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 June 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: 12,799,925 shares
as of July 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 Six Months Ended June 30, 1998 and
June 30, 1997...........................................3
Consolidated Balance Sheets (Unaudited):
June 30, 1998 and December 31, 1997......................4
Condensed Consolidated Statements of Cash Flows
(Unaudited):
Six Months Ended June 30, 1998 and June 30, 1997........5
Notes to Condensed Consolidated Financial Statements
(Unaudited) ............................................6-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.....................11-15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.....16-17
Item 5. Other Events..............................................17
Item 6. Exhibits and Reports on Form 8-K..........................17
SIGNATURES.................................................................18
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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenue $317,004 $286,258 $610,961 $635,783
Cost of revenue 300,284 255,544 566,513 579,214
-------- -------- -------- --------
Gross profit 16,720 30,714 44,448 56,569
General and administrative
expenses 15,515 17,666 31,609 34,719
-------- -------- -------- --------
Operating income 1,205 13,048 12,839 21,850
Other income (expense)
Interest income 297 1,047 1,500 1,877
Interest expense (591) (445) (1,008) (872)
-------- -------- -------- --------
Total other (expense) income,
net (294) 602 492 1,005
Income before provision for
income taxes 911 13,650 13,331 22,855
Income tax provision 260 4,168 5,067 7,805
-------- -------- -------- --------
Net income $ 651 $ 9,482 $ 8,264 $ 15,050
======== ======== ======== ========
Per share amounts:
Basic and diluted earnings
per share $0.05 $0.74 $0.64 $1.17
===== ===== ===== =====
Dividends declared per share $0.15 $0.15 $0.30 $0.30
===== ===== ===== =====
Weighted average number of
shares outstanding:
Basic 12,792 12,796 12,797 12,801
======== ======== ======== ========
Diluted 12,922 12,913 12,927 12,852
======== ======== ======== ========
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)
June 30, December 31,
1998 1997
-------- ------------
Assets
Current assets:
Cash and cash equivalents $ 23,315 $ 75,030
U.S. Government securities, at amortized cost
which approximates fair value - 31,909
Accounts receivable, principally trade, net 248,537 180,057
Costs and revenues recognized in excess of
billings 95,040 102,476
Deferred income taxes 18,931 18,835
Other 1,313 337
-------- --------
Total current assets 387,136 408,644
Assets held for sale 6,744 10,395
Fixed assets, net 146,223 140,177
Domestic prepaid pension cost 158,493 148,155
Note receivable 15,000 15,000
Other assets 41,044 16,406
-------- --------
Total assets $754,640 $738,777
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Bank loans $ 20,000 $ -
Current portion of long-term debt 1,885 1,750
Accounts payable, principally trade 63,213 85,338
Billings in excess of costs and revenues
recognized 138,391 115,730
Accrued liabilities 82,927 79,351
Accrued taxes 6,012 14,689
-------- --------
Total current liabilities 312,428 296,858
Long-term debt 21,594 22,510
Deferred income taxes 60,325 57,463
Other liabilities 15,351 16,714
Shareholders' equity:
Preferred stock, no par value; authorized
2,000,000 shares; none issued - -
Common stock, $1 par value; authorized
40,000,000 shares; 17,731,488 shares issued
including shares held in treasury 17,731 17,731
Capital in excess of par value of common stock 51,547 51,426
Retained earnings 428,761 424,287
Accumulated other comprehensive income (5,825) (2,205)
Less: Common stock held in treasury, at cost
(4,937,699 and 4,908,975 shares) 128,333 127,070
Employee stock ownership and restricted
stock plans 18,939 18,937
-------- --------
Total shareholders' equity 344,942 345,232
-------- --------
Total liabilities and shareholders' equity $754,640 $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)
Six Months
Ended June 30,
1998 1997
---- ----
Cash Flows from Operating Activities:
Net income $ 8,264 $15,050
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,675 6,677
Amortization of net cost of stock plans 732 580
Gain from asset divestiture (3,066) -
Deferred income taxes 2,766 6,593
Domestic prepaid pension cost (10,338) (9,402)
Changes in operating assets and liabilities (103,345) 64,393
-------- -------
Net cash (used for) provided by operating activities (97,312) 83,891
Cash Flows from Investing Activities:
Proceeds from maturities of U.S. Government
securities 31,909 4,000
Proceeds from asset divestiture 13,546 -
Purchases of fixed assets, net (13,721) (8,739)
Purchases of U.S. Government securities - (34,509)
-------- -------
Net cash provided by (used for) investing activities 31,734 (39,248)
-------- -------
Cash Flows from Financing Activities:
Repayments of long-term debt (781) (756)
Increase (decrease) in bank loans 20,000 (5,000)
Purchases of common stock for treasury (1,514) (2,309)
Dividends paid (3,842) (3,840)
-------- -------
Net cash provided by (used for) financing activities 13,863 (11,905)
-------- -------
Net (decrease) increase in cash and cash equivalents (51,715) 32,738
Cash and cash equivalents at beginning of period 75,030 57,887
-------- -------
Cash and cash equivalents at end of period $ 23,315 $90,625
======== =======
See accompanying notes to condensed consolidated financial statements.
5
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Stone & Webster, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(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 six months ended
June 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 $174.2
million at June 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 six months ended June 30, 1998 and 1997 (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenue:
Engineering, construction and
consulting services $309,387 $280,374 $596,484 $625,060
Cold storage and related
activities 7,617 5,884 14,477 10,723
-------- -------- -------- --------
Total revenue $317,004 $286,258 $610,961 $635,783
======== ======== ======== ========
Operating income:
Engineering, construction and
consulting services $ 286 $ 13,697 $ 11,307 $ 23,687
Cold storage and related
activities 2,295 2,021 4,580 3,181
-------- -------- -------- --------
2,581 15,718 15,887 26,868
General corporate expenses (1,376) (2,670) (3,048) (5,018)
-------- -------- -------- --------
Total operating income $ 1,205 $ 13,048 $ 12,839 $ 21,850
======== ======== ======== ========
6
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Stone & Webster, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
(D) The Company had a valuation allowance of $3.6 million at June 30, 1998 and
December 31, 1997 for deferred tax assets related to net operating loss
carryforwards. The valuation allowance at June 30, 1998 comprises $3.5
million relating to state net operating loss carryforwards and $0.1 million
relating to the carryforwards of international subsidiaries.
(E) Basic earnings per share for the six months ended June 30, 1998 and 1997
were computed based on the weighted average number of common shares
outstanding during the period of 12,797,455 and 12,801,097, respectively.
Diluted earnings per share for the six months ended June 30, 1998 and 1997
were computed based on the weighted average common and dilutive potential
shares outstanding during the period of 12,926,628 and 12,852,177,
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
$10.2 million for the quarter and six months ended June 30, 1998 compared
to $4.5 million and $9.0 million for the same periods in the prior year.
These items increased net income by $3.1 million, or $0.24 per share and
$6.2 million or $0.48 per share for the quarter and six months ended June
30, 1998, compared with $2.7 million, or $0.21 per share and $5.5 million
or $0.42 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 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.
(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 six-month period ended June 30,
1998, nonqualified options for 21,000 shares of common stock were granted
to 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 6,750 shares were exercised and options for 31,625 shares were
cancelled during the six-month period. Nonqualified options for 350,500
shares remain exercisable.
7
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Stone & Webster, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
Under the 1998 Plan for the six-month period ended June 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. No option shares
were cancelled under this Plan for the six- month period ended June 30,
1998.
(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 six months ended June 30, 1998, the Company
acquired 38,387 shares at a cost of $1.5 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) 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 (loss) was ($4.9) million and
$9.6 million for the quarters ended June 30, 1998 and 1997, respectively.
Other comprehensive income (loss) consists of translation adjustments of
$(5.6) million and $0.1 million for the quarters ended June 30, 1998 and
1997, respectively. For the six months ended June 30, 1998 and 1997
comprehensive income was $4.6 million and $14.7 million, respectively.
Other comprehensive income consists of translation adjustments of ($3.6)
million and ($0.4) million for the six months ended June 30, 1998 and 1997,
respectively.
(J) 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.
(K) In January 1998, the Company purchased the assets of Belmont Constructors
Company, 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.
8
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Stone & Webster, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
(L) In 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. SC Wood is
principally operated as a pumping station which uses natural gas to pump
petroleum products. The results of SC Wood, after the acquisition, were not
included in the Company's Consolidated Statement of Operations for the six
months ended June 30, 1998 because the transaction occurred at the end of
the second quarter.
(M) Subsequent to the close of the second quarter of 1998, the Company signed a
definitive agreement to acquire the shares of a multi-location,
privately-owned cold storage company for $75 million in cash and additional
consideration for working capital and certain capital expenditures. The
Company retains an option to cancel the transaction if certain
contingencies are not resolved. It is expected that the contingencies will
be resolved and the transaction closed during the third quarter of 1998.
(N) The Company has signed an agreement to acquire all of the outstanding stock
of Power Technologies, Inc. ("PTI"). PTI will be merged into a subsidiary
of the Company. 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 will be 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. On August 11, 1998, the Shareholders of PTI voted
to adopt the merger agreement.
(O) Certain financial statement items have been reclassified to conform to the
current year's presentation. For the three and six month periods ended June
30, 1998, the Company made reclassifications between general and
administrative expenses and cost of revenue.
(P) 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
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Stone & Webster, Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
The Trans-Pacific Petrochemical Indotama ("TPPI") project continues to be
suspended pending resolution of financing issues by the client, and the
project is not expected to resume in 1998. The Company has obtained
approval to resell or use committed materials and procured equipment to
reduce costs of project suspension. The Company believes that it is
unlikely that the project will be cancelled. Had the project been cancelled
as of June 30, 1998, the Company would have recorded a pre-tax charge of
approximately $54 million representing project working capital plus current
procurement commitments net of the estimated salvage value of procured
equipment and materials.
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 potential value of any recovery on these
claims has not been reflected in the Company's financial results.
(Q) 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.
10
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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 June 30, 1998, the Company reported revenue of $317.0
million, an increase of 10.7 percent from the $286.3 million reported in the
second quarter of 1997. Operating income for the quarter was $1.2 million
compared with $13.0 million for the second quarter of 1997. Net income for the
quarter ended June 30, 1998 was $0.7 million or $0.05 per share, compared with
net income of $9.5 million or $0.74 per share for the same period in 1997. For
the quarter ended June 30, 1997, net income included recognition of a net
operating tax loss carryforward benefit in an international subsidiary of $1.5
million ($0.12 per share). New orders were $147.9 million for the quarter ended
June 30, 1998 compared with $243.9 million for the second quarter of 1997.
Revenue for the six months ended June 30, 1998 was $611.0 million compared with
$635.8 million reported for the same period in 1997, a decrease of 4.0 percent.
Operating income for the first six months of 1998 was $12.8 million compared
with operating income of $21.9 million for the same period in 1997. Net income
for the six months ended June 30, 1998 was $8.3 million or $0.64 per share,
compared with net income of $15.0 million, or $1.17 per share for the same
period in 1997. Backlog for the first six months of 1998 was $2.4 billion which
decreased $0.1 billion compared to December 31, 1997, and decreased $0.4 billion
compared to June 30, 1997. New orders for the first six months of 1998 were
$434.3 million compared to $893.8 for the same period in 1997.
Components of earnings per share were:
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Basic and diluted earnings per share from:
Operations $(0.19) $0.47 $0.01 $0.69
Pension related items 0.24 0.21 0.48 0.42
------ ----- ----- -----
Ongoing operations 0.05 0.68 0.49 1.11
Divested operations - 0.06 - 0.06
Asset divestiture - 0.15 - -
------ ----- ----- -----
Basic and diluted earnings per share $ 0.05 $0.74 $0.64 $1.17
====== ===== ===== =====
11
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Stone & Webster, Incorporated and Subsidiaries
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Pension related items reduced operating costs by $5.1 million and $10.2 million
for the quarter and six months ended June 30, 1998, respectively, and $4.5
million and $9.0 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 $309.4 million in the second quarter of 1998, an increase of 10.3 percent
from the $280.4 million reported for the same period last year. The increase in
revenue is primarily attributable to higher procurement on several power
projects and revenue from Belmont Constructors Company, Inc. ("Belmont") which
the Company acquired in January 1998. These items were partially offset by lower
revenues in the Process Division primarily due to suspension of the
Trans-Pacific Petrochemical Indotama ("TPPI") project. Operating income was $0.3
million for the second quarter of 1998 compared to $13.7 million in the second
quarter of 1997. The decrease in operating income is primarily due to losses of
$10.2 million on two Power Division projects, one in the Middle East and one in
Africa and to provisions of $4.0 million for anticipated losses on several
projects in the Process Division. For the quarter ended June 30, 1997, operating
income included $1.1 million of cash distributions from the Binghamton
Cogeneration Partnership and the recognition of a $6.6 million charge ($4.3
million after tax or $0.33 per share) representing Stone & Webster's share of a
loss on a contract that had been awarded to an international joint venture in
1994.
The Trans-Pacific Petrochemical Indotama project continues to be suspended
pending resolution of financing issues by the client and the project is not
expected to resume in 1998. The Company has obtained approval to resell or use
committed materials and procured equipment to reduce costs of project
suspension. The Company believes that it is unlikely that the project will be
cancelled. Had the project been cancelled as of June 30, 1998, the Company would
have recorded a pre-tax charge of approximately $54 million representing project
working capital plus current procurement commitments net of the estimated
salvage value of procured equipment and materials.
For the first six months of 1998, the Engineering, Construction and Consulting
segment had revenue of $596.5 million, a decrease of 4.6 percent compared to
revenue of $625.1 million for the same period in 1997. Operating income for the
first six months of 1998 was $11.3 million compared with operating income of
$23.7 million for the same period in 1997.
12
<PAGE>
Stone & Webster, Incorporated and Subsidiaries
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
New orders for the Engineering, Construction and Consulting segment for the
quarter and six months ended June 30, 1998 were $147.9 and $434.3 million,
respectively, compared with $243.9 and $893.8 million for the same periods in
1997. In the second quarter the Company announced the award of a contract with
Energy Management, Inc. in excess of $200 million for engineering, procurement
and construction of two 265 MW power plants in New England. This award is not
included in backlog because the Company has not yet received notification to
proceed with the work pending final project financing arrangements. During the
quarter, the Company also announced a $19 million contract for engineering and
steel procurement on a 2 x 250 MW coal-fired power plant in China.
Orders and backlog for the six months ended June 30, 1998 and 1997 were (in
thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Beginning backlog $2,518,628 $2,792,801 $2,519,302 $2,487,552
Orders 147,881 243,907 374,360 893,842
Backlog acquired (Belmont) - - 59,944 -
Revenue (309,387) (280,374) (596,484 (625,060)
---------- ---------- ---------- ----------
Ending backlog $2,357,122 $2,756,334 $2,357,122 $2,756,334
========== ========== ========== ==========
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 $2.3 million and
$4.6 million for the quarter and six months ended June 30, 1998, respectively,
compared with operating income of $2.0 million and $3.2 million for the same
periods in 1997. Revenue was $7.6 million and $14.5 million for the quarter and
six months ended June 30, 1998, respectively, compared with revenue of $5.9
million and $10.7 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.
General and Administrative Expenses, Other Income (Expenses) and Income Taxes
General and administrative expenses for the quarter and six months ended June
30, 1998 were $15.5 million and $31.6 million, respectively, compared with $17.7
million and $34.7 million for the same period periods in 1997. The decrease in
general and administrative expenses for the quarter ended June 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 June 30, 1998 was $0.3 million and interest income net of interest expense
for the first six months was $0.5 million, compared with interest income net of
interest expense for the quarter and six months ended June 30 1997 of $0.6
million and $1.0 million, respectively.
13
<PAGE>
Stone & Webster, Incorporated and Subsidiaries
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
Financial Condition
Cash and cash equivalents decreased by $51.7 million during the first six months
of 1998. Net cash used for operating activities of $97.3 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 Company, Inc. and working capital requirements for several
projects. Net cash provided by investing activities of $31.7 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 $13.9 million reflects the payment of dividends, repayment of
long-term debt, borrowings under a bank loan, and purchases of common stock. The
Company's ongoing share repurchase program is discussed in Note H to the
condensed consolidated financial statements. Total debt was $43.5 million at
June 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 $33.4 million. At
June 30, 1998, there was $20.0 million outstanding under these facilities.
Other Accounting Matters
The Company is in the process of evaluating and upgrading its computer
applications, in part, to ensure their functionality with respect to the "year
2000" change. At present, the Company does not anticipate that material
incremental costs will be incurred in any single future year.
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.
14
<PAGE>
Stone & Webster, Incorporated and Subsidiaries
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
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.
15
<PAGE>
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Shareholders of the registrant was held on May 14,
1998.
(b) At the Annual Meeting, Frank J. A. Cilluffo, David N. McCammon and J. Angus
McKee were re-elected as Directors for terms expiring in 2001. The terms of
office as Directors of Donna F. Bethell, Kent F. Hansen, Elvin R. Heiberg
III, John P. Merrill, Jr., Bernard W. Reznicek, H. Kerner Smith and Peter
M. Wood continued after the meeting.
(c) At the Annual Meeting, the Shareholders also approved the adoption of the
Stone & Webster, Incorporated Annual Incentive Compensation Plan, approved
the adoption of the Stone & Webster, Incorporated Long-Term Incentive
Compensation Plan, and ratified the selection of the firm of
PricewaterhouseCoopers L.L.P. independent accountants, as auditor of the
registrant and its subsidiaries for the year ended December 31, 1998.
The total votes cast for, withheld or against, as well as the number of
abstentions and broker non-votes as to each such matter were as follows:
(1) Election of Directors
Total Votes
Nominee For Withheld
Frank J. A. Cilluffo 10,927,366 719,097
David N. McCammon 11,017,924 628,539
J. Angus McKee 11,000,658 645,805
There were no broker non-votes.
(2) Approval of the Annual Incentive Compensation Plan
Total Votes For 9,340,035
Total Votes Against 1,329,608
Total Abstentions 200,756
There were 776,064 broker non-votes.
(3) Approval of the Long-Term Incentive Compensation Plan
Total Votes For 7,026,562
Total Votes Against 3,621,932
Total Abstentions 222,405
There were 775,564 broker non-votes.
16
<PAGE>
(4) Selection of Independent Accountants.
Total Votes For 11,288,858
Total Votes Against 270,077
Total Abstentions 87,528
There were no broker non-votes.
Item 5. Other Events
The text of registrant's press release dated August 12, 1998 relating to the
acquisition of a company involved in the ownership and operation of public
refrigerated warehouses is attached hereto as Exhibit 99 and is hereby
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
(4) Instruments defining the rights of security holders, including
indentures.
As of June 30, 1998, registrant and its subsidiaries had outstanding
long-term debt (excluding current portion) totaling $21.6 million,
principally in connection with a mortgage relating to real property
for a subsidiary's office building and in connection with capitalized
please 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.
(99) Text of Press Release.
(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.
17
<PAGE>
Stone & Webster, Incorporated and Subsidiaries
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: August 12, 1998 Thomas L. Langford
Executive Vice President
(Duly authorized officer and
Chief Financial Officer)
/S/ DANIEL P. LEVY
Daniel P. Levy
Vice President and Controller
(Principal Accounting Officer)
18
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 23,315
<SECURITIES> 0
<RECEIVABLES> 252,797
<ALLOWANCES> 4,260
<INVENTORY> 0
<CURRENT-ASSETS> 387,136
<PP&E> 320,472
<DEPRECIATION> 174,249
<TOTAL-ASSETS> 754,640
<CURRENT-LIABILITIES> 312,428
<BONDS> 21,594
0
0
<COMMON> 17,731
<OTHER-SE> 327,211
<TOTAL-LIABILITY-AND-EQUITY> 754,640
<SALES> 0
<TOTAL-REVENUES> 610,961
<CGS> 0
<TOTAL-COSTS> 566,513
<OTHER-EXPENSES> 31,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,008
<INCOME-PRETAX> 13,331<F1>
<INCOME-TAX> 5,067
<INCOME-CONTINUING> 8,264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,264
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
<FN>
<F1>Includes General and Administrative Expenses of $31,609 and
interest income of $1,500 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 90,625
<SECURITIES> 34,829
<RECEIVABLES> 244,917
<ALLOWANCES> 3,271
<INVENTORY> 0
<CURRENT-ASSETS> 514,780
<PP&E> 289,019
<DEPRECIATION> 159,008
<TOTAL-ASSETS> 824,448
<CURRENT-LIABILITIES> 405,255
<BONDS> 23,464
0
0
<COMMON> 17,731
<OTHER-SE> 309,130
<TOTAL-LIABILITY-AND-EQUITY> 824,448
<SALES> 0
<TOTAL-REVENUES> 635,783
<CGS> 0
<TOTAL-COSTS> 579,214
<OTHER-EXPENSES> 34,719
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 872
<INCOME-PRETAX> 22,855<F1>
<INCOME-TAX> 7,805
<INCOME-CONTINUING> 15,050
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,050
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
<FN>
<F1>Includes General and Administrative Expenses of $34,719 and interest income
of $1,877 not reflected on this tag list.
</FN>
</TABLE>
Contact: Mr. Thomas L. Langford For Immediate Release
Executive Vice President
Direct Dial: 617-589-7424
Fax: 617-589-1640
Commercial Cold Storage To Acquire The Nordic Group
Boston, MA, August 12, 1998 - Stone & Webster, Incorporated (NYSE:SW) announced
today, that its subsidiary, Commercial Cold Storage, Inc., has reached a
definitive agreement to acquire the stock of The Nordic Group. The closing of
the acquisition is subject to certain conditions stated in the agreement. The
Nordic Group, headquartered in Wilmington, NC, is a leader in the ownership and
operation of public refrigerated warehouses throughout the Southeast. They own
eleven refrigerated facilities in North Carolina, South Carolina, Alabama,
Mississippi and Ohio comprised of 22.7 million cubic feet of frozen and
refrigerated space.
Stone & Webster is a global leader in engineering, construction, and consulting
for the power, process, environmental/infrastructure and industrial markets.
