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 December 26, 1997
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 1-11075
DAMES & MOORE GROUP
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4316617
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
911 Wilshire Blvd., Suite 700, Los Angeles, California 90017
(Address, including Zip Code, of Principal Executive Offices)
(213) 996-2200
(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
---
As of February 2 1998, 18,014,091 shares of the registrant's common stock,
$0.01 par value, were issued and outstanding.
1
Part I. Financial Information
Item 1. Financial Statements
DAMES & MOORE GROUP
Condensed Consolidated Statements of Financial Position
(In thousands, except share and per share amounts)
(Unaudited)
Assets Dec. 26, March 28,
Current: 1997 1997
-------- --------
Cash and cash equivalents $ 12,950 $ 12,726
Marketable securities - 5,984
Billed accounts receivable, net of allowance
for doubtful accounts of: $4,351 and $3,001 129,941 114,126
Billed contract retentions 10,574 5,095
Unbilled 61,339 56,491
-------- --------
201,854 175,712
Deferred income taxes 2,909 4,135
Prepaid expenses and other assets 9,502 9,697
-------- --------
Total current assets 227,215 208,254
Property and equipment, net 20,886 19,594
Goodwill of acquired businesses, net 118,738 109,626
Investments in affiliates 4,638 9,270
Other assets 10,658 11,538
-------- --------
$382,135 $358,282
======== ========
Liabilities and shareholders' equity
Current:
Current portion of long-term debt $ 2,919 $ 11,560
Accounts payable 33,543 23,021
Accrued payroll and employee benefits 31,373 24,784
Current income taxes payable 4,221 3,145
Accrued expenses and other liabilities 21,726 30,354
-------- --------
Total current liabilities 93,782 92,864
Long-term debt 137,010 128,542
Other long-term liabilities 6,600 5,253
Contingencies
Shareholders' equity:
Preferred stock, $0.01 par value,
shares authorized: 1,000,000
shares issued: none
Common stock and capital in excess of $0.01
par value, shares authorized: 27,000,000
shares issued: 22,742,000 and 22,726,000 107,531 107,242
Retained earnings 101,342 87,979
Treasury stock: 4,728,000 and 4,714,000 (63,243) (63,070)
Other shareholders' equity (887) (528)
-------- --------
Total shareholders' equity 144,743 131,623
-------- --------
$382,135 $358,282
======== ========
See accompanying notes to condensed consolidated financial statements.
2
DAMES & MOORE GROUP
Condensed Consolidated Statements of Earnings
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1997 1996 1997 1996
-------- -------- -------- --------
Gross revenues $174,974 $168,350 $522,959 $486,299
Direct costs of
outside services 55,741 53,641 160,261 148,101
-------- ------- ------- -------
Net revenues 119,233 114,709 362,698 338,198
-------- ------- ------- -------
Operating expenses:
Salaries and related costs 82,092 78,359 251,488 234,288
General expenses 22,394 22,304 68,272 63,211
Depreciation and amortization 2,368 2,217 6,785 6,280
Amortization of goodwill 1,135 1,029 3,440 2,882
-------- -------- -------- --------
107,989 103,909 329,985 306,661
-------- -------- -------- --------
Earnings from operations 11,244 10,800 32,713 31,537
Investment and other income 190 545 537 1,698
Interest expense (2,640) (2,097) (7,644) (4,990)
-------- -------- -------- --------
Earnings before income taxes 8,794 9,248 25,606 28,245
Income taxes 3,641 3,612 10,617 11,606
-------- -------- -------- --------
Net earnings $ 5,153 $ 5,636 $ 14,989 $ 16,639
======== ======== ======== ========
Cash dividends declared
per share $ 0.03 $ 0.03 $ 0.09 $ 0.09
======== ======== ======== ========
Earnings per share - Basic $ 0.29 $ 0.28 $ 0.84 $ 0.79
======== ======== ======== ========
Earnings per share - Diluted $ 0.29 $ 0.28 $ 0.83 $ 0.78
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
DAMES & MOORE GROUP
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
--------------------
Dec. 26, Dec. 27,
1997 1996
-------- --------
Cash flows from operating activities:
Net earnings $ 14,989 $ 16,639
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 10,472 9,325
Unrealized (gain) on marketable securities - (16)
(Earnings) loss on equity investments 366 (164)
Deferred income taxes 1,777 (754)
Change in assets and liabilities, net of
effects of purchases of businesses:
Marketable securities 5,984 5,945
Accounts receivable (23,285) (21,917)
Prepaid expenses and other assets (377) (1,967)
Income tax receivable and payable (472) 408
Accounts payable and accrued expenses 5,631 3,315
-------- --------
Net cash provided by operating activities 15,085 10,814
-------- --------
Cash flows from investing activities:
Purchases of businesses, net of cash acquired (13,232) (24,159)
Purchases of property and equipment (6,802) (7,067)
Investments and other assets 8 (5,987)
Proceeds from sales of investments and
other property 6,911 -
-------- --------
Net cash (used in) investing activities (13,115) (37,213)
-------- --------
Cash flows from financing activities:
Repayments on lines of credit (21,002) -
Proceeds from debt instruments 21,000 52,831
Issuance of common stock 245 357
Stock repurchased (367) (57,603)
Dividends (1,622) (1,829)
-------- --------
Net cash (used in) financing activities (1,746) (6,244)
-------- --------
Net increase (decrease) in cash and
cash equivalents 224 (32,643)
Cash and cash equivalents, beginning of period 12,726 55,351
-------- --------
Cash and cash equivalents, end of period $ 12,950 $ 22,708
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 9,228 $ 2,990
Income tax paid 9,634 10,629
Non cash investing activities -
business acquisitions 2,392 8,259
See accompanying notes to condensed consolidated financial statements.
4
DAMES & MOORE GROUP
Notes to Condensed Consolidated Financial Statements
(In thousands, except share amounts)
Note 1 - Basis of Presentation:
The accompanying condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
disclosures included in the Company's 1997 annual report to shareholders.
The condensed consolidated financial statements include all adjustments
(consisting only of normal recurring items) which management considers
necessary to present fairly the financial position of the Company as of
December 26, 1997 and March 28, 1997; and the results of operations for
the three-month periods and the nine-month periods ended December 26, 1997
and December 27, 1996. Certain items in the prior year's financial
statements have been reclassified to be consistent with the 1998 fiscal
year presentation.
The results of operations for the interim periods are not necessarily
indicative of operating results to be expected for the full year.
Fiscal Year:
The Company uses a 52-53 week fiscal year ending the last Friday in March.
The nine-month periods ended December 26, 1997 and December 27, 1996 were
each comprised of 39 weeks.
Note 2 - Restructuring Costs:
During the fourth quarter of fiscal 1997, the Company recorded a provision
of $2,651 pretax, for the restructuring of its international operations,
and construction and project management subsidiary. At December 26, 1997
approximately $1,662 of these costs had been expended, leaving a balance
of $989 to be expended to complete the restructuring.
Note 3 - Long-term Debt:
The Company has amended its bank credit agreements. The Company has
$74,610 available for borrowing in U.S. dollars, offshore foreign
currencies or foreign domestic currencies, and for the issuance of
letters of credit and purchase of foreign currency exchange contracts.
Interest is charged under several options, including the bank's reference
rate or at LIBOR plus a spread, at the Company's option. The agreements
contain limitations on additional indebtedness, sales of assets,
acquisitions and capital expenditures, as well as maintenance of certain
financial ratios and minimum net worth requirements. Such requirements
were satisfied as of December 26, 1997. As of December 26, 1997, under
these lines, the Company had borrowings of $18,360, and standby letters
of credit totaling $18,137 principally for project performance, advance
payment guarantees and the Company's domestic insurance program. The
lines of credit mature as follows: $6,600 in August 1998, $14,810 in
February 1999, and $53,200 in January 2001.
5
DAMES & MOORE GROUP
Condensed Consolidated Statements of Earnings
(In thousands, except per share amounts)
(Unaudited)
Note 4 - Shareholders' Equity:
During the first three quarters of fiscal 1998, the Company has declared
quarterly cash dividends of $0.03 per share on its common stock, totaling
$1,622. Under the Company's Amended and Restated 1991 Long-Term Incentive
Plan, it issued 23,300 shares and repurchased 10,000 shares of Restricted
Stock; additionally, stock options for 3,752 common shares were exercised.
The Company's Board of Directors authorized the Company to purchase up to
2,500,000 shares of its common stock on the open market. During the first
three quarters the Company reacquired 21,009 shares of its common stock,
and reissued 6,100 shares of treasury stock. As of December 26, 1997, in
addition to the private acquisition of 3,700,000 shares of the Company's
common stock from Hochtief AG on November 19, 1996, the Company has
repurchased 1,839,709 shares and reissued 811,440 shares.
Note 5 - Earnings Per Share (EPS):
The following is a reconciliation of the weighted average shares outstanding
used for computing basic and diluted EPS.
Three Months Ended Nine Months Ended
--------------------- ------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1997 1996 1997 1996
-------- -------- -------- --------
Weighted average shares -
Basic EPS 17,873,040 20,062,803 17,882,430 21,072,029
Dilutive Securities:
Restricted stock 128,283 125,073 127,428 122,778
Stock options 29,766 65,310 29,817 27,110
Weighted average shares - ---------- ---------- ---------- ----------
Diluted EPS 18,031,089 20,253,186 18,039,675 21,221,917
========== ========== ========== ==========
Stock options to purchase 950,670 and 967,680 shares of common stock as of
December 26, 1997 and December 27, 1996, respectively, were outstanding but
were not included in the computation of diluted EPS because the stock
options' exercise price was greater than the average market price of the
common shares.
6
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Dollars in thousands)
From time to time, the Company or its representatives may make forward-looking
statements in this report or elsewhere relating to such matters as
anticipated financial performance, including projections of revenues,
expenses, earnings, liquidity, capital resources or other financial items;
business plans, objectives and prospects; technological developments; and
similar matters. Forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 frequently are identified by the use
of terms such as "expect", "believe", "estimate", "may", "should", "will" or
similar expressions.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated
results or other expectations expressed in the forward-looking statements
made by the Company or its representatives. The risks and uncertainties that
may affect the operations, performance, development and results of the
Company's business include the following, among other factors: (a) the ability
to attract and retain qualified professional personnel; (b) potential liability
for consulting services relating to toxic and hazardous materials and the
ability to insure such risks; (c) dependence on environmental regulation
including decreased revenues that may result from a reduction in laws,
regulations and programs related to environmental issues or from changes
in governmental policies regarding the funding, implementation or enforcement
of such laws, regulations and programs; (d) increasing competition faced by
the Company in its service areas; and (e) periodic fluctuations in general
business conditions, demand for the types of services provided by the
Company, and foreign operations. For further information, see Exhibit 99.
Acquisitions and Operations
During the first quarter of fiscal 1998, the Company acquired SRA Technologies,
Inc., a professional services company providing specialized clinical
laboratory services, contract research, analysis and management services to
both government and commercial clients in the areas of life sciences,
environmental health service studies, and energy. During the second quarter
of fiscal 1998, the Company commenced operations in Puerto Rico with its
agreement to purchase Lebron Associates, an engineering firm that provides
expertise in transportation, civil, architectural, industrial and environmental
engineering. This acquisition was completed in October 1997. The acquisition
of DMG Environmental, Inc., a small environmental consulting firm, was also
completed in October 1997.
All acquisitions are accounted for as purchases; accordingly, the difference
between the purchase cost and the fair value of the net assets of acquired
businesses is amortized on a straight-line basis over various periods not
exceeding 40 years. Results of operations for all acquisitions have been
included in the consolidated financial statements from the date of the
respective acquisition.
Results of Operations
Third Quarter 1998 Compared with Third Quarter 1997
The Company uses a 52-53 week fiscal year ending the last Friday in March. The
third quarters for both fiscal years 1998 and 1997 were comprised of 13 weeks.
1998 Increase 1997
-------- -------- --------
Net Revenues $119,233 3.94% $114,709
The 3.94% increase in net revenues in the third quarter of 1998 as compared to
the third quarter of 1997 is primarily a result of the Company's fiscal 1998
acquisitions, which contributed $3,534 of the increase, or 3.08%. The
remaining increase of $990, or .86%, represents growth in the Company's
construction and project management, demolition, and international business
groups.
7
1998 Increase 1997
-------- -------- --------
Salaries and Related Costs $ 82,092 4.76% $ 78,359
Salaries and related costs increased by 4.76% in the third quarter of 1998 as
compared to the third quarter of 1997. Acquisitions completed in fiscal 1998
represent $1,974, or 2.52%, of this increase. The remaining increase
represents increased hiring, primarily where net revenues have been growing,
and annual salary increases. Salaries and related costs represent 68.9% and
68.3% of net revenues for the third quarters of 1998 and 1997, respectively.
1998 Increase 1997
-------- -------- --------
Amortization of Goodwill $ 1,135 10.25% $ 1,029
Amortization of goodwill increased $81, or 7.85%, due to fiscal 1998
acquisitions, with the balance attributable to the resolution of additional
contingent amounts due to previously acquired companies; future acquisitions
will continue this trend.
1998 Increase 1997
-------- -------- --------
Earnings from Operations $ 11,244 4.11% $ 10,800
The increase in earnings from operations is due to fiscal 1998 acquisitions.
The Company's operating margin as a percentage of net revenues were 9.4% for
the third quarters of 1998 and 1997.
1998 Decrease 1997
-------- -------- --------
Investment and Other Income $ 190 (65.04%) $ 545
The decrease in investment and other income reflects a reduction of interest
income from the interim investment of long-term borrowings that was awaiting
deployment to fund acquisitions and stock repurchases.
1998 Increase 1997
-------- -------- --------
Interest Expenses $ 2,640 25.93% $ 2,097
The Company's stock repurchases and funding of acquisitions have been financed
with long-term debt. The Company's borrowings have increased from $130,382
at December 27, 1996 to $139,929 at December 26, 1997, resulting in higher
interest costs. Consequently, interest expense has and may continue to
increase. See "Liquidity and Capital Resources".
1998 Increase 1997
-------- -------- --------
Income Taxes $ 3,641 .81% $ 3,612
Income taxes as a percentage of earnings before income taxes were 41.4% and
39.1% for the third quarters of 1998 and 1997, respectively. The Company's
U.S. tax returns were finalized in the third quarter of both fiscal years,
which typically results in small adjustments that slightly skew the quarters'
tax rate.
1998 Decrease 1997
-------- -------- --------
Net Earnings $ 5,153 (8.58%) $ 5,636
Net earnings as a percentage of net revenues were 4.3% and 4.9% for the third
quarters of 1998 and 1997, respectively. The decrease as a percentage of net
revenues is primarily due to increased interest costs resulting from debt
financing for acquisitions and the repurchase of the Company's common stock.
First Three Quarters 1998 Compared with First Three Quarters 1997
The Company uses a 52-53 week fiscal year ending the last Friday in March.
The first three quarters for both fiscal years 1998 and 1997 were each
comprised of 39 weeks.
8
1998 Increase 1997
-------- -------- --------
Net Revenues $362,698 7.24% $338,198
The 7.24% increase in net revenues in the first three quarters of 1998 as
compared to the first three quarters of 1997 is primarily a result of fiscal
1997 and 1998 acquisitions, which contributed $17,680 of the increase, or
5.23%. The remaining increase of $6,820, or 2.01%, represents growth from the
Company's process and multidisciplinary engineering, construction and project
management, demolition, and international business groups.
1998 Increase 1997
-------- -------- --------
Salaries and Related Costs $251,488 7.34% $234,288
Salaries and related costs increased by 7.34% in the first three quarters of
1998 as compared to the first three quarters of 1997. Acquisitions completed
in fiscal 1997 and 1998 represent $11,130, or 4.75%, of this increase. The
remaining increase represents additional hiring, primarily where net revenues
have been growing, and annual salary increases. Salaries and related costs
represent 69.3% of net revenues for the first three quarters of 1998 and 1997.
1998 Increase 1997
-------- -------- --------
General Expenses $ 68,272 8.01% $ 63,211
Acquisitions completed in fiscal 1997 and 1998 accounted for an increase of
$4,290, or 6.8%, in general expenses. Consultant fees, claims, and currency
fluctuations represent the balance of the increase in general expenses. As a
percentage of net revenues, general expenses represent 18.8% and 18.7% of net
revenues for the first three quarters of 1998 and 1997, respectively.
1998 Increase 1997
-------- -------- --------
Depreciation and Amortization $ 6,785 8.05% $ 6,280
Fiscal 1997 and 1998 acquisitions were responsible for $420, or 6.7%, of the
increase in depreciation and amortization. The balance of the increase is due
to new purchases of property and equipment. Depreciation and amortization
represents 1.9% of net revenues for the first three quarters of 1998 and 1997.
1998 Increase 1997
-------- -------- --------
Amortization of Goodwill $ 3,440 19.34% $ 2,882
Amortization of goodwill increased $289, or 10%, due to the Company's fiscal
1997 and 1998 acquisitions; future acquisitions will continue this trend.
The balance of the increase is due to the write-off of the remaining goodwill
of a previously acquired small business, which has been discontinued and the
resolution of additional contingent amounts due to previously acquired
companies.
1998 Increase 1997
-------- -------- --------
Earnings from Operations $ 32,713 3.73% $ 31,537
The increase in earnings from operations is due to fiscal 1997 and 1998
acquisitions. The Company's operating margin as a percentage of net revenues
were 9.0% and 9.3% for the first three quarters of 1998 and 1997, respectively.
1998 Decrease 1997
-------- -------- --------
Investment and Other Income $ 537 (68.41%) $ 1,698
The decline in investment and other income reflects a reduction of interest
income from the interim investment of long-term borrowings that was awaiting
deployment to fund acquisitions and stock repurchases. In 1997 the Company
acquired the majority interest in a company in which it had previously held
a minority interest; as a result their operating results are now a part of
earnings from operations. The balance of the change represents losses from
Dames & Moore Ventures, which had just commenced operations in the first
quarter of 1997.
9
1998 Increase 1997
-------- -------- --------
Interest Expense $ 7,644 53.19% $ 4,990
The Company's stock repurchases and funding of acquisitions have been financed
with long-term debt. Accordingly, interest expense has increased and may
continue to increase. See "Liquidity and Capital Resources".
1998 Decrease 1997
-------- -------- --------
Income Taxes $ 10,617 (8.53%) $ 11,606
Income taxes as a percentage of earnings before income taxes were 41.5% and
41.1% for the first three quarters of 1998 and 1997, respectively.
1998 Decrease 1997
-------- -------- --------
Net Earnings $ 14,989 (9.92%) $ 16,639
Net earnings as a percentage of net revenues were 4.1% and 4.9% for the first
three quarters of 1998 and 1997, respectively. The decrease as a percentage
of net revenues is primarily due to increased interest costs resulting from
debt financing for acquisitions and the repurchase of the Company's common
stock.
Liquidity and Capital Resources
Cash and cash equivalents total $12,950 at December 26, 1997, an increase from
$12,726 at March 28, 1997. The Company's working capital of $133,433 at
December 26, 1997 has grown from $115,390 at March 28, 1997. The primary
sources of cash during the first three quarters of 1998 consisted of funds
from operations of $15,085, and proceeds from sales of investments and other
property of $6,911. The primary uses of cash in the first three quarters of
1998 consisted of acquisitions totaling $13,232.
Net cash provided by operating activities for the first three quarters of
1998 totaled $15,085 as compared to $10,814 for the first three quarters of
1997. The increase is a result of: a reduction in deferred income taxes due
to temporary differences being recognized for tax purposes, and higher non-cash
expenses, depreciation and amortization. The increase in accounts
receivables is a reflection of both higher revenues and a longer collection
cycle. The growth in accounts payable represents a higher volume of direct
costs of outside services and a correlation of payables with the Company's
receivable collection cycle.
Acquisitions made by the Company during the first three quarters of 1998 were
smaller-sized companies than those purchased in the comparable first three
quarters of 1997 and accordingly, required less cash. The sale of the
Company's investment in Glencoe Insurance Ltd. generated proceeds of $5,185,
in fiscal 1998. The purchase of this investment was made in fiscal 1997 for
approximately $5,054.
The Company's bank credit agreements were amended and the termination dates
extended. The amendment provides more flexibility on limitations on
additional indebtedness, and maintenance of certain financial ratios. See
Note 3 to the Condensed Financial Statements for further information on the
bank credit agreements.
While the Company anticipates continuing capital requirements to support
growth and diversification of services, funding of acquisitions, and new
ventures, management believes that cash generated from operations and
existing lines of credit will be sufficient to meet requirements for the
foreseeable future. It is also anticipated that future acquisitions may
receive the Company's common stock as part of the purchase price.
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
Not applicable.
10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1 Third Amendment to First Amended and Restated Credit
Agreement, dated November 12, 1997, between Bank of America National
Trust and Savings Association and the Company.
Exhibit 27.1 Financial Data Schedule (included only in the
electronic filing).
Exhibit 99 Risk Factors
(b) There have been no reports on Form 8-K filed during the quarter of
which this report on Form 10-Q is being filed.
11
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.
DAMES & MOORE GROUP
Date: February 2, 1998 /s/ ARTHUR C. DARROW
----------------------------
Arthur C. Darrow
President and
Chief Executive Officer
(Principal Executive Officer)
Date: February 2, 1998 /s/ MARK A. SNELL
----------------------------
Mark A. Snell
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: February 2, 1998 /s/ LESLIE S. PUGET
----------------------------
Leslie S. Puget
Corporate Controller
(Principal Accounting Officer)
12
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 Third Amendment to First Amended and Restated Credit Agreement, dated
November 12, 1997, between Bank of America National Trust and Savings
Association and the Company.
27 Financial Data Schedule, which is included only in the electronic
submission to the Securities and Exchange Commission.
99 Risk Factors
13