<PAGE> 1
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 November 30, 1998
----------------------------------------
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, 11,803,016 shares outstanding as of January 9, 1999.
<PAGE> 2
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. - Financial Statements
Consolidated Balance Sheets - August 31, 1998
and November 30, 1998 3 - 4
Consolidated Statements of Income - For the Three
Months Ended November 30, 1997 and 1998 5
Consolidated Statements of Cash Flows - For the Three Months
Ended November 30, 1997 and 1998 6 - 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 18
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 19
Part II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 20
Item 6. - Exhibits and Reports on Form 8-K 20
Signature Page 21
Exhibit Index 22
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
August 31, November 30,
1998 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,743 $ 3,889
Accounts receivable, net 140,631 154,719
Receivables from unconsolidated entity 1,758 2,638
Inventories 65,861 69,355
Cost and estimated earnings in excess of billings
on uncompleted contracts 19,797 10,570
Prepaid expenses 4,948 5,125
Deferred income taxes 4,697 4,933
Other current assets 9,559 10,458
------------ ------------
Total current assets 250,994 261,687
Investment in unconsolidated entity 3,965 3,912
Property and equipment:
Transportation equipment 3,153 3,370
Furniture and fixtures 10,756 10,797
Machinery and equipment 65,158 69,970
Buildings and improvements 32,920 33,104
Land 5,923 5,923
------------ ------------
117,910 123,164
Less: Accumulated depreciation (25,050) (27,568)
------------ ------------
92,860 95,596
Goodwill, net of accumulated amortization of $1,430
at August 31, 1998 and $1,824 at November 30, 1998 33,356 33,202
Other assets 8,669 8,728
------------ ------------
$ 389,844 $ 403,125
============ ============
</TABLE>
(Continued)
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
August 31, November 30,
1998 1998
------------ ------------
<S> <C> <C>
Current liabilities:
Outstanding checks in excess of bank balance $ 4,009 $ 7,163
Accounts payable 45,307 27,525
Accrued liabilities 24,831 26,375
Current maturities of long-term debt 9,314 9,889
Revolving lines of credit 20,898 57,518
Deferred revenue - prebilled 1,813 1,341
Advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts 14,367 14,784
------------ ------------
Total current liabilities 120,539 144,595
Long-term debt, less current maturities 91,715 90,453
Deferred income taxes 6,895 6,823
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, no par value,
50,000,000 shares authorized;
19,942,782 and 19,944,032 shares issued, respectively;
13,279,866 and 11,803,016 shares outstanding, respectively 119,360 119,367
Retained earnings 58,950 61,772
Accumulated other comprehensive income (loss) (420) 27
Unearned restricted stock compensation (367) (335)
Treasury stock, 6,662,916 and 8,141,016 shares, respectively (6,828) (19,577)
------------ ------------
Total shareholders' equity 170,695 161,254
------------ ------------
$ 389,844 $ 403,125
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended
November 30,
1997 1998
------------ ------------
<S> <C> <C>
Income:
Sales $ 98,670 $ 115,918
Cost of sales 80,696 95,315
------------ ------------
Gross profit 17,974 20,603
General and administrative expenses 10,490 14,275
------------ ------------
Operating income 7,484 6,328
Interest expense (1,631) (2,442)
Other income, net 103 194
------------ ------------
(1,528) (2,248)
------------ ------------
Income before income taxes 5,956 4,080
Provision for income taxes 1,441 1,205
------------ ------------
Income from continuing operations before earnings (losses)
from unconsolidated entity 4,515 2,875
Earnings (losses) from unconsolidated entity 120 (53)
------------ ------------
Income from continuing operations 4,635 2,822
Discontinued operations, net of taxes:
Operating results 69 --
------------ ------------
Net income $ 4,704 $ 2,822
============ ============
Basic income per common share:
Number of shares 12,488 12,460
Income from continuing operations $ 0.37 $ 0.23
Income from discontinued operations 0.01 --
------------ ------------
Net income per common share $ 0.38 $ 0.23
============ ============
Diluted income per common share:
Number of shares 12,738 12,521
Income from continuing operations $ 0.36 $ 0.23
Income from discontinued operations 0.01 --
------------ ------------
Net income per common share $ 0.37 $ 0.23
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended
November 30,
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,704 $ 2,822
Adjustments to reconcile net income
to net cash provided by (used in) operating --
activities:
Depreciation and amortization 2,036 3,086
(Earnings) losses from unconsolidated entity (120) 53
Deferred income tax benefit -- (309)
Transaction (gains) losses -- (95)
Other -- 32
Changes in assets and liabilities, net of effect of acquisitions:
(Increase) decrease in receivables (11,985) (14,486)
(Increase) decrease in cost and estimated earnings in
excess of billings on uncompleted contracts (4,279) 9,227
(Increase) decrease in inventories 1,172 (3,127)
(Increase) decrease in prepaid expenses (638) (161)
(Increase) decrease in other current and other assets (2,177) (1,261)
Increase (decrease) in accounts payable (5,658) (18,200)
Increase (decrease) in deferred revenue - prebilled 875 (472)
Increase (decrease) in advanced billings 4,806 514
Increase (decrease) in accrued liabilities 2,935 1,591
---------- ----------
Net cash provided by (used in) operating
activities (8,329) (20,786)
---------- ----------
Cash flows from investing activities:
Investment in subsidiaries, net of cash received (18,822)
Purchase of property and equipment (2,845) (5,401)
---------- ----------
Net cash used in investing activities (21,667) (5,401)
---------- ----------
</TABLE>
(Continued)
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended
November 30,
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in outstanding checks
in excess of bank balance 2,335 3,130
Net proceeds on revolving credit agreements 35,333 36,687
Proceeds from issuance of debt -- 974
Repayment of debt and leases (3,671) (1,661)
Purchase of treasury stock -- (12,749)
Issue common stock -- 7
---------- ----------
Net cash provided by financing activities 33,997 26,388
Effect of exchange rate changes on cash -- (55)
---------- ----------
Net increase in cash and cash equivalents 4,001 146
Cash and cash equivalents - beginning of period 4,357 3,743
---------- ----------
Cash and cash equivalents - end of period $ 8,358 $ 3,889
========== ==========
Supplemental disclosures:
Cash payments for:
Interest $ 1,651 $ 3,357
========== ==========
Income taxes $ 738 $ 716
========== ==========
Noncash investing and financing activities:
Investment in subsidiary acquired
through issuance of debt $ 1,078 $ --
========== ==========
Other current assets acquired through
issuance of debt $ 879 $ --
========== ==========
Property and equipment acquired through
issuance of debt $ 85 $ --
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Unaudited Financial Information -
The financial information for the three months ended November 30, 1997
and 1998 and as of August 31, 1998 and November 30, 1998 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 - 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 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 number of shares outstanding for the quarter ended
November 30, 1997, 1998 was 12,488,393 and 12,460,400 respectively. Dilutive
common shares equivalent shares for quarters ended November 30, 1997 and 1998
were 249,937 and 60,471, respectively, all attributable to stock options.
Note 3 - 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 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
8
<PAGE> 9
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. Prospect also owned a 66% interest in Inflo Control Systems
Limited (Inflo), a manufacturer of boiler steam leak detection, acoustic mill
and combustion monitoring equipment and related systems. 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, as well as Prospect's entire ownership
interest in Inflo. The Company also assumed certain liabilities of PEL and
Prospect relating to its employees and pension plans including approximately
$4,100,000 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 November 30, 1998, approximately
$2,900,000 had been paid to former employees with the remaining $1,200,000
expected to be paid during the second quarter of fiscal 1999, upon completion of
the Company's workforce reduction plan. 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; see Note 6 to Notes to
Consolidated Financial Statements) have been included in the 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. (Lancas), 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 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 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.
9
<PAGE> 10
On July 28, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Bagwell Brothers, Inc. and a subsidiary
(collectively, Bagwell). Total consideration paid was $1,600,000 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 $10,300,000 is being
amortized on a straight-line basis over 20 years. The operating results of
Bagwell have been included in the 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 three months ended November 30, 1997, if such acquisition had
taken place on September 1, 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Gross revenue $ 136,765
============
Income from continuing operations $ 4,160
============
Basic earnings from continuing operations per common share $ .33
============
Diluted earnings from continuing operations per common share $ .33
============
</TABLE>
Note 4 - Investment in Unconsolidated Entities -
During the three months ended November 30, 1998, the Company recognized
losses of $53,000 from Shaw-Nass Middle East, W.L.L., the Company's Bahrain
joint venture (Shaw-Nass). In addition, as of August 31, 1998 and November 30,
1998, the Company had outstanding receivables from Shaw-Nass totaling $1,758,000
and $2,638,000, respectively. These receivables relate primarily to inventory
and equipment sold to the entity.
Note 5 - 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):
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended November 30,
1997 1998
---------- ----------
<S> <C> <C>
Net income $ 4,704 $ 2,822
Foreign currency translation adjustments -- 467
---------- ----------
Total comprehensive income $ 4,704 $ 3,289
========== ==========
</TABLE>
Note 6 - 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
consolidated financial statements of the Company. Revenues of these discontinued
operations totaled approximately $1,072,000 for the three months ended November
30, 1997.
11
<PAGE> 12
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 November 30,
1998, and the results of its operations for the three-month period 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, in 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 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:
12
<PAGE> 13
<TABLE>
<CAPTION>
(Unaudited)
Three-Months Ended
November 30,
1997 1998
------- -------
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 81.8 82.2
------- -------
Gross profit 18.2 17.8
General and administrative expenses 10.6 12.3
------- -------
Operating income 7.6 5.5
Interest expense (1.6) (2.1)
Other income, net .1 .1
------- -------
(1.5) (2.0)
------- -------
Income before income taxes 6.1 3.5
Provision for income taxes 1.5 1.0
------- -------
Income from continuing operations before earnings
(losses) from unconsolidated entity 4.6 2.5
Earnings (losses) from unconsolidated entity .1 (.1)
------- -------
Income from continuing operations 4.7 2.4
Operating results of discontinued operations, net of taxes .1 --
------- -------
Net income 4.8% 2.4%
======= =======
</TABLE>
Sales increased 17.4% to $115.9 million for the three months ended
November 30, 1998 as compared to $98.7 million for the same period in the prior
year. Approximately $13 million of the increase relates to sales of subsidiaries
acquired either in, or subsequent to, the three months ended November 30, 1997.
The Company's sales were for projects in the following geographic
regions:
<TABLE>
<CAPTION>
Three-Months Ended November 30,
1997 1998
-------------------------- --------------------------
Geographic Region (in millions) % (in millions) %
- ------------------ -------------- ------ -------------- ------
<S> <C> <C> <C> <C>
U.S.A $ 57.8 58% $ 85.2 73%
Far East/Pacific Rim 21.5 22 9.3 8
Middle East 7.6 8 5.5 5
South America 5.7 6 2.7 2
Europe 5.1 5 9.0 8
Other 1.0 1 4.2 4
-------------- ------ -------------- ------
$ 98.7 100% $ 115.9 100%
============== ====== ============== ======
</TABLE>
13
<PAGE> 14
The Company's sales were for projects in the following industry
sectors:
<TABLE>
<CAPTION>
Three-Months Ended November 30,
1997 1998
------------------------ ------------------------
Industry Sector (in millions) % (in millions) %
- --------------- ------------ ------ ------------- ------
<S> <C> <C> <C> <C>
Electric Power $ 34.5 35% $ 34.1 30%
Chemical 29.4 30 38.3 33
Refining 13.4 14 20.1 17
Petrochemical 9.0 9 7.6 7
Oil and Gas 5.2 5 8.5 7
Other 7.2 7 7.3 6
------------ ------ ------------ ------
98.7 100% $ 115.9 100%
============ ====== ============ ======
</TABLE>
Sales for domestic projects increased $27.4 million, or 47%, from $57.8
million for the three months ended November 30, 1997 to $85.2 million for the
three months ended November 30, 1998. The increase in domestic sales primarily
resulted from increases in sales to the Chemical, Refining, and Oil and gas
sectors. Sales for international projects decreased $10.2 million, or 25%, to
$30.7 million for the three months ended November 30, 1998 from $40.9 million
for the same period of the prior year. The decrease in international sales is
primarily attributable to decreases in Far East/Pacific Rim region (due to
general economic conditions), as well as decreases in the South American region
(due to general economic conditions and, particularly with respect to Venezuela,
recent political events) and the Middle East region (due to general
fluctuations) partially offset by an increase in the European region.
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 does believe, however, that the Far
East/Pacific Rim and South American markets do present significant long-term
opportunities for the Company. The increases in the European region are
attributable to the acquisition of Prospect, which was acquired in November of
1997.
Increases in the Chemical and Refining sectors resulted primarily from
domestic projects in which the Company supplied construction services, in
addition to piping. 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. In light of
decreased oil prices worldwide and decreased spending in the oil and gas
industry in general, the Company's outlook for sales from the Oil and Gas sector
in the short- and mid-term indicates little or no growth, or possibly a decline.
While the dollar amount of sales in the Electric Power sector remained level
comparing the three-month periods ended November 30, 1997 and 1998, there was a
shift toward domestic projects from international projects in the three months
ended November 30, 1998. In light of the economic conditions in the Far
East/Pacific Rim and the increase inquiry levels for domestic Electric Power
projects, the Company anticipates that this trend will continue for the
foreseeable future.
The gross profit percentage for the three-month period ended November
30, 1998 decreased to 17.8% from 18.2% for the same period the prior year. The
reduction in the Company's work in South
14
<PAGE> 15
America was the major factor in the gross profit percentage decline. In light of
the general economic conditions in South America and the increasing percentage
of the Company's revenues being attributable to construction services, which
generally have lower gross profit percentages than pipe fabrication, the Company
believes that its gross profit percentage will continue to decrease slightly
through the remainder of fiscal 1999.
General and administrative expenses increased from $10.5 million for
the quarter ended November 30, 1997 to $14.3 million for the quarter ended
November 30, 1998. Approximately $2.2 million of this increase relates to the
integration of PED, Prospect, Cojafex, Lancas and Bagwell into the Company's
business, and $.9 million relates to increases for a construction subsidiary;
the remainder relates to normal increases. The Company's general and
administrative expenses also increased as a percentage of sales from 10.6% for
the three months ended November 30, 1997 to 12.3% for the three months ended
November 30, 1998. The Company believes that general and administrative expenses
as a percentage of sales will decrease toward historical levels as the
operations of PED, Prospect, Cojafex, Lancas and Bagwell 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 November 30, 1998 was $2.4
million, compared to $1.6 million for the same period last year. Interest
expense increased primarily due to increased borrowings from the Company's major
line of credit facility, which has generally been used to provide working
capital and fund fixed asset purchases and subsidiary acquisitions.
Additionally, in the three months ended November 30, 1998, this line of credit
facility was used to purchase treasury stock totaling $12.7 million.
The Company's effective tax rates for the quarters ended November 30,
1997 and 1998 were 24.2% and 29.5%, respectively. The tax rates for each quarter
relate primarily to the mix of foreign versus domestic work.
Total backlog increased to $430 million at November 30, 1998 compared
to $271 million reported at November 30, 1997 and $254 million reported at
August 31, 1998. Approximately 85% of the backlog relates to domestic projects
and roughly 90% of the backlog relates to work currently anticipated to be done
during the 12 months following November 30, 1998. In addition, a significant
portion of the backlog relates to a Refining project in Norco, Louisiana.
Backlog by industry sector is as follows (in millions):
<TABLE>
<S> <C>
Chemical $ 170.3
Refining 143.8
Electric Power 78.7
Oil and Gas 15.6
Petrochemical 11.5
Other 10.1
--------
$ 430.0
========
</TABLE>
15
<PAGE> 16
Liquidity and Capital Resources
Net cash used in operations was $20.8 million for the three months ended
November 30, 1998, compared to $8.3 million for the same period of the previous
fiscal year. For the three months ended November 30, 1998, cash from operating
activities was favorably impacted by net income of $2.8 million, depreciation
and amortization of $3.1 million, and a $9.2 million decrease in cost and
estimated earnings in excess of billings on uncompleted contracts. Offsetting
these positive factors were an increase in receivables of $14.5 million,
reductions in accounts payable of $18.2 million and an increase in inventories
of $3.1 million. The increase in receivables resulted from the extension of
credit to customers, as well as the timing of work, billings and collections,
which also impacted the decrease in cost and estimated earnings in excess of
billings on uncompleted contracts. The decrease in accounts payable resulted
from the timing of payments to vendors.
Net cash used in investing activities was $5.4 million for the three
months ended November 30, 1998, compared to $21.7 million for the same period of
the last fiscal year. During the three months ended November 30, 1998, the
Company purchased approximately $5.4 million of property and equipment.
Approximately $4.5 million of this amount was for construction equipment. In the
three months ended November 30, 1997, in addition to $2.8 million of property
and equipment acquisitions, the Company invested $18.8 million, net of cash
received, in the PED and Prospect acquisitions.
Net cash provided by financing activities was $26.4 million for the
three-month period ended November 30, 1998, compared to $34.0 million provided
for the three months ended November 30, 1997. For the three months ended
November 30, 1998, $36.7 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 Board of Directors. As of November 30, 1998, 1,478,100 shares of
stock had been repurchased at a total price, including brokerage commissions, of
approximately $12.7 million. Cash was also provided by a $3.1 million increase
in outstanding checks in excess of bank balances (resulting from the timing of
payments and the clearance of checks), while funds of $1.7 million were used to
pay down outstanding debt.
As of November 30, 1998, the Company had approximately $37 million
available under it 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 ("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
16
<PAGE> 17
produce erroneous results on or before January 1, 2000 because the year 2000 may
be interpreted as the year 1900. During 1998, the Company's executive management
and Board of Directors 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
(scheduled to be completed in April, 1999 and estimated to cost approximately
$250,000) and correction or replacement of any non-compliant systems.
The Company is currently evaluating its IT systems for Y2K compliance.
Over the last 20 months, the Company has been evaluating, updating and
consolidating its principal IT systems. While this project was undertaken
primarily to integrate the Company's various operations and increase the
efficiency, accuracy and usefulness of the Company's IT systems, the Company has
been able to evaluate and address its Y2K risks with respect to its principal IT
systems without incurring significant additional costs. The Company's
non-compliant IT systems are currently scheduled for replacement or modification
to Y2K compliant systems by June 1999.
Regarding the Company's non-IT systems, which primarily consist of
systems with embedded technology, the Company is in the process of completing
its preliminary assessment of all date-sensitive components. Upon completion of
its assessment, the Company will replace or modify other non-compliant non-IT
systems as necessary.
The Company has not incurred significant costs related to Y2K
compliance as of November 30, 1998. 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 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. As
part of its assessment of the Y2K risk associated with third party systems, the
Company is contacting its significant suppliers and customers to determine their
level of Y2K compliance. The Company has scheduled to complete its assessment by
June 1999.
Based upon the outcome of its assessments and audits 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.
17
<PAGE> 18
Financial Accounting Standards Board Statements
In June 1998, the Financial Accounting Standards Board (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 November 30, 1998, the Company
had total unamortized deferred organizational costs of approximately $870,000.
The Company intends to adopt this new requirement in fiscal 2000.
18
<PAGE> 19
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 change in the Company's
exposure to these risks.
19
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended November 30, 1998, 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 November 30, 1998, the Company did not
file a Form 8-K.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SHAW GROUP INC.
Dated: January 14, 1999 /s/ Robert L. Belk
-----------------------------------
Chief Financial Officer
(Duly Authorized Officer)
21
<PAGE> 22
THE SHAW GROUP INC.
EXHIBIT INDEX
Form 10-Q Quarterly Report for the Quarterly Period ended November 30,
1998.
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
11 Computation of Earnings per Share
27 Financial Data Schedule
</TABLE>
22
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1997 1998
----------- -----------
<S> <C> <C>
Income from continuing operations (dollars in thousands) $ 4,635 $ 2,822
=========== ===========
Shares:
Weighted average number of common shares outstanding 12,488,393 12,460,400
Net effect of stock options 249,937 60,471
----------- -----------
Weighted average number of common shares outstanding,
plus assumed exercise of stock options 12,738,330 12,520,871
=========== ===========
Income from continuing operations:
Basic earnings per share $ .37 $ .23
=========== ===========
Diluted earnings per share $ .36 $ .23
=========== ===========
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 3,889
<SECURITIES> 0
<RECEIVABLES> 154,719
<ALLOWANCES> 0
<INVENTORY> 69,355
<CURRENT-ASSETS> 261,687
<PP&E> 123,164
<DEPRECIATION> 27,568
<TOTAL-ASSETS> 403,125
<CURRENT-LIABILITIES> 144,595
<BONDS> 0
0
0
<COMMON> 119,367
<OTHER-SE> 41,887
<TOTAL-LIABILITY-AND-EQUITY> 403,125
<SALES> 115,918
<TOTAL-REVENUES> 115,918
<CGS> 95,315
<TOTAL-COSTS> 95,315
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,442
<INCOME-PRETAX> 4,080
<INCOME-TAX> 1,205
<INCOME-CONTINUING> 2,822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,822
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
