UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1999
---------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------------- to------------------
Commission File Number: 0-22992
---------------------------------------------
The Shaw Group Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Louisiana 72-1106167
------------------------------ ----------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
8545 United Plaza Boulevard, Baton Rouge, Louisiana 70809
- --------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(225) 932-2500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares outstanding of each of the issuer's classes of common stock
as of the latest practicable date, is as follows:
Common stock, no par value, 11,709,985 shares outstanding as of July 8, 1999.
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
Part I - Financial Information
Item 1. - Financial Statements
Condensed Consolidated Balance Sheets - August 31, 1998
and May 31, 1999 3 - 4
Condensed Consolidated Statements of Income - For the
Three Months and Nine Months Ended May 31, 1998 and 1999 5
Condensed Consolidated Statements of Cash Flows - For the
Nine Months Ended May 31, 1998 and 1999 6
Notes to Condensed Consolidated Financial Statements 7 - 10
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 18
Item 3. - Quantitative and Qualitative Disclosures About
Market Risk 18
Part II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 19
Item 6. - Exhibits and Reports on Form 8-K 19
Signature Page 20
Exhibit Index 21
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
August 31, May 31,
1998 1999
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,743 $ 3,834
Accounts receivable, net 140,631 126,988
Receivables from unconsolidated entity 1,758 4,176
Inventories 65,861 66,610
Cost and estimated earnings in excess of billings
on uncompleted contracts 19,797 19,468
Other current assets 19,204 21,374
------- -------
Total current assets 250,994 242,450
Investment in unconsolidated entity 3,965 4,373
Investment in securities available for sale -- 13,186
Property and equipment, less accumulated depreciation
of $25,050 at August 31, 1998 and $32,703 at
May 31, 1999, respectively 92,860 97,937
Goodwill, net of accumulated amortization of $1,430 at
August 31, 1998 and $2,801 at May 31, 1999, respectively 33,356 32,073
Other assets 8,669 8,135
-------- --------
$389,844 $398,154
======== ========
</TABLE>
(Continued)
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
August 31, May 31,
1998 1999
------------ -----------
<S> <C> <C>
Current liabilities:
Outstanding checks in excess of bank balance $ 4,009 $ 10,602
Accounts payable 45,307 24,903
Accrued liabilities 24,831 26,032
Current maturities of long-term debt 9,314 8,310
Revolving lines of credit 20,898 47,401
Deferred revenue - prebilled 1,813 2,519
Advanced billings and billings in excess of cost and
estimated earnings on uncompleted contracts 14,367 13,988
------ ------
Total current liabilities 120,539 133,755
Long-term debt, less current maturities 91,715 89,230
Deferred income taxes 6,895 6,820
Commitments and contingencies -- --
Shareholders' equity:
Common stock, no par value,
13,279,866 and 11,709,985 shares outstanding, respectively 119,360 119,128
Retained earnings 58,950 71,321
Accumulated other comprehensive income (loss) (420) (1,418)
Unearned restricted stock compensation (367) (157)
Treasury stock, 6,662,916 and 8,221,547 shares, respectively (6,828) (20,525)
--------- --------- -------- --------
Total shareholders' equity 170,695 168,349
-------- --------
$389,844 $398,154
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Income:
Sales $143,561 $125,426 $373,791 $354,293
Cost of sales 120,921 100,889 311,075 286,299
-------- -------- -------- --------
Gross profit 22,640 24,537 62,716 67,994
General and administrative expenses 12,460 14,723 34,731 42,998
------- -------- -------- --------
Operating income 10,180 9,814 27,985 24,996
Interest expense (2,344) (2,491) (6,245) (7,374)
Other income (expense), net 655 218 881 267
------- -------- -------- --------
(1,689) (2,273) (5,364) (7,107)
Income before income taxes 8,491 7,541 22,621 17,889
Provision for income taxes 2,711 2,579 6,852 5,926
------- -------- -------- --------
Income from continuing operations before
earnings from unconsolidated entity 5,780 4,962 15,769 11,963
Earnings (losses) from unconsolidated entity (11) 263 113 408
------- -------- -------- --------
Income from continuing operations 5,769 5,225 15,882 12,371
Earnings from discontinued operations,
net of taxes 209 -- 138 --
-------- -------- -------- --------
Net income $ 5,978 $ 5,225 $ 16,020 $ 12,371
======== ======== ======== ========
Basic income per common share:
Number of shares 12,559 11,734 12,533 12,001
Income from continuing operations $ .46 $ .45 $ 1.27 $ 1.03
Income from discontinued operations .02 -- .01 --
-------- -------- -------- --------
Net income per common share $ .48 $ .45 $ 1.28 $ .03
======== ======== ======== ========
Diluted income per common share:
Number of shares 12,779 12,214 12,766 12,329
Income from continuing operations $ .45 $ .43 $ 1.24 $ 1.00
Income from discontinued operations .02 -- .01 --
-------- -------- -------- --------
Net income per common share $ .47 $ .43 $ 1.25 $ 1.00
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
May 31,
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,020 $ 12,371
Depreciation and amortization 6,803 9,767
Other (574) (620)
Changes in assets and liabilities (excluding cash and
those relating to investing and financing activities) (37,223) (12,180)
------- -------
Net cash provided by (used in) operating activities (14,974) 9,338
Cash flows from investing activities:
Investment in subsidiaries, net of cash received (26,126) --
Investment in securities available for sale -- (13,186)
Purchases of property and equipment (9,969) (12,931)
Proceeds from sale of property and equipment 3,370 1,252
------ -------
Net cash used in investing activities (32,725) (24,865)
Cash flows from financing activities:
Net increase in outstanding checks
in excess of bank balance 10,658 6,566
Net proceeds (repayments) on revolving credit agreements (15,039) 26,644
Proceeds from issuance of debt 62,188 5,555
Repayment of debt and leases (11,108) (9,044)
Purchases of treasury stock -- (13,697)
Issuance of common stock 513 23
------ -------
Net cash provided by financing activities 47,212 16,047
Effect of exchange rate changes on cash (80) (429)
------ -------
Net increase (decrease) in cash and cash equivalents (567) 91
Cash and cash equivalents - beginning of period 4,358 3,743
------- -------
Cash and cash equivalents - end of period $ 3,791 $ 3,834
======= =======
Supplemental disclosures:
Noncash investing and financing activities:
Investment in subsidiary acquired through issuance of debt $ 4,702 $ --
======= =======
Property and equipment acquired through reduction in cost and
estimated earnings in excess of billings on uncompleted contracts $ -- $ 3,000
======= =======
Property and equipment acquired through issuance of debt $ 85 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Unaudited Financial Information -
The financial information for the three-month and nine-month periods ended
May 31, 1998 and 1999 and as of August 31, 1998 and May 31, 1999 included herein
is unaudited; however, such information reflects, in the opinion of management,
all adjustments (consisting solely of normal recurring adjustments) that are
necessary to present fairly the results of operations for such periods. Results
of operations for the interim period are not necessarily indicative of results
of operations that will be realized for the fiscal year ending August 31, 1999.
Certain reclassifications have been made to the prior year's financial
statements in order to conform to current reporting practices.
Note 2 - Inventories
The major components of inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
August 31, 1998 May 31, 1999
--------------------------------- ----------------------------------
Weighted Weighted
Average FIFO TOTAL Average FIFO TOTAL
------- ---- ----- ------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Finished Goods $28,671 $ -- $28,671 $28,013 $ -- $28,013
Raw Materials 3,162 25,937 29,099 3,085 28,439 31,524
Work In Process 1,914 6,177 8,091 1,405 5,668 7,073
----- ----- ----- ----- ----- -----
$33,747 $32,114 $65,861 $32,503 $34,107 $66,610
======= ======= ======= ======= ======= =======
</TABLE>
Note 3 - Earnings Per Common Share -
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per common share were determined on the assumptions that all
dilutive stock options were exercised and stock was repurchased using the
treasury stock method, at the average price for each period. The Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," effective December 15, 1997. As a result, the Company's reported
earnings per share for prior periods were restated to conform to the
requirements of SFAS No. 128. The effect of this adoption on previously reported
earnings per share data was not significant.
At May 31, 1998 and 1999, the Company had dilutive stock options of 381,253
and 1,138,500, respectively, which were assumed exercised using the treasury
stock method. The resulting diltuive common equivalent shares were used in the
calculation of diluted income per common share for each period. Additionally,
the Company had 74,341 and 65,371 of stock options at May 31, 1998 and 1999,
respectively, which were excluded from the calculation of diluted income per
share because they were antidilutive.
The weighted average common shares outstanding for the quarters ended May
31, 1998 and 1999 were 12,558,907 and 11,734,204, respectively. Dilutive common
equivalent shares for the quarters ended May 31, 1998 and 1999 were 220,243 and
479,422, respectively, all attributable to stock options.
7
<PAGE>
The weighted average common shares outstanding for the nine months ended
May 31, 1998 and 1999 were 12,533,485 and 12,000,775, respectively. Dilutive
common equivalent shares for the nine months ended May 31, 1998 and 1999 were
232,016 and 328,135, respectively, all attributable to stock options.
Note 4 - Acquisitions -
On October 8, 1997, the Company purchased the capital stock of Pipework
Engineering and Developments Limited (PED), a pipe fabrication company in
Wolverhampton, United Kingdom, for $539,000 in cash, net of cash received, and
notes payable to former stockholders of $1,078,000. The Company incurred
acquisition costs of approximately $160,000. The purchase method was used to
account for the acquisition. Goodwill, which is being amortized over 20 years
using the straight-line method, was approximately $1,600,000. The operating
results of PED have been included in the condensed consolidated statements of
income of the Company from the date of acquisition. The pro-forma effect of the
acquisition of PED, had it occurred on September 1, 1997, is not material to the
operations of the Company.
On November 14, 1997, the Company purchased all of the capital stock or
substantially all of the assets of the principal operating businesses of
Prospect Industries plc (Prospect) of Derby, United Kingdom, for approximately
$14,600,000 in cash, net of cash received. The Company incurred acquisition
costs of approximately $2,000,000. Prospect, a mechanical contractor and
provider of turnkey piping systems serving the power generating and process
industries worldwide, operated through several wholly-owned subsidiaries
including Connex Pipe Systems, Inc. (Connex), a piping systems fabrication
business located in Troutville, Virginia; Aiton Australia Pty Limited (Aiton
Australia), a piping systems, boiler refurbishment and project management
company based near Sydney, Australia; and Prospect Engineering Limited (PEL), a
mechanical contractor and a provider of turnkey piping systems located in Derby,
United Kingdom. Under the terms of the acquisition agreement, the Company
acquired all of the outstanding capital stock of Prospect Industries Overseas
Limited (a United Kingdom holding company that held the entire ownership
interest in Connex), all of the capital stock of Aiton Australia and certain
assets of PEL. The Company also assumed certain liabilities of PEL and Prospect
relating to its employees and pension plans including approximately $3,500,000
of cost related to the Company's plan to reduce the workforce at Prospect. These
costs relate to amounts due to employees under statutory and contractual
severance entitlements. As of May 31, 1999, approximately $3,100,000 had been
paid to former employees with the remaining $400,000 to be paid upon completion
of the Company's workforce reduction plan, the majority of which is expected to
take place during the last quarter of fiscal 1999. The purchase method was used
to account for the acquisition. Goodwill, which is being amortized over 20 years
using the straight-line method, was approximately $2,500,000. The operating
results of the Prospect businesses (other than discontinued operations, which
are discussed in Note 8 of the Notes to Condensed Consolidated Financial
Statements) have been included in the condensed consolidated statements of
income from the date of the acquisition.
On January 15, 1998, the Company purchased all of the outstanding capital
stock of Lancas, C.A. (now named Shaw Lancas, C.A.), a construction company in
Punto Fijo, Venezuela, for approximately $2,600,000 in cash, net of cash
received. The Company also incurred approximately $100,000 of acquisition costs.
Goodwill of approximately $500,000 is being amortized over 20 years using the
straight-line method. The purchase method was used to account for this
acquisition. The operating results of Lancas have been included in the condensed
consolidated statements of income from the date of acquisition. The pro-forma
effect of the acquisition of Lancas, had it occurred on September 1, 1997, is
not material to the operations of the Company.
On January 19, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Cojafex, B.V. of Rotterdam, Holland (Cojafex) for
approximately $8,500,000; $4,547,000 (net of cash received) of which was paid at
closing. The balance of the purchase price will be paid through December 31,
2003. The Company incurred acquisition costs of approximately $60,000. Cojafex
owns the technology for certain induction pipe bending machines used for bending
8
<PAGE>
pipe and other carbon steel and alloy items for industrial, commercial and
agricultural applications, and, using such technology, Cojafex designs,
engineers, manufactures, markets and sells such induction bending machines.
Goodwill, which is being amortized over 20 years using the straight-line method,
was approximately $8,500,000. The purchase method was used to account for this
acquisition. The operating results of Cojafex have been included in the
condensed consolidated statements of income from the date of acquisition. The
pro-forma effect of the acquisition of Cojafex, had it occurred on September 1,
1997, is not material to the operations of the Company.
On July 28, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Bagwell Brothers, Inc. (now named Shaw Bagwell,
Inc.) and a subsidiary (collectively, Bagwell). Total consideration paid was
$1,600,000 in cash and 645,000 shares of the Company's Common Stock valued at
$13,033,000. The Company also incurred $184,000 of acquisition costs. The
purchase method was used to account for the acquisition. Goodwill of
approximately $11,300,000 is being amortized on a straight-line basis over 20
years. The operating results of Bagwell have been included in the condensed
consolidated statements of income from the date of acquisition. The pro-forma
effect of the acquisition of Bagwell, had it occurred on September 1, 1997, is
not material to the operations of the Company.
The following summarized unaudited income statement data reflects the
impact that the Prospect acquisition would have had on the Company's results of
operations for the nine months ended May 31, 1998, if such acquisition had taken
place on September 1, 1997 (in thousands, except per share data):
1998
----
Gross revenue $403,482
========
Income from continuing operations $ 15,843
========
Basic earnings from continuing operations per common share $ 1.26
========
Diluted earnings from continuing operations per common share $ 1.24
========
Note 5 - Investment in Unconsolidated Entities
During the nine months ended May 31, 1999, the Company recognized earnings
of $408,000 from Shaw-Nass Middle East, W.L.L., the Company's Bahrain joint
venture (Shaw-Nass). In addition, as of August 31, 1998 and May 31, 1999, the
Company had outstanding receivables from Shaw-Nass totaling $1,758,000 and
$4,176,000, respectively. These receivables relate primarily to inventory and
equipment sold to the entity.
Note 6 - Investment in Securities Available for Sale
In connection with its construction and maintenance work, the Company
embarked on its first significant project financing participation. As a result,
the Company acquired $12,500,000 of 15% Senior Secured Notes (the "Notes") due
December 1, 2003 from a customer (together with certain preferred stock related
thereto). Through December 1, 2000, additional bonds are expected to be received
in lieu of interest, increasing the Company's investment in the Notes. Since
these securities are available for sale, SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" requires that the securities be
measured at fair value in the balance sheet and that unrealized holding gains
and losses, net of taxes, for these investments be reported in a separate
component of shareholders' equity until realized. Based on sales of additional
securities by the debtor and the Company's best estimates, at May 31, 1999, the
securities had an aggregate value approximating the principal amount of
$13,186,000. As a result, no unrealized gain or loss is recognized in
shareholders' equity.
9
<PAGE>
Note 7 - Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," which was required to be
adopted by the Company in the first quarter of fiscal 1999, establishes
standards for the reporting and display of comprehensive income as part of a
full set of financial statements. Comprehensive income for a period encompasses
net income and all other changes in a company's equity other than from
transactions with the company's owners. Comprehensive income was comprised of
the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 5,978 $ 5,225 $16,020 $12,370
Foreign currency translation adjustments (258) (325) (829) (998)
------- ------- ------- -------
Total comprehensive income $ 5,720 $ 4,900 $15,191 $11,372
======= ======= ======= =======
</TABLE>
The foreign currency translation adjustments relate to the varying strength
of the U.S. dollar in relation to the British pound, Australian dollar and Dutch
guilder.
Note 8 - Discontinued Operations
In June 1998, the Company adopted a plan to discontinue its operations of
the following subsidiaries: Weldtech, a seller of welding supplies; Inflo
Control Systems Limited (Inflo), a manufacturer of boiler steam leak detection,
acoustic mill and combustion monitoring equipment and related systems; Greenbank
(a division of PEL), an abrasive and corrosion resistant pipe systems
specialist; and NAPTech Pressure Systems Corporation, a manufacturer of pressure
vessels and truck tanker trailers. The Company sold and/or discontinued its
investment in each of these operations prior to August 31, 1998. The results of
these operations have been classified as discontinued operations in the
condensed consolidated financial statements of the Company. Revenues of these
discontinued operations totaled approximately $7,246,000 for the nine months
ended May 31, 1998.
10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
- ------------
The following discussion summarizes the financial position of The Shaw
Group Inc. and its subsidiaries (hereinafter referred to collectively, unless
the context otherwise requires, as the "Company" or "Shaw") at May 31, 1999, and
the results of its operations for the three-month and nine-month periods then
ended and should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Quarterly Report on Form 10-Q.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The statements contained in this
Quarterly Report on Form 10-Q that are not historical facts are forward-looking
statements based on the Company's current expectations and beliefs concerning
future developments and their potential effects on the Company. There can be no
assurance that future developments affecting the Company will be those
anticipated by the Company. Actual results may differ from those projected in
the forward-looking statements. These forward-looking statements involve
significant risks and uncertainties (some of which are beyond the control of the
Company) and are subject to change based upon various factors, including but not
limited to the following risks and uncertainties: changes in the demand for and
market acceptance of the Company's products and services; in general, economic
conditions and, specifically, economic conditions prevailing in international
markets; the presence of competitors with greater financial resources and the
impact of competitive products, services and pricing; the effect of the
Company's policies, including without limitation the amount and rate of growth
of Company expenses; the continued availability to the Company of adequate
funding sources and changes in interest rates; delays or difficulties in the
production, delivery or installation of products and the provision of services;
Y2K or Year 2000 risks; and various legal, regulatory and litigation risks. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Results of Operations
- ---------------------
The following table sets forth for the periods indicated the percentages of
the Company's net sales that certain income and expense items represent:
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 84.2 80.4 83.2 80.8
---- ---- ---- ----
Gross profit 15.8 19.6 16.8 19.2
General and administrative expenses 8.7 11.8 9.3 12.1
---- ---- ---- ----
Operating income 7.1 7.8 7.5 7.1
Interest expense (1.6) (2.0) (1.7) (2.1)
Other income (expense), net .4 .2 .2 .1
---- ---- ---- ----
(1.2) (1.8) (1.5) (2.0)
---- ---- ---- ----
Income before income taxes 5.9 6.0 6.0 5.1
Provision for income taxes 1.9 2.0 1.8 1.7
---- ---- ---- ----
Income from continuing operations
before earnings from
unconsolidated entity 4.0 4.0 4.2 3.4
Earnings from unconsolidated entity -- .2 -- .1
---- ---- ---- ----
Income from continuing operations 4.0 4.2 4.2 3.5
Earnings from discontinued operations,
net of taxes .2 -- .1 --
---- ---- ---- ----
Net income 4.2% 4.2% 4.3% 3.5%
==== ==== ==== ====
</TABLE>
Sales decreased 12.7% to $125.4 million for the three months ended May 31,
1999 as compared to $143.6 million for the same period in the prior year. An
analysis of sales follows.
The Company's sales were for projects in the following geographic regions:
Three Months Ended May 31,
1998 1999
Geographic Region (in millions) % (in millions) %
----------------- ------------- -- ------------- --
U.S.A. $ 73.8 51% $ 90.8 72%
Far East/Pacific Rim 31.5 22 12.8 10
Middle East 1.7 1 1.2 1
South America 12.6 9 5.2 4
Europe 23.2 16 14.7 12
Other .8 1 .7 1
------ --- ----- ---
$143.6 100% $125.4 100%
====== === ====== ===
12
<PAGE>
The Company's sales were for projects in the following industry sectors:
Three Months Ended May 31,
1998 1999
-------------------- ----------------------
Industry Sector (in millions) % (in millions) %
--------------- ------------- -- ------------- --
Electric Power $ 63.5 44% $ 41.6 33%
Chemical 31.3 22 38.1 30
Refining 23.9 17 26.6 21
Petrochemical 14.6 10 3.2 3
Oil and Gas 5.6 4 6.3 5
Other 4.7 3 9.6 8
------ --- ------ ---
$143.6 100% $125.4 100%
====== === ====== ===
Sales for domestic projects increased $17.0 million, or 23%, from $73.8
million for the three months ended May 31, 1998 to $90.8 million for the three
months ended May 31, 1999. Sales increased in each domestic industry sector,
excluding Petrochemical. A large construction project for a refinery in Norco,
Louisiana accounted for approximately 14% of the Company's sales for the three
months ended May 31, 1999. Sales for international projects decreased $35.2
million, or 50%, to $34.6 million for the three months ended May 31, 1999 from
$69.8 million for the same period of the prior year. The decrease in
international sales is primarily attributable to decreases in Electric Power
sector sales to the Far East/Pacific Rim region (due to general economic
conditions), in Electric Power sector sales to the European region (primarily
due to the delay in the Company's U.K. operations obtaining more profitable
projects) and in Petrochemical sector sales to the South American region (due to
the completion of a project in fiscal 1998 and general economic conditions and,
particularly with respect to Venezuela, recent political events).
Notwithstanding the December 1998 award to the Company of an approximately $30
million contract to supply piping for a nuclear power plant in Taiwan, the
short-term outlook for the Far East/Pacific Rim region, as well as for the South
American region, is uncertain, but the Company is encouraged by recent,
increased activity in these areas. The Company continues to believe that the Far
East/Pacific Rim and South American markets present significant long-term
opportunities for the Company. The decrease in the European region is believed
to be temporary, as the Company's U.K. operations are beginning to show
improvement as indicated by their backlog of $27 million as of May 31, 1999.
The dollar amount of sales in the Electric Power sector decreased
significantly during the three-month period ended May 31, 1999 as compared to
the same period of the prior year, primarily due to decreased foreign projects
in the Far East/Pacific Rim and European markets. In light of current economic
conditions and increased activity in the Far East/Pacific Rim, the Company is
encouraged for its prospects in this geographic region but remains conservative
in its expectations for the near-term future. Even if Electric Power sales in
the Far East/Pacific Rim do not improve, the Company anticipates sales to be
positively impacted by increased activity in Europe, as well as the domestic
market, as evidenced by the $300 million, five year power contract announced by
the Company in February, 1999. Sales in the Chemical sector for the three months
ended May 31, 1999 increased over the same period the prior year due to domestic
projects. Sales in the Petrochemical sector decreased significantly during the
three-month period ended May 31, 1999 as compared to the same period of the
prior year, primarily due to the completion of a project in fiscal 1998 in South
America. The increase in the Oil and Gas sector was the result of a subsidiary
acquired in July 1998, partially offset by reductions in Oil and Gas project
work performed by other subsidiaries of the Company. Notwithstanding recent
increases in oil prices worldwide, the Company's outlook for sales from the Oil
and Gas sector in the short- and mid-term is somewhat pessimistic since capital
spending generally lags behind significant oil and gas price increases.
The gross profit, as a percentage of sales, for the three-month period
ended May 31, 1999 increased to 19.6% from 15.8% for the three-month period
ended May 31, 1998. Similarly, the gross profit percentage for the nine-month
13
<PAGE>
period ended May 31, 1999 increased to 19.2% from 16.8% for the same period the
prior year. The gross profit percentages for the three-month and nine-month
periods ended May 31, 1999 were positively impacted by the exclusion from sales
and cost of sales of significant costs for material, equipment and subcontract
work on a large construction project; these costs are generally included in
sales and cost of sales on a pass-through basis because they are typically
within the Company's scope under construction contracts. The amount of gross
profit on this project remained the same notwithstanding the exclusion from
sales and cost of sales of the costs of materials, equipment and subcontractor
work from the contractual scope of this project; thus, gross profit as a
percentage of sales is higher than customary. In addition, the Company's gross
profit percentages for the three-month and nine-month periods ended May 31, 1999
were positively impacted by several other construction contracts with higher
gross profit percentages than the Company has historically experienced. In light
of the general economic conditions in South America (which historically has
realized higher gross profit percentages than the Company's other operations)
and the increasing percentage of Company revenues from construction projects
(which generally have lower gross profit percentages than pipe fabrication), the
Company believes that current levels of gross profit, as a percentage of sales,
will not be maintained over the long term.
General and administrative expenses were $14.7 million for the three-month
period ended May 31, 1999, up 18% from the same period for the prior year. For
the nine-month period ended May 31, 1999, general and administrative expenses
were $43.0 million, up 24% from the prior year. The increases primarily relate
to growth of the Company's construction services and the integration of Shaw
Lancas, C.A. (the Company's Venezuelan construction subsidiary) and Shaw
Bagwell, Inc. (the Company's oil and gas services subsidiary) into the Company's
business. The Company's general and administrative expenses also increased as a
percentage of sales for each period as compared to the prior year. The Company
believes that general and administrative expenses as a percentage of sales will
decrease toward historical levels as revenues of Shaw Lancas, C.A. and Shaw
Bagwell, Inc. increase, but there can be no assurance that this will occur.
Additionally, as long as sales are negatively impacted by the exclusion of
significant costs for material, equipment and subcontract work on construction
projects, the percentage of general and administrative expenses as compared to
sales will remain higher than historical levels.
Interest expense for the quarter ended May 31, 1999 was $2.5 million, up
$.1 million from the same period of the prior year. For the nine months ended
May 31, 1999, interest expense was $7.4 million, up $1.1 million from the same
period of the previous year. Interest expense varies in relation to the balances
in, and variable interest rates under, the Company's principal revolving line of
credit facility, which has generally been used to provide working capital and
fund fixed asset purchases and subsidiary acquisitions. Additionally, in the
nine months ended May 31, 1999, this line of credit facility was used to
purchase treasury stock totaling $13.7 million.
The Company's effective tax rates for the nine months ended May 31, 1998
and 1999 were 30.3% and 33.1%, respectively. The tax rates for each period
relate primarily to the mix of foreign versus domestic work.
Total backlog increased to $781 million at May 31, 1999 compared to $257
million reported at May 31, 1998 and $776 million reported at February 28, 1999.
Approximately 78% of the backlog relates to domestic projects and roughly 50% of
the backlog relates to work currently anticipated to be done during the 12
months following May 31, 1999. In addition, a significant portion of the backlog
relates to a $300 million, five-year, domestic power contract.
14
<PAGE>
Backlog by industry sector is as follows (in millions):
Electric Power $466.4
Chemical 156.9
Refining 111.9
Oil and Gas 31.5
Petrochemical 2.5
Other 11.8
------
$781.0
======
Backlog by geography is as follows (in millions):
Domestic $609.4
International 171.6
------
$781.0
======
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operations was $9.3 million for the nine months ended
May 31, 1999, compared to $15.0 million used in operations for the same period
of the previous fiscal year. For the nine months ended May 31, 1999, cash from
operating activities was favorably impacted by net income of $12.4 million and
depreciation and amortization of $9.7 million offset by changes in certain
assets and liabilities of $12.2 million and other non-cash items of $.6 million.
A decrease in accounts payable, resulting from the timing of payments to
vendors, offset by a decrease in accounts receivable, due to increased
collections, accounted for the majority of the $12.2 million change in assets
and liabilities.
Net cash used in investing activities was $24.9 million for the nine months
ended May 31, 1999, compared to $32.7 million for the same period of the
previous fiscal year. During the nine months ended May 31, 1999, the Company
embarked on its first significant project financing participation. In connection
with its construction and maintenance work on a refinery project in Norco,
Louisiana, Shaw acquired $12.5 million of 15% Senior Secured Notes (the "Notes")
due December 1, 2003 (together with certain preferred stock related thereto).
The Notes are secured by a first priority security interest in certain refinery
assets. Through December 1, 2000, additional Notes are expected to be received
in lieu of interest, increasing the Company's investment in the Notes. The
Company also purchased approximately $12.9 million of property and equipment,
excluding a $3.0 million non-cash transaction. Approximately $6.5 million of
this amount was for a new corporate facility in Baton Rouge, Louisiana. An
additional $5.1 million was for construction equipment. In the nine months ended
May 31, 1998, in addition to $10.0 million of property and equipment
acquisitions, the Company invested $26.1 million, net of cash received, in the
PED, Prospect, Lancas and Cojafex acquisitions.
Net cash provided by financing activities was $16.0 million for the
nine-month period ended May 31, 1999, compared to $47.2 million that was
provided for the nine months ended May 31, 1998. For the nine months ended May
31, 1999, $26.6 million of cash was provided from the Company's revolving line
of credit agreements with its commercial lenders. The revolving line of credit
facilities have been used generally to provide working capital and fund fixed
asset purchases and subsidiary acquisitions. Beginning in the first quarter of
fiscal 1999, the Company also began to use its principal revolving line of
credit facility to repurchase shares of the Company's Common Stock through open
market and block transactions in accordance with a plan adopted by the Company's
Board of Directors. During the nine months ended May 31, 1999, 1,558,631 shares
of stock had been repurchased at a total price, including brokerage commissions,
of approximately $13.7 million. Cash was also provided by $5.6 million of new
debt and a $6.6 million increase in outstanding checks in excess of bank
balances (resulting from the timing of payments and the clearance of checks),
15
<PAGE>
while funds of $9.0 million were used to pay down outstanding debt. During the
nine months ended May 31, 1998, the Company issued $62.2 million of debt,
including $60 million of Senior Secured Notes, the proceeds of which were used
primarily to pay down the Company's revolving line of credit facility. These
transactions were the primary reasons for the $47.2 million of funds provided by
financing activities in the nine months ended May 31, 1998.
As of May 31, 1999, the Company had approximately $52 million available
under its principal revolving line of credit facility. The Company believes its
current borrowing arrangements are sufficient to support its operations for the
next twelve months.
Year 2000 Compliance
- --------------------
The "Year 2000" or "Y2K" issue is the result of computerized systems being
written to store and process the year portion of dates using two digits rather
than four. Date-sensitive systems may fail, or produce erroneous results, on or
before or after January 1, 2000 because the year 2000 may be interpreted as the
year 1900. During 1998, the Company began implementation of a program to
identify, evaluate and address the Company's Y2K risks to ensure that its
Information Technology ("IT") systems and non-IT systems will be able to process
dates from and after January 1, 2000 without critical systems failure. In
addition to evaluating its own systems, the Company is attempting to assess the
Y2K risks associated with its significant customers and suppliers.
In general, the Company's program for identifying, evaluating and
addressing its Y2K risks for both IT and non-IT systems involves preliminary
assessments by Company personnel, detail audits and assessments by consultants
and correction or replacement of any non-compliant systems. Total outside costs
of approximately $450,000 (primarily consultant expenses) are expected to be
incurred during the evaluation and assessment process. Included in these costs
are some programming costs to remediate in-house programs. Approximately
$370,000 of these costs has been expensed by the Company during the nine months
ended May 31, 1999.
The analysis of its systems for Y2K risks has been segmented into three
categories: local, national, and international. Each segment was divided into
major business areas: systems, products, facilities, and suppliers. These
business areas were divided into even smaller categories for data collection and
evaluation, such as computers, network equipment, production equipment,
manufacturing equipment, alarm systems, phone systems, etc. The data was entered
into a repository that was created to track evaluation and remediation efforts.
The following is an example of the methodology and results gathered during the
Company's Year 2000 program:
Systems
The Company's proprietary and off-the-shelf systems were identified
during the inventory phases of the program for compliance analysis. Shaw's
proprietary software has been remediated and tested for Year 2000 problems.
Year 2000 compliant software has been installed on all production systems.
A testing methodology used for these proprietary systems, in an identical
but separate environment, was set up evaluating operational functionality,
as well as current, future, and crossover dates between the years 1999 and
2000. Other business critical off-the-shelf applications have been
upgraded, according to manufacturer direction, to meet year 2000 compliance
specifications. Replacement of all non-year 2000 compliant systems are
currently underway.
Products
After an inventory and evaluation, the Company believes that the
majority of its products are generally not vulnerable to Year 2000
anomalies. With regard to the Cojafex bending machines, which are the only
significant Company products with imbedded technology, design modifications
are being implemented to assure full Y2K compliance of future machines.
With respect to Cojafex machines previously sold, the Company believes
that, while certain reporting functions may be impacted, the production
functionality of the machines will not be adversely affected.
16
<PAGE>
Facilities
The Company has identified its business facilities as critical to the
Year 2000 evaluation process. All facilities have been inventoried,
identifying systems such as phone systems, HVAC, alarm systems, fire
systems, elevators, electrical power, and others. These items were
evaluated because of their potential impact on business operations if they
were to fail. To date, no business facilities have been determined to be
materially noncompliant.
Suppliers
Based on its preliminary risk assessments, the Company believes the
most likely Y2K related failure would be a temporary disruption in certain
materials and services provided by third parties, which could have a
material adverse effect on the Company's financial condition or results of
operations. Shaw has attempted to identify and classify business suppliers
based on relevant priority factors, and has contacted numerous suppliers
and potential suppliers regarding their Y2K compliance. The Company
believes that, in general, many vendors can be easily substituted in case
of noncompliance; however, certain types of raw materials are available
from only one or a few specialized suppliers. To date, the Company believes
that all suppliers material to the Company's operations or conduct of
business have been contacted either by phone or survey about their
compliance efforts and status.
The deadline for the Year 2000 project is August 1, 1999; however, since
many third party issues are involved and remain uncertain, unforeseen problems
could develop. Because of this, Y2K compliance monitoring will continue through
January 2000.
Based upon the outcome of its assessments and the information derived from
its significant customers and suppliers, the Company is currently developing
contingency plans to address certain risk areas, as needed. There can be no
assurance, however, that the Company will not be materially, adversely affected
by Y2K problems or related costs.
At the present time, the Company believes that the cost to modify or
replace its non-compliant systems should not exceed $600,000 (the majority of
which will be of a capital nature), bringing the total expected Y2K expenditures
to a maximum of $1,050,000. There can be no assurance, however, that such costs
will not escalate and materially and negatively impact the Company's financial
condition or results of operations.
Financial Accounting Standards Board Statements
- -----------------------------------------------
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures about Segments of an Enterprise and Related Information," which is
effective for periods beginning after December 15, 1997. SFAS No. 131 will
require the Company to report financial and descriptive information about its
operations in its annual financial statements for the year ending August 31,
1999.
17
<PAGE>
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 -- "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). The provisions of this statement are effective for the Company's
fiscal year ending August 31, 2000. Management does not believe that the impact
of adopting this statement will have a material impact on the Company's
financial position or results of operations.
In early 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP"). The SOP is effective for fiscal years beginning after
December 15, 1998 and will require costs of start-up activities and organization
costs to be expensed as incurred. Any such unamortized costs on the date of
adoption of the new standard will be written off and reflected as a cumulative
effect of a change in accounting principle. As of May 31, 1999, the Company had
total unamortized deferred organizational costs of approximately $620,000. The
Company intends to adopt this new requirement in fiscal 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Foreign Currency Risk
- ---------------------------------------
The Company is exposed to interest rate risk and foreign currency risk.
Since August 31, 1998, there have been no material changes in the Company's
exposure to these risks.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended May 31, 1999, there were no matters
submitted to a vote of security holders by the Company.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit Number Description
-------------- -----------
11 Computation of Earnings Per Share
27 Financial Data Schedule
B. Form 8-K
During the fiscal quarter ended May 31, 1999, the Company did not file a
Form 8-K.
19
<PAGE>
SIGNATURE
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.
THE SHAW GROUP INC.
Dated: July 15, 1999 /S/ Robert L. Belk
------------------------
Chief Financial Officer
(Duly Authorized Officer)
20
<PAGE>
THE SHAW GROUP INC.
EXHIBIT INDEX
Form 10-Q Quarterly Report for the Quarterly Period ended May 31, 1999.
Exhibit Number Description
- -------------- -----------
11 Computation of Earnings per Share
27 Financial Data Schedule
21
<PAGE>
<TABLE>
EXHIBIT 11
Computation of Earnings Per Share
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income from continuing operations
(dollars in thousands) $ 5,769 $ 5,225 $ 15,882 $ 12,371
========== ========== ========== ==========
Shares:
Weighted average number of common
shares outstanding 12,558,907 11,734,204 12,533,485 12,000,775
Net effect of stock options 220,243 479,422 232,016 328,135
--------------------------- ---------- ---------- ---------- ----------
Weighted average number of common
shares outstanding, plus assumed
exercise of stock options 12,779,150 12,213,626 12,765,501 12,328,910
========== ========== ========== ==========
Income from continuing operations:
Basic earnings per share $ .46 $ .45 $ 1.27 $ 1.03
=========== ========== ========== ==========
Diluted earnings per share $ .45 $ .43 $ 1.24 $ 1.00
=========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000914024
<NAME> The Shaw Group Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Aug-31-1999
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 3,834
<SECURITIES> 0
<RECEIVABLES> 126,988
<ALLOWANCES> 0
<INVENTORY> 66,610
<CURRENT-ASSETS> 242,450
<PP&E> 130,640
<DEPRECIATION> 32,703
<TOTAL-ASSETS> 398,154
<CURRENT-LIABILITIES> 133,755
<BONDS> 0
0
0
<COMMON> 119,128
<OTHER-SE> 49,221
<TOTAL-LIABILITY-AND-EQUITY> 398,154
<SALES> 354,293
<TOTAL-REVENUES> 354,293
<CGS> 286,299
<TOTAL-COSTS> 286,299
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,374
<INCOME-PRETAX> 17,889
<INCOME-TAX> 5,926
<INCOME-CONTINUING> 12,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,371
<EPS-BASIC> 1.03
<EPS-DILUTED> 1.00
</TABLE>
