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 February 28,1999
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, 11,702,485 shares outstanding as of April 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 February 28, 1999 3 - 4
Condensed Consolidated Statements of Income -
For the Three Months and Six Months Ended
February 28, 1998 and 1999 5
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended February 28, 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
2
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
August 31, February 28,
1998 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,743 $ 7,820
Accounts receivable, net 140,631 134,362
Receivables from unconsolidated entity 1,758 4,459
Inventories 65,861 65,413
Cost and estimated earnings in excess of billings
on uncompleted contracts 19,797 23,933
Other current assets 19,204 20,374
---------- ----------
Total current assets 250,994 256,361
Investment in unconsolidated entity 3,965 4,110
Investment in securities available for sale -- 12,808
Property and equipment, less accumulated depreciation
of $25,050 at August 31, 1998 and $29,996 at
February 28, 1999, respectively 92,860 100,007
Goodwill, net of accumulated amortization of $1,430 at
August 31, 1998 and $2,379 at February 28, 1999, respectively 33,356 33,362
Other assets 8,669 8,634
----------- -----------
$389,844 $415,282
======== ========
</TABLE>
(Continued)
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
August 31, February 28,
1998 1999
---- ----
<S> <C> <C>
Current liabilities:
Outstanding checks in excess of bank balance $ 4,009 $ 8,190
Accounts payable 45,307 29,915
Accrued liabilities 24,831 24,554
Current maturities of long-term debt 9,314 9,637
Revolving lines of credit 20,898 67,799
Deferred revenue - prebilled 1,813 2,058
Advanced billings and billings in excess of cost and
estimated earnings on uncompleted contracts 14,367 8,923
--------- ---------
Total current liabilities 120,539 151,076
Long-term debt, less current maturities 91,715 93,142
Deferred income taxes 6,895 6,824
Commitments and contingencies -- --
Shareholders' equity:
Common stock, no par value,
13,279,866 and 11,774,516 shares outstanding, respectively 119,360 119,367
Retained earnings 58,950 66,096
Accumulated other comprehensive income (loss) (420) (1,093)
Unearned restricted stock compensation (367) (303)
Treasury stock, 6,662,916 and 8,169,516 shares, respectively (6,828) (19,827)
----------- --------
Total shareholders' equity 170,695 164,240
--------- ---------
$389,844 $415,282
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
February 28, February 28,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income:
Sales $134,645 $112,949 $233,315 $228,867
Cost of sales 111,893 90,095 192,589 185,410
-------- -------- -------- --------
Gross profit 22,752 22,854 40,726 43,457
General and administrative expenses 12,544 14,000 23,034 28,275
-------- -------- -------- --------
Operating income 10,208 8,854 17,692 15,182
Interest expense (2,271) (2,441) (3,902) (4,883)
Other income (expense), net 120 (145) 223 49
-------- -------- -------- --------
(2,151) (2,586) (3,679) (4,834)
Income before income taxes 8,057 6,268 14,013 10,348
Provision for income taxes 2,666 2,142 4,107 3,347
-------- -------- -------- --------
Income from continuing operations before
earnings from unconsolidated entity 5,391 4,126 9,906 7,001
Earnings from unconsolidated entity 4 198 124 145
-------- -------- --------- --------
Income from continuing operations 5,395 4,324 10,030 7,146
Earnings (losses) from discontinued operations,
net of taxes (57) -- 12 --
-------- -------- --------- --------
Net income $ 5,338 $ 4,324 $ 10,042 $ 7,146
======== ======== ========= ========
Basic income per common share:
Number of shares 12,508 11,775 12,506 12,120
Income from continuing operations $ .43 $ .37 $ .80 $ .59
Income from discontinued operations -- -- -- --
-------- -------- --------- --------
Net income per common share $ .43 $ .37 $ .80 $ .59
======== ======== ========= ========
Diluted income per common share:
Number of shares 12,749 12,126 12,746 12,356
Income from continuing operations $ .42 .36 $ .79 $ .58
Income from discontinued operations -- -- -- --
-------- -------- --------- --------
Net income per common share $ .42 $ .36 $ .79 $ .58
======== ======== ========= ========
</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>
Six Months Ended
February 28,
1998 1999
--------------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,042 $ 7,146
Depreciation and amortization 4,385 6,410
Other (124) (591)
Changes in assets and liabilities (excluding cash and
those relating to investing and financing activities) (41,898) (24,841)
--------- ---------
Net cash used in operating activities (27,595) (11,876)
Cash flows from investing activities:
Investment in subsidiaries, net of cash received (26,126) --
Investment in securities available for sale -- (12,808)
Purchases of property and equipment (5,610) (11,038)
Proceeds from sale of property and equipment -- 49
-------- -------
Net cash used in investing activities (31,736) (23,797)
Cash flows from financing activities:
Net increase in outstanding checks
in excess of bank balance 7,904 4,166
Net proceeds on revolving credit agreements 56,178 47,028
Proceeds from issuance of debt 879 5,374
Repayment of debt and leases (5,947) (3,624)
Purchases of treasury stock -- (12,999)
Issuance of common stock 70 7
-------- -------
Net cash provided by financing activities 59,084 39,952
Effect of exchange rate changes on cash (124) (202)
-------- --------
Net increase (decrease) in cash and cash equivalents (371) 4,077
Cash and cash equivalents - beginning of period 4,358 3,743
-------- --------
Cash and cash equivalents - end of period $ 3,987 $ 7,820
======== ========
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
======== ========
</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 six-month periods ended
February 28, 1998 and 1999 and as of August 31, 1998 and February 28, 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>
August 31, 1998 February 28, 1999
--------------------------------------- -------------------------------
<CAPTION>
Weighted Weighted
Average FIFO TOTAL Average FIFO TOTAL
<S> <C> <C> <C> <C> <C> <C>
Finished Goods $28,671 $ -- $28,671 $28,189 $ -- $28,189
Raw Materials 3,162 25,937 29,099 3,691 26,480 30,171
Work In Process 1,914 6,177 8,091 1,578 5,475 7,053
------- ------- ------- ------- ------- -------
$33,747 $32,114 $65,861 $33,458 $31,955 $65,413
======= ======= ======= ======= ======= =======
</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.
The weighted average common shares outstanding for the quarters ended
February 28, 1998 and 1999 were 12,507,760 and 11,774,927, respectively.
Dilutive common equivalent shares for the quarters ended February 28, 1998 and
1999 were 241,252 and 351,199, respectively, all attributable to stock options.
The weighted average common shares outstanding for the six months ended
February 28, 1998 and 1999 were 12,505,564 and 12,119,557, respectively.
Dilutive common equivalent shares for the six months ended February 28, 1998 and
1999 were 240,228 and 236,693, respectively, all attributable to stock options.
7
<PAGE>
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. Acquisition costs of
approximately $160,000 were incurred by the Company. 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. Acquisition costs of approximately
$2,000,000 were incurred by the Company. 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 $4,000,000
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 February 28, 1999, approximately $3,000,000 had
been paid to former employees with the remaining $1,000,000 to be paid upon
completion of the Company's workforce reduction plan, the majority of which is
expected to take place during the second half 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
$4,600,000. The operating results of the Prospect businesses (other than
discontinued operations, which are discussed in Note 9 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 $400,000 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. Acquisition costs of approximately $60,000 were incurred by the Company.
Cojafex owns the technology for certain induction pipe bending machines used for
bending 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
8
<PAGE>
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 six months ended February 28, 1998, if such acquisition had
taken place on September 1, 1997 (in thousands, except per share data):
1998
----
Gross revenue $263,006
========
Income from continuing operations $ 9,991
========
Basic earnings from continuing operations per common share $ .80
========
Diluted earnings from continuing operations per common share $ .78
========
Note 5 - Investment in Unconsolidated Entities-
During the six months ended February 28, 1999, the Company recognized
earnings of $145,000 from Shaw-Nass Middle East, W.L.L., the Company's Bahrain
joint venture (Shaw-Nass). In addition, as of August 31, 1998 and February 28,
1999, the Company had outstanding receivables from Shaw-Nass totaling $1,758,000
and $4,459,000, 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 recent sales of
additional securities by the debtor, at February 28, 1999, the securities had an
aggregate value approximating the principal amount of $12,808,000. As a result,
no unrealized gain or loss is recognized in shareholders' equity.
Note 7 - Long-Term Financing Agreement -
In February 1999, an insurance company approved an agreement to finance a
first mortgage on the Company's corporate headquarters for $4,400,000 at 7.2%
with a 20-year payout. The Company intends to use the proceeds to pay down its
U.S. revolving line of credit balance. Accordingly, at February 28, 1999, the
Company's revolving line of credit has been reduced by that amount, and the
current and long-term portion of the long-term debt has been increased by
$105,000 and $4,295,000, respectively.
Note 8 - Comprehensive Income -
SFAS No. 130, "Reporting Comprehensive Income," which is 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 Six Months Ended
February 28, February 28,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 5,338 $ 4,324 $10,042 $ 7,146
Foreign currency translation adjustments (571) (1,120) (571) (673)
------- ------- ------- -------
Total comprehensive income $ 4,767 $ 3,204 $ 9,471 $ 6,473
======= ======= ======= =======
</TABLE>
9
<PAGE>
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 9 - 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 $3,884,000 for the six months
ended February 28, 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 February 28,
1999, and the results of its operations for the three-month and six-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>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
February 28, February 28,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.1 79.8 82.5 81.0
----- ----- ------ ------
Gross profit 16.9 20.2 17.5 19.0
General and administrative expenses 9.3 12.4 9.9 12.4
------ ----- ------ ------
Operating income 7.6 7.8 7.6 6.6
Interest expense (1.7) (2.2) (1.7) (2.1)
Other income (expense), net .1 ( .1) .1 --
------- ----- ------ ------
(1.6) (2.3) (1.6) (2.1)
------- ----- ------- ------
Income before income taxes 6.0 5.5 6.0 4.5
Provision for income taxes 2.0 1.9 1.8 1.5
------- ----- ------- ------
Income from continuing operations
before earnings from
unconsolidated entity 4.0 3.6 4.2 3.0
Earnings from unconsolidated entity -- .2 .1 .1
------- ----- ------- ------
Income from continuing operations 4.0 3.8 4.3 3.1
Operating results of discontinued operations,
net of taxes -- -- -- --
------- ----- ------- ------
Net income 4.0% 3.8% 4.3% 3.1%
======= ===== ======= ======
</TABLE>
Sales decreased 16.1% to $112.9 million for the three months ended February
28, 1999 as compared to $134.6 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 February 28,
1998 1999
---------------------- ----------------------
Geographic Region (in millions) % (in millions) %
----------------- ------------- --- ------------- ---
U.S.A. $ 69.5 52% $ 85.1 75%
Far East/Pacific Rim 29.0 21 10.3 9
Middle East 2.8 2 1.9 2
South America 7.7 6 3.3 3
Europe 19.8 15 9.9 9
Other 5.8 4 2.4 2
------ ---- ------ ---
$134.6 100% $112.9 100%
====== === ====== ===
12
<PAGE>
The Company's sales were for projects in the following industry
sectors:
Three Months Ended February 28,
1998 1999
-------------------- ----------------------
Industry Sector (in millions) % (in millions) %
--------------- ------------- --- ---------------- ---
Electric Power $ 62.4 46% $ 32.1 28%
Chemical 33.3 25 33.6 30
Refining 15.5 12 23.9 21
Petrochemical 10.7 8 8.3 7
Oil and Gas 4.4 3 6.5 6
Other 8.3 6 8.5 8
------ ---- ------ ---
$134.6 100% $112.9 100%
====== ==== ====== ===
Sales for domestic projects increased $15.6 million, or 22%, from $69.5
million for the three months ended February 28, 1998 to $85.1 million for the
three months ended February 28, 1999. The increase in domestic sales primarily
resulted from increases in sales to the Chemical and Refining sectors for
projects in which the Company supplied construction services in addition to
piping. A large construction project for a refinery in Norco, Louisiana
accounted for approximately 14% of the Company's sales for the three months
ended February 28, 1999. Sales for international projects decreased $37.3
million, or 57%, to $27.8 million for the three months ended February 28, 1999
from $65.1 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 Company's U.K. operations targeting fewer, but more profitable,
projects in an effort to achieve consistent profitability) and in Refinery
sector sales to the South American region (due to general economic conditions
and, particularly with respect to Venezuela, recent political events), as well
as decreases in Chemical sector sales to other regions. 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. The Company continues to believe, however, that the Far East/Pacific
Rim and South American markets do 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 $29.6 million as of February 28, 1999.
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, as the
stability of the recent increase in oil prices is questionable and, in any
event, capital spending generally lags behind significant oil and gas price
increases. The dollar amount of sales in the Electric Power sector decreased
significantly during the three-month period ended February 28, 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 the
economic conditions in the Far East/Pacific Rim, the Company anticipates that
this downward trend in sales will continue for the foreseeable future in this
geographic region. The Company anticipates a partial offset of this trend by
increased activity in Europe, as well as the domestic market as evidenced by the
recently announced $300 million, five year power contract.
13
<PAGE>
The gross profit, as a percentage of sales, for the three-month period
ended February 28, 1999 increased to 20.2% from 16.9% for the three-month period
ended February 28, 1998. Similarly, the gross profit percentage for the
six-month period ended February 28, 1999 increased to 19.0% from 17.5% for the
same period the prior year. The gross profit percentages for the three-month and
six-month periods ended February 28, 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 six-month periods
ended February 28, 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 $14.0 million for the three-month
period ended February 28, 1999, up 12% from the same period for the prior year.
For the six-month period ended February 28, 1999, general and administrative
expenses were $28.3 million, up 23% from the prior year. The increases primarily
relate to 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 and growth of the Company's
construction services. 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 the operations of
Shaw Lancas, C.A. and Shaw Bagwell, Inc. are more efficiently integrated into
the Company's operations as a whole, but there can be no assurance that any such
decrease will occur.
Interest expense for the quarter ended February 28, 1999 was $2.4 million,
compared to $2.3 million for the same period of the prior year. For the six
months ended February 28, 1999, interest expense was $4.9 million, up $1.0
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 six months ended February 28, 1999, this line
of credit facility was used to purchase treasury stock totaling $13.0 million.
The Company's effective tax rates for the six months ended February 28,
1998 and 1999 were 29.3% and 32.3%, respectively. The tax rates for each period
relate primarily to the mix of foreign versus domestic work.
Total backlog increased to $776 million at February 28, 1999 compared to
$280 million reported at February 28, 1998 and $430 million reported at November
30, 1998. 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 February 28, 1999. In addition, a significant
portion of the backlog relates to a $300 million, five-year, domestic power
contract.
Backlog by industry sector is as follows (in millions):
Electric Power $453.4
Chemical 187.0
Refining 100.6
Oil and Gas 21.7
Petrochemical 6.5
Other 6.6
------
$775.8
======
14
<PAGE>
Backlog by geography is as follows (in millions):
Domestic $605.2
International 170.6
-----
$775.8
======
Liquidity and Capital Resources
- -------------------------------
Net cash used in operations was $11.9 million for the six months ended
February 28, 1999, compared to $27.6 million for the same period of the previous
fiscal year. For the six months ended February 28, 1999, cash from operating
activities was favorably impacted by net income of $7.1 million and depreciation
and amortization of $6.4 million offset by changes in certain assets and
liabilities of $24.8 million and other non-cash items of $.6 million. A decrease
in accounts payable, resulting from the timing of payments to vendors, accounted
for the majority of the $24.8 million change in assets and liabilities.
Net cash used in investing activities was $23.8 million for the six months
ended February 28, 1999, compared to $31.7 million for the same period of the
previous fiscal year. During the six months ended February 28, 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 bonds are expected to be received
in lieu of interest, increasing the Company's investment in the Notes. The
Company also purchased approximately $11.0 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 $4.9 million was for construction equipment. In the six months ended
February 28, 1998, in addition to $5.6 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 $40.0 million for the
six-month period ended February 28, 1999, compared to $59.1 million that was
provided for the six months ended February 28, 1998. For the six months ended
February 28, 1999, $47.0 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 six months ended
February 28, 1999, 1,506,600 shares of stock had been repurchased at a total
price, including brokerage commissions, of approximately $13.0 million. Cash was
also provided by $5.4 million of new debt (including the $4.4 million long-term
financing agreement referred to in Note 6 of the Notes to Condensed Consolidated
Financial Statements) and a $4.2 million increase in outstanding checks in
excess of bank balances (resulting from the timing of payments and the clearance
of checks), while funds of $3.6 million were used to pay down outstanding debt.
As of February 28, 1999, the Company had approximately $28 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.
15
<PAGE>
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
(which consultants have cost the Company approximately $100,000 to date and are
currently estimated to cost approximately $250,000 for the duration of the
program) and correction or replacement of any non-compliant systems.
The Company is currently evaluating its IT systems for Y2K compliance. The
analysis 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 evaluated for compliance
and is currently in the remediation process, which the Company
currently estimates to be 85% complete. Upon completion, these
proprietary systems will be tested in an identical but separate
environment, to evaluate their functionality after remediation has
taken place. This testing process will include operational
functionality as well as current, future and crossover dates from the
year 1999 and the year 2000. Testing for these systems is scheduled for
June 1999, with installation to the active environment immediately
after successful testing. Off-the-shelf applications critical to the
Company have been inventoried, evaluated and, to the extent found
non-compliant, are being upgraded. Support systems, such as PC's, have
been identified and evaluated with more than 90% passing compliance
tests. The remaining systems are being reported to upper management at
each site to schedule a phase-in of new systems by June 1, 1999. The
Company currently does not have an estimate of the costs of such
upgrades and new systems but believes that such costs will not be
significantly more than the Company's customary expenditures for
routine maintenance and upgrading of its off-the-shelf applications and
support systems.
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. Only one facility domestically and
the Company's international facilities remain to be inventoried, and
those facilities are scheduled to be completed before the end of April
1999. Systems such as HVAC, alarm systems, fire systems, elevators,
electrical power, and others have been targeted for evaluation because
of their potential impact on business operations if they were to fail.
For completed locations, all of these items have been inventoried and
72% of these systems evaluated for compliance. 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
contracted 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 Company has not incurred significant costs related to Y2K compliance as
of February 28, 1999, except for consultant services of approximately $100,000.
Based upon the information currently available, the Company does not believe
that the cost to modify or replace its non-compliant IT and non-IT systems will
be significant; however, there can be no assurance that such cost will not
materially and negatively impact its financial condition or results of
operations.
Based upon the outcome of its assessments and the information derived from
its significant customers and suppliers, the Company will develop specific
contingency plans to address certain risk areas, as needed, beginning in July
1999. There can be no assurance that the Company will not be materially
adversely affected by Y2K problems or related costs.
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
operating segments in its annual financial statements for the year ending August
31, 1999.
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 February 28, 1999, the Company
had total unamortized deferred organizational costs of approximately $680,000.
The Company intends to adopt this new requirement in fiscal 2000.
17
<PAGE>
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
On January 29, 1999, the Company held its 1999 Annual Meeting of
Shareholders. The only matters submitted to a vote at the meeting were the
election of directors and a proposal to approve an amendment to the Company's
1993 Employee Stock Option Plan to increase the number of shares of Common Stock
reserved for issuance thereunder.
The results of the vote for election of directors were as follows:
Name For Withheld
---- --- --------
J. M. Bernhard, Jr. 17,310,159 128,171
L. Lane Grigsby 17,309,609 128,721
David W. Hoyle 17,309,659 128,671
Albert McAlister 17,310,059 128,271
John W. Sinders, Jr. 17,308,859 129,471
William H. Grigg 17,309,959 128,371
There were no broker non-votes with respect to the election of
directors.
The results of the vote taken on the proposal to increase the number of
shares of the Company's Common Stock reserved for issuance under The Shaw Group
Inc. 1993 Employee Stock Option Plan as restricted stock or upon exercise of
stock options from 590,442 shares to 1,662,500 shares were as follows:
For 12,816,080
Against 1,720,185
Abstain 19,810
There were 2,882,255 broker non-votes with respect to the proposal.
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 February 28, 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: April 14, 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 February 28, 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 Six Months Ended
February 28, February 28,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income from continuing operations
(dollars in thousands) $ 5,395 $ 4,324 $ 10,030 $ 7,146
========== =========== ========== ===========
Shares:
Weighted average number of common
shares outstanding 12,507,760 11,774,927 12,505,564 12,119,557
Net effect of stock options 241,252 351,199 240,228 236,693
---------- ----------- ---------- ----------
Weighted average number of common
shares outstanding, plus assumed
exercise of stock options 12,749,012 12,126,126 12,745,792 12,356,250
========== =========== ========== ==========
Income from continuing operations:
Basic earnings per share $ .43 $ .37 $ .80 $ .59
=========== =========== ========== ==========
Diluted earnings per share $ .42 $ .36 $ .79 $ .58
=========== =========== ========== ==========
</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> 6-Mos
<FISCAL-YEAR-END> Aug-31-1999
<PERIOD-END> Feb-28-1998
<EXCHANGE-RATE> 1.000
<CASH> 7,820
<SECURITIES> 0
<RECEIVABLES> 134,362
<ALLOWANCES> 0
<INVENTORY> 65,413
<CURRENT-ASSETS> 256,361
<PP&E> 130,003
<DEPRECIATION> 29,996
<TOTAL-ASSETS> 415,282
<CURRENT-LIABILITIES> 151,076
<BONDS> 0
0
0
<COMMON> 119,367
<OTHER-SE> 44,873
<TOTAL-LIABILITY-AND-EQUITY> 415,282
<SALES> 228,867
<TOTAL-REVENUES> 228,867
<CGS> 185,410
<TOTAL-COSTS> 185,410
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,883
<INCOME-PRETAX> 10,348
<INCOME-TAX> 3,347
<INCOME-CONTINUING> 7,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,146
<EPS-PRIMARY> .59
<EPS-DILUTED> .58
</TABLE>
