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, 1999
------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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, 15,208,046 shares outstanding as of January 7, 2000.
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
Part I - Financial Information
Item 1. - Financial Statements
Condensed Consolidated Balance Sheets - August 31, 1999
and November 30, 1999 3 - 4
Condensed Consolidated Statements of Income - For the
Three Months Ended November 30, 1998 and 1999 5
Condensed Consolidated Statements of Cash Flows - For
the Three Months Ended November 30, 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 - 17
Item 3. - Quantitative and Qualitative Disclosures About
Market Risk 17
Part II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 18
Item 6. - Exhibits and Reports on Form 8-K 18
Signature Page 19
Exhibit Index 20
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<CAPTION>
ASSETS
August 31, November 30,
1999 1999
-------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,901 $ 7,937
Accounts receivable, net 122,053 142,465
Receivables from unconsolidated entity, net 4,310 4,289
Inventories 78,464 78,236
Cost and estimated earnings in excess of billings
on uncompleted contracts 24,277 37,039
Prepaid expenses 4,131 6,553
Other current assets 11,934 11,921
-------------- -----------------
Total current assets 252,070 288,440
Investment in unconsolidated entity 4,646 4,882
Investment in securities available for sale 13,830 14,295
Property and equipment, less accumulated
depreciation
of $35,252 at August 31, 1999 and $37,815 at
November 30, 1999, respectively 95,508 94,550
Goodwill, net of accumulated amortization of $3,276
at August 31, 1999 and $3,458 at November 30, 1999 32,134 31,356
Other assets 8,874 7,194
-------------- -----------------
$ 407,062 $ 440,717
============== =================
</TABLE>
(Continued)
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
August 31, November 30,
1999 1999
--------------- -----------------
<S> <C> <C>
Current liabilities:
Outstanding checks in excess of bank balance $ 6,633 $ 4,878
Accounts payable 37,714 28,355
Accrued liabilities 28,407 32,498
Current maturities of long-term debt 8,056 8,412
Revolving lines of credit 43,562 9,961
Deferred revenue - prebilled 3,576 7,266
Advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts 10,147 12,141
--------------- -----------------
Total current liabilities 138,095 103,511
Long-term debt, less current maturities 87,841 83,530
Deferred income taxes 6,887 6,730
Commitments and contingencies -- --
Shareholders' equity:
Common stock, no par value,
11,736,046 and 15,208,046 shares outstanding, respectively 119,353 186,969
Retained earnings 77,071 82,571
Accumulated other comprehensive income (loss) (1,535) (1,961)
Unearned restricted stock compensation (125) (108)
Treasury stock, 8,224,236 shares (20,525) (20,525)
--------------- -----------------
Total shareholders' equity 174,239 246,946
--------------- -----------------
$ 407,062 $ 440,717
=============== =================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended
November 30,
1998 1999
-------------- --------------
<S> <C> <C>
Income:
Sales $ 116,032 $ 150,808
Cost of sales 95,315 124,730
-------------- --------------
Gross profit 20,717 26,078
General and administrative expenses 14,275 15,912
-------------- --------------
Operating income 6,442 10,166
Interest expense (2,442) (1,968)
Other income, net 80 173
-------------- --------------
(2,362) (1,795)
-------------- --------------
Income before income taxes, earnings (losses) from unconsolidated
entity and cumulative effect of change in accounting principle 4,080 8,371
Provision for income taxes 1,205 2,787
-------------- --------------
Income before earnings (losses) from unconsolidated entity and
cumulative effect of change in accounting principle 2,875 5,584
Earnings (losses) from unconsolidated entity (53) 236
-------------- --------------
Income before cumulative effect of change in accounting principle 2,822 5,820
Cumulative effect on prior years of change in accounting for
start-up costs, net of taxes -- (320)
-------------- --------------
Net income $ 2,822 $ 5,500
============== ==============
Basic income per common share:
Number of shares 12,460 12,510
Income before cumulative effect of change in accounting principle $ 0.23 $ 0.47
Cumulative effect on prior years of change in accounting for
start-up costs, net of taxes -- (0.03)
-------------- --------------
Net income per common share $ 0.23 $ 0.44
============== ==============
Diluted income per common share:
Number of shares 12,521 13,241
Income before cumulative effect of change in accounting principle $ 0.23 $ 0.44
Cumulative effect on prior years of change in accounting for
start-up costs, net of taxes -- (0.02)
-------------- --------------
Net income per common share $ 0.23 $ 0.42
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Three Months Ended
November 30,
1998 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,822 $ 5,500
Depreciation and amortization 3,086 3,367
Other (319) (390)
Changes in assets and liabilities (excluding cash and
those relating to investing and financing activities) (26,375) (34,039)
-------------- --------------
Net cash provided by (used in) operating activities (20,786) (25,562)
Cash flows from investing activities:
Purchases of property and equipment (5,401) (2,712)
Proceeds from sale of property and equipment -- 1,031
-------------- --------------
Net cash used in investing activities (5,401) (1,681)
Cash flows from financing activities:
Net increase (decrease) in outstanding checks
in excess of bank balance 3,130 (1,755)
Net proceeds (repayments) on revolving credit agreements 36,687 (33,528)
Proceeds from issuance of debt 974 708
Repayment of debt and leases (1,661) (4,663)
Purchases of treasury stock (12,749) --
Issuance of common stock 7 67,617
-------------- --------------
Net cash provided by financing activities 26,388 28,379
Effect of exchange rate changes on cash (55) (100)
-------------- --------------
Net increase in cash and cash equivalents 146 1,036
Cash and cash equivalents - beginning of period 3,743 6,901
-------------- --------------
Cash and cash equivalents - end of period $ 3,889 $ 7,937
============== ==============
Supplemental disclosure:
Noncash investing and financing activities:
Investment in securities available for sale acquired in
lieu of interest payment $ -- $ 465
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Unaudited Financial Information
The financial information of The Shaw Group Inc. and its wholly-owned
subsidiaries (collectively, "the Company" or "Shaw") for the three-month periods
ended November 30, 1998 and 1999 and as of August 31, 1999 and November 30, 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, 2000.
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, 1999 November 30, 1999
--------------------------------------- --------------------------------------
Weighted Weighted
Average FIFO TOTAL Average FIFO TOTAL
------- ---- ----- ------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Finished Goods $29,244 $ 642 $29,886 $30,968 $ -- $30,968
Raw Materials 3,686 32,869 36,555 3,788 34,490 38,278
Work In Process 1,306 10,717 12,023 1,532 7,458 8,990
--------- --------- ---------- --------- -------- ---------
$34,236 $44,228 $78,464 $36,288 $41,948 $78,236
======= ======= ======= ======= ======= =======
</TABLE>
Note 3 - Public Offering of Common Stock
On November 10, 1999, the Company closed the sale of 3,000,000 shares of
its common stock, no par value (the "Common Stock"), in an underwritten public
offering at a price of $21 per share, less underwriting discounts and
commissions. On November 16, 1999, the underwriters for such offering exercised
an option to purchase an additional 450,000 shares of Common Stock from the
Company pursuant to such terms to cover over-allotments. The net proceeds to the
Company, less underwriting discounts and commissions and other expenses of the
offering, totaled approximately $67,617,000 and were used to pay down amounts
outstanding under the Company's primary revolving line of credit facility and
certain other long-term debt. The Company's primary revolving line of credit
facility has been used to provide working capital, as well as to fund fixed
asset purchases and subsidiary acquisitions.
Note 4 - 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 based 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.
At November 30, 1998 and 1999, the Company had outstanding dilutive stock
options of 235,750 and 1,196,250, respectively, which were assumed exercised
using the treasury stock method. The resulting dilutive common equivalent shares
were used in the calculation of diluted income per common share for each quarter
end. Additionally, the Company had 220,371 and 39,500 of stock options at
November 30, 1998 and 1999, respectively, which were excluded from the
calculation of diluted income per share because they were antidilutive.
<PAGE>
The weighted average common shares outstanding for the quarters ended
November 30, 1998 and 1999 were 12,460,400 and 12,509,899, respectively.
Dilutive common equivalent shares for the quarters ended November 30, 1998 and
1999 were 60,471 and 731,365, respectively, all attributable to stock options.
Note 5 - Investment in Unconsolidated Entities
During the three months ended November 30, 1999, the Company recognized
earnings of $236,000 from Shaw-Nass Middle East, W.L.L., the Company's Bahrain
joint venture ("Shaw-Nass"). In addition, as of August 31, 1999 and November 30,
1999, the Company had outstanding receivables from Shaw-Nass totaling $4,310,000
and $4,289,000, respectively. These receivables relate primarily to inventory
and equipment sold to Shaw-Nass.
Note 6 - Investment in Securities Available for Sale
In connection with its construction services, the Company embarked on its
first significant project financing participation on December 15, 1998. As a
result, the Company acquired $12,500,000 of 15% Senior Secured Notes due
December 1, 2003 (the "15% Notes"), issued by a customer, together with certain
preferred stock related thereto, also issued by the customer. The 15% Notes were
secured originally by a first priority security interest in some of the assets
in the customer's refinery located in Norco, Louisiana, at which the Company is
currently providing construction services.
Pursuant to an exchange offer initiated by the customer in October 1999, to
all of the holders of the 15% Notes (aggregating approximately $254 million in
principal and interest), on November 17, 1999, the Company exchanged its 15%
Notes for (i) $14,294,535 (representing the principal and accrued interest on
the Company's 15% Notes) of 10% Senior Secured Notes due November 15, 2004 (the
"New Notes"), and (ii) shares of Class A Convertible Preferred Stock, the amount
and value of which are not material. The 10% interest rate on the New Notes will
increase to 14% per annum on November 16, 2003, and will continue at such rate
until maturity. Through November 15, 2003, the Company expects to receive
additional New Notes in lieu of interest payments.
Pursuant to the New Notes exchange offer, the customer issued an aggregate
of approximately $254 million of the New Notes to the holders of the 15% Notes.
The Company participated in the New Notes exchange offer because, upon receipt
of the requisite approval by the holders of the 15% Notes, the collateral
securing the 15% Notes would be released. All holders of the 15% Notes
participated in the New Notes exchange offer.
Prior to the exchange offer, the Company's customer incurred additional
secured indebtedness of approximately $150,000,000 ranking senior to the 15%
Notes. Such indebtedness also ranks senior to the New Notes. As such, the
security interest in the refinery assets securing the New Notes is subordinate
to the security interest securing such additional indebtedness. Simultaneous
with the incurrence of additional secured indebtedness, the customer issued
additional common stock, raising $50 million of equity.
Since the New Notes are available for sale, Statement of Financial
Accounting Standards (SFAS) No. 115 -- "Accounting for Certain Investments in
Debt and Equity Securities" requires that they be measured at fair value in the
Company's consolidated 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 issuance of additional debt
securities by the customer during fiscal year 1999, the relatively dormant
market for the New Notes, the raising of $50,000,000 of additional equity, and
the impending scheduled completion of the refinery project, the Company believes
that the New Notes had an aggregate value approximating the outstanding
principal amount of $14,294,535 at November 30, 1999. As a result, no unrealized
<PAGE>
gain or loss is recognized in shareholders' equity. Since the financing
arrangement is related to construction services, the interest income of $465,000
in the first quarter of fiscal year 2000 from the 15% Notes and the New Notes is
included in sales, and the interest cost of $258,000 in the first quarter of
fiscal year 2000 associated with carrying the 15% Notes and the New Notes is
included in cost of sales in the statement of income. The interest cost was
calculated at the Company's effective borrowing rate, which approximated 7.35%
per annum for the three months ended November 30, 1999.
In November 1999, the Company also exchanged the related preferred stock
for shares of new Class C Convertible Preferred Stock, the amount and value of
which are not material.
Note 7 - Comprehensive Income
SFAS No. 130 -- "Reporting Comprehensive Income," which was 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):
Three Months Ended
November 30,
1998 1999
-------- --------
Net Income $ 2,822 $ 5,500
Foreign currency translation adjustments 467 (426)
-------- --------
Total comprehensive income $ 3,289 $ 5,074
======== ========
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 - Business Segments
The Company has aggregated its business activities into two operating
segments: pipe services and manufacturing. The following table presents
information about segment profits and assets (in thousands):
Pipe
Services Manufacturing Corporate Total
--------- ------------- ---------- -------
Quarter ended November 30, 1998
Sales to external customers $ 103,201 $ 12,831 $ -- $ 116,032
Intersegment sales -- 4,656 -- 4,656
Net income 2,527 385 (90) 2,822
Total assets 321,128 56,362 25,635 403,125
Quarter ended November 30, 1999
Sales to external customers $ 138,194 $ 12,614 $ -- $ 150,808
Intersegment sales -- 4,874 -- 4,874
Net income 5,063 349 88 5,500
Total assets 351,050 59,166 30,501 440,717
Note 9 - Change in Accounting Principle
In 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 requires costs of start-up activities to be expensed as
incurred. During the three-month period ended November 30, 1999, the Company
changed its accounting for start-up costs and expensed previously unamortized
deferred start-up costs of approximately $320,000, net of taxes. The unamortized
costs are reflected as a cumulative effect of a change in accounting principle.
<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 November 30,
1999, and the results of their 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 (including without
limitation, statements to the effect that the Company "believes," "anticipates,"
"plans," or other similar expressions) 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. The forward-looking statements include 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.
<PAGE>
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:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
November 30,
1998 1999
------------ --------------
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 82.2 82.7
------------ ------------
Gross profit 17.8 17.3
General and administrative expenses 12.3 10.6
------------ ------------
Operating income 5.5 6.7
Interest expense (2.1) (1.3)
Other income, net .1 .1
------------ ------------
(2.0) (1.2)
------------ ------------
Income before income taxes, earnings (losses) from unconsolidated
entity and cumulative effect of change in accounting principle 3.5 5.5
Provision for income taxes 1.0 1.8
------------ ------------
Income before earnings (losses) from unconsolidated entity and
cumulative effect of change in accounting principle 2.5 3.7
Earnings (losses) from unconsolidated entity ( .1) .1
------------ ------------
Income before cumulative effect of change in accounting principle 2.4 3.8
Cumulative effect on prior years of change in accounting for
organization cost, net of taxes -- (.2)
------------ ------------
Net income 2.4% 3.6%
============ ============
</TABLE>
<PAGE>
Sales increased 30.0% to $150.8 million for the three months ended November
30, 1999, as compared to $116.0 million for the same period in the prior year.
The Company's sales to customers in the following geographic regions
approximated the following:
Three Months Ended November 30,
1998 1999
--------------------------- ----------------------
Geographic Region (in millions) % (in millions) %
- ----------------- -------------- ---------- --------------- -----
U.S.A. $ 85.2 73% $ 117.1 78%
Far East/Pacific Rim 9.3 8 8.0 5
Middle East 5.5 5 1.6 1
South America 2.8 2 9.6 6
Europe 9.0 8 12.4 8
Other 4.2 4 2.1 2
---------- ------ ----------- ------
$ 116.0 100% $ 150.8 100%
========== ====== =========== ======
Sales for domestic projects increased $31.9 million, or 37%, from $85.2
million for the three months ended November 30, 1998 to $117.1 million for the
three months ended November 30, 1999. The increase in domestic sales primarily
resulted from increases in sales to the power generation and crude oil refining
industries, partially offset by a decrease in sales to the chemical processing
industry. Sales for international projects increased $2.9 million, or 9%, to
$33.7 million for the three months ended November 30, 1999 from $30.8 million
for the same period of the prior year, but international sales for the quarter
ended November 30, 1999 were approximately $1 million less than those for the
quarter ended August 31, 1999, indicating that the international market
continues to be weak. Bidding activity in international markets, however, has
recently increased. International sales remain sluggish in the Far East/Pacific
Rim region (due to general economic conditions). Middle East region sales are
down from the previous year, partially due to more fabrication work being
completed by the Company's joint venture, Shaw-Nass Middle East, W.L.L. ("Shaw
Nass"); some of this work was previously completed by the Company's wholly-owned
fabrication facilities. Since Shaw-Nass is a joint venture, its sales are not
reflected in the Company's consolidated sales. Even though sales in the South
American region have recently shown some improvement, the Company's short-term
outlook is uncertain due to general economic conditions and, particularly with
respect to Venezuela, political conditions. The Company continues to believe,
however, that the Far East/Pacific Rim, Middle East and South American markets
present significant long-term opportunities for the Company. For the quarter
ended November 30, 1999, virtually all European sector sales were to the United
Kingdom. European inquiries are increasing with the majority of activity
initiating in Spain.
<PAGE>
Based on the Company's available work force, its domestic fabrication shops
operated at full capacity during the quarter ended November 30, 1999. The
Company has increased it fabrication capacity through internal means and is
pursuing opportunities for further expansion through asset acquisitions and/or
new construction.
The Company's sales to customers in the following industry sectors
approximated the following:
Three Months Ended November 30,
1998 1999
------------------ -----------------
Industry Sector (in millions) % (in millions) %
------------ ---- -----------------
Power Generation $ 34.1 30% $ 58.3 39%
Chemical Processing 38.3 33 28.5 19
Crude Oil Refining 20.1 17 42.7 28
Petrochemical Processing 7.7 7 2.6 2
Oil and Gas Exploration and Production 8.5 7 10.5 7
Other 7.3 6 8.2 5
--------- ---- ------- -----
$ 116.0 100% $150.8 100%
========= ==== ======= =====
Increases in sales to the power generation and crude oil refining
industries resulted primarily from domestic projects, as well as international
crude oil refining projects. Sales related to domestic power generation projects
increased due to new power generation projects, including the previously
announced $300 million, five-year contract with General Electric. Crude oil
refining industry sales were positively impacted by a large construction project
for a refinery in Norco, Louisiana, and increased activity in Venezuela. The
decrease in sales in the chemical processing industry sector resulted from
reduced domestic activity.
The gross profit margin for the three-month period ended November 30, 1999
decreased to 17.3% from 17.8% for the same period the prior year. Although gross
profit margin improvements were recognized for some fabrication services and in
the manufacturing segment of the Company's business, lower margins on erection
and construction services offset these improvements.
General and administrative expenses increased from $14.3 million for
the quarter ended November 30, 1998 to $15.9 million for the quarter ended
November 30, 1999. This increase relates primarily to variable expenses related
to increased sales. As a percentage of sales, however, general and
administrative expenses decreased from 12.3% for the three months ended November
30, 1998 to 10.6% for the three months ended November 30, 1999.
<PAGE>
Interest expense for the quarter ended November 30, 1999 was $2.0 million,
compared to $2.4 million for the same period of the prior fiscal year. Interest
expense varies from period to period due to several factors, including the level
of borrowings and interest rate fluctuations on variable rate loans.
The Company's effective tax rates for the quarters ended November 30, 1998
and 1999 were 29.5% and 33.3%, respectively. The tax rates for each quarter
relate primarily to the mix of foreign versus domestic work. The increase in the
tax rate for the quarter ended November 30, 1999, compared to the quarter ended
November 30, 1998, is due primarily to the increase in domestic sales.
Total backlog increased to $833 million at November 30, 1999, compared to
$430 million reported at November 30, 1998 and $818 million reported at August
31, 1999. Approximately 76% of the backlog relates to domestic projects, and
roughly 47% of the backlog relates to work currently anticipated to be completed
during the 12 months following November 30, 1999. The backlog is largely a
reflection of the broader economic trends being experienced by the Company's
customers and is important in anticipating operational needs. Backlog is not a
measure defined in generally accepted accounting principles and the Company's
backlog may not be comparable to backlog of other companies. While Shaw believes
backlog information may be helpful in understanding its business, it is not
necessarily indicative of future earnings.
Backlog at November 30, 1999 by industry sector is as follows (in
millions):
Power Generation $ 527.7
Chemical Processing 136.8
Crude Oil Refining 125.7
Oil and Gas Exploration and Production 31.3
Petrochemical Processing .5
Other 11.2
________
$ 833.2
========
The Company recently joined with other manufacturers in filing an
Anti-Dumping Duty Petition against importers of certain stainless pipe
fittings. The suit alleges that these importers were dumping products in the
United States in violation of U.S. unfair trade laws and international trade
rules established by the World Trade Organization. While the Company cannot
provide any assurances with respect to the ultimate outcome of such Petition,
management of the Company believes that a favorable decision in such matter
would enhance the long-term profitability in its manufacturing segment.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Net cash used in operations was $25.6 million for the three months ended
November 30, 1999, compared to $20.8 million for the same period of the previous
fiscal year. For the three months ended November 30, 1999, cash from operating
activities was favorably impacted by net income of $5.5 million and depreciation
and amortization of $3.4 million. Offsetting these positive factors were changes
in certain assets and liabilities of $34.0 million and other non-cash items of
$.4 million. Increases in accounts receivables and cost and estimated earnings
in excess of billings on uncompleted contracts and a reduction in accounts
payable accounted for the majority of the $33.5 million change in assets and
liabilities.
Net cash used in investing activities was $1.7 million for the three months
ended November 30, 1999, compared to $5.4 million for the same period of the
last fiscal year. During the three months ended November 30, 1999, the Company
purchased approximately $2.7 million of property and equipment compared to $5.4
million for the three months ended November 30, 1998. During the quarter ended
November 30, 1999, the Company received $1 million from the sale of property and
equipment.
Net cash provided by financing activities was $28.4 million for the
three-month period ended November 30, 1999, compared to $26.4 million provided
for the three months ended November 30, 1998. The primary source of cash for the
three months ended November 30, 1999 was the sale of 3,450,000 shares of the
Company's common stock (see Note 3 of Notes to Condensed Consolidated Financial
Statements). The net proceeds of $67.6 million were used to pay down amounts
outstanding under the Company's primary revolving line of credit facility and
certain other long-term debt. The Company's primary revolving line of credit
facility has been used by the Company to provide working capital, as well as to
fund fixed asset purchases and subsidiary acquisitions.
As of November 30, 1999, the Company had approximately $89 million
available under its principal revolving line of credit facility. In September
1999, the maturity date of such line of credit facility was extended to May 31,
2002. The amendment also modified the interest rate spread to not exceed, at the
Company's election, 2.5% over the London Interbank Offering Rate or 1.75% over
the Prime Rate. 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,
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 its
Y2K risks to ensure that its information technology systems and non-information
technology systems are able to process dates from and after January 1, 2000
without critical systems failures. In addition to evaluating its own systems,
the Company assessed 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 all of its systems involved preliminary assessments
by its personnel and detail audits and assessments by consultants. The Company
completed this phase in the fourth quarter of fiscal 1999. The Company segmented
the analysis of its systems into local, national and international categories.
Shaw divided each category into major business areas consisting of systems,
products, facilities and suppliers. The Company then divided these business
areas into smaller categories, such as computers, network equipment, production
equipment, manufacturing equipment, alarm systems and phone systems, for data
collection and evaluation. The Company entered the data 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:
<PAGE>
Systems
Shaw identified its proprietary and off-the-shelf systems during the
inventory phases of its Y2K program. The Company'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 established
to evaluate operational functionality and current, future and crossover dates
between the years 1999 and 2000. The Company upgraded other business critical
off-the-shelf applications according to the directions of manufacturers to meet
year 2000 compliance specifications.
Products
After an inventory and evaluation, Shaw believes that the majority of its
products are generally not vulnerable to year 2000 problems. Design
modifications have been implemented to Cojafex bending machines, the Company's
only significant products with embedded technology, to assure Y2K compliance of
future machines. The Company believes that, while certain reporting functions
may be impacted, the production functionality of Cojafex machines previously
sold will not be adversely affected by Y2K problems.
Facilities
The Company evaluated its facilities for Y2K purposes, including phone
systems, HVAC, alarm systems, fire systems, elevators and electrical power. The
Company evaluated these items because of their potential impact on business
operations if they were to fail. To date, Shaw has not experienced or discovered
that any of its major business facilities are materially noncompliant with its
Y2K requirements.
Suppliers
Shaw believes the most likely Y2K problems that it may experience would be
a temporary disruption in certain materials and services provided to it by third
parties. These disruptions could have a material adverse effect on the Company.
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. Shaw believes that it will be able to replace
non-compliant vendors; however, certain types of raw materials are available
from only one or a few specialized suppliers. To date, the Company believes that
it has contacted all suppliers material to its operations about their compliance
efforts and status. The Company has not experienced or discovered any problems
that it believes will materially adversely affect it, but the Company cannot be
assured that problems of this nature will not arise.
Current Assessment
Through January 14, 2000, the Company has not experienced any material
impact on its operations as a result of the year 2000 date change. All critical
systems have continued to function normally, no material problems have been
identified with respect to products and facilities and no disruptions have been
experienced due to materials and services provided by third parties. The Company
cannot, however, be assured that it will not be materially adversely affected by
Y2K problems in the future. The Company will continue its Y2K compliance
monitoring for the foreseeable future due to the overall uncertainty surrounding
the Y2K issue.
The total cost of Y2K testing and remediation during the life cycle of the
project to outside sources was approximately $.9 million (including the costs to
replace non-compliant hardware). The Company cannot be assured, however, that
such costs will not escalate and materially and negatively impact it. The
Company incurred no outside costs in fiscal 1998 related to Y2K issues.
<PAGE>
Financial Accounting Standards Board Statements
- -----------------------------------------------
In 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 requires costs of start-up activities to be expensed as
incurred. During the three-month period ended November 30, 1999, the Company
changed its accounting for start-up costs and expensed previously unamortized
deferred start-up costs of approximately $320,000, net of taxes. The unamortized
costs are reflected as a cumulative effect of a change in accounting principle.
In fiscal 1999, 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 statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Changes in a derivative's fair value are to be recognized
currently in earnings unless specific hedge accounting criteria are met. The
Company will be required to adopt SFAS No. 133, as amended by SFAS No. 137 which
defers the effective date, on September 1, 2000. The Company has not yet
quantified the impact on its financial statements that may result from adoption
of SFAS No. 133; however, the Company does not use derivative instruments or
hedging activities extensively in its business.
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, 1999, there have been no material changes in the Company's
exposure to these risks.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended November 30, 1999, there were
no matters submitted by the Company to a vote of security holders.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit Number Description
-------------- -----------
+10 Third Amendment to Credit Agreement made as
of August 31, 1999, among the Company,
Mercantile Business Credit Inc., Bank One
Louisiana, N.A.(successor of First National
Bank of Commerce, assignee of City National
Bank of Baton Rouge), Hibernia National Bank
and Union Planters Bank of Louisiana
++27 Financial Data Schedule
----------
+ Incorporated by reference from the Company's Form 10-K for the
fiscal year ended August 31, 1999, as amended
++ Filed herewith
B. Form 8-K
During the fiscal quarter ended November 30, 1999, the Company
did not file a Form 8-K.
<PAGE>
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, 2000 /S/ Robert L. Belk
-----------------------------
Chief Financial Officer
(Duly Authorized Officer)
<PAGE>
THE SHAW GROUP INC.
EXHIBIT INDEX
Form 10-Q Quarterly Report for the Quarterly Period ended November 30, 1999.
Exhibit Number Description
--------------- -----------
+10 Third Amendment to Credit Agreement made as of
August 31, 1999, among the Company, Mercantile
Business Credit Inc., Bank One Louisiana, N.A.
(successor of First National Bank of Commerce,
assignee of City National Bank of Baton Rouge),
Hibernia National Bank and Union Planters Bank of
Louisiana
++27 Financial Data Schedule
----------
+ Incorporated by reference from the Company's Form 10-K for the
fiscal year ended August 31, 1999, as amended
++ Filed herewith
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