SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended: September 30, 1997
Commission File Number: 1-5642
DRAVO CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0447860
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
One Oliver Plaza, Pittsburgh, Pennsylvania 15222
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 566-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the registrant's classes of common
stock as of October 31, 1997:
Title of Class Shares Outstanding
Common Stock, $1.00 par value 14,780,836
DRAVO CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 3, 4
Consolidated Statements of Earnings for the
Quarters ended September 30, 1997 and 1996 5
Consolidated Statements of Earnings for the
Nine Months ended September 30, 1997 and 1996 6
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1997 and 1996 7, 8
Notes to Consolidated Financial Statements 9-12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
DRAVO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in 000's)
September 30, December 31,
1997 1996
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,749 $ 1,600
Accounts receivable, net 20,396 23,265
Notes receivable, net 768 921
Inventories 17,988 16,481
Other current assets 625 751
Total current assets 41,526 43,018
Advances to and equity in joint ventures 2,953 2,093
Notes receivable 6,419 4,380
Other assets 25,854 25,066
Deferred income taxes 24,853 24,853
Property, plant and equipment 260,776 238,025
Less: accumulated depreciation and
amortization 119,151 112,026
Net property, plant and equipment 141,625 125,999
Total assets $243,230 $225,409
See accompanying notes to consolidated financial statements.
DRAVO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in 000's)
September 30, December 31,
1997 1996
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term notes $ 9,760 $ 6,166
Accounts payable - trade 14,165 14,542
Accrued insurance 2,642 1,906
Accrued retirement contribution 1,810 1,785
Net liabilities of discontinued operations 4,432 6,299
Other current liabilities 4,630 3,843
Total current liabilities 37,439 34,541
Long-term notes 71,390 63,535
Net liabilities of discontinued operations 5,953 6,786
Other liabilities 7,157 6,632
Redeemable preference stock:
Par value $1, issued 200,000 shares:
Series D, $12.35 cumulative, convertible,
exchangeable (entitled in liquidation to
$20.0 million) 20,000 20,000
Shareholders' equity:
Preference stock, par value $1, authorized
1,878,870: Series B, $2.475 cumulative,
convertible; issued 19,386 and 20,386 shares
(entitled in liquidation to $1.1 million); 19 20
Series D, reported above
Common stock, par value $1, authorized
35,000,000 shares; issued 15,100,033
and 15,096,817 15,100 15,097
Other capital 63,063 63,077
Retained earnings 27,316 20,063
Treasury stock at cost:
Common shares 322,413 and 333,168 (4,207) (4,342)
Total shareholders' equity 101,291 93,915
Total liabilities and shareholders' equity $243,230 $225,409
See accompanying notes to consolidated financial statements.
DRAVO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
(unaudited, $ in 000's, except per share data)
Quarters ended September 30,
1997 1996
Revenue $ 40,966 $ 40,752
Cost of revenue 29,921 30,217
Gross profit 11,045 10,535
Selling, general and administrative expenses 5,575 5,454
Earnings from operations 5,470 5,081
Other income (expense):
Equity in earnings of joint ventures 259 234
Interest income 79 6
Interest expense (1,926) (1,575)
Net other income (expense) (1,588) (1,335)
Earnings before taxes 3,882 3,746
Provision for income taxes 127 113
Net earnings 3,755 3,633
Preference dividends 629 633
Net earnings available
for common shares $ 3,126 $ 3,000
Earnings per share $ 0.21 $ 0.20
Weighted average shares outstanding 14,854 14,936
See accompanying notes to consolidated financial statements.
DRAVO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
(unaudited, $ in 000's, except per share data)
Nine Months ended September 30,
1997 1996
Revenue $121,025 $118,325
Cost of revenue 90,680 88,707
Gross profit 30,345 29,618
Selling, general and administrative expenses 16,356 15,777
Earnings from operations 13,989 13,841
Other income (expense):
Equity in earnings of joint ventures 632 702
Other expense (9) -
Interest income 161 874
Interest expense (5,095) (4,911)
Net other income (expense) (4,311) (3,335)
Earnings before taxes 9,678 10,506
Provision for income taxes 537 316
Net earnings 9,141 10,190
Preference dividends 1,888 1,899
Net earnings available
for common shares $ 7,253 $ 8,291
Earnings per share $ 0.49 $ 0.56
Weighted average shares outstanding 14,851 14,879
See accompanying notes to consolidated financial statements.
DRAVO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited, $ in 000's)
Nine Months ended September 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 9,141 $ 10,190
Adjustments to reconcile net earnings
to net cash provided by continuing
operations activities:
Depreciation and amortization 7,732 7,744
Loss on disposal of assets 9 -
Equity in joint ventures (860) (431)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 2,869 (1,314)
Decrease (increase) in notes receivable (1,886) 37
Increase in inventories (1,507) (1,020)
Decrease (increase) in other current assets 188 (145)
Increase (decrease) in accounts payable
and accrued expenses 1,208 (1,431)
Increase (decrease) in taxes payable 24 (171)
Increase in other assets (788) (903)
Increase in other liabilities 525 1,954
Net cash provided by continuing
operations activities 16,655 14,510
Net cash provided (used) by discontinued
operations activities (2,700) 4,932
Net cash provided by operating
activities 13,955 19,442
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (23,367) (15,528)
Net cash used by investing activities $ (23,367) $ (15,528)
See accompanying notes to consolidated financial statements.
DRAVO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited, $ in 000's)
Nine Months ended September 30,
1997 1996
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (repayment) under revolving
credit agreements $ (1,010) $ 3,550
Principal payments under long-term notes (6,204) (6,014)
Proceeds from long-term notes 18,663 -
Proceeds from issuance of common stock - 248
Dividends on preference stock (1,888) (1,899)
Net cash provided (used) by financing
activities 9,561 (4,115)
Net increase (decrease) in cash and cash
equivalents 149 (201)
Cash and cash equivalents at beginning of
period 1,600 1,086
Cash and cash equivalents at end of period $ 1,749 $ 885
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 4,905 $ 4,976
Income taxes 517 487
See accompanying notes to consolidated financial statements.
DRAVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Dravo Corporation and its majority-owned subsidiaries (the
company). The principal subsidiary is Dravo Lime Company, one of the nation's
largest lime producers. Significant intercompany balances and transactions
have been eliminated in the consolidation process.
These unaudited consolidated financial statements include all
adjustments, consisting only of normal, recurring accruals, which management
considers necessary for a fair presentation of the company's consolidated
financial position, results of operations, and cash flows for the interim
periods presented.
(2) Inventories
Inventories are classified as follows:
($ in 000's)
September 30, December 31,
1997 1996
Finished goods $ 3,205 $ 2,586
Materials and supplies 14,783 13,895
Net inventories $17,988 $16,481
Finished goods are valued at average production cost or market, whichever
is lower, and include raw materials, direct labor, and operating overhead.
Materials and supplies are valued at average cost.
(3) Contingent Liabilities
The company has been notified by the federal Environmental Protection
Agency (EPA) that the EPA believes the company is a potentially responsible
party (PRP) for the clean-up of soil and groundwater contamination at four
sub-sites in Hastings, NE. The Hastings site is one of the EPA's priority
sites for taking remedial action under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA).
The company participated in an EPA-initiated allocation proceeding for
a municipal landfill sub-site to allocate shares of liability for past
response costs and costs of a proposed cap of the landfill. As part of this
proceeding, the allocator conducted a mediation session which resulted in a
settlement among the EPA and the PRPs. Pursuant to the settlement, the
company agreed to pay $702,000, or 14.33 percent of the $4.9 million past
costs and estimated source control costs for this sub-site. A Consent Order
incorporating the settlement and an agreement among the private parties
concerning the construction and maintenance of the proposed cap is being
negotiated. In exchange, the
company received contribution protection against third-party claims as
well as a covenant from the EPA not to sue for its past and future response
costs at this sub-site and matters covered by the settlement.
The company has also been notified by the EPA that the EPA considers
it a PRP at another municipal landfill in Hastings. At least three other
parties (including the City of Hastings) are considered by the EPA to be PRPs
at this second sub-site. At this sub-site, the company has concluded that the
City of Hastings is primarily responsible for proper closure of the landfill
and the remediation of any release of hazardous substances. In January, 1994,
the EPA invited the company and the other PRPs to make an offer to conduct a
remedial investigation and feasibility study (RI/FS) of this sub-site and
stated that the EPA was in the process of preparing a work plan for the RI/FS.
None of the PRPs accepted EPA's invitation to perform the RI/FS for this
sub-site. The EPA has conducted the remedial investigation. The company is
considering a proposal to conduct the feasibility study along with other PRPs.
With respect to the third sub-site, the company and two other PRPs have
been served with administrative orders directing them to undertake soil
remediation and interim groundwater remediation at that sub-site. The company
is currently complying with these orders while reserving its right to seek
reimbursement from the United States for its costs if it is determined it is
not liable for response costs or if it is required to incur costs because of
arbitrary, capricious or unreasonable requirements imposed by the EPA.
The EPA has taken no legal action with respect to its demand that the
company and the other PRPs pay its past response costs. A total of five
parties have been named by the EPA as PRPs at this sub-site, but two of them
have been granted de minimis status. The company believes other persons
should also be named as PRPs.
The fourth sub-site is a former naval ammunition depot which was
subsequently converted to an industrial park. The company and its predecessor
owned and operated a manufacturing facility in this industrial park. To date,
the company's investigation indicates that it did not cause the release of
hazardous substances at this sub-site during the time it owned and operated
the facility. The United States has undertaken to conduct the remediation of
this sub-site.
In addition to sub-site clean-up, the EPA is seeking a clean-up of
area-wide contamination associated with all of the sub-sites in and around
Hastings, NE. The company, along with other Hastings PRPs, has recommended
that the EPA adopt institutional controls as the area-wide remedy in Hastings.
EPA has completed an area wide remedial investigation and has asked the PRPs
to agree to perform a feasibility study to determine whether institutional
controls or another remedial alternative should be undertaken. The company,
along with other PRPs, are considering this proposal. An acceptable area wide
remediation plan could result in interim remedies at the subsites becoming
final remedies.
On August 10, 1992, the company filed suit in the Alabama District
Court against its primary liability insurance carriers and one of its
predecessor's insurers, seeking a declaratory judgment that the company is
entitled to a defense and indemnity under its contracts of insurance
(including certain excess policies provided by one of the primary carriers)
with regard to the third Hastings sub-site. On motion of the defendant
insurance carriers, the suit was transferred to the District
Court for the Western District of Pennsylvania on October 31, 1996.
The company has settled the claim against its predecessor's insurer, but the
case against the company's insurers is still in litigation. An award of
punitive damages is also being sought against the company's insurers for their
bad faith in failing to investigate the company's claim and/or denying the
company's claim. The company has notified its primary and excess general
liability carrier, as well as the excess carrier of its predecessor, of the
receipt of its notice of potential liability at the second and fourth sub-sites.
Estimated total clean-up costs at the third sub-site, including
capital outlays and future maintenance costs for soil and groundwater
remediation of approximately $14 million, are based on independent engineering
studies. Included in the discontinued operations provision is the company's
estimate that it will participate in 33 percent of these remediation costs.
The company's estimated share of the costs is based on its assessment of the
total clean-up costs, its potential exposure, and the viability of other named
PRPs. These estimates are, by their nature, uncertain and dependent upon
numerous factors, any of which could cause actual results to differ materially
from projected amounts.
Other claims and assertions made against the company will be resolved,
in the opinion of management, without material additional charges to earnings.
(4) Discontinued Operations
Discontinued operations' assets and liabilities at September 30, 1997 and
December 31, 1996 relate to non-cancelable leases, insurance, environmental,
legal and other matters associated with exiting the engineering and construction
business and are presented below:
($ in 000's) September 30, December 31,
1997 1996
Current assets:
Accounts and retainers receivable $ 275 $ 323
Total current assets 275 323
Other 309 309
Total assets $ 584 $ 632
Current liabilities:
Accounts and retainers payable $ 527 $ 536
Accrued loss on leases 1,705 2,304
Other 2,475 3,782
Total current liabilities 4,707 6,622
Accrued loss on leases - 954
Other 6,262 6,141
Total liabilities $ 10,969 $ 13,717
Net liabilities and accrued loss
on leases of discontinued operations $(10,385) $ (13,085)
DRAVO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (FAS
128). FAS 128 supersedes APB Opinion No. 15, Earnings per Share (APB 15) and
requires the calculation and dual presentation of Basic and Diluted earnings
per share, replacing the measures of Primary and Fully-diluted earnings per
share as reported under APB 15. FAS 128 is effective for financial statements
issued for periods ending after December 15, 1997; earlier application is not
permitted. After the effective date, all prior-period earnings per share data
presented must be restated to conform with the provisions of FAS 128. The
impact of FAS 128 on the company's earnings per share calculation will be
immaterial.
DRAVO CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Third quarter revenue of $41.0 million was up slightly over last year's
$40.8 million. Gross profit was up $510,000 over last year on the higher
revenue and a 1 percent gross margin increase. The company's results are
heavily influenced by its major utility customers plant operations. Events at
two large utility customers, an equipment failure and a decision to take a
generating unit out of service earlier than anticipated, suppressed revenue and
earnings during the quarter. Strong commercial sales, however, helped to
offset the utility revenue shortfall. The margin increase was attributable
primarily to lower production costs at the Maysville and Black River plants.
Selling, general and administrative expenses were higher primarily due to a bad
debt accrual for disputed invoices. Interest expense was $351,000 higher
because of higher debt levels and because the 1996 period benefited from the
capitalization of interest charges associated with the Maysville expansion
project.
Year-to date earnings of $9.1 million, or 49 cents per share, were down
from last year's $10.2 million, or 56 cents per share. The shortfall is
attributable to this year's poor first quarter earnings of $1.1 million, or
three cents per share. As reported previously, an early March flood in
northern Kentucky stopped the company from loading barges and its customers
from unloading barges for an extended period. Revenue and income in both the
second and third quarters of the current year have exceeded last year's
comparable period results, however, the impact of the flood and other
previously reported first quarter difficulties were too severe to recoup.
Additionally, last year's earnings were bolstered by refunds received from a
state taxing authority for amended returns filed based on current
interpretation of the state tax code. The refunds included interest income of
$851,000.
Capital expenditures for the nine months ended September 30 were $23.4
million compared to $15.5 million last year. Construction progress payments
for a new Maysville kiln, $8.3 million, and the $8.3 million purchase of land
containing more than 27 million tons of high calcium reserves adjacent to the
Longview facility accounted for a large part of the additions to property,
plant and equipment. Total debt increased $11.4 million from year-end
primarily due to funding capital expenditures.
The company's effective tax rate increased from 3.0% for the nine
months ended September 30, 1996 to 5.5% for the nine months ended September 30,
1997. This rate increase is attributed to alternative minimum tax. The
company is currently reviewing its deferred tax asset valuation allowance in
light of current and projected income levels and the status of the remaining
discontinued operations issues. If it is determined that it is more likely
than not that more net operating losses will be used before expiration than
have already been recorded, the valuation allowance will be adjusted and a tax
benefit will be recognized. Accordingly, for financial reporting purposes, tax
expense in future periods will be recorded at a higher effective tax rate.
DRAVO CORPORATION AND SUBSIDIARIES
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is filed as an exhibit to Part I of this Form 10-Q:
Exhibit No. 11 - Statement re computation of per share earnings.
The following are filed as exhibits to Part II of this Form 10-Q:
Exhibit No. 4 - Instruments defining the rights of security
holders, including indentures
Amendment Agreement dated July 31, 1997 encompassing the
Seventh Amendment to the Override Agreement and the Sixth
Amendment to Revolving Credit Agreement.
Exhibit No. 10 - Material contracts
Agreement dated September 15, 1997 between Dravo
Corporation and Carl A. Gilbert. Identical agreements were
entered into with James J. Puhala, John R. Major, Marshall
S.Johnson, and Donald H. Stowe, Jr.
(b) Reports on Form 8-K
The company filed no reports on Form 8-K for the quarter ended
September 30, 1997.
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.
DRAVO CORPORATION
(Registrant)
Date: November 13, 1997 /s/JAMES J. PUHALA
James J. Puhala
Vice President, Administration and
General Counsel and Acting
Chief Financial Officer
Date: November 13, 1997 /s/LARRY J. WALKER
Larry J. Walker
Vice President and Controller
(Principal Accounting Officer)