UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 1-1228
Stone & Webster, Incorporated
(Exact name of registrant as specified in its charter)
Delaware 13-5416910
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
245 Summer Street, Boston, MA 02210
(Address of Principal Executive Offices (Zip Code)
(617) 589-5111
(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 .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock: 13,033,377 shares
as of October 31, 1998.
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Stone & Webster, Incorporated and Subsidiaries
Form 10-Q
Index
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited):
Three and Nine Months Ended September 30, 1998
and September 30, 1997 3
Consolidated Balance Sheets (Unaudited):
September 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows
(Unaudited):
Nine Months Ended September 30, 1998 and
September 30, 1997 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-11
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 12-17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
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PART I. Financial Information
Item 1. Financial Statements
Stone & Webster, Incorporated and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenue $350,443 $368,216 $961,404 $1,003,999
Cost of revenue 330,744 337,385 897,257 916,599
-------- -------- -------- ----------
Gross profit 19,699 30,831 64,147 87,400
General and administrative expenses 15,818 16,991 47,427 51,710
-------- -------- -------- ----------
Operating income 3,881 13,840 16,720 35,690
Other income (expense)
Interest income 708 1,059 2,208 2,892
Interest expense (1,078) (430) (2,086) (1,258)
-------- -------- -------- ----------
Total other income (expense), net (370) 629 122 1,634
Income before provision for income
taxes 3,511 14,469 16,842 37,324
Income tax provision 1,343 5,084 6,410 12,889
-------- -------- -------- ----------
Net income $ 2,168 $ 9,385 $ 10,432 $ 24,435
======== ======== ======== ==========
Per share amounts:
Basic and diluted earnings per share $0.17 $0.73 $0.81 $1.90
===== ===== ===== =====
Dividends declared per share $0.15 $0.15 $0.45 $0.45
===== ===== ===== =====
Weighted average number of shares
outstanding:
Basic 12,912 12,828 12,835 12,808
====== ====== ====== ======
Diluted 12,957 13,025 12,932 12,902
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
3
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Stone & Webster, Incorporated and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except per share amounts)
September 30, December 31,
1998 1997
---- ----
Assets
Current assets:
Cash and cash equivalents $ 33,783 $ 75,030
U.S. Government securities, at amortized cost,
which approximates fair value - 31,909
Accounts receivable, principally trade, net 237,395 180,057
Costs and revenues recognized in excess of
billings 133,587 102,476
Deferred income taxes 19,065 18,835
Other 1,628 337
-------- --------
Total current assets 425,458 408,644
Assets held for sale 6,744 10,395
Fixed assets, net 153,238 140,177
Domestic prepaid pension cost 163,663 148,155
Note receivable 15,400 15,000
Other assets 31,279 16,406
-------- --------
Total assets $795,782 $738,777
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Bank loans $ 25,850 $ -
Current portion of long-term debt 2,109 1,750
Accounts payable, principally trade 84,106 85,338
Billings in excess of costs and revenues
recognized 153,975 115,730
Accrued liabilities 68,238 79,351
Accrued taxes 15,402 14,689
-------- --------
Total current liabilities 349,680 296,858
Long-term debt 22,542 22,510
Deferred income taxes 56,865 57,463
Other liabilities 11,331 16,714
Shareholders' equity:
Preferred stock, no par value; authorized
2,000 shares; none issued - -
Common stock, $1 par value; authorized 40,000
shares; 17,731 shares issued including shares
held in treasury 17,731 17,731
Capital in excess of par value of common stock 54,197 51,426
Retained earnings 428,943 424,287
Accumulated other comprehensive income (5,719) (2,205)
Less: Common stock held in treasury, at cost
(4,700 and 4,909 shares) 122,205 127,070
Employee stock ownership and restricted
stock plans 17,583 18,937
-------- --------
Total shareholders' equity 355,364 345,232
-------- --------
Total liabilities and shareholders' equity $795,782 $738,777
======== ========
See accompanying notes to condensed consolidated financial statements.
4
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Stone & Webster, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months
Ended September 30,
1998 1997
---- ----
Cash Flows from Operating Activities:
Net income $10,432 $24,435
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,770 9,776
Amortization of net cost of stock plans 1,286 1,040
Gain from asset divestiture (3,066) -
Deferred income taxes (828) 9,245
Domestic prepaid pension cost (15,508) (13,917)
Changes in operating assets and liabilities (91,260) 27,306
------- -------
Net cash (used for) provided by operating
activities (87,174) 57,885
------- -------
Cash Flows from Investing Activities:
Proceeds from maturities of U.S. Government
securities 31,909 58,178
Proceeds from asset divestiture 13,546 -
Purchases of fixed assets, net (24,831) (12,698)
Purchases of U.S. Government securities - (88,363)
------- -------
Net cash provided by (used for) investing activities 20,624 (42,883)
------- -------
Cash Flows from Financing Activities:
Acquisition of long-term debt 1,627 -
Repayments of long-term debt (1,236) (1,152)
Increase (decrease) in bank loans 25,850 (5,000)
Sales (purchases) of common stock for treasury 4,345 (2,618)
Dividends paid (5,776) (5,766)
Payments received from Employee Stock Ownership Trust 1,835 1,835
Payments to Employee Stock Ownership Trust (1,342) (1,729)
------- -------
Net cash provided by (used for) financing activities 25,303 (14,430)
------- -------
Net (decrease) increase in cash and cash equivalents (41,247) 572
Cash and cash equivalents at beginning of period 75,030 57,887
------- -------
Cash and cash equivalents at end of period $33,783 $58,459
======= =======
See accompanying notes to condensed consolidated financial statements.
5
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Stone & Webster, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
(A) The accompanying unaudited condensed consolidated financial statements of
Stone & Webster, Incorporated and Subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. The December 31, 1997 consolidated
balance sheet data was derived from audited financial statements but does
not include all disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the quarter and nine months ended
September 30, 1998 are not necessarily indicative of the results that may
be expected for the fiscal year ending December 31, 1998 or for any other
future period. For further information, refer to the consolidated financial
statements and notes included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
The preparation of condensed consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
(B) Fixed assets, net is stated at cost less accumulated depreciation of $186.0
million at September 30, 1998 and $165.4 million at December 31, 1997.
(C) Revenue and operating income by business segment were the following for the
quarter and nine months ended September 30, 1998 and 1997 (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenue:
Engineering, construction
and consulting services $343,040 $361,862 $939,524 $ 986,913
Cold storage and related
activities 7,403 6,354 21,880 17,086
-------- -------- -------- ----------
Total revenue $350,443 $368,216 $961,404 $1,003,999
======== ======== ======== ==========
Operating income:
Engineering, construction
and consulting services $ 3,735 $ 15,075 $ 15,042 $ 38,762
Cold storage and related
activities 1,580 2,186 6,160 5,367
-------- -------- -------- ----------
5,315 17,261 21,202 44,129
General corporate expenses (1,434) (3,421) (4,482) (8,439)
-------- -------- -------- ----------
Total operating income $ 3,881 $ 13,840 $ 16,720 $ 35,690
======== ======== ======== ==========
(D) The Company had a valuation allowance of $4.7 million at September 30, 1998
and $3.6 million December 31, 1997 for deferred tax assets related to net
operating loss carryforwards. The valuation allowance at September 30, 1998
comprises $4.6 million relating to state net operating loss carryforwards
and $0.1 million relating to the carryforwards of international
subsidiaries.
6
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(E) Basic earnings per share for the nine months ended September 30, 1998 and
1997 were computed based on the weighted average number of common shares
outstanding during the period of 12,835,460 and 12,807,791, respectively.
Diluted earnings per share for the nine months ended September 30, 1998 and
1997 were computed based on the weighted average common and dilutive
potential shares outstanding during the period of 12,931,656 and
12,901,824, respectively. The difference between the basic and the dilutive
shares outstanding represents the potential dilution from the exercise of
stock options during the period assuming the application of the treasury
stock method.
(F) Pension related items, which reduced operating costs, were $5.1 million and
$15.4 million for the quarter and nine months ended September 30, 1998
compared to $4.3 million and $13.4 million for the same periods in the
prior year. These items increased net income by $3.1 million, or $0.23 per
share, and $9.2 million, or $0.71 per share, for the quarter and nine
months ended September 30, 1998, compared with $2.6 million, or $0.20 per
share and $8.1 million or $0.62 per share for the same periods in 1997.
Pension related items include a net pension credit for the Company's
domestic subsidiaries and a net pension cost for its international
subsidiaries. The pension credit is the result of a plan that is funded in
excess of the projected benefit obligation and income from the amortization
of Statement of Financial Accounting Standards No. 87 net transition asset.
The plan is overfunded primarily due to favorable asset performance. The
transition asset will be fully amortized in 1998.
(G) Following approval by the Shareholders at the Company's annual meeting on
May 14, 1998, the Company's Restricted Stock Plan and the 1995 Stock Option
Plan were replaced by the Stone & Webster, Incorporated Long-Term Incentive
Compensation Plan (the "1998 Plan"), effective January 1, 1998. The 1998
Plan permits the grant of nonqualified stock options, incentive stock
options, restricted stock, performance shares, and performance units. No
further awards will be granted under the Restricted Stock Plan or the 1995
Stock Option Plan. Options previously granted will become or remain
exercisable in accordance with the terms of the award until their
expiration or earlier cancellation.
Under the 1995 Stock Option Plan for the nine-month period ended September
30, 1998, nonqualified options for 21,000 shares of common stock were
granted to non-employee directors and employees at a weighted average per
share option price of $41.84. Twenty-five percent of the nonqualified
options granted become exercisable on each of the first four anniversary
dates of the grant. Options with respect to 16,250 shares were exercised
and options for 29,750 shares were cancelled during the nine-month period.
Nonqualified options for 340,750 shares remain exercisable.
Under the 1998 Plan for the nine-month period ended September 30, 1998,
nonqualified and incentive stock options for 245,500 shares of common stock
were granted to employees at a per share option price of $43.19.
Twenty-five percent of the options granted will become exercisable on each
of the first four anniversary dates of the grants. Therefore, no options
under this plan will be exercisable before May 14, 1999. Options for 1,000
shares were cancelled during the nine-month period. Nonqualified options
for 244,500 shares remain exercisable. For the nine-month period ended
September 30, 1998, 1,000 shares of restricted stock were awarded under the
1998 Plan at an average per share price of $38.44. No shares have been
forfeited as of September 30, 1998.
7
<PAGE>
(H) In July 1995 and January 1998, the Board of Directors of the Company
authorized an increase in the share repurchase program from 1.0 million to
2.5 million shares and from 2.5 million to 3.0 million shares,
respectively, of the Company's common stock in open market transactions at
prevailing prices. For the nine months ended September 30, 1998, the
Company acquired 43,011 shares at a cost of $1.7 million. The amount and
timing of stock repurchases will depend upon market conditions, share
price, as well as other factors. The Company reserves the right to
discontinue the repurchase program at any time.
(I) During the third quarter of 1998, the Company entered into three separate
line of credit agreements totaling $110 million. These bank loans amounted
to $40.0 million, $40.0 million and $30.0 million, and there were no
borrowings under any of these bank loans as of September 30, 1998. Bank
debt as of September 30, 1998 was under previously existing lines of
credit. In addition, the Company assumed a $2.0 million line of credit from
Power Technologies, Inc. upon the finalization of the merger in the third
quarter (see Note O). Borrowings under this line of credit amounted to $0.8
million as of September 30, 1998.
(J) Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130").
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses). The
adoption of this statement only changes the display and disclosure of
information and does not impact amounts previously reported for net income
or shareholders' equity. Comprehensive income was $2.3 million and $9.0
million for the quarters ended September 30, 1998 and 1997, respectively.
Other comprehensive income (loss) consists of translation adjustments of
$0.1 million and $(0.4) million for the quarters ended September 30, 1998
and 1997, respectively. For the nine months ended September 30, 1998 and
1997 comprehensive income was $6.9 million and $23.6 million, respectively.
Other comprehensive income consists of translation adjustments of $(3.5)
million and $(0.8) million for the nine months ended September 30, 1998 and
1997, respectively.
(K) During the first quarter of 1998, the Company completed its divestiture of
underutilized office space with the sale of its Cherry Hill, New Jersey,
office building for $13.5 million in cash. The Company recognized a gain on
the sale of this property of $3.1 million ($2.0 million after tax or $0.15
per share). In 1996, the carrying value of the building was written down to
fair value and the loss, per Statement of Financial Accounting Standards
No. 121, was recorded as an operating loss. The Company also completed the
disposal of its remaining unused office space in its former New York
corporate offices. The provisions made in 1996 for losses on sublease or
lease cancellation of this space have, in aggregate, not been materially
different from the actual costs incurred in disposal of the excess space.
8
<PAGE>
(L) In January 1998, the Company purchased the assets of Belmont Constructors,
Inc. ("Belmont"). The purchase price is contingent upon the results of
certain long-term contracts which will be completed by the end of 1998.
Belmont is principally engaged in providing construction and construction
management services to a diverse group of clients in the hydrocarbons,
water, industrial and power markets. The Company recorded this transaction
using the purchase method of accounting for business combinations. The
results of Belmont are included in the Company's condensed consolidated
financial statements from the date of acquisition.
(M) During the second quarter of 1998, the Company acquired ownership of S.C.
Wood, LLC (SC Wood) in settlement of claims against a client who failed to
fulfill certain contractual obligations. The assets of SC Wood consist
primarily of a petroleum products pumping station. The Company paid a
nominal amount as the purchase price. The assets of SC Wood are carried at
$6.7 million representing the net book value of services and other advances
in connection with the project. The Company plans to sell the operations of
SC Wood and therefore the net assets of SC Wood are classified as an asset
held for sale in the Company's Consolidated Balance Sheet at September 30,
1998. SC Wood is principally operated as a pumping station which uses
natural gas to pump petroleum products.
(N) During the third quarter of 1998, Commercial Cold Storage, Inc.
("Commercial"), a subsidiary of Stone & Webster, Incorporated, signed a
definitive agreement to acquire the shares of seven companies which
comprise The Nordic Group, a multi-location, privately-owned cold storage
company. The acquisition was completed subsequent to the closing of the
third quarter and the purchase price of approximately $75 million in cash
plus $3.5 million in working capital and approximately $1.5 million in
other adjustments, subject to certain post-closing adjustments, was
financed through lines of credit. The Nordic Group will be operated as a
subsidiary of Commercial.
(O) During the third quarter of 1998, the Company completed the acquisition of
Power Technologies, Inc. ("PTI"). PTI provides engineering consulting
services, develops computer software for use by utility companies, develops
and conducts educational courses and develops customized computer hardware.
At the closing, the purchase price was paid in common stock of the Company
having a value of $9 million. Along with certain other contingent cash
considerations related to a specific project, the PTI shareholders may
receive additional shares of the Company's stock having a value of up to $8
million based on meeting certain performance requirements over the next
five years. In the event of a contingent payout, the number of shares of
common stock issued will be based on the stock price used in connection
with the initial closing.
(P) Certain financial statement items have been reclassified to conform to the
current year's presentation. For the three and nine month periods ended
September 30, 1997, the Company made reclassifications between general and
administrative expenses and cost of revenue.
(Q) Although the Company continues to have possible liabilities related to
environmental pollution and other legal actions, management believes, on
the basis of its assessment of these matters, including consultation with
counsel, that none of these pending legal actions nor such possible
liabilities will result in payments of amounts, if any, that would have a
material adverse effect on the Company's financial position, results of
operations or earnings per share calculations.
9
<PAGE>
The Trans-Pacific Petrochemical Indotama ("TPPI") project continues to be
suspended pending resolution of financing issues by the client. If
refinancing efforts are successful, it is possible that the project could
be restarted during 1999. The Company has obtained approval to resell or
use committed materials and procured equipment to reduce costs of project
suspension. The Company has also had substantive discussions with potential
purchasers of the olefins plant which constitutes the majority of the
Company's scope for the project. Had the project been cancelled as of
September 30, 1998, and if resale of the olefins plant were unlikely to be
completed, the Company would have recorded a pre-tax charge of
approximately $63 million representing project working capital plus current
procurement commitments net of the estimated salvage value of procured
equipment and materials.
The Company is currently performing two contracts in Ghana for the
engineering, procurement and construction of power plants. Due to various
factors, including owner directed technical and schedule changes, increases
in scope of the currently authorized contracts and other factors, the cost
to complete these contracts will significantly exceed each contract's
value. Management believes that it has valid contractual and equitable
grounds for change orders providing additional compensation under these
contracts. The Company has submitted requests for equitable adjustment and
change orders in excess of $40 million on one contract and is preparing
change order requests to be submitted on the second contract. The Company
has recognized revenue in excess of $40 million on these two contracts
representing, in management's judgment, a conservative estimate of the
total amount expected to be realized from the change orders. Negotiations
regarding these change orders are ongoing and management expects to reach
agreement with the owner on the first change order by the end of 1998.
A joint venture, in which the Company is a 50 percent owner, submitted
claims to recover in excess of $112 million in connection with scope and
specification changes on a major petrochemical project in the Middle East.
The Company believes that the joint venture will realize substantial
recovery on these claims. The Company has not recognized any contract
revenue associated with these claims. The joint venture has been notified
of claims in excess of $53 million, which have been submitted by a
subcontractor who has filed for arbitration of these claims. Substantially
all of the subcontractor's claims have been included in the claims
submitted by the joint venture.
(R) In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement
specifies new guidelines for determining a company's operating segments and
related requirements for disclosure. The Company is in the process of
evaluating the impact of the new standard on the presentation of the
financial statements and the disclosures therein. The Statement is
effective for fiscal years beginning after December 15, 1997. The Company
will adopt the new standard for the fiscal year ending December 31, 1998.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This Statement revises employers' disclosures
about pension and other postretirement benefit plans. It does not change
the measurement or recognition of those plans. The Statement is effective
for fiscal years beginning after December 15, 1997. The Company will adopt
the new standard for the fiscal year ending December 31, 1998.
10
<PAGE>
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Statement is effective for fiscal years
beginning after June 15, 1999. The Company will adopt the new standard by
January 1, 2000. Management is evaluating the impact this Statement may
have on the Company's financial statements.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Stone & Webster, Incorporated and Subsidiaries
Management's Discussion and Analysis of
Results of Operations and Financial Condition
The following is management's discussion and analysis of certain significant
factors that have affected the financial condition and results of operations of
Stone & Webster, Incorporated and Subsidiaries (the "Company") for the periods
noted. This discussion and analysis should be read in conjunction with the
Company's 1997 Annual Report on Form 10-K. The earnings per share calculations
disclosed are the same for both basic and diluted.
Results of Operations
For the quarter ended September 30, 1998, the Company reported revenue of $350.4
million, a decrease of 4.8 percent from the $368.2 million reported in the third
quarter of 1997. Operating income for the quarter was $3.9 million compared with
$13.8 million for the third quarter of 1997. Net income for the quarter ended
September 30, 1998 was $2.1 million or $0.17 per share, compared with net income
of $9.4 million or $0.73 per share for the same period in 1997. New orders were
$725.1 million for the quarter ended September 30, 1998 compared with $211.0
million for the third quarter of 1997.
Revenue for the nine months ended September 30, 1998 was $961.4 million compared
with $1,004.0 million reported for the same period in 1997, a decrease of 4.2
percent. Operating income for the first nine months of 1998 was $16.7 million
compared with operating income of $35.7 million for the same period in 1997. Net
income for the nine months ended September 30, 1998 was $10.4 million or $0.81
per share, compared with net income of $24.4 million, or $1.90 per share for the
same period in 1997. Backlog for the first nine months of 1998 was $2.7 billion
which increased $0.2 billion compared to December 31, 1997, and increased $0.1
billion compared to September 30, 1997. New orders for the first nine months of
1998 were $1.2 billion compared to $1.1 billion for the same period in 1997.
Components of earnings per share were:
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Basic and diluted earnings per share
from:
Operations $(0.06) $0.53 $(0.05) $1.22
Pension related items 0.23 0.20 0.71 0.62
------ ----- ------ -----
Ongoing operations 0.17 0.73 0.66 1.84
Divested operations - - - 0.06
Asset divestiture - - 0.15 -
------ ----- ------ -----
Basic and diluted earnings per share $0.17 $0.73 $0.81 $1.90
===== ===== ===== =====
12
<PAGE>
Pension related items reduced operating costs by $5.1 million and $15.4 million
for the quarter and nine months ended September 30, 1998, respectively, and $4.3
million and $13.4 million for the same periods in the prior year. Pension
related items include a net pension credit for the Company's domestic
subsidiaries and a net pension cost for its foreign subsidiaries. The pension
credit is the result of a plan that is funded in excess of the projected benefit
obligation and income from the amortization of Statement of Financial Accounting
Standards No. 87 net transition asset. The plan is overfunded primarily due to
favorable asset performance. The transition asset will be fully amortized in
1998.
During the first quarter of 1998, the Company completed the divestiture of
underutilized office space with the sale of its Cherry Hill, New Jersey, office
building for $13.5 million in cash. The Company recognized a gain on the sale of
this property of $3.1 million ($2.0 million after tax or $0.15 per share). Also
in the first quarter the Company completed the disposal of its remaining unused
office space in its former New York corporate offices. The provisions made in
1996 for losses on sublease or lease cancellation of this space have, in
aggregate, not been materially different from the actual costs incurred in
disposal of the excess space.
Engineering, Construction and Consulting
The Company's Engineering, Construction and Consulting segment reported revenue
of $343.0 million in the third quarter of 1998, a decrease of 5.2 percent from
the $361.9 million reported for the same period last year. The decrease in
revenue is primarily attributed to lower revenues in the Process Division due to
suspension of the Trans-Pacific Petrochemical Indotama ("TPPI") project. In
addition, there has been lower than expected new work and higher than expected
activity on the assumed lump sum projects from Belmont Constructors, Inc.
("Belmont"), which the Company acquired in January 1998. Operating income was
$3.7 million for the third quarter of 1998 compared to $15.1 million in the
third quarter of 1997. The decrease in operating income is primarily due to
losses on several Power and Process Division projects.
For the first nine months of 1998, the Engineering, Construction and Consulting
segment had revenue of $939.5 million, a decrease of 4.8 percent compared to
revenue of $986.9 million for the same period in 1997. Operating income for the
first nine months of 1998 was $15.0 million compared with operating income of
$38.8 million for the same period in 1997.
New orders for the Engineering, Construction and Consulting segment for the
quarter and nine months ended September 30, 1998 were $725.1 million and $1.2
billion, respectively, compared with $211.0 million and $1.1 billion for the
same periods in 1997.
The Trans-Pacific Petrochemical Indotama ("TPPI") project continues to be
suspended pending resolution of financing issues by the client. If refinancing
efforts are successful, it is possible that the project could be restarted
during 1999. The Company has obtained approval to resell or use committed
materials and procured equipment to reduce costs of project suspension. The
Company has also had substantive discussions with potential purchasers of the
olefins plant which constitutes the majority of the Company's scope for the
project. Had the project been cancelled as of September 30, 1998, and if resale
of the olefins plant were unlikely to be completed, the Company would have
recorded a pre-tax charge of $63 million representing project working capital
plus current procurement commitments net of the estimated salvage value of
procured equipment and materials.
13
<PAGE>
The Company is currently performing two contracts in Ghana for the engineering,
procurement and construction of power plants. Due to various factors, including
owner directed technical and schedule changes, increases in scope of the
currently authorized contracts and other factors, the cost to complete these
contracts will significantly exceed each contract's value. Management believes
that it has valid contractual and equitable grounds for change orders providing
additional compensation under these contracts. The Company has submitted
requests for equitable adjustment and change orders in excess of $40 million on
one contract and is preparing change order requests to be submitted on the
second contract. The Company has recognized revenue in excess of $40 million on
these two contracts representing, in management's judgment, a conservative
estimate of the total amount expected to be realized from the change orders.
Negotiations regarding these change orders are ongoing and management expects to
reach agreement with the owner on the first change order by the end of 1998.
Orders and backlog for the nine months ended September 30, 1998 and 1997 were
(in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Beginning backlog $2,357,122 $2,756,334 $2,519,302 $2,487,552
Orders 725,113 210,809 1,099,473 1,104,651
Backlog acquired (Belmont) - - 59,944 -
Revenue (343,040) (361,863) (939,524) (986,923)
---------- ---------- ---------- ----------
Ending backlog $2,739,195 $2,605,280 $2,739,195 $2,605,280
========== ========== ========== ==========
Orders represent the net amount of new orders, cancellations and scope changes.
Cold Storage And Related Activities
The Company's Cold Storage segment reported operating income of $1.6 million and
$6.2 million for the quarter and nine months ended September 30, 1998,
respectively, compared with operating income of $2.2 million and $5.4 million
for the same periods in 1997. The decrease in operating income was primarily due
to an increase in direct labor expense from overtime incurred and increased
customer claims during the third quarter. Revenue was $7.4 million and $21.9
million for the quarter and nine months ended September 30, 1998, respectively,
compared with revenue of $6.4 million and $17.1 million for the same periods in
1997. The increase in revenue and operating income of the Cold Storage segment
is primarily the result of increased volume and continued expansion of the
customer base. Commercial Cold Storage, Inc., a wholly owned subsidiary of the
Company, completed its acquisition of the seven corporations constituting The
Nordic Group subsequent to the third quarter.
14
<PAGE>
General and Administrative Expenses, Other Income (Expenses) and Income Taxes
General and administrative expenses for the quarter and nine months ended
September 30, 1998 were $15.8 million and $47.4 million, respectively, compared
with $17.0 million and $51.7 million for the same periods in 1997. The decrease
in general and administrative expenses for the quarter ended September 30, 1998
is primarily attributable to lower occupancy costs as a result of the
divestiture of unused office space. Interest expense net of interest income for
the quarter ended September 30, 1998 was $0.4 million and interest income net of
interest expense for the first nine months was $0.1 million, compared with
interest income net of interest expense for the quarter and nine months ended
September 30 1997, of $0.6 million and $1.6 million, respectively.
Financial Condition
Cash and cash equivalents decreased by $41.3 million during the first nine
months of 1998. Net cash used for operating activities of $87.2 million
reflected an increase in operating working capital (which consists of accounts
receivable and costs and revenues recognized in excess of billings less accounts
payable and billings in excess of costs and revenues recognized) due to
procurement commitments on the TPPI project, funding requirements of the
recently acquired Belmont Constructors, Inc. assets and working capital
requirements for several projects including the power projects in Ghana. Net
cash provided by investing activities of $20.6 million reflects maturities of
U.S. Government securities and proceeds from the sale of the Company's Cherry
Hill, New Jersey, office building offset by purchases of fixed assets used in
the Company's operations. Net cash provided by financing activities of $25.3
million reflects the payment of dividends, repayment of long-term debt,
borrowings under a bank loan. The Company's ongoing share repurchase program is
discussed in Note H to the condensed consolidated financial statements. Total
debt was $50.5 million at September 30,1998, compared to $24.3 million at
year-end 1997.
The Company believes that the types of businesses in which it is engaged require
that it maintain a strong financial condition. The Company has on hand and has
access to sufficient sources of funds to meet its anticipated operating,
dividend and capital expenditure needs. Cash on hand and temporary investments
provide adequate operating liquidity. Additional liquidity is provided through
lines of credit and revolving credit facilities that total $145.2 million. At
September 30, 1998, there was $25.9 million outstanding under these facilities.
Subsequent to the end of the third quarter, the Company was notified by one of
its lenders that a $25.0 million line of credit will not be renewed. The bank
has agreed to continue the facility, which is outstanding in its entirety, on a
month-to-month basis, while the Company negotiates replacement lines with other
lenders. The Company is in active discussions with several financial
institutions. The Company anticipates repaying this line of credit by year end,
regardless of the status of negotiations with the new lenders.
Year 2000 Compliance
The Company is in the process of evaluating and upgrading its computer
applications, including all of its information technology and non-information
technology such as embedded technology, in part to ensure their functionality
with respect to the Year 2000 millennium change.
15
<PAGE>
The Company has substantially completed its evaluation of all software and
information systems which it uses that are to be validated as Year 2000
compliant. The Company expects to implement successfully the systems and
programming changes necessary to address the Year 2000 issue during 1999. Key
financial systems will become compliant through implementation of new
enterprise-wide financial systems. The primary objective of implementing these
new systems is to improve access to financial information of the Company and to
implement a state-of-the-art project accounting system. Therefore, costs related
to this implementation effort are not all considered Year 2000 compliance costs.
The Company is giving consideration to compliance by third party suppliers.
Failure by third party suppliers to become Year 2000 compliant could result in
the Company's inability to obtain products as scheduled, which could potentially
lead to delays in meeting client orders. The Company will also review the Year
2000 readiness of clients which are material to the Company's business, if any.
Failure by material customers to become Year 2000 compliant could result in the
Company's inability to obtain or perform work on a timely basis for such
customers, leading to delays in receipt of revenue.
The Company is taking protective measures regarding the purchases from third
party suppliers of software, hardware and computer information systems. The
Company is obtaining assurances that the information systems and related
products supplied will be Year 2000 compliant. In addition, the Company is in
the process of determining significant vendors to be contacted regarding their
Year 2000 compliance. The Company had not contacted any of its significant
suppliers as of September 30, 1998. No definitive conclusions can be made
regarding whether the software or systems of third party suppliers will have a
materially adverse effect on the Company's business, results of operations or
financial condition. However, at this time, management does not believe that the
Company will experience significant exposure related to the software or systems
of third party suppliers.
The Company has initiated a process of reviewing existing contractual
obligations with its clients to determine whether any Year 2000 compliance
exposure exists to its clients or third parties. As of September 30, 1998, no
such exposure had been determined. The Company currently believes that systems
and equipment purchased by it for delivery to third parties will be made Year
2000 compliant during 1999.
A formal contingency plan will not be formulated unless the Company has
identified specific areas where there is substantial risk of Year 2000 problems
occurring, and no such areas have been identified as of this date. The Company
has not yet developed an estimate of material lost revenue due to Year 2000
issues in a most reasonably likely worst case Year 2000 scenario because it has
not yet completed all of the necessary review, which is ongoing. To date, the
cost of the reviews and analysis have totaled less than $0.1 million. The Year
2000 review is intended to correct the remaining internal systems that are not
Year 2000 compliant and to identify any client or other external situations in
which the Company or its vendors have provided systems that are not Year 2000
compliant. The cost of correcting external Year 2000 compliance situations, if
any, cannot be determined until such cases, if any exist, are identified and
evaluated. The cost to correct internal systems and review external systems is
estimated to be $0.4 million.
Readers are cautioned that forward-looking statements contained in the Year 2000
Issue disclosure should be read in conjunction with the Company's disclosures
under the heading: "Forward- Looking Information" on page 17.
16
<PAGE>
Other Accounting Matters
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This Statement specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. The Company is in the process of evaluating the
impact of the new standard on the presentation of the financial statements and
the disclosures therein. The Statement is effective for fiscal years beginning
after December 15, 1997. The Company will adopt the new standard for the fiscal
year ending December 31, 1998.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This Statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. The Statement is effective for fiscal years beginning after
December 15, 1997. The Company will adopt the new standard for the fiscal year
ending December 31, 1998.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Statement is effective for fiscal years beginning after June 15, 1999. The
Company will adopt the new standard by January 1, 2000. Management is evaluating
the impact this Statement may have on the Company's financial statements.
Forward-Looking Information
Any of the statements or comments in this Form 10-Q that refer to the Company's
estimated or future results are forward-looking and reflect the Company's
current analysis of existing trends and information. The Company cautions that a
variety of factors including, but not limited to, the following could cause
business conditions and results to differ materially from what is contained in
forward-looking statements: changes in the rate of economic growth in the United
States and other major international economies, changes in investment by the
energy, power and environmental industries, the uncertain timing of awards and
contracts, changes in regulatory environment, changes in project schedules,
changes in trade, monetary and fiscal policies worldwide, currency fluctuations,
outcomes of pending and future litigation, protection and validity of patents
and other intellectual property rights, and increasing competition by foreign
and domestic companies and other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission.
The statements under the caption "Year 200 Compliance" describing the Company's
plans and objectives for handling the Year 2000 issue and the expected impact of
the Year 2000 issue on the Company are forward-looking statements. Those
statements involve risks and uncertainties that could cause actual results to
differ materially from the results discussed above. Factors that might cause
such a difference include, but are not limited to, delays in executing the plan
outlined above and unforeseen or increased costs associated with the
implementation of the plan and any necessary changes to the Company's systems.
Any inability experienced by the Company during implementation resulting from
necessary changes not completed in a timely manner could have an adverse effect
on the results of operations. Moreover, even if the Company successfully
implements the changes necessary to address the Year 2000 issue, there can be no
assurances that the Company will not be adversely affected by the failure of
others, including vendors and clients, to become Year 2000 compliant.
17
<PAGE>
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
(4) Instruments defining the rights of security holders, including
indentures.
As of September 30, 1998, registrant and its subsidiaries had
outstanding long-term debt (excluding current portion) totaling $22.5
million, principally in connection with a mortgage relating to real
property for a subsidiary's office building and in connection with
capitalized lease commitments for the acquisition of certain office
equipment. None of these agreements are filed herewith because the
amount of indebtedness authorized under each such agreement does not
exceed 10 percent of the total assets of the registrant and its
subsidiaries on a consolidated basis; the registrant hereby undertakes
to furnish copies of such agreements to the Commission upon request.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the quarter for which
this report is filed. Stone & Webster, Incorporated and Subsidiaries
18
<PAGE>
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STONE & WEBSTER, INCORPORATED
By: /S/ THOMAS L. LANGFORD
_________________________________________
Dated: November 13, 1998 Thomas L. Langford
Executive Vice President
(Duly authorized officer and
Chief Financial Officer)
By: /S/ DANIEL. P. LEVY
_________________________________________
Daniel P. Levy
Vice President and Controller
(Principal Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 33,783
<SECURITIES> 0
<RECEIVABLES> 240,220
<ALLOWANCES> 2,825
<INVENTORY> 0
<CURRENT-ASSETS> 425,458
<PP&E> 339,248
<DEPRECIATION> 186,010
<TOTAL-ASSETS> 795,782
<CURRENT-LIABILITIES> 349,680
<BONDS> 22,542
0
0
<COMMON> 17,731
<OTHER-SE> 337,633
<TOTAL-LIABILITY-AND-EQUITY> 795,782
<SALES> 0
<TOTAL-REVENUES> 961,404
<CGS> 0
<TOTAL-COSTS> 897,257
<OTHER-EXPENSES> 47,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,086
<INCOME-PRETAX> 16,842 <F1>
<INCOME-TAX> 6,410
<INCOME-CONTINUING> 10,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,432
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
<FN>
<F1>Includes Interest Income of $2,208 not reflected on this tag list.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 58,459
<SECURITIES> 34,644
<RECEIVABLES> 143,359
<ALLOWANCES> 4,114
<INVENTORY> 0
<CURRENT-ASSETS> 398,107
<PP&E> 292,110
<DEPRECIATION> 161,691
<TOTAL-ASSETS> 716,207
<CURRENT-LIABILITIES> 287,327
<BONDS> 23,042
0
0
<COMMON> 17,731
<OTHER-SE> 318,573
<TOTAL-LIABILITY-AND-EQUITY> 716,207
<SALES> 0
<TOTAL-REVENUES> 1,003,999
<CGS> 0
<TOTAL-COSTS> 916,599
<OTHER-EXPENSES> 51,710
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,258
<INCOME-PRETAX> 37,324 <F1>
<INCOME-TAX> 12,889
<INCOME-CONTINUING> 24,435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,435
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.90
<FN>
<F1>Includes Interest Income of $1,877 not reflected on this tag list.
</FN>
</TABLE>
