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, 1999
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
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(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
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: 13,064,499 shares as of July 31, 1999.
Stone & Webster, Incorporated and Subsidiaries
Form 10-Q
Index
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited):
Three and Six Months Ended June 30, 1999 and
June 30, 1998......................................... 3
Consolidated Balance Sheets (Unaudited):
June 30, 1999 and December 31, 1998................... 4
Condensed Consolidated Statements of Cash Flows
(Unaudited):
Six Months Ended June 30, 1999 and June 30, 1998....... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ 6-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition......................10-15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...... 16
Item 6. Exhibits and Reports on Form 8-K......................... 17
SIGNATURES................................................................ 18
2
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,
1999 1998 1999 1998
---- ---- ---- ----
Revenue $310,310 $317,004 $576,408 $610,961
Cost of revenue 285,648 300,385 602,417 566,436
-------- -------- -------- --------
Gross profit (loss) 24,662 16,619 (26,009) 44,525
General and administrative expenses 16,913 15,414 33,639 31,686
-------- -------- -------- --------
Operating income (loss) 7,749 1,205 (59,648) 12,839
Other income (expense):
Interest income 422 297 1,083 1,500
Interest expense (1,957) (591) (3,915) (1,008)
-------- -------- -------- --------
Total other income (expense), net (1,535) (294) (2,832) 492
Income (loss) before provision for
income taxes 6,214 911 (62,480) 13,331
Income tax (benefit) provision - 260 (10,000) 5,067
-------- -------- -------- --------
Net income (loss) $ 6,214 $ 651 $(52,480) $ 8,264
======== ======== ======== ========
Per share amounts:
Basic and diluted earnings per share $0.48 $0.05 $(4.02) $0.64
===== ===== ====== =====
Dividends declared per share $0.15 $0.15 $ 0.30 $0.30
===== ===== ====== =====
Weighted-average number of shares
outstanding:
Basic 13,063 12,792 13,058 12,797
====== ====== ====== ======
Diluted 13,122 12,922 13,058 12,927
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
3
Stone & Webster, Incorporated and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share amounts)
June 30, December 31,
1999 1998
-------- ------------
Assets
Current assets:
Cash and cash equivalents $ 29,157 $ 45,492
Accounts receivable, principally trade, net 281,116 276,235
Costs and revenues recognized in excess of
billings 61,669 49,302
Deferred income taxes 39,001 20,338
Other 1,559 638
-------- --------
Total current assets 412,502 392,005
Assets held for sale 6,744 6,744
Fixed assets, net 220,175 219,157
Domestic prepaid pension cost 162,947 155,703
Note receivable - 15,150
Other assets 49,524 45,923
-------- --------
Total assets $851,892 $834,682
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Bank loans $106,475 $106,350
Current portion of long-term debt 2,065 2,175
Accounts payable, principally trade 103,855 96,134
Billings in excess of costs and revenues
recognized 241,300 176,692
Accrued liabilities 80,639 80,036
Accrued taxes 7,377 12,034
-------- --------
Total current liabilities 541,711 473,421
Long-term debt 21,241 22,228
Deferred income taxes 39,085 33,030
Other liabilities 13,951 14,427
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 54,671 54,625
Retained earnings 311,002 367,358
Accumulated other comprehensive income (9,296) (9,707)
Less: Common stock held in treasury, at cost
(4,667,689 and 4,692,933 shares) 121,373 122,030
Employee stock ownership and restricted
stock plans 16,831 16,401
-------- --------
Total shareholders' equity 235,904 291,576
-------- --------
Total liabilities and shareholders' equity $851,892 $834,682
======== ========
See accompanying notes to condensed consolidated financial statements
4
Stone & Webster, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months
Ended June 30,
1999 1998
---- ----
Cash Flows from Operating Activities:
Net income (loss) $(52,480) $ 8,264
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Depreciation and amortization 11,387 7,675
Amortization of net cost of stock plans 918 732
Gain from asset divestiture - (3,066)
Deferred income taxes (12,608) 2,766
Domestic prepaid pension cost (7,244) (10,338)
Changes in operating assets and liabilities 45,838 (103,345)
-------- --------
Net cash used for operating activities (14,189) (97,312)
-------- --------
Cash Flows from Investing Activities:
Purchases of fixed assets (12,405) (13,721)
Proceeds from note receivable 15,150 -
Proceeds from maturities of U.S. Government
securities - 31,909
Proceeds from asset divestiture - 13,546
-------- --------
Net cash provided by investing activities: 2,745 31,734
-------- --------
Cash Flows from Financing Activities:
Repayments of long-term debt (1,097) (781)
Increase in bank loans 125 20,000
Purchases of common stock for treasury - (1,514)
Dividends paid (3,919) (3,842)
-------- --------
Net cash (used for) provided by financing
activities (4,891) 13,863)
-------- --------
Net decrease in cash and cash equivalents (16,335) (51,715)
Cash and cash equivalents at beginning of period 45,492 75,030
-------- --------
Cash and cash equivalents at end of period $ 29,157 $ 23,315
======== ========
See accompanying notes to condensed consolidated financial statements.
5
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, 1998 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 ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1999 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, 1998.
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 are stated at cost less accumulated depreciation of
$152.9 million at June 30, 1999 and $190.9 million at December 31, 1998.
(C) Revenue and operating income by business segment were as follows for the
quarter and six months ended June 30, 1999 and 1998 (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Engineering, construction
and consulting services $298,395 $309,387 $553,051 $596,484
Cold Storage 11,915 7,617 23,357 14,477
-------- -------- -------- --------
Total revenue $310,310 $317,004 $576,408 $610,961
======== ======== ======== ========
Operating income:
Engineering, construction
and consulting services $ 5,309 $ (1,090) $(64,045) $ 8,259
Cold Storage 2,440 2,295 4,397 4,580
-------- -------- -------- --------
Total operating income
(loss) $ 7,749 $ 1,205 $(59,648) $ 12,839
======== ======== ======== ========
(D) Basic earnings per share for the six-month periods ended June 30, 1999 and
1998 were computed based on the weighted-average number of common shares
outstanding during the period of 13,057,529 and 12,797,455 respectively.
Diluted earnings per share for the six-month periods ended June 30, 1999
and 1998 were computed based on the weighted-average common and dilutive
potential shares outstanding during the period of 13,106,518 and
12,926,628, 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. Since the Company incurred a loss for the six months ended
June 30, 1999 and the dilutive potential shares would be antidilutive they
are not included in the calculation of earnings per share as prescribed by
FAS 128.
6
(E) The Company had a valuation allowance of $43.0 million at June 30, 1999 and
$9.1 million at December 31, 1998 for the deferred tax assets related to
net operating loss carryforwards. The valuation allowance at June 30, 1999
comprises $20.0 million relating to federal net operating loss
carryforwards, $9.3 million relating to state net operating loss
carryforwards and $13.7 million relating to the loss carryforwards of
international subsidiaries. During the first quarter of 1999, the annual
tax benefit was recognized to the extent of the net deferred tax liability.
In addition, a valuation allowance was established against operating loss
carryforwards in excess of the net deferred tax liability position. During
the second quarter of 1999, a portion of the valuation allowance was
released and no provision for taxes was required.
(F) Pension related items, which reduced operating costs, were $3.5 million and
$6.8 million for the quarter and six months ended June 30, 1999 compared to
$5.1 million and $10.2 million for the same periods in the prior year.
These items increased net income by $3.5 million, or $0.27 per share and
$4.1 million or $0.31 per share for the quarter and six months ended June
30, 1999, compared with $3.1 million, or $0.24 per share and $6.2 million
or $0.48 per share for the same periods in 1998. 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, which is primarily due to favorable asset performance.
(G) Under the 1995 Stock Option Plan, as of June 30, 1999, options for 557,375
shares were outstanding, no options were exercised, 43,375 options were
canceled, 14,500 options were accelerated and nonqualified options for
426,875 shares were exercisable.
Under the Stone & Webster, Incorporated Long-Term Incentive Compensation
Plan (the "1998 Plan") for the six-month period ended June 30, 1999,
nonqualified and incentive stock options for 450,500 shares of common stock
were granted to employees and nonemployee directors at a weighted-average
per share option price of $28.48. The options granted will become
exercisable at various times ranging from February 1999 to May 2003. As of
June 30, 1999, options for 668,500 shares were outstanding, no options were
exercised, 22,000 options were canceled, 16,500 options were accelerated
and 213,959 options were exercisable. For the six-month period ended June
30, 1999, 22,792 shares of restricted stock were awarded under the 1998
Plan at a per share weighted-average price of $28.77, with vesting of
one-third of the shares occurring on the effective date and one-third of
the shares vesting on each of the first and second anniversaries of the
effective date of the grant. No shares have been forfeited for the quarter
ended June 30, 1999.
The Employee Retirement Plan of Stone & Webster, Incorporated and
Participating Subsidiaries (the "Retirement Plan") and the Trust Agreement
under the Retirement Plan have been amended, effective July 1, 1999, to
permit the investment of a portion of the assets of the Retirement Plan in
common stock or other qualifying securities issued by the Company, provided
that the aggregate maximum number of such securities acquired shall be less
than five percent (5%) of such common stock or other securities, as the
case may be, then outstanding, and provided that such investment be in
compliance with the Employee Retirement Income Security Act of 1974, as
amended, and other applicable laws. The Board of Directors has directed
that such investment be made in an orderly manner from time to time in
accordance with investment guidelines and objectives established by the
Board.
7
(H) The Company had three separate domestic line of credit agreements available
totaling $105.0 million. As of June 30, 1999, these facilities were fully
utilized. The Company also had a domestic line of credit through a
subsidiary in the amount of $2.0 million. Borrowings under this line of
credit amounted to $1.5 million as of June 30, 1999.
Subsequent to the close of the second quarter, the Company finalized
negotiations on a $230.0 million collateralized line of credit with a group
of banks, which will provide operating funds and letters of credit. Upon
closing the new facility, the Company repaid the bank loans and certain
long-term debt that was outstanding as of the end of the second quarter.
(I) Comprehensive income (loss) was $6.4 million and ($4.9) million for the
quarters ended June 30, 1999 and 1998, respectively. Other comprehensive
income (loss) consists of translation adjustments of $0.1 million and
($5.6) million for the quarters ended June 30, 1999 and 1998, respectively.
For the six months ended June 30, 1999 and 1998 comprehensive income (loss)
was ($52.1) million and $4.6 million, respectively. Other comprehensive
income (loss) consists of translation adjustments of $0.4 million and
($3.6) million for the six months ended June 30, 1999 and 1998,
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). 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) Certain financial statement items have been reclassified to conform to the
current year's presentation.
(L) 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.
The Trans-Pacific Petrochemical Indotama ("TPPI") project remains suspended
pending resolution of financing issues by the client. The TPPI project is
included in the Company's backlog in the amount of $410.0 million. The
Company has obtained approval to resell or use committed materials and
procured equipment to reduce costs of project suspension. The Company has
also had substantive discussions with potential purchasers of the olefins
plant which constitutes the majority of the Company's scope for the
project, and during the first quarter of 1999, signed a conditional
memorandum of understanding to sell the plant. Had the project been
cancelled as of June 30, 1999, and if resale of the olefins plant were
unlikely to be completed, the Company would have recorded a pre-tax charge
of approximately $75.0 million representing project working capital plus
current procurement commitments net of the estimated salvage value of
procured equipment and materials.
8
The Company is currently engaged in two international projects that
incurred losses in the first quarter. Due to various factors, including
owner directed technical and schedule changes, increases in scope of the
currently authorized contracts and other factors, the cost to complete
these contracts will significantly exceed each contract's value. Management
believes that it has valid contractual and equitable grounds for change
orders providing additional compensation under these contracts. The Company
has or expects to submit claims greater than losses incurred to date. In
the quarter ended March 31, 1999, the Company recognized operating losses
of $74.2 million on these projects.
A joint venture, in which the Company is a 50 percent owner, has submitted
claims to recover in excess of $112.0 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 recover at least an amount
sufficient to liquidate the subcontractor claims, and has not recognized
any contract revenue associated with these claims. In addition, the joint
venture has been notified of claims in excess of $53.0 million, which have
been submitted by a subcontractor who has filed for arbitration of these
claims. Substantially all of the subcontractor's claims have been included
in the claims submitted by the joint venture. In 1997, the Company
recognized losses of $25.8 million related to this contract.
The Company recognized approximately $35.0 million in revenue in 1998 for
change orders that have not yet received client approval, which in
management's judgment, is a conservative estimate of the probable amount to
be realized.
(M) 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. In June 1999, the FASB agreed to defer the
effective date of the Statement for one year. The Statement is now
effective for fiscal years beginning after June 15, 2000. The Company will
adopt the new standard by January 1, 2001. Management is evaluating the
impact this Statement may have on the Company's financial statements.
9
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 1998 Annual Report on Form 10-K. Unless noted otherwise, earnings per
share calculations disclosed are basic and diluted.
Results of Operations
- ---------------------
For the quarter ended June 30, 1999, the Company reported revenue of $310.3
million, a decrease of 2.1 percent from the $317.0 million reported in the
second quarter of 1998. Operating income for the quarter was $7.7 million
compared with $1.2 million for the second quarter of 1998. Net income for the
quarter ended June 30, 1999 was $6.2 million or $0.48 per share, compared with
net income of $0.7 million or $0.05 per share for the same period in 1998. New
orders were $351.3 million for the quarter ended June 30, 1999 compared with
$147.9 million for the second quarter of 1998.
Revenue for the six months ended June 30, 1999 was $576.4 million compared with
$611.0 million reported for the same period in 1998, a decrease of 5.6 percent.
Operating loss for the first six months of 1999 was $59.6 million compared with
operating income of $12.8 million for the same period in 1998. Net loss for the
six months ended June 30, 1999 was $52.5 million or $4.02 per share, compared
with net income of $8.3 million, or $0.64 per share for the same period in 1998.
New orders were $500.1 million for the six months ended June 30, 1999 compared
with $374.4 million for the six months ended June 30, 1998 and backlog remained
consistent at $2.6 billion compared to December 31, 1998 and was up from $2.4
billion at June 30, 1998.
Components of earnings per share for three months and six months ended June 30
were:
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Basic and diluted earnings per
share from:
Operations $0.21 $(0.19) $(4.33) $0.01
Pension related items 0.27 0.24 0.31 0.48
----- ------ ------ -----
Ongoing operations 0.48 0.05 (4.02) 0.49
Asset divestiture - - - 0.15
----- ------ ------ -----
Basic and diluted earnings per
share $0.48 $ 0.05 $(4.02) $0.64
===== ====== ====== =====
Pension related items reduced operating costs by $3.5 million and $6.8 million
for the quarter and six months ended June 30, 1999, respectively, and $5.1
million and $10.2 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, which is primarily due to favorable asset performance.
10
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). 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.
Engineering, Construction and Consulting
- ----------------------------------------
The Company's Engineering, Construction and Consulting segment reported revenue
of $298.4 million in the second quarter of 1999, a decrease of 3.6 percent from
the $309.4 million reported for the same period last year. The decrease in
revenue is primarily due to lower revenues in the Power and Industrial
divisions. In addition, the Company's Process division continues to feel the
effects of the economic slowdown in parts of Asia, which in 1998 and 1999 caused
projects to be either canceled or delayed. Operating income was $5.3 million for
the second quarter of 1999 compared to a loss of $1.0 million in the second
quarter of 1998. This increase is primarily due to improved operating margins
and continued reduction of costs and operating expenses. The increase in
operating income was partially offset by $2.3 million related to severance costs
incurred in the current quarter.
For the first six months of 1999, the Engineering, Construction and Consulting
segment had revenue of $553.1 million, a decrease of 7.3 percent compared to
revenue of $596.5 million for the same period in 1998. Operating loss for the
first six months of 1999 was $64.0 million compared with operating income of
$8.3 million for the same period in 1998. The decrease in operating income is
primarily due to provisions in the amount of $74.2 million on two international
projects for unanticipated cost increases.
The Trans-Pacific Petrochemical Indotama ("TPPI") project remains suspended
pending resolution of financing issues by the client. The TPPI project is
included in the Company's backlog in the amount of $410.0 million. The Company
has obtained approval to resell or use committed materials and procured
equipment to reduce costs of project suspension. The Company has also had
substantive discussions with potential purchasers of the olefins plant which
constitutes the majority of the Company's scope for the project, and during the
first quarter of 1999, signed a conditional memorandum of understanding to sell
the plant. Had the project been cancelled as of June 30, 1999, and if resale of
the olefins plant were unlikely to be completed, the Company would have recorded
a pre-tax charge of approximately $75.0 million representing project working
capital plus current procurement commitments net of the estimated salvage value
of procured equipment and materials.
The Company is currently engaged in two international projects that incurred
losses in the first quarter of 1999. Due to various factors, including owner
directed technical and schedule changes, increases in scope of the currently
authorized contracts and other factors, the cost to complete these contracts
will significantly exceed the contract's value. Management believes that it has
valid contractual and equitable grounds for change orders providing additional
compensation under these contracts. The Company has or expects to submit claims
greater than the losses incurred to date. In the quarter ended March 31, 1999,
the Company recognized operating losses of $74.2 million on these projects.
11
A joint venture, in which the Company is a 50 percent owner, has submitted
claims to recover in excess of $112.0 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 recover at least an amount
sufficient to liquidate the subcontractor claims, and has not recognized any
contract revenue associated with these claims. In addition, the joint venture
has been notified of claims in excess of $53.0 million, which have been
submitted by a subcontractor who has filed for arbitration of these claims.
Substantially all of the subcontractor's claims have been included in the claims
submitted by the joint venture. In 1997, the Company recognized losses of $25.8
million related to this contract.
The Company recognized approximately $35.0 million in revenue in 1998 for change
orders that have not yet received client approval, which in management's
judgment, is a conservative estimate of the probable amount to be realized.
New orders for the Engineering, Construction and Consulting segment for the
quarter and six months ended June 30, 1999 were $351.3 million and $500.1
million, respectively, compared with $147.9 million and $374.4 million for the
same periods in 1998.
Orders and backlog for the six months ended June 30, 1999 and 1998 were (in
thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Beginning backlog $2,530,343 $2,518,628 $2,636,166 $2,519,302
Orders 351,272 147,881 500,105 374,360
Backlog acquired (BCI) - - - 59,944
Revenue (298,395) (309,387) (553,051) (596,484)
---------- ---------- ---------- ----------
Ending backlog $2,583,220 $2,357,122 $2,583,220 $2,357,122
========== ========== ========== ==========
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 $2.4 million and
$4.4 million for the quarter and six months ended June 30, 1999, respectively,
compared with operating income of $2.3 million and $4.6 million for the same
periods in 1998. Revenue was $11.9 million and $23.4 million for the quarter and
six months ended June 30, 1999, respectively, compared with revenue of $7.6
million and $14.5 million for the same periods in 1998. The improvement in the
Cold Storage segment revenue is the result of the acquisition of The Nordic
Group in the fourth quarter of 1998. The decrease in operating income is a
result of higher nonrecurring costs associated with restructuring the Company's
pre-acquisition facilities.
12
General and Administrative Expenses, Other Income (Expenses) and Income Taxes
- -----------------------------------------------------------------------------
General and administrative expenses for the quarter and six months ended June
30, 1999 were $16.9 million and $33.6 million, respectively, compared with $15.4
million and $31.7 million for the same period periods in 1998. The increase in
general and administrative expenses is due to $2.5 million in severance costs,
which were partially offset by cost savings realized from the restructuring of
the Company's Engineering and Construction activities. Net interest expense for
the quarter ended June 30, 1999 was $1.5 million compared to $0.3 million for
the same period in 1998. Net interest expense for the first six months was $2.8
million, compared with net interest income of $0.5 million for the same period
in 1998. During the first quarter of 1999, the annual tax benefit was recognized
to the extent of the net deferred tax liability. In addition, a valuation
allowance was established against net operating loss carryforwards in excess of
the net deferred tax liability position. During the second quarter of 1999, a
portion of the valuation allowance was released and no provision for taxes was
required. In 1998, the tax provision was based upon the expected annual earnings
among domestic and international subsidiaries, prior to loss provisions recorded
at year end.
Financial Condition
- -------------------
Cash and cash equivalents decreased by $16.3 million during the first six months
of 1999. Net cash used for operating activities of $14.1 million reflects a
decrease in operating working capital (which consists of accounts receivable and
costs and revenue in excess of billings less accounts payable and billings in
excess of costs and revenue recognized) and depreciation and amortization
expense for the six months ended June 30, 1999. The decrease in operating
working capital was primarily due to provisions taken on two international
projects in the first quarter. The decrease in operating working capital was
offset by the operating loss and deferred income taxes. Net cash provided by
investing activities of $2.7 million reflects purchases of fixed assets used in
the Company's operations and the proceeds on a note receivable. Net cash used
for financing activities of $5.0 million reflects the payment of dividends and
the repayment of long-term debt. Total debt was $129.8 million at June 30,1999,
compared to $130.8 million at December 31, 1998.
Management believes that the types of businesses in which it is engaged require
that it maintain a strong financial condition. Management believes that it has
on hand and has access to sufficient sources of funds to meet its anticipated
operating, dividend and capital expenditure needs. At June 30, 1999, the Company
had bank lines of credit available totaling $120.8 million (which represented
both domestic and foreign subsidiary banking facilities). In addition, the
Company had $106.5 million outstanding under its banking facilities at the end
of the quarter. Subsequent to the close of the second quarter, the Company
finalized negotiations on a $230.0 million collateralized line of credit with a
group of banks, which will provide operating funds and letters of credit. Upon
closing the new facility, the Company repaid the bank loans and certain
long-term debt that were outstanding as of the end of the second quarter.
Year 2000 Compliance
- --------------------
The Company is in the process of upgrading its computer applications in part to
ensure their functionality with respect to the Year 2000.
The Company has substantially completed its evaluation of all software and
information systems which it uses and are to be validated as Year 2000
compliant. The Company expects to implement the systems and programming changes
necessary to address the Year 2000 issue during 1999. Key financial systems will
become compliant through implementation of new enterprise-wide financial
systems. The primary objective of implementing these new systems is to improve
access to financial information of the Company and to implement a
state-of-the-art project accounting system. Therefore, costs related to this
implementation effort are not considered Year 2000 compliance costs.
13
The Company is giving consideration to compliance by third party suppliers.
Failure by third party suppliers to become Year 2000 compliant could result in
the Company's inability to obtain products as scheduled, which could potentially
lead to delays in meeting client orders. The Company will also review the Year
2000 readiness of clients that are material to the Company's business, if any.
Failure by material customers to become Year 2000 compliant could result in the
Company's inability to obtain or perform work on a timely basis for such
customers, leading to delays in receipt of revenue.
The Company is taking protective measures regarding the purchases from third
party suppliers of software, hardware and computer information systems. The
Company is obtaining assurances that the information systems and related
products supplied will be Year 2000 compliant. As of June 30, 1999, the Company
has identified and contacted a substantial number of its significant suppliers
in regards to Year 2000 compliance. No definitive conclusions can be made
regarding whether the software or systems of third party suppliers will have a
materially adverse effect on the Company's business, results of operations or
financial condition. However, at this time, management does not believe that the
Company will experience significant exposure related to the software or systems
of third party suppliers.
The Company has initiated a process of reviewing existing contractual
obligations with its clients to determine whether any Year 2000 compliance
exposure exists to its clients or third parties. As of June 30, 1999, no such
exposure had been determined. The Company currently believes that systems and
equipment purchased by it for delivery to third parties will be made Year 2000
compliant during 1999.
A formal contingency plan will not be formulated unless the Company identifies
specific areas where there is substantial risk of Year 2000 problems occurring,
and no such areas have been identified as of this date. The Company has not yet
developed an estimate of material lost revenue due to Year 2000 issues in a most
likely worst case Year 2000 scenario because it has not yet completed all of the
necessary reviews. To date, the cost of the reviews and analysis have totaled
less than $0.3 million. The Year 2000 review is intended to correct the
remaining internal systems that are not Year 2000 compliant and to identify any
client or other external situations in which the Company or its vendors have
provided systems that are not Year 2000 compliant. The cost of correcting
external Year 2000 compliance situations, if any, cannot be determined until
such cases, if any exist, are identified and evaluated. The cost to correct
internal systems and review external systems is estimated to be $0.5 million.
Readers are cautioned that forward-looking statements contained in the Year 2000
Issue disclosure should be read in conjunction with the Company's disclosures
under the heading: "Forward-Looking Information."
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Other Accounting Matters
- ------------------------
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. In
June 1999, the FASB agreed to defer the effective date of the Statement for one
year. The Statement is now effective for fiscal years beginning after June 15,
2000. The Company will adopt the new standard by January 1, 2001. 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 international economies, changes in investment by the energy,
power and environmental industries, the uncertain timing of awards and
contracts, changes in regulatory environment, changes in project schedules,
changes in trade, monetary and fiscal policies worldwide, currency fluctuations,
outcomes of pending and future litigation, protection and validity of patents
and other intellectual property rights, and increasing competition by foreign
and domestic companies and other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission.
The statements under the caption "Year 2000 Compliance" describing the Company's
plans and objectives for handling the Year 2000 issue and the expected impact of
the Year 2000 issue on the Company are forward-looking statements. Those
statements involve risks and uncertainties that could cause actual results to
differ materially from the results discussed above. Factors that might cause
such a difference include, but are not limited to, delays in executing the plan
outlined above and unforeseen or increased costs associated with the
implementation of the plan and any necessary changes to the Company's systems.
Any inability experienced by the Company during implementation resulting from
necessary changes not completed in a timely manner could have an adverse effect
on the results of operations. Moreover, even if the Company successfully
implements the changes necessary to address the Year 2000 issue, there can be no
assurances that the Company will not be adversely affected by the failure of
others, including vendors and clients, to become Year 2000 compliant.
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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 13,
1999.
(b) At the Annual Meeting, John P. Merrill, Jr., Bernard W. Reznicek and Peter
M. Wood were re-elected as Directors for terms expiring in 2002. The terms
of office as Directors of Donna F. Bethell, Frank J. A. Cilluffo, Kent F.
Hansen, Elvin R. Heiberg III, David N. McCammon, J. Angus McKee and H.
Kerner Smith continued after the meeting.
(c) At the Annual Meeting, the Shareholders also ratified the selection of the
firm of PricewaterhouseCoopers LLP, independent accountants, as auditor of
the registrant and its subsidiaries for the year ended December 31, 1999.
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
John P. Merrill, Jr. 10,541,433 1,054,484
Bernard W. Reznicek 9,849,922 1,745,995
Peter M. Wood 9,848,361 1,747,556
There were no broker non-votes.
(2) Selection of Independent Accountants.
Total Votes For 10,274,540
Total Votes Against 1,206,587
Total Abstentions 114,790
There were no broker non-votes.
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Item 6. Exhibits and Reports on Form 8-K
Stone & Webster, Incorporated and Subsidiaries
Exhibits and Reports on Form 8-K.
(a) Exhibit Index
(4) Instruments defining the rights of security holders, including
indentures.
As of June 30, 1999, registrant and its subsidiaries had outstanding
long-term debt (excluding current portion) totaling approximately
$21.2 million, principally in connection with a mortgage relating to
real property for a subsidiary's office building and in connection
with capitalized lease commitments for the acquisition of certain
office equipment. None of these agreements are filed herewith because
the amount of indebtedness authorized under each such agreement does
not exceed 10 percent of the total assets of the registrant and its
subsidiaries on a consolidated basis; the registrant hereby undertakes
to furnish copies of such agreements to the Commission upon request.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
Registrant filed the following report on Form 8-K during the period covered
by this report.
Date of Form 8-K Description
---------------- -----------
April 15, 1999 Submitted under Item 5, Other Events, relating
to the preliminary report of first quarter
results.
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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, 1999 Thomas L. Langford
Executive Vice President
(Duly authorized officer and principal financial
officer)
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