UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
(Exact name of registrant as specified in its charter)
Delaware 13-5416910
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
245 Summer Street, Boston, MA 02210
(Address of Principal Executive Offices) (Zip Code)
(617) 589-5111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: 13,065,297 shares as of October 31, 1999.
Stone & Webster, Incorporated and Subsidiaries
Form 10-Q
Index
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited):
Three and Nine Months Ended September 30, 1999 and
September 30, 1998........................................ 3
Consolidated Balance Sheets (Unaudited):
September 30, 1999 and December 31, 1998................... 4
Condensed Consolidated Statements of Cash Flows
(Unaudited):
Nine Months Ended September 30, 1999 and September 30,
1998..................................................... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................ 6-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition..................... 11-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................... 17
SIGNATURES.............................................................. 18
PART I. Financial Information
Item 1. Financial Statements
Stone & Webster, Incorporated and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenue $286,071 $343,040 $839,122 $939,524
Cost of revenue 279,054 324,557 862,510 881,096
-------- -------- -------- --------
Gross profit (loss) 7,017 18,483 (23,388) 58,428
General and administrative
expenses 13,664 16,182 47,303 47,868
-------- -------- -------- --------
Operating income (loss) (6,647) 2,301 (70,691) 10,560
Other income (expense):
Interest income 503 708 1,586 2,208
Interest expense (2,714 (1,078) (6,629) (2,086)
-------- -------- -------- --------
Total other income (expense), net (2,211) (370) (5,043) 122
Income (loss) from continuing
operations before provision
for taxes (8,858) 1,931 (75,734) 10,682
Income tax (benefit) provision - 665 (10,000) 3,779
-------- -------- -------- --------
Income (loss) from continuing
operations (8,858) 1,266 (65,734) 6,903
Income from discontinued
operation, net of tax 2,004 902 6,401 3,529
-------- -------- -------- --------
Net income (loss) $ (6,854) $ 2,168 $(59,333) $ 10,432
======== ======== ======== ========
Per share amounts:
- ------------------
Basic and diluted earnings
(loss) per share
Continuing operations $(0.67) $0.10 $(5.03) $0.54
Discontinued operations 0.15 0.07 0.49 0.27
------ ----- ------ -----
Total earnings (loss)
per share $(0.52) $0.17 $(4.54) $0.81
====== ===== ====== =====
Dividends declared per share $ 0.15 $0.15 $ 0.45 $0.45
Weighted-average number of
shares outstanding:
Basic 13,064 12,912 13,060 12,835
====== ====== ====== ======
Diluted 13,064 12,957 13,060 12,932
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
Stone & Webster, Incorporated and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share amounts)
September 30, December 31,
1999 1998
---- ----
Assets
Current assets:
Cash and cash equivalents $ 35,114 $ 45,492
Accounts receivable, principally trade, net 264,310 276,235
Costs and revenues recognized in excess of
billings 100,033 49,302
Deferred income taxes 21,560 20,338
Other 1,673 638
-------- --------
Total current assets 422,690 392,005
Assets held for sale 6,744 6,744
Fixed assets, net 217,344 219,157
Domestic prepaid pension cost 166,847 155,703
Note receivable - 15,150
Other assets 59,040 45,923
-------- --------
Total assets $872,665 $834,682
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Bank loans $129,671 $106,350
Current portion of long-term debt 2,261 2,175
Accounts payable, principally trade 138,921 96,134
Billings in excess of costs and revenues
recognized 233,013 176,692
Accrued liabilities 79,214 80,036
Accrued taxes 7,009 12,034
-------- --------
Total current liabilities 590,089 473,421
Long-term debt 19,922 22,228
Deferred income taxes 21,560 33,030
Other liabilities 14,722 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 54,663 54,625
Retained earnings 302,210 367,358
Accumulated other comprehensive income (11,726) (9,707)
Less: Common stock held in treasury, at cost
(4,666,891 and 4,692,933 shares) 121,352 122,030
Employee stock ownership and restricted
stock plans 15,154 16,401
Total shareholders' equity 226,372 291,576
-------- --------
Total liabilities and shareholders' equity $872,665 $834,682
======== ========
See accompanying notes to condensed consolidated financial statements
Stone & Webster, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months
Ended September 30,
1999 1998
---- ----
Cash Flows from Operating Activities:
Net income (loss) $(59,333) $10,432
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Depreciation and amortization 17,038 11,770
Amortization of net cost of stock plans 1,279 1,286
Gain from asset divestiture - (3,066)
Deferred income taxes (12,692) (828)
Domestic prepaid pension cost (11,144) (15,508)
Changes in operating assets and liabilities 38,981 (91,260)
-------- -------
Net cash used for operating activities (25,871) (87,174)
-------- -------
Cash Flows from Investing Activities:
Purchases of fixed assets (15,225) (24,831)
Proceeds from note receivable 15,150 -
Proceeds from maturities of U.S. Government
securities - 31,909
Proceeds from asset divestiture - 13,546
-------- -------
Net cash (used for) provided by investing
activities (75) 20,624
======== =======
Cash Flows from Financing Activities:
Repayments of long-term debt (2,834) (1,236)
Acquisition of long-term debt 614 1,627
Increase in bank loans 23,321 25,850
Issuance of common stock from treasury - 4,345
Payments received from Employee Stock Ownership
Trust 1,835 1,835
Payments to Employee Stock Ownership Trust (1,489) (1,342)
Dividends paid (5,879) (5,776)
-------- -------
Net cash provided by financing activities 15,568 25,303
-------- -------
Net decrease in cash and cash equivalents (10,378) (41,247)
Cash and cash equivalents at beginning of period 45,492 75,030
-------- -------
Cash and cash equivalents at end of period $ 35,114 $33,783
======== =======
See accompanying notes to condensed consolidated financial statements.
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 September 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 September 30, 1999 and $190.9 million at December 31,
1998.
(C) On October 27, 1999, the Company announced its intention to sell the Nordic
Refrigerated Services business unit (cold storage segment). The Company is
seeking a buyer and has retained outside consultants to assist with this
sale. Accordingly, the results of the Nordic Refrigerated Services business
unit have been classified as a discontinued operation and prior periods
have been reclassified. The Company does not anticipate a loss on the sale
of this segment and accordingly, no loss provision has been recorded. The
continuing operations of the Company are the Engineering, Construction and
Consulting business.
Revenue and income from discontinued operation are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Revenue $11,734 $7,403 $35,091 $21,880
Operating income 2,004 1,580 6,401 6,160
Income tax expense - 678 - 2,631
Income from discounted operation 2,004 902 6,401 3,529
Net assets from discontinued operation are as follows:
September 30, December 31,
(in thousands) 1999 1998
---- ----
Current assets $ 12,000 $ 9,897
Property plant and equipment, net 110,981 114,795
Other assets 2,677 2,165
Current liabilities (3,962) (8,487)
Deferred taxes (4,176) (4,680)
-------- --------
Net assets of discontinued operation $117,520 $113,690
======== ========
(D) Basic earnings per share for the nine months ended September 30, 1999 and
1998 were computed based on the weighted-average number of common shares
outstanding during the period of 13,059,878 and 12,835,460, respectively.
Diluted earnings per share for the nine months ended September 30, 1999 and
1998 were computed based on the weighted-average common and dilutive
potential shares outstanding during the period of 13,062,452 and
12,931,656, 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 three- and
nine-month periods ended September 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.
(E) The Company had a valuation allowance of $30.2 million at September 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
September 30, 1999 comprises $5.0 million relating to federal net operating
loss carryforwards, $9.3 million relating to state net operating loss
carryforwards and $15.9 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;
therefore, no provision for taxes was required for the third quarter. In
addition, a valuation allowance was established against operating loss
carryforwards in excess of the net deferred tax liability position.
(F) Pension related items, which reduced operating costs, were $3.3 million and
$10.1 million for the quarter and nine months ended September 30, 1999
compared to $5.1 million and $15.4 million for the same periods in the
prior year. These items increased net income by $3.3 million, or $0.25 per
share and $6.1 million or $0.46 per share for the quarter and nine months
ended September 30, 1999, compared with $3.1 million, or $0.23 per share
and $9.2 million or $0.71 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 September 30, 1999, nonqualified
options for 550,125 shares were outstanding and options for 434,625 shares
were exercisable. For the nine months ended September 30, 1999, no options
were exercised, 50,625 options were canceled and 29,000 options were
accelerated.
Under the Stone & Webster, Incorporated Long-Term Incentive Compensation
Plan (the "1998 Plan") for the nine months ended September 30, 1999,
nonqualified and incentive stock options for 457,000 shares of common stock
were granted to employees and nonemployee directors at a weighted-average
per share option exercise price of $28.45. The options granted will become
exercisable at times ranging from February 1999 to August 2003. As of
September 30, 1999, options for 668,750 shares were outstanding and 227,834
options were exercisable. For the nine months ended September 30, 1999, no
options were exercised, 28,250 options were canceled, and 33,000 options
were accelerated. Under the 1998 Plan for the nine months ended September
30, 1999, 22,792 shares of restricted stock were awarded at a per share
weighted-average grant price of $28.77 with vesting of shares occurring in
part on the effective date and the balance in thirds or fifths on the
anniversaries of the dates of grant. No shares have been forfeited for the
quarter or for the nine months ended September 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.
(H) During the third quarter of 1999, the Company finalized negotiations on a
$230.0 million collateralized line of credit with a group of banks, which
provided up to $130 million in direct borrowing for operating funds and
$100 million in 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. As of September 30, 1999,
$129.7 million of direct borrowings and $84.2 million of letters of credit
were outstanding under this new agreement. As of September 30, 1998, the
Company had three separate domestic line of credit agreements available
totaling $110.0 million. The Company also had a domestic line of credit
through a subsidiary in the amount of $2.0 million under which it had
borrowed $0.8 million. Borrowings under other lines of credit amounted to
$25.1 million as of September 30, 1998.
Because of the losses in the third quarter, the Company requested waivers
from its bank group regarding certain covenants in its principal credit
agreement for which it is not in compliance, and the banks have waived
those covenants until November 29, 1999. The credit agreement matures at
the end of January 2000.
(I) Comprehensive income (loss) was $(9.3) million and $2.3 million for the
quarters ended September 30, 1999 and 1998, respectively. Other
comprehensive income (loss) consists of translation adjustments of $(2.4)
million and $0.1 million for the quarters ended September 30, 1999 and
1998, respectively. For the nine months ended September 30, 1999 and 1998
comprehensive income (loss) was $(61.4) million and $6.9 million,
respectively. Other comprehensive income (loss) consists of translation
adjustments of $(2.0) million and $(3.5) million for the nine months ended
September 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. On October 27, 1999, the Company announced
its intention to sell its corporate headquarters building in Boston,
Massachusetts.
(K) Certain financial statement items have been reclassified to conform to the
current period'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 $401.7 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 September 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 $75.5 million representing project working capital plus
current procurement commitments net of the estimated salvage value of
procured equipment and materials.
The Company was engaged in two international projects that incurred losses
in the first quarter. One of these projects is now finished and the other
is in the final stages of completion. 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 has significantly exceeded 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 first quarter, 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 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.
Substantially all of the subcontractor's claims have been included in the
claims submitted by the joint venture to its client. The Company believes
current reserves are adequate to cover these claims, and has not recognized
any contract revenue in anticipation of recovery on its claims. 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 Financial Accounting Standards Board (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.
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
- ---------------------
On October 27, 1999 the Company announced its intention to sell the Nordic
Refrigerated services business unit (cold storage segment) and its corporate
headquarters building in Boston, Massachusetts. The Company is seeking buyers
and has retained outside consultants to assist with these sales. Accordingly,
the results of the Nordic Refrigerated Services business unit have been
classified as a discontinued operation and prior periods have been reclassified.
The Company's continuing operations are composed of the Engineering,
Construction and Consulting business. For this business, new orders were $219.4
million for the quarter ended September 30, 1999 compared with $725.1 million
for the third quarter of 1998.
The Company's Engineering, Construction and Consulting business reported revenue
of $286.1 million in the third quarter of 1999, a decrease of 16.6 percent from
the $343.0 million reported for the same period last year. The decrease in
revenue is primarily due to lower revenues in the Power, Process and Industrial
divisions. Operating loss was $6.6 million for the third quarter of 1999
compared to income of $2.3 million in the third quarter of 1998. This decrease
is primarily due to a provision of $10.4 million to cover anticipated costs to
complete three major domestic projects.
For the first nine months of 1999, the Engineering, Construction and Consulting
business had revenue of $839.1 million, a decrease of 10.7 percent compared to
revenue of $939.5 million for the same period in 1998. Operating loss for the
first nine months of 1999 was $70.7 million compared with operating income of
$10.6 million for the same period in 1998. The decrease in operating income is
primarily due to provisions of $74.2 million to cover anticipated costs of
completing two international projects, as reported in the first quarter of 1999,
and $10.4 million to cover anticipated costs of completing three domestic
projects in the current quarter. New orders were $719.5 million for the nine
months ended September 30, 1999 compared with $1,099.5 million for the nine
months ended September 30, 1998 and backlog was $2.5 billion compared to $2.6
billion December 31, 1998 and $2.7 billion at September 30, 1998.
Components of earnings per share from continuing operations for the three months
and nine months ended September 30 were:
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Basic and diluted earnings per
share from:
Operations $(0.92) $(0.13) $(5.49) $(0.32)
Pension related items 0.25 0.23 0.46 0.71
Ongoing operations (0.67) 0.10 (5.03) 0.39
Asset divestiture - - - 0.15
------ ------ ------ ------
Basic and diluted earnings per
share $(0.67) $ 0.10 $(5.03) $ 0.54
====== ====== ====== ======
Pension related items reduced operating costs by $3.3 million and $10.1 million
for the quarter and nine months ended September 30, 1999, respectively, and $5.1
million and $15.4 million for the same periods in the prior year. Pension
related items include a net pension credit for the Company's domestic
subsidiaries and a net pension cost for its foreign subsidiaries. The pension
credit is the result of a plan that is funded in excess of the projected benefit
obligation, which is primarily due to favorable asset performance.
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. Following the sale of the corporate headquarters building in Boston,
Massachusetts, the Company will no longer realize net rental income from third
party tenants of the building which amounted to approximately $4.3 million for
the nine months ended September 30, 1999, and may incur increased rental expense
based on market rates.
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 $401.7 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 September 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 $75.5 million representing
project working capital plus current procurement commitments net of the
estimated salvage value of procured equipment and materials.
The Company was engaged in two international projects that incurred losses in
the first quarter of 1999. One of these projects is now finished and the other
is in the final stages of completion. 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 has
significantly exceeded 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 first quarter, 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
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. Substantially
all of the subcontractor's claims have been included in the claims submitted by
the joint venture to its client. The Company believes current reserves are
adequate to cover these claims, and has not recognized any contract revenue in
anticipation of recovery on its claims. 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.
Engineering, Construction and Consulting business orders and backlog for the
three months and nine months ended September 30, 1999 and 1998 were (in
thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Beginning backlog $2,583,220 $2,357,122 $2,636,166 $2,519,302
Orders 219,393 725,113 719,498 1,099,473
Backlog acquired (BCI) - - - 59,944
Revenue (286,071) (343,040) (839,122) (939,524)
---------- ---------- ---------- ----------
Ending backlog $2,516,542 $2,739,195 $2,516,542 $2,739,195
========== ========== ========== ==========
Orders represent the net amount of new orders, cancellations and scope changes.
Discontinued Operation
- ----------------------
The Company's discontinued cold storage segment reported operating income of
$2.0 million and $6.4 million for the quarter and nine months ended September
30, 1999, respectively, compared with operating income of $1.6 million and $6.2
million for the same periods in 1998. Revenue was $11.7 million and $35.1
million for the quarter and nine months ended September 30, 1999, respectively,
compared with revenue of $7.4 million and $21.9 million for the same periods in
1998. The improvement in the discontinued 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 and the effects of
hurricanes and resulting flooding on operations. No significant direct damage
was experienced by the cold storage facilities.
General and Administrative Expenses, Other Income (Expenses) and Income Taxes
General and administrative expenses for the quarter and nine months ended
September 30, 1999 were $13.7 million and $47.3 million, respectively, compared
with $16.2 million and $47.9 million for the same periods in 1998. The second
quarter of 1999 includes a $2.5 million charge to general and administrative
expenses for severance costs which was partially offset by cost savings realized
from the restructuring of the Company's Engineering and Construction activities.
Net interest expense for the quarter ended September 30, 1999 was $2.2 million
compared to $0.4 million for the same period in 1998. Net interest expense for
the first nine months was $5.0 million, compared with net interest income of
$0.1 million for the same period in 1998, due to increased bank loans. During
the first quarter of 1999, the annual tax benefit was recognized to the extent
of the net deferred tax liability; therefore, no provision for taxes was
required for the third quarter. In addition, a valuation allowance was
established against net operating loss carryforwards in excess of the net
deferred tax liability position. 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
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Cash and cash equivalents decreased by $10.4 million during the first nine
months of 1999. Net cash used for operating activities of $25.9 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 nine months ended September 30, 1999. The decrease in operating
working capital was primarily due to provisions taken on two international
projects in the first quarter and three domestic projects in the third quarter.
The decrease in operating working capital was offset by the operating loss and
deferred income taxes. Net cash used for investing activities of $0.1 million
reflects purchases of fixed assets used in the Company's operations and the
proceeds on a note receivable. Net cash provided by financing activities of
$15.6 million reflects the payment of dividends, the repayment of long-term debt
and borrowings under bank loans. Total debt was $151.9 million at September
30,1999, compared to $130.8 million at December 31, 1998.
During the third quarter of 1999, the Company finalized negotiations on a $230.0
million collateralized line of credit with a group of banks, which provided up
to $130 million in direct borrowing for operating funds and $100 million in
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. As of September 30, 1999, $129.7 million of direct borrowings
and $84.2 million of letters of credit were outstanding under this new
agreement. As of September 30, 1999, the Company had foreign subsidiary banking
facilities available totaling $9.9 million.
Although the Company has substantial marketable assets, the losses incurred in
the past 24 months have negatively impacted the Company's cash position. As of
the end of the third quarter of 1999, the Company had fully drawn the cash
available to it under its current credit facility and the amount of the
Company's past due trade payables had increased, as reflected in accounts
payable on the Consolidated Balance Sheets, with certain of the Company's
vendors and subcontractors having delayed work to be performed by them.
In order to improve the Company's cash liquidity, the Company has retained
financial advisors who are working with the Company to arrange both interim and
longer term financing and to restructure the Company's balance sheet and assist
with asset sales authorized by the Board of Directors. To enhance liquidity and
focus on its core competencies, the Company intends to sell its corporate
headquarters building in Boston, Massachusetts, and its Nordic Refrigerated
Services business unit. Sale of these assets, which are currently carried on the
Company's books for approximately $125 million, is expected to yield in excess
of $300 million in gross proceeds.
Because of the losses in the third quarter, the Company requested waivers from
its bank group regarding certain covenants in its principal credit agreement for
which it is not in compliance, and the banks have waived those covenants until
November 29, 1999. The credit agreement matures at the end of January 2000. The
Company will require additional short-term funding to continue normal
operations, and it is in active discussions with its principal lenders to obtain
such funding.
In light of the Company's current liquidity needs, on October 26, 1999 the Board
of Directors decided to omit the Company's normal quarterly dividend of 15 cents
per share. The Board will re- evaluate the dividend at its meeting following the
end of the current quarter based on the Company's circumstances at that time.
Year 2000 Compliance
- --------------------
The Company is finalizing the upgrade of 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 complete the implementation of the systems and
programming changes necessary to address the Year 2000 issue during the
remainder of 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.
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 is also reviewing 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 September 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 is reviewing existing contractual obligations with its clients to
determine whether any Year 2000 compliance exposure exists to its clients or
third parties. As of September 30, 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."
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.
PART II. Other Information
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 September 30, 1999, registrant and its subsidiaries had
outstanding long-term debt (excluding current portion) totaling
approximately $19.9 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.
(10) Credit Agreement Dated as July 30, 1999 (filed herewith).
(27) Financial Data Schedule.
(b) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the quarter for
which this report is filed.
Stone & Webster, Incorporated and Subsidiaries
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STONE & WEBSTER, INCORPORATED
By: /S/ THOMAS L. LANGFORD
-----------------------------------------------
Dated: November 15, 1999 Thomas L. Langford
Executive Vice President
(Duly authorized officer and principal
financial officer)