated financial information as of
September 1, 2000, the Corporation has used the most recent information and
estimates available from the ongoing review described above. Current information
available to the Corporation indicates that the Acquisition Date EAC's appear to
require substantial adjustment. As a result, the Corporation has reduced the net
assets relating to long-term contracts in the preliminary purchase price
allocation by approximately $325 million from similar amounts set forth in the
historical pre-acquisition accounting data of the RECI Subsidiaries. The
Corporation also has made reductions in net contract assets in the preliminary
purchase price allocation of approximately $225 million. These further
reductions result from (1) application of the Corporation's method of
determining progress for contracts in process and (2) adjustment of contract
balances to fair value in order to allow for a reasonable profit margin for
completing contracts in process. The preliminary allocation has resulted in cost
increases of net assets acquired (goodwill) of $1,181 million being recorded.
I-18
<PAGE>
The Corporation will adjust the preliminary allocation, as necessary, based
upon remaining procedures to be undertaken during the latter stages of the
review, including receipt of input from the Sellers. Moreover, the Stock
Purchase Agreement provides for preparation of a balance sheet in accordance
with the terms and conditions of the agreement. The agreement further provides
that if the Corporation and the Sellers do not agree on this balance sheet, any
disputed items shall be submitted to a recognized independent firm of
accountants for binding resolution. Given the nature of the matters involved, it
is possible that during the period of the review or as a result of the contract
adjustment provision described above, there will be further adjustments to the
balances set forth herein. Substantial progress has been made in completing the
review, but management cannot presently determine the final conclusions that
will be reached, the impact such conclusions will have on the determination and
allocation of the final purchase price or the resulting impact of those
determinations and allocations on the operating results for periods subsequent
to acquisition.
Because the Corporation cannot yet determine the final impact of the
matters discussed above on pro forma adjustments that would be appropriate for
the nine month periods ended September 1, 2000 and August 27, 1999, it has not
presented unaudited pro forma consolidated results of operations of the
Corporation as if the acquisition of the Westinghouse businesses and RE&C
businesses had taken place on December 1, 1998.
ACQUISITION FINANCING:
On July 7, 2000, in order to finance the acquisition of the RE&C
businesses, 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 senior notes due July 1, 2010 (the "Senior Notes").
RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 1, 2000 COMPARED TO
THE QUARTER AND NINE MONTHS ENDED AUGUST 27, 1999
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
(IN MILLIONS) SEPTEMBER 1, 2000 AUGUST 27, 1999 SEPTEMBER 1, 2000 AUGUST 27, 1999
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Revenue $ 898.8 $ 595.4 $ 2,051.3 $ 1,584.6
Gross profit 47.7 31.7 105.6 76.9
General and administrative expenses (12.9) (4.7) (24.4) (19.1)
Goodwill amortization (13.3) (4.1) (21.6) (8.4)
Integration and merger costs (10.1) -- (10.1) --
Investment income 4.4 .5 5.8 2.7
Interest expense (12.9) (1.7) (17.7) (4.7)
Other income (expense), net .7 (1.4) 1.4 10.4
Income before income tax and minority
interests 3.7 20.3 39.1 57.7
Income tax expense (1.8) (7.3) (15.5) (21.5)
Minority interests (2.7) (.8) (3.5) (1.3)
Net income (loss) (.7) 12.3 20.0 35.0
----------------- --------------- ----------------- ---------------
</TABLE>
REVENUE AND GROSS PROFIT:
Revenue for the quarter and nine months ended September 1, 2000 increased
51% and 29% to $898.8 million and $2,051.3 million, respectively, from the
comparable periods of 1999. Revenue for the third quarter increased due to the
acquisition of the RE&C businesses. Excluding the RE&C businesses, revenue
declined 11% in the third quarter 2000 from the same period in 1999. The decline
resulted from a 22% increase in Industrial/Process
I-19
<PAGE>
projects, offset by a 30% decline in revenue in Government from a reduction in
scope of three remediation contracts and a 17% decline in Infrastructure &
Mining from the completion of several heavy civil projects. The Westinghouse
businesses and the concurrent formation of the Corporation's Westinghouse
Government Services Group ("WGSG") on March 22, 1999 also had a significant
increase on revenue for the nine months ended September 1, 2000. The results of
operations for WGSG are included in the Corporation's results of operations for
the nine months ended September 1, 2000 but were absent for the period December
1, 1998 to March 21, 1999.
Gross profit increased $15.9 million and $28.7 million for the quarter and
nine months ended September 1, 2000 primarily due to the addition of the RE&C
businesses, improved performance-based incentives earned in Government and
improved performance on a number of heavy civil, mining and international
projects in Infrastructure & Mining. The Corporation's gross profit as a percent
of revenue was 5.3% and 5.1% for the quarter and nine months ended September 1,
2000, respectively, and 5.3% and 4.9% for the comparable period of 1999. The
third quarter of 2000 included charges on two contracts of $22.5 million offset
by an insurance recovery of $4.5 million for a pretax charge of $(18.0) million.
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 September 1, 2000, backlog of $6,673 million was comprised of $2,595
million (39%) from fee-type contracts and $4,078 million (61%) from fixed-price
contracts and the Corporation's share from mining ventures.
GENERAL AND ADMINISTRATIVE EXPENSE:
General and administrative expense of $12.9 million and $24.4 million for
the quarter and nine months ended September 1, 2000 increased $8.2 million and
$5.3 million from the comparable periods of 1999. The increases in the quarter
relate to the general and administrative costs for the RE&C businesses and
increased information systems costs. The nine months ended August 27, 1999
included costs for key executive retirement and key executive recruitment.
GOODWILL AMORTIZATION:
Amortization of cost in excess of net assets acquired ("goodwill") for the
quarter and nine months ended September 1, 2000 was $13.3 million and $21.6
million, an increase of $9.2 million and $13.2 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, and the
amortization of goodwill arising from the acquisition of the RE&C businesses,
which amortization began on July 7, 2000, the date of acquisition. The goodwill
arising from the acquisition of the RE&C businesses will not be finally
determined until, among other things, the Corporation completes the review
described under "Recent Developments - Acquisition of Raytheon Engineers &
Constructors."
INTEGRATION AND MERGER COSTS:
During the third quarter ended September 1, 2000, the Corporation wrote off
$3.3 million of deferred bank fees related to the revolving credit facilities
that were refinanced and incurred $4.2 million for comitment, administrative and
bank fees for an unused bridge loan facility in connection with the July 7, 2000
purchase of the RE&C businesses and the related acquisition financing and
refinancing of the Corporation's prior lines of credit.
I-20
<PAGE>
INVESTMENT INCOME:
Investment income for the quarter and nine months ended September 1, 2000
increased $3.9 million and $3.1 million, respectively, from the comparable
periods in 1999 as a result of the investment of excess funds derived from the
financing for the acquisition of the RE&C businesses.
INTEREST EXPENSE:
Interest expense increased $11.2 million and $13.0 million for the quarter
and nine months ended September 1, 2000, respectively, from the comparable
periods of 1999 which reflects the increase in borrowings and the increase in
borrowing rates related to the acquisition of the RE&C businesses.
OTHER INCOME (EXPENSE), NET:
Other income (expense) was $.7 million and $1.4 million for the quarter and
nine months ended September 1, 2000 compared to $(1.4) million for the quarter
and $10.4 million for the nine months ended August 27, 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 nine months ended September 1,
2000 was 47.5% and 39.7% compared to 35.7% and 37.3% for the comparable periods
of 1999 due to a slightly higher proportion of non-deductible expenses to pretax
income. For 1999, the Corporation realized a reduction in the effective 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 nine months ended September 1, 2000 increased to $2.7 million and
$3.5 million, respectively, compared to $.8 million and $1.3 million for the
quarter and nine months ended August 27, 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>
QUARTER ENDED NINE MONTHS ENDED
REVENUE SEPTEMBER 1, AUGUST 27, SEPTEMBER 1, AUGUST 27,
QUARTER AND NINE MONTHS ENDED 2000 1999 2000 1999
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Power $ 180 $ 15 $ 221 $ 32
Infrastructure & Mining 218 196 609 567
Industrial/Process 233 151 576 475
Government 234 233 612 510
Petroleum & Chemicals 35 -- 35 --
Intersegment and other (1) -- (2) --
------- ------- ------- -------
Total revenue $ 899 $ 595 $ 2,051 $ 1,584
======= ======= ======= =======
</TABLE>
I-21
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
OPERATING INCOME SEPTEMBER 1, AUGUST 27, SEPTEMBER 1, AUGUST 27,
QUARTER AND NINE MONTHS ENDED 2000 1999 2000 1999
------------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
Power $ 13 $ 1 $ 15 $ 2
Infrastructure & Mining 12 12 35 33
Industrial/Process 15 3 27 12
Government 8 16 30 29
Petroleum & Chemicals 1 -- 1 --
Intersegment and other (1) -- (2) 1
----- ----- ----- -----
Total segment operating income 48 32 106 77
----- ----- ----- -----
General and administrative expense (13) (5) (24) (19)
----- ----- ----- -----
Total goodwill amortization (14) (4) (22) (9)
----- ----- ----- -----
Integration and merger costs (10) -- (10) --
----- ----- ----- -----
Total operating income $ 11 $ 23 $ 50 $ 49
===== ===== ===== =====
</TABLE>
POWER:
Revenue for the quarter and nine months ended September 1, 2000 were $180
million and $221 million, respectively, increases of $165 million and $189
million, respectively, compared to the quarter and nine months ended August 27,
1999. The increase in revenue for the quarter and nine months was due
principally to the acquisition of the RE&C businesses.
Gross profit for the quarter and nine months ended September 1, 2000 were
$13.0 million and $15.0 million, respectively, increases of $12.6 million and
$13.3 million, respectively, compared to the quarter and nine months ended
August 27, 1999. The increase in gross profit for the quarter and nine months
was principally from the acquisition of the RE&C businesses. Included in the
third quarter of 2000 was a $7.5 million loss recorded on a power project that
was near completion. The gross profit rates for the quarter and nine months
ended September 1, 2000 were 7.2% and 6.8%, respectively, compared to 2.8% and
5.1% for the same periods in 1999.
New work booked for the quarter and nine months ended September 1, 2000
were $27 million and $72 million, respectively. Backlog at September 1, 2000 was
$1,644 million, an increase of $1,378 million compared to August 27, 1999. Of
the increase, $1,378 million was attributable to the addition of the RE&C
businesses.
INFRASTRUCTURE & MINING:
Revenue for the quarter and nine months ended September 1, 2000 were $218
million and $609 million, respectively, increases of $22 million and $42
million, respectively, compared to the quarter and nine months ended August 27,
1999. The increase in revenue for the quarter was due principally to the
acquisition of the RE&C businesses, which provided $56 million in the quarter
and nine months ended September 1, 2000. Excluding the RE&C businesses, revenues
declined by $33 million from third quarter 1999 reflecting lower revenues from
heavy civil construction projects.
Gross profit for the quarter and nine months ended September 1, 2000 were
$11.7 million and $34.7 million, respectively, a decline of $.4 million and an
increase of $2.2 million, respectively, compared to the quarter and nine months
ended August 27, 1999. Gross profit rates for the quarter and nine month period
ended September 1, 2000 were 5.3% and 5.7%, respectively, compared to 6.2% and
5.7% for the same periods in 1999. Third quarter of 1999 included the settlement
of a royalty issue of $3.2 million. The nine months ended September 1, 2000
includes a second quarter $4.0 million settlement on an international contract
and an elimination of $3.9 million provision for loss related to a fixed-price
contract.
I-22
<PAGE>
New work booked for the quarter and nine months ended September 1, 2000
were $169 million and $503 million. Backlog at September 1, 2000 was $2,247
million, an increase of $799 million from August 27, 1999. Of the increase, $781
million was attributable to the addition of the RE&C businesses.
INDUSTRIAL/PROCESS:
Revenue for the quarter and nine months ended September 1, 2000 were $233
million and $576 million, respectively, increases of $82 million and $101
million, respectively, compared to the quarter and nine months ended August 27,
1999. The increase in revenue for the quarter was due principally to the
acquisition of the RE&C businesses.
Gross profit for the quarter and nine months ended September 1, 2000 were
$14.5 million and $26.6 million, respectively, increases of $11.1 million and
$14.4 million, respectively, compared to the quarter and nine months ended
August 27, 1999. Increases in gross profit for the quarter and nine months were
primarily from the acquisition of the RE&C businesses. The third quarter of 2000
included a $4.5 million positive insurance settlement. Gross profit rates for
the quarter and nine months ended September 1, 2000 were 6.2% and 4.6%,
respectively, compared to 2.2% and 2.6% for the same periods in 1999.
New work booked for the quarter and nine months ended September 1, 2000
were $176 million and $590 million, respectively. Backlog at September 1, 2000
was $715 million, an increase of $218 million compared to August 27, 1999. Of
the increase, $188 million was attributable to the addition of the RE&C
businesses.
GOVERNMENT:
Revenue for the quarter and nine months ended September 1, 2000 were $234
million and $612 million, respectively, increases of $1 million and $102
million, respectively, compared to the quarter and nine months ended August 27,
1999. The increase in revenue for the nine month period was due principally to
the acquisition of the Westinghouse businesses on March 22, 1999.
Gross profit for the quarter and nine months ended September 1, 2000 were
$8.1 million and $30.1 million, respectively, a decrease of $7.5 million and an
increase of $.7 million, respectively, compared to the quarter and nine months
ended August 27, 1999. Gross profit rates for the quarter and nine months ended
September 1, 2000 were 3.5% and 4.9%, respectively, compared to 6.7% and 5.8%
for the same periods in 1999. The quarter and nine months ended September 1,
2000 included a charge on a construction contract of $15.0 million. Excluding
the charge, strong performance resulted from improved performance-based
incentives partially offset by higher bid and proposal costs.
New work booked for the quarter and nine months ended September 1, 2000
were $76 million and $257 million, respectively. Backlog at September 1, 2000
was $1,635 million, an increase of $634 million compared to August 27, 1999. Of
the increase, $788 million was attributable to the addition of the RE&C
businesses.
PETROLEUM & CHEMICALS:
The Corporation had no revenue or gross profit from this segment except
that which it acquired in the purchase of the RE&C businesses. Accordingly,
revenue for the quarter and nine months ended September 1, 2000 was $35 million.
Gross profit for the quarter and nine months ended September 1, 2000 was $1.3
million. Gross profit rates for the quarter and nine months ended September 1,
2000 were 3.7%.
New work booked for the quarter and nine months ended September 1, 2000 was
$3 million. Backlog at September 1, 2000 was $432 million.
I-23
<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 NINE MONTHS ENDED
SEPTEMBER 1, AUGUST 27, SEPTEMBER 1, AUGUST 27,
QUARTER AND NINE MONTHS ENDED 2000 1999 2000 1999
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Power $ 27 $ 111 $ 72 $ 157
Infrastructure & Mining 169 247 503 540
Industrial/Process 176 128 590 474
Government 76 258 257 312
Petroleum & Chemicals 3 -- 3 (1)
------- ------- ------- -------
Total new work $ 451 $ 744 $ 1,425 $ 1,482
======= ======= ======= =======
</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) SEPTEMBER 1, 2000 AUGUST 27, 1999
----------------- ---------------
<S> <C> <C>
Cash and cash equivalents
Beginning of period $ 29,640 $ 67,054
End of period 372,114 38,466
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 1, 2000 AUGUST 27, 1999
----------------- ---------------
<S> <C> <C>
Net cash provided (used) by:
Operating activities $ (50,826) $ 9,455
Investing activities (176,661) (121,052)
Financing activities 569,961 83,009
</TABLE>
Cash and cash equivalents increased $342.5 million to $372.1 million at
September 1, 2000 from $29.6 million at December 3, 1999. The increase reflects
net cash used by operating activities and investing activities of $50.8 million
and $176.7 million, offset by net cash provided by financing activities of $570
million. The net cash used by operating activities during the nine months ended
September 1, 2000 was $50.8 million compared to a net provided of $9.5 million
during the same period of 1999, primarily as a result of additional construction
joint-venture cash requirements and other working capital requirements relating
to the acquisition of the RE&C businesses in 2000. 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 nine months ended September
1, 2000 included $152.6 million relating to the acquisition of the RE&C
businesses, $23.0 million of net purchases of property and equipment and $1.0
million of net purchases of marketable securities. Net cash provided by
financing activities included $569 million in proceeds from debt issued in
connection with the acquisition of the RE&C businesses net of the related
financing fees and payoff of the $100 million prior revolving credit facility.
Cash flow for the nine months ended
I-24
<PAGE>
August 27, 1999 reflects $123.3 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, $27.1 million of net
purchases of property and equipment, $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 during the 1999 period
included $100.0 million of net borrowings under the Corporation's then-existing
credit facilities, $10.2 million used for the repurchase of 1,026,900 shares of
the Corporation's common stock for treasury and $3.3 million of distributions
paid on account of minority interests in the operations of WGSG.
On July 7, 2000, the Corporation borrowed net proceeds of $697.8 million
consisting of $400 million from the Tranche B term loan facility and $297.8
million in net proceeds from the senior unsecured notes. The proceeds were used
to repay approximately $100 million outstanding under the prior credit facility,
pay financing fees of approximately $29 million for the New Credit Facilities,
fund the $53 million cash component of the purchase price for the RE&C
businesses, the $30.8 million paid to the Sellers for cash held in the RECI
Subsidiaries and the $83 million paid to the Sellers representing the net cash
advanced or paid by the Sellers for the use or benefit of the purchased business
between April 30, 2000 and Closing. Approximately $160 million has been used to
fund permanent working capital of the RE&C businesses. The balance remains in
cash and is anticipated to be used for working capital requirements of the
Corporation.
The Corporation anticipates capital expenditures during the remainder of
2000 of approximately $10 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 September 1, 2000, the Corporation had not repurchased any shares or warrants
under the authorizations. Subject to market conditions and other factors,
purchases of shares or warrants may be commenced, discontinued and resumed from
time to time without prior notice. The repurchase by the Corporation of its
common stock or warrants is restricted under the New Credit Facilities and the
indenture relating to the Senior Notes.
CREDIT FACILITIES AND ACQUISITION FINANCING:
Prior to the acquisition of the RE&C businesses, the Corporation had
uncollateralized revolving credit facilities providing an aggregate borrowing
capacity of $325 million, of which $99.9 million was outstanding at June 2,
2000. On July 7, 2000, in order to finance such acquisition, refinance such
existing revolving 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 million of term loans
and revolving borrowing capacity (the "New Credit Facilities") and (ii) issued
and sold $300 million aggregate principal amount of 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 million, including a
multi-draw Tranche A term loan facility in an aggregate principal amount of $100
million that matures July 7, 2005 and a Tranche B term loan facility in an
aggregate principal amount of $400 million that matures July 7, 2007, and (ii) a
five-year senior secured revolving credit facility in an aggregate principal
amount of up to $500 million, all of which is available in the form of letters
of credit. Initial borrowings under the New Credit Facilities totaled $400
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
the applicable LIBOR or base rate plus an additional margin, currently at 3.25%
and 2.25%, respectively. The effective interest rate was 9.87% at September 1,
2000. 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
I-25
<PAGE>
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. On October 5, 2000, the Corporation
terminated the Tranche A term loan facility due to its determination that near
term borrowing capacity is sufficient and to eliminate ongoing related
commitment fees.
SENIOR NOTES: The Senior Notes are unsecured senior obligations that mature
on July 1, 2010. Interest on the Senior Notes is payable semiannually in arrears
on January 1 and July 1, commencing January 1, 2001. The Senior Notes were sold
in a private offering to qualified institutional buyers. Under a registration
rights agreement for the benefit of the holders of the Senior Notes, the
Corporation is required to offer to exchange the Senior Notes for new Senior
Notes that are registered under the Securities Act of 1933. The Senior Notes
provide for additional interest to the extent and for the period that the
registration process is not completed within the specified periods. The Senior
Notes accrued interest at a rate of 11% per annum through September 20, 2000,
and currently accrue interest at 11.5% per annum. They will continue at that
rate until the Corporation fully complies with the registration requirements of
the registration rights agreement, subject to a further increase in interest
rate of .5% per annum from and after December 20, 2000, until the registration
process is completed. At that time, the Senior Notes will again accrue interest
at the annual rate of 11%. 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 indenture 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 or liens, provide guarantees, make investments and pay dividends or
repurchase shares.
The Corporation is subject to foreign currency translation and exchange
issues, primarily with regard to its mining venture, MIBRAG mbH, in Germany. At
September 1, 2000, the cumulative adjustments for translation losses net of
related income tax benefits was $8.1 million. The Corporation realized a pretax
gain on foreign currency exchange transactions of $244 thousand for the nine
months ended September 1, 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 September 1, 2000 was $6,673
million, compared with $3,328 million at December 3, 1999. New work awarded in
the quarter and nine months ended September 1, 2000 totaled $450 million and
$1,423 million compared with $744 million and $1,482 million for the quarter and
nine months ended August 27, 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.
I-26
<PAGE>
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.
I-27
<PAGE>
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
September 1, 2000, the Corporation had $231,784 of short-term investments
classified as cash equivalents and $41,774 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.
I-28
<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 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
WASHINGTON GROUP INTERNATIONAL, INC.
(formerly Morrison Knudsen Corporation)
/s/ Anthony S. Cleberg
----------------------------------
Anthony S. Cleberg
Executive Vice President and Chief
Financial Officer, in his respective
capacities as such
Date: October 23, 2000
II-1
<PAGE>
WASHINGTON GROUP INTERNATIONAL, INC.
(FORMERLY 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.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<S> <C>
10.1* Schedule listing directors and executive officers with whom the
Corporation has entered into Indemnification Agreements.** (The form
of the Indemnification Agreement is filed as Exhibit 10.20 to the
Corporation's Form 10-K Annual Report for fiscal year ended November
30, 1996 and is incorporated herein by reference.)
10.2* The Corporation's Nonqualified Stock Option Plan Agreement with Dennis
R. Washington dated July 7, 2000.**
27.* Financial Data Schedule.
</TABLE>
-------------------
* Filed herewith.
** Management contract or compensatory plan.
E-1
