UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2006 | Commission file number 000-23943 |
PETER KIEWIT SONS’, INC. (Exact name of registrant as specified in its charter) | |
Delaware (State of Incorporation) | 91-1842817 (I.R.S. Employer Identification No.) |
Kiewit Plaza, Omaha, Nebraska (Address of principal executive offices) | 68131 (Zip Code) |
(402) 342-2052 (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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one.): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] | |
The number of shares outstanding of each of the registrant’s classes of common stock as of August 8, 2006: | |
Title of Class Common Stock, $0.01 par value | Shares Outstanding 18,212,394 |
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES | ||
Index | ||
Page | ||
PART I - FINANCIAL INFORMATION | ||
Item 1. | Financial Statements. | |
Consolidated Condensed Statements of Operations for the three and six months ended | 2 | |
Consolidated Condensed Balance Sheets as of June 30, 2006 and December 31, 2005. | 3 | |
Consolidated Condensed Statements of Cash Flows for the six months ended | 5 | |
6 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 13 |
Item 3. | 19 | |
Item 4. | 20 | |
PART II - OTHER INFORMATION | ||
Item 1A. | 20 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 20 |
Item 4. | 20 | |
Item 6. | 21 | |
21 | ||
i
PART I – FINANCIAL INFORMATION |
Item 1. Financial Statements. |
Report of Independent Registered Public Accounting Firm |
The Board of Directors and Stockholders |
Peter Kiewit Sons’, Inc.: |
We have reviewed the accompanying consolidated condensed balance sheet of Peter Kiewit Sons’, Inc. and subsidiaries as of June 30, 2006, the related consolidated condensed statements of operations for the three and six-month periods ended June 30, 2006 and 2005 and the related consolidated condensed statements of cash flows for the six-month periods ended June 30, 2006 and 2005. These consolidated condensed financial statements are the responsibility of the Company’s management. |
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. |
Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. |
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Peter Kiewit Sons’, Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, changes in redeemable common stock and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. |
(signed) KPMG LLP |
Omaha, Nebraska |
August 8, 2006 |
1
2
3
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES | |||||||||||||
Consolidated Condensed Balance Sheets, Continued | |||||||||||||
June 30, | |||||||||||||
2006 | December 31, | ||||||||||||
(unaudited) | 2005 | ||||||||||||
(dollars in millions) | |||||||||||||
LIABILITIES AND EQUITY | |||||||||||||
Current liabilities: | |||||||||||||
Accounts payable, including retainage of $88 and $85 | $ | 255 | $ | 265 | |||||||||
Current portion of long-term debt | 9 | 1 | |||||||||||
Accrued costs on construction contracts | 259 | 235 | |||||||||||
Billings in excess of related costs and earnings | 441 | 343 | |||||||||||
Distributions and costs in excess of investment in nonconsolidated joint ventures | 6 | 6 | |||||||||||
Accrued insurance costs | 84 | 82 | |||||||||||
Accrued payroll and payroll taxes | 48 | 53 | |||||||||||
Other | 44 | 94 | |||||||||||
Total current liabilities | 1,146 | 1,079 | |||||||||||
Long-term debt, less current portion | 30 | 38 | |||||||||||
Deferred income taxes | 36 | 33 | |||||||||||
Accrued reclamation | 27 | 29 | |||||||||||
Total liabilities excluding redeemable common stock | $ | 1,239 | $ | 1,179 | |||||||||
Total redeemable common stock* | 877 | - | |||||||||||
Total liabilities including redeemable common stock | 2,116 | 1,179 | |||||||||||
Minority interest | 100 | 109 | |||||||||||
Commitments and contingencies | |||||||||||||
Preferred stock, no par value, 250,000 shares authorized, | |||||||||||||
no shares outstanding | - | - | |||||||||||
Redeemable common stock ($945 million aggregate redemption value at December 31, 2005): | |||||||||||||
Common stock, $0.01 par value, 125 million shares authorized, | |||||||||||||
19,730,897 issued and outstanding at December 31, 2005 | - | - | |||||||||||
Additional paid-in capital | - | 239 | |||||||||||
Accumulated other comprehensive income | - | 14 | |||||||||||
Retained earnings | - | 829 | |||||||||||
Total redeemable common stock* | - | 1,082 | |||||||||||
Excess of assets over liabilities including redeemable | |||||||||||||
common stock * | 174 | - | |||||||||||
$ | 2,390 | $ | 2,370 | ||||||||||
* See Note 3 “Redeemable Common Stock” | |||||||||||||
See accompanying notes to consolidated condensed financial statements. |
4
5
6
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements 3. Redeemable Common Stock, Continued: |
Effective January 1, 2006, the Company began accounting for the Redeemable Common Stock under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” (“SFAS 150”). Since the Company is obligated to purchase all Redeemable Common Stock upon death or termination of a stockholder, it is considered ‘mandatorily redeemable’ under SFAS 150. SFAS 150 requires that mandatorily redeemable stock be recorded at formula value and presented as a liability on the balance sheet. The formula value of the Redeemable Common Stock is determined annually and is based on the book value of the Company. Formula value equals total assets (excluding property, plant and equipment used in the Company’s construction activities (“Construction PP& E”)), reduced by total liabilities (excluding the liability for Redeemable Common Stock) and minority interest. Any excess of assets over liabilities, which consists entirely of the net book value of the Construction PP&E (approximately $174 million at June 30, 2006), is presented as “Excess of assets over liabilities including redeemable common stock.” Period to period changes in formula value represent an expense in the consolidated condensed statement of operations captioned “Earnings attributable to redeemable common stock” beginning in 2006. Period to period changes in Construction PP&E are not attributable to Redeemable Common Stock and therefore, represent “Net income” beginning in 2006 on the consolidated condensed statement of operations. Since formula value of the Redeemable Common Stock is based on the book value of the Company, the SFAS 150 earnings attributable to redeemable common stock offsets a substantial portion of curr ent year earnings. Furthermore, since SFAS 150 requires that mandatorily redeemable stock be excluded from earnings per share, the Company has not presented earnings per share beginning in 2006. These accounting and presentation changes have occurred despite the fact that the underlying nature and terms of the Company’s Redeemable Common Stock have not changed. |
Prior to the adoption of SFAS 150, the Company accounted for the Redeemable Common Stock under Emerging Issues Task Force (“EITF”) Issue No. 87-23, “Book Value Stock Purchase Plans” (“EITF No. 87-23”), whereby changes in the aggregate redemption value of the Redeemable Common Stock are not recognized as an expense. Additionally, the Company presented the Redeemable Common Stock as mezzanine equity on the consolidated balance sheets. As of January 1, 2006, SFAS No. 123-R, “Share-Based Payment,” preempts the provisions of EITF No. 87-23 for the Company and supplants them with those of SFAS 150. |
7
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements 3. Redeemable Common Stock, Continued: | ||||||||||||||||
The changes in the components of the Redeemable Common Stock for the six months ended June 30, 2006 were as follows: | ||||||||||||||||
Redeemable Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total | ||||||||||||
(dollars in millions) | ||||||||||||||||
December 31, 2005 balance, $0.01 par | ||||||||||||||||
value, 125 million shares authorized, | ||||||||||||||||
19,730,897 issued and outstanding | $ | - | $ | 239 | $ | 14 | $ | 829 | $ | 1,082 | ||||||
Dividends | - | - | - | (30 | ) | (30 | ) | |||||||||
Repurchase of redeemable common | ||||||||||||||||
stock | - | (18 | ) | - | (52 | ) | (70 | ) | ||||||||
Cumulative change in accounting | ||||||||||||||||
principle | - | - | - | (8 | ) | (8 | ) | |||||||||
Comprehensive income: | ||||||||||||||||
Net income before earnings | ||||||||||||||||
attributable to redeemable | ||||||||||||||||
common stock | - | - | - | 73 | 73 | |||||||||||
Other comprehensive income, | ||||||||||||||||
net of tax: | ||||||||||||||||
Foreign currency adjustment | - | - | 3 | - | 3 | |||||||||||
Change in unrealized holding gain | - | - | 1 | - | 1 | |||||||||||
Total other comprehensive income | 4 | |||||||||||||||
Total comprehensive income | 77 | |||||||||||||||
June 30, 2006 balance, $0.01 par | ||||||||||||||||
value, 125 million shares authorized, | ||||||||||||||||
18,256,667 issued and outstanding | $ | - | $ | 221 | $ | 18 | $ | 812 | $ | 1,051 | ||||||
Excess of assets over liabilities | (174 | ) | ||||||||||||||
Total redeemable common stock | $ | 877 |
8
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements 3. Redeemable Common Stock, Continued: The changes in the components of accumulated other comprehensive income for the six months ended June 30, 2006 and the year ended December 31, 2005 were as follows: | ||||||||
2006 | 2005 | |||||||
(dollars in millions) | ||||||||
Balance at beginning of period | $ | 14 | $ | 9 | ||||
Unrealized holding gain arising during period | 1 | 1 | ||||||
Tax expense | - | - | ||||||
Foreign currency translation adjustments | 5 | 7 | ||||||
Tax expense | (2 | ) | (3 | ) | ||||
Balance at end of period | $ | 18 | $ | 14 |
4. Deferred Stripping Costs: |
Effective January 1, 2006, the Company adopted EITF No. 04-6, “Accounting for Stripping Costs Incurred During Production in the Mining Industry,” (“EITF No. 04-6”). Mining companies typically remove rock, soil and waste materials (“overburden”) in order to access mineral deposits. EITF No. 04-6 specifies that the stripping costs related to exposed, but not extracted, mineral must be expensed as incurred rather than inventoried in the cost of the mineral. Prior to implementing EITF No. 04-6, the Company deferred stripping costs and charged them to operations as coal was extracted and sold. |
The cumulative effect, net of tax, of implementing EITF No. 04-6 resulted in a reduction of retained earnings attributable to Redeemable Common Stock of $8 million in the first quarter of 2006. |
5. Earnings Per Share: |
For the three and six months ended June 30, 2005, basic earnings per share was computed using the weighted average number of shares outstanding during the period. Diluted earnings per share gives effect to convertible debentures considered to be dilutive common stock equivalents. As described in Note 3, earnings per share for the three and six months ended June 30, 2006 has not been presented consistent with the adoption of SFAS 150. |
9
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements | ||||||
5. Earnings Per Share, Continued: | ||||||
Three Months Ended June 30, 2005 | Six Months Ended June 30, 2005 | |||||
Net income available to common stockholders (in millions) | $ | 60 | $ | 54 | ||
Add: Interest expense, net of tax effect, | ||||||
associated with convertible debentures | * | * | ||||
Net income for diluted shares | $ | 60 | $ | 54 | ||
Total number of weighted average shares outstanding used to | ||||||
compute basic earnings per share (in thousands) | 28,172 | 28,471 | ||||
Additional dilutive shares assuming | ||||||
conversion of convertible debentures | 1,026 | 1,022 | ||||
Total number of shares used to compute | ||||||
diluted earnings per share | 29,198 | 29,493 | ||||
Net income per share: | ||||||
Basic | $ | 2.13 | $ | 1.89 | ||
Diluted | $ | 2.05 | $ | 1.83 | ||
* Interest expense attributable to convertible debentures was less than $0.5 million, net of tax. | ||||||
6. Disclosures about Fair Value of Financial Instruments: | ||||||
Foreign Currency Forward Contracts. | ||||||
The Company has entered into several foreign currency forward contracts as a strategy to offset the earnings impact of currency fluctuations upon future transactions. The forward contracts are generally scheduled to mature as those future transactions occur. The forward contracts have not been designated as hedging instruments under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” The forward contracts had outstanding notional amounts of $U.S. 122 million and $U.S. 62 million at June 30, 2006 and December 31, 2005, respectively. The forward contracts will offset the earnings impact caused by currency fluctuations of U.S. dollar denominated liabilities and expenses related to the completion of construction contracts by Canadian subsidiaries. The forward contracts are recorded in liabilities in the consolidated condensed balance sheets at fair value based upon quoted market prices. Changes in the fair value of the forward contracts are immediately recognized in cost of revenue in the consolidated condensed statements of operations. | ||||||
10
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements 6. Disclosures about Fair Value of Financial Instruments, Continued: The forward contracts mature monthly in varying amounts between 2006 and 2008 and will settle based upon the difference between the current exchange rate at the time of settlement and the exchange rates in the forward contracts. At June 30, 2006 and December 31, 2005, the fair value of these forward contracts was a current liability of $3 million and $2 million, respectively, and a long-term liability of less than $0.5 million for both periods. During the three months ended June 30, 2006 and June 30, 2005, the Company recognized losses on the forward contracts of $3 million and gains of $1 million, respectively. During the six months ended June 30, 2006 and June 30, 2005, the Company recognized losses on the forward contracts of $3 million and $1 million, respectively. |
7. Segment Data: |
The Company has two reportable segments, construction and coal mining. |
Intersegment sales, if any, are recorded at cost and are eliminated upon consolidation. There were no intersegment sales for the three and six months ended June 30, 2006 and June 30, 2005. Operating income is comprised of net sales less all identifiable operating expenses, general and administrative expenses, gain on sale of operating assets and depreciation and amortization. Investment income and interest expense have been excluded from segment operations. | ||||||||||||
Three Months Ended | Three Months Ended | |||||||||||
June 30, 2006 | June 30, 2005 | |||||||||||
Construction | Coal Mining | Construction | Coal Mining | |||||||||
(dollars in millions) | ||||||||||||
Revenue – external customers | $ | 1,190 | $ | 47 | $ | 954 | $ | 43 | ||||
Depreciation and amortization | $ | 24 | $ | 4 | $ | 20 | $ | 5 | ||||
Operating income | $ | 82 | $ | 8 | $ | 150 | $ | 11 | ||||
Six Months Ended | Six Months Ended | |||||||||||
June 30, 2006 | June 30, 2005 | |||||||||||
Construction | Coal Mining | Construction | Coal Mining | |||||||||
(dollars in millions) | ||||||||||||
Revenue – external customers | $ | 2,130 | $ | 93 | $ | 1,722 | $ | 84 | ||||
Depreciation and amortization | $ | 46 | $ | 7 | $ | 45 | $ | 11 | ||||
Operating income | $ | 103 | $ | 18 | $ | 118 | $ | 23 |
11
PETER KIEWIT SONS’, INC. AND SUBSIDIARIES | |||
Notes to Consolidated Condensed Financial Statements | |||
8. Other Matters: | |||
The Company is involved in various lawsuits and claims incidental to its business. Management believes that any resulting liability, beyond that provided, should not materially affect the Company’s financial position, future results of operations or future cash flows. | |||
During the six months ended June 30, 2006 and June 30, 2005, the Company recognized additional operating income of $6 million and $101 million, respectively, of claim settlements on construction projects. | |||
It is customary in the Company’s industry to use standby letters of credit. At June 30, 2006, the Company had outstanding letters of credit with a number of banks totaling approximately $248 million. None of the available letters of credit have been drawn upon. | |||
The Company anticipates repurchasing approximately 893,000 shares of Redeemable Common Stock over the next 2 years as a result of changes in the roles of certain members of executive management. The aggregate value of these shares calculated at the June 30, 2006 formula price is approximately $43 million. | |||
12
13
Total construction revenue increased $236 million or 25% from the same period in 2005. Increases in revenue from the second quarter of 2005 to the second quarter of 2006 include numerous construction projects spanning various markets including petroleum ($130 million) exclusive of a large oil and gas joint venture project located in Newfoundland, Canada (“Oil and Gas Project”), power/heat/cooling ($74 million), transportation ($53 million), water supply/dams ($44 million) and sewage and solid waste disposal ($30 million). Offsetting these increases was a decrease in revenues of $126 million (of which $88 million represented claim revenue) on the Oil and Gas Project which was substantially completed in 2005. Given the non-recurring nature of construction projects, the mix and volume of construction projects by market often varies from period to period. | ||||||||||||
Construction contract backlog at June 30, 2006 and June 30, 2005 was $6.4 billion and $5.1 billion, respectively. Additionally, the Company was low bidder on $0.9 billion and $1.1 billion of construction jobs that had not been awarded at June 30, 2006 and June 30, 2005, respectively. Foreign operations, located primarily in Canada, represent 14% of construction backlog at June 30, 2006. Domestic construction projects are spread geographically throughout the U.S. The Company’s 10 largest jobs in backlog made up 51% of total backlog at both June 30, 2006 and June 30, 2005. | ||||||||||||
Coal mining revenues increased $4 million or 9% from the same period in 2005. This increase is primarily due to an increased sales price per ton and, to a lesser degree,. increased tons sold | ||||||||||||
Coal mining sales backlog at June 30, 2006 and June 30, 2005 was approximately 135 million and 99 million, respectively, tons of coal. The remaining terms on these contracts range from less than 1 year to 20 years. | ||||||||||||
Operating Income. | ||||||||||||
Operating income consists of margin (revenue less cost of revenue), general and administrative expenses and gain on sale of operating assets. Operating income from each of the Company’s segments was: | ||||||||||||
Three Months Ended | ||||||||||||
June 30, 2006 |
|
| June 30, 2005 | |||||||||
Construction | Coal Mining | Construction | Coal Mining | |||||||||
(dollars in millions) | ||||||||||||
Margin | $ | 144 | $ | 10 | $ | 215 | $ | 13 | ||||
General and administrative expenses | (65 | ) | (2 | ) | (69 | ) | (2 | ) | ||||
Gain on sale of operating assets | 3 | - | 4 | - | ||||||||
Operating income | $ | 82 | $ | 8 | $ | 150 | $ | 11 | ||||
Margin. | ||||||||||||
Total construction margin decreased $71 million or 33% from the same period in 2005 primarily due to the substantial completion of the Oil and Gas Project in 2005. Margin on the Oil and Gas Project decreased a total of $108 million (including $88 million in claim margin). Offsetting the margin decrease from 2005 to 2006 on the Oil and Gas Project were increases in margin on numerous construction projects spanning various markets including power/heat/cooling ($18 million), water supply/dams ($14 million), petroleum ($13 million) exclusive of the Oil and Gas Project, sewage and solid waste disposal ($5 million), and transportation ($2 million). Given the non-recurring nature of construction projects, the mix and volume of construction projects by market often varies from period to period. | ||||||||||||
Construction margin as a percentage of construction revenue for the three months ended June 30, 2006 decreased to 12% from 23% for the same period in 2005, primarily due to the claim margin earned from the Oil and Gas Project in 2005. | ||||||||||||
Total coal mining margin decreased $3 million or 23% from the same period in 2005. Coal mining margin as a percentage of coal mining revenue for the three months ended June 30, 2006 decreased to 21% from 30% for the same period in 2005. The decreases are primarily due to lower fees earned from a mining services contract. |
14
General and Administrative Expenses. |
General and administrative expenses related to construction operations for the three months ended June 30, 2006 decreased $4 million from the same period in 2005, primarily due to compensation expense in 2005 related to the vesting of convertible debentures. As a percentage of revenue, general and administrative expenses for the three months ended June 30, 2006 decreased to 5% as compared to 7% for the same period in 2005 as increased revenues did not require a proportionate increase in general and administrative expenses. |
General and administrative expenses related to mining operations remained consistent at $2 million in the second quarter of 2006 as compared to the same period in 2005. As a percentage of revenue, general and administrative expenses for the three months ended June 30, 2006 remained consistent at 4.2%. |
Gain on Sale of Operating Assets. |
Net gains on the disposition of property, plant and equipment were $3 million and $4 million for the three months ended June 30, 2006 and June 30, 2005, respectively. Gain on sale of operating assets is affected to a large degree by market conditions and the specific types and quantity of pieces of equipment sold. |
Other Income (Expense). |
Other net income decreased $4 million for the three months ended June 30, 2006 from the same period in 2005 primarily due to increased foreign exchange losses offset by increased interest income. |
Minority Interest in Income of Consolidated Subsidiaries. |
Minority interest in income of consolidated subsidiaries consists primarily of the portion of the consolidated construction joint ventures that is not owned by the Company. During the three months ended June 30, 2006, the Company recognized $8 million of minority interest in income of consolidated subsidiaries as compared to $69 million in the same period in 2005. The majority of this decrease is attributable to the completion of the Oil and Gas Project in 2005. |
Income Tax Expense. |
The Company measures income tax expense for interim periods by calculating an estimated annual effective tax rate for the applicable period. The estimated effective income tax rates applied to operations for the three months ended June 30, 2006 and June 30, 2005 were 38% and 39% respectively. These rates differ from the federal statutory rate of 35% primarily due to state income taxes, offset in part by the deduction for domestic production activities, tax exempt interest income and percentage depletion. |
Earnings Attributable to Redeemable Common Stock. |
As described in Note 3, Redeemable Common Stock, the Company adopted the provisions of SFAS 150 as of January 1, 2006. SFAS 150 requires that Redeemable Common Stock be recorded as a liability at formula value and that changes in formula value be recorded as an expense on the consolidated condensed statement of operations. That expense, captioned “Earnings attributable to redeemable common stock” represents the portion of earnings for the period that, at the next annual determination, will increase formula value. |
15
Results of Operations – Six Months 2006 vs. Six Months 2005 | ||||||||||||||||||
Revenue. | ||||||||||||||||||
Revenue from each of the Company’s segments was: | ||||||||||||||||||
Six Months Ended | ||||||||||||||||||
June 30, | ||||||||||||||||||
2006 | 2005 | |||||||||||||||||
(dollars in millions) | ||||||||||||||||||
Construction | $ | 2,130 | $ | 1,722 | ||||||||||||||
Coal Mining | 93 | 84 | ||||||||||||||||
$ | 2,223 | $ | 1,806 | |||||||||||||||
Total construction revenue increased $408 million or 24% from the same period in 2005. Increases in revenue include numerous construction projects spanning various markets including petroleum ($162 million) exclusive of the Oil and Gas Project, power/heat/cooling ($128 million), transportation ($82 million), water supply/dams ($64 million), sewage and solid waste disposal ($45 million) and commercial building ($15 million). Offsetting these increases was a decrease in revenue from the Oil and Gas project of $150 million (including $88 million in claim revenue) and a decrease in other claim revenue of $3 million from $9 million in the six months ended June 30, 2005 to $6 million in the six months ended June 30, 2006. Given the non-recurring nature of construction projects, the mix and volume of construction projects by market often varies from period to period. | ||||||||||||||||||
Coal mining revenues increased $9 million or 11% from the same period in 2005. This increase is primarily due to an increased sales price per ton and, to a lesser degree, increased tons sold. | ||||||||||||||||||
Operating Income. | ||||||||||||||||||
Operating income consists of margin (revenue less cost of revenue), general and administrative expenses and gain on sale of operating assets. Operating income from each of the Company’s segments was: | ||||||||||||||||||
Six Months Ended | ||||||||||||||||||
June 30, 2006 | June 30, 2005 | |||||||||||||||||
Construction | Coal Mining | Construction | Coal Mining | |||||||||||||||
(dollars in millions) | ||||||||||||||||||
Margin | $ | 227 | $ | 23 | $ | 246 | $ | 27 | ||||||||||
General and administrative expenses | (132 | ) | (5 | ) | (134 | ) | (4 | ) | ||||||||||
Gain on sale of operating assets | 8 | - | 6 | - | ||||||||||||||
Operating income | $ | 103 | $ | 18 | $ | 118 | $ | 23 |
16
Margin. |
Total construction margin decreased $19 million or 8% from the same period in 2005 primarily due to the substantial completion of the Oil and Gas Project in 2005. Margin on the Oil and Gas Project decreased a total of $84 million (including $88 million in claim margin). Offsetting the decrease from 2005 to 2006 on the Oil and Gas Project were increases in margin on numerous construction projects spanning various markets including water supply/dams ($24 million), transportation ($20 million), power/heat/cooling ($16 million), and sewage and solid waste disposal ($11 million). Given the non-recurring nature of construction projects, the mix and volume of construction projects by market often varies from period to period. |
Construction margin as a percentage of construction revenue for the six months ended June 30, 2006 decreased to 11% from 14% for the same period in 2005, primarily due to the claim margin earned from the Oil and Gas Project in 2005. |
Total coal mining margin decreased $4 million or 15% from the same period in 2005. Coal mining margin as a percentage of coal mining revenue for the six months ended June 30, 2006 decreased to 25% from 32% for the same period in 2005. The decreases are primarily due to lower fees earned from a mining services contract. |
General and Administrative Expenses. |
General and administrative expenses related to construction operations for the six months ended June 30, 2006 decreased $2 million from the same period in 2005. As a percentage of revenue, general and administrative expenses for the six months ended June 30, 2006 decreased to 6% as compared to 8% for the same period in 2005 as increased revenues did not require a proportionate increase in general and administrative expenses. |
General and administrative expenses related to mining operations increased $1 million in the six months ended June 30, 2006 as compared to the same period in 2005. As a percentage of revenue, general and administrative expenses for the six months ended June 30, 2006 increased to 5.1% as compared to 4.9% for the same period in 2005. |
Gain on Sale of Operating Assets. |
Net gains on the disposition of property, plant and equipment were $8 million and $6 million for the six months ended June 30, 2006 and June 30, 2005, respectively. Gain on sale of operating assets is affected to a large degree by market conditions and the specific types and quantity of pieces of equipment sold. |
Other Income (Expense). |
Other net income decreased $2 million for the six months ended June 30, 2006 from the same period in 2005 primarily due to increased foreign exchange losses offset by increased interest income. |
Minority Interest in Income of Consolidated Subsidiaries. |
Minority interest in income of consolidated subsidiaries consists primarily of the portion of the consolidated construction joint ventures that is not owned by the Company. During the six months ended June 30, 2006, the Company recognized $11 million of minority interest in income of consolidated subsidiaries as compared to $63 million in the same period in 2005. The majority of this decrease is attributable to the completion of the Oil and Gas Project in 2005. |
Income Tax Expense. |
The Company measures income tax expense for interim periods by calculating an estimated annual effective tax rate for the applicable period. The estimated effective income tax rates applied to operations for the six months ended June 30, 2006 and June 30, 2005 were 38% and 39% respectively. These rates differ from the federal statutory rate of 35% primarily due to state income taxes, offset in part, by the deduction for domestic production activities, tax exempt interest income and percentage depletion. |
17
Earnings Attributable to Redeemable Common Stock. |
As described in Note 3, Redeemable Common Stock, the Company adopted the provisions of SFAS 150 as of January 1, 2006. SFAS 150 requires that Redeemable Common Stock be recorded as a liability at formula value and that changes in formula value be recorded as an expense on the consolidated condensed statement of operations. That expense, captioned “Earnings attributable to redeemable common stock” represents the portion of earnings for the period that, at the next annual determination, will increase formula value. |
Financial Condition – June 30, 2006 vs. December 31, 2005 |
Cash and cash equivalents decreased $56 million to $262 million at June 30, 2006 from $318 million at December 31, 2005. The major items contributing to the decrease were $108 million of capital expenditures, $70 million of repurchases of Redeemable Common Stock and $30 million of dividends paid, offset primarily by $137 million of cash provided by operations and $25 million of net proceeds from available-for-sale securities. |
Net cash provided by operating activities for the six months ended June 30, 2006 increased by $115 million to $137 million as compared to $22 million in the same period in 2005. This increase was primarily due to decreased receivables and increased billings in excess of related costs and earnings resulting from significant mobilization payments on new projects. Cash provided or used by operating activities is affected to a large degree by the mix, timing, stage of completion and terms of individual contracts which are reflected in changes through current assets and liabilities. |
Net cash used in investing activities for the six months ended June 30, 2006 increased by $147 million to $72 million as compared to cash provided of $75 million in the same period in 2005. The increase was primarily due to increased capital expenditures of $45 million from $63 million to $108 million, and decreased net proceeds from available-for-sale securities of $85 million from $110 million to $25 million. In 2005, available-for-sale securities were sold to partially fund increased repurchases of Redeemable Common Stock caused by a $398 million tender offer and $52 million of repurchases resulting from changes in the roles of certain members of executive management. |
Capital spending varies due to the nature and timing of jobs awarded. Management does not expect any material changes to capital spending. Acquisitions depend largely on market conditions. |
Net cash used in financing activities for the six months ended June 30, 2006 decreased by $460 million to $124 million as compared to $584 million in the same time period in 2005. This decrease was primarily due to repurchases of Redeemable Common Stock in 2005 caused by a $398 million tender offer and $52 million of repurchases resulting from changes in the roles of certain members of executive management. |
Liquidity. |
During the six months ended June 30, 2006 and June 30, 2005, the Company expended $108 million and $63 million, respectively, on capital expenditures. The Company anticipates that its future cash requirements for capital expenditures and acquisitions will not change significantly from these historical amounts except as described below. Cash generated by joint ventures, while readily available, is generally not distributed to partners until the liabilities and commitments of the joint ventures have been substantially satisfied. Other long-term liquidity uses include the payment of income taxes, long-term debt and dividends. As of June 30, 2006, the Company had no material firm binding purchase commitments related to its investments other than meeting the normal course of business needs of its construction joint ventures and as discussed below. The current portion of long-term debt is $9 million. The Company paid dividends during the six months ended June 30, 2006 and June 30, 2005 of $30 million and $27 million, respectively. The Company also has the commitment to repurchase its Redeemable Common Stock at any time during the year from shareholders. |
18
The Company anticipates repurchasing approximately 893,000 shares of Redeemable Common Stock over the next 2 years as a result of changes in the roles of certain members of executive management. The aggregate value of these shares calculated at the June 30, 2006 formula price is approximately $43 million. |
It is customary in the Company’s industry to use standby letters of credit. At June 30, 2006, the Company had outstanding letters of credit with a number of banks totaling approximately $248 million. None of the available letters of credit have been drawn upon. |
The Company’s current financial condition, together with anticipated cash flows from operations, should be sufficient for immediate cash requirements and future investing activities. The Company does not have any committed bank credit facilities. In the past, the Company has been able to borrow on satisfactory terms. The Company believes that, to the extent necessary, it will likewise be able to borrow funds on acceptable terms for the foreseeable future. |
Off-Balance Sheet Arrangements. |
During the six months ended June 30, 2006 and June 30, 2005, the Company did not enter into any off-balance sheet arrangements requiring disclosure under this caption. |
19
Period |
| Total Number of Shares of Redeemable Common Stock Repurchased |
| Average Price Paid per Share of Redeemable Common Stock |
April 1, 2006 through April 30, 2006 | 57,201 | $47.10 | ||
May 1, 2006 through May 31, 2006 | 26,090 | $46.25 | ||
June 1, 2006 through June 30, 2006 | 20,818 | $46.25 | ||
Total | 104,109 | $46.72 |
1. Approval of the Certificate Amendment. The stockholders were asked to approve an amendment to the Certificate to revise the definition of “current inside director”. The amendment was approved by the stockholders. The votes cast for, against or abstaining were as follows: | ||||||||
Affirmative Votes | Negative Votes | Abstentions | ||||||
17,698,555 | 30,747 | 50,199 |
20
2. Election of Directors. A slate of nominees for director was proposed by the incumbent directors. No additional nominations were received and all of the nominees proposed by the board were elected to serve one-year terms. |
Director Nominee Votes For Withheld |
Mogens C. Bay 17,763,662 15,839 |
Scott L. Cassels 17,763,662 15,839 |
Richard W. Colf 17,763,662 15,839 |
Richard Geary 17,762,396 17,105 |
Bruce E. Grewcock 17,763,662 15,839 |
Steven Hansen 17,763,662 15,839 |
Allan K. Kirkwood 17,763,662 15,839 |
Michael R. McCarthy 17,763,662 15,839 |
Christopher J. Murphy 17,763,662 15,839 |
Douglas E. Patterson 17,752,564 26,937 |
R. Michael Phelps 17,763,662 15,839 |
Kirk R. Samuelson 17,763,662 15,839 |
Walter Scott, Jr. 17,762,396 17,105 |
Thomas S. Shelby 17,763,662 15,839 |
Kenneth E. Stinson 17,763,662 15,839 |
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. | |
Date: August 8, 2006 | PETER KIEWIT SONS’, INC. /s/ Michael J. Piechoski Michael J. Piechoski Vice President and Principal Financial Officer |
21