UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended August 31, 1998
or
[] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 0-22992
THE SHAW GROUP INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-1106167
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11100 Mead Road, Second Floor
Baton Rouge, Louisiana 70816
(Address of principal executive offices) (zip code)
(225) 296-1140
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common stock, no par
value.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the stock held by non-affiliates (affiliates being
directors, officers and holders of more than 5% of the Company's common stock)
of the Registrant at October 30, 1998 was approximately $84 million.
The number of shares of the Registrant's common stock, no par value, outstanding
at November 24, 1998 was 11,808,016.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be prepared for use
in connection with the registrant's 1999 Annual Meeting of Shareholders to be
held in January 1999 will be incorporated by reference into Part III of this
Form 10-K.
PART I
ITEM 1. Business
General
The Shaw Group Inc. ("Shaw" or the "Company") is a leading supplier of
integrated piping systems and provider of industrial construction and
maintenance services primarily for the electric power, chemical, petrochemical,
oil and gas and refining industries worldwide. Shaw is committed to being a
"Total Piping Resource" for its customers by offering comprehensive design and
engineering services, piping system fabrication, manufacturing and sale of
specialty pipe fittings, design and manufacturing of pipe support systems, final
on-site erection, turnkey construction and project maintenance.
Shaw was founded in 1987 by current management and subsequently
purchased the assets of Benjamin F. Shaw Company, a century-old pipe fabricator.
The Company has increased its revenues from $29.3 million in the year ended
August 31, 1988 to $501.6 million in the year ended August 31, 1998 by
increasing both its domestic and international businesses. Through internal
expansion and a series of strategic acquisitions, Shaw has increased its pipe
fabrication and bending capacity, expanded its piping system products and
services and broadened its overall project scope to include construction and
maintenance services. These initiatives have provided Shaw with the ability to
achieve substantial economies of scale in purchasing raw material and to provide
customers with a broad range of industrial products and services.
The Company believes it has earned a reputation as an efficient,
low-cost supplier of complex piping systems as a result of several competitive
advantages. Specifically, the Company coordinates and integrates project
engineering and fabrication processes in order to maximize overall efficiency in
time, cost and performance. In addition, the Company's significant investment in
state-of-the-art induction bending technology provides it with time, labor and
raw material savings as compared to traditional fabrication methods. Shaw also
manufactures specialty pipe fittings, pipe hangers and other pipe products. This
manufacturing capability has served to reduce the Company's supply costs and
enhance its overall piping package. The Company utilizes its proprietary
software technology to enhance the planning and scheduling efforts of its
customers, helping to reduce total installed costs and project cycle times. The
Company also provides final on-site erection of piping systems, as well as total
project construction and maintenance services.
Forward-Looking Statements and Associated Risks
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The statements contained in this
Annual Report on Form 10-K that are not historical facts are forward-looking
statements based on the Company's current expectations and beliefs concerning
future developments and their potential effects on the Company. There can be no
assurance that future developments affecting the Company will be those
anticipated by the Company. Actual results may differ from those projected in
the forward-looking statements. These forward-looking statements involve
significant risks and uncertainties (some of which are beyond the control of the
Company) and are subject to change based upon various factors, including but not
limited to the following risks and uncertainties: changes in the demand for and
market acceptance of the Company's products and in general economic conditions
and, specifically, in economic conditions prevailing in international markets;
the presence of competitors with greater financial resources and the impact of
competitive products and pricing; the effect of the Company's policies,
including the amount and rate of growth of Company expenses; the continued
availability to the Company of adequate funding sources and changes in interest
rates; delays or difficulties in the production, delivery or installation of
products; Y2K risks; and various legal, regulatory and litigation risks. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. For a more detailed discussion of some of the foregoing
risks and uncertainties, see the Company's filings with the Securities and
Exchange Commission.
Subsequent Events
Subsequent to August 31, 1998, in accordance with a plan adopted by its
Board of Directors, the Company began repurchasing shares of the Company's
common stock, no par value (the "Common Stock"), through open market and block
transactions. The Board has approved acquisition of up to 2,700,000 shares,
which amounts to approximately 20% of the shares outstanding at August 31, 1998.
As of November 24, 1998, 1,473,100 shares of stock had been repurchased at a
total price, including brokerage commissions, of $12,704,300. The repurchases of
stock have been financed by the Company's principal revolving line of credit
facility.
Fiscal 1998 Developments
On November 14, 1997, the Company purchased all of the capital stock or
substantially all of the assets of the principal operating businesses of
Prospect Industries plc ("Prospect") of Derby, United Kingdom, for approximately
$16.6 million in cash and acquisition costs. Excluded from the purchase price is
$1,438,000, which represents the fair value of the assets and liabilities of a
discontinued operation, CBP Engineering Corp. ("CBP"). The sale of CBP was
consummated in 1998 at no gain or loss. Prospect, a mechanical contractor and
provider of turnkey piping systems serving the power generating and process
industries worldwide, operated through several wholly-owned subsidiaries
including Connex Pipe Systems, Inc. ("Connex"), a piping systems fabrication
business located in Troutville, Virginia; Aiton Australia Pty Limited ("Aiton
Australia"), a piping systems, boiler refurbishment and project management
company based near Sydney, Australia; and Prospect Engineering Limited ("PEL"),
a provider of turnkey piping systems located in Derby, United Kingdom. Prospect
also owned a 66% interest in Inflo Control Systems Limited ("Inflo"), a
manufacturer of boiler steam leak detection, acoustic mill and combustion
monitoring equipment and related systems. Under the terms of the acquisition
agreement, the Company acquired all of the outstanding stock of Prospect
Industries Overseas Limited, a United Kingdom holding company that held the
entire ownership interest in Connex and CBP, and Aiton Australia and certain
assets of PEL, as well as Prospect's entire ownership interest in Inflo. The
Company also assumed certain liabilities of PEL and Prospect relating to its
employees and pension plans. For Prospect's year ended September 30, 1996, its
most recently published audited consolidated financial statements, sales
amounted to approximately $138 million.
On January 15, 1998, the Company purchased all of the outstanding
capital stock of Lancas, C.A. ("Lancas"), a construction company in Punto Fijo,
Venezuela for $2.7 million in cash and acquisition costs, net of cash received.
On January 19, 1998, the Company acquired all of the outstanding capital
stock of Cojafex B.V. of Rotterdam Holland ("Cojafex") for $8.5 million, $4.6
million in cash and acquisition costs (net of cash received) of which was paid
at closing. Cojafex owns the technology for certain induction-bending machines
used for bending pipe and other carbon steel and alloy items for industrial,
commercial and architectural applications. Shaw currently has seven Cojafex
induction bending machines in operation. Shaw supplied Cojafex bending machines
packaged with fabrication technology and technical services on-site in India for
one of the largest grass roots refinery projects ever planned.
On July 29, 1998 the Company completed the acquisition of Bagwell Brothers,
Inc. and a related entity (collectively, "Bagwell") of Delcambre, Louisiana.
Shaw's total consideration paid for the acquisition amounted to 645,000 shares
of its Common Stock valued at $13.0 million and $1.8 million in cash and
acquisition costs. Bagwell specializes in the fabrication and construction of
offshore modules, topsides, heliports, vessels and offshore platforms, as well
as management of offshore construction and maintenance work. Bagwell had revenue
of approximately $30 million for its most recent fiscal year ended February 28,
1998.
In June 1998, the Company adopted a plan to discontinue its operations
of the following subsidiaries: Weldtech, a seller of welding supplies; Inflo, a
manufacturer of boiler steam leak detection, acoustic mill and combustion
monitoring equipment and related systems; Greenbank (a division of PEL), an
abrasive and corrosion resistant pipe systems specialist; and NAPTech Pressure
Systems Corporation, a manufacturer of pressure vessels. The Company sold and/or
discontinued its investment in each of these operations prior to August 31,
1998.
For further discussions regarding these acquisitions, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Industry Overview
The industrial pipe fabrication industry provides piping systems for
new construction and retrofit projects in the electric power, refining,
chemical, petrochemical, oil and gas and other industries, including pulp and
paper, pharmaceutical and food processing industries. The Company estimates that
prefabricated piping systems account for approximately 3% of the total installed
cost of a new construction project and are crucial components of each project.
The Company divides the industry into three major segments, electric power, oil
and gas and the process industry segment. The refining, chemical and
petrochemical sectors represent the largest portion of the process industry
segment.
The domestic pipe fabrication and construction industry depends largely
on new construction and retrofit projects in the chemical, refining, oil and
gas, pulp and paper, pharmaceutical, food processing and other industries. These
industries have historically been cyclical in nature and vulnerable to general
downturns in the economy. The chemical sector began to experience an upturn in
mid-1995 driven by an increase in capital expenditures for capacity expansions
and retrofits. This resulted in a significant improvement in the domestic
pricing environment during fiscal 1996, which continued through fiscal 1998.
Project activity in the chemical and refining sectors continues to be robust,
and the Company anticipates that a significant portion of domestic project work
over the next several years will be generated by chemical plant expansions and
refinery retrofits relating to the modernization of aging facilities and
compliance with environmental regulations. Historically, the Company experienced
minimal demand for new electric power plant construction in the United States;
thus, the domestic electric power piping market consisted almost exclusively of
retrofits. In fiscal 1998, however, the Company experienced increased demand for
new construction in the domestic power market as a result of the decommissioning
of nuclear plants, deregulation of the power industry and the proliferation of
new gas power plants.
The international pipe fabrication market has exhibited significant
growth over the last several years. New construction represents the majority of
work performed in the electric power sector overseas. Strong demand for
electricity, particularly in underdeveloped and overpopulated areas of the
world, has resulted in a significant increase in new power plant construction.
With respect to the Far East/Pacific Rim region, the Company expects that sales
in the foreseeable future will be negatively impacted by the economic problems
in the region.
Generally, United States pipe fabricators can fabricate critical or
high pressure piping systems domestically for electric power projects and ship
the finished goods to selected international markets less expensively than their
major overseas competitors, due primarily to significantly lower labor costs
than in certain other industrialized countries (principally Germany and Japan)
and greater availability of raw materials in the United States. Typically, the
Company's international competitors are divisions of large industrial firms.
Most international projects require a certain percentage of "local
content" sourcing. Therefore, non-critical or low pressure piping for electric
power projects is frequently fabricated at the project site by local welders or
in regional fabrication facilities. The same is true for the chemical and
refining sectors, which utilize less critical piping systems. In most areas of
the Pacific Rim and South America, this work is performed at significantly lower
labor costs. In order to bid more competitively for work in the international
chemical and refining sector, as well as for the low pressure piping portion of
overseas power projects, Shaw has established overseas facilities and has
developed portable induction bending machines that can be used on international
job construction sites.
The Company's long-term outlook for the chemical and refining sectors
remains positive for the South American region based on the current economic
forecast, the prospective projects identified by the Company and the Company's
existing presence and contacts in the region, particularly Venezuela. There are
short-term economic and political uncertainties, however, that will likely
negatively impact growth in the region in fiscal 1999.
The Company entered the domestic offshore oil and gas market with the
acquisition of Bagwell in fiscal 1998. Demand in this industry is directly
related to commodity prices, and the Company believes that the low oil prices
currently being realized could have a negative effect on overall spending in the
industry and could impact the results of its operations in this market in fiscal
1999. In an improved pricing environment, however, the Company believes its
position in this market will provide significant opportunity for growth both
domestically and internationally.
Products and Services
As part of its commitment to being a "Total Piping Resource" for its
customers, the Company provides a complete range of piping products and
services, including comprehensive design and engineering services, piping system
fabrication, manufacturing and sale of specialty pipe fittings, design and
manufacturing of pipe support systems, final on-site erection, turnkey
construction and project maintenance.
Pipe Fabrication
Shaw's core business is the fabrication of complex piping systems from
raw material made of carbon steel, stainless and other alloys, as well as other
materials, including nickel, titanium and aluminum. The Company produces
prefabricated piping systems by cutting pipe to length, welding fittings on the
pipe and bending the pipe, each to precise customer specifications. As of August
31, 1998, Shaw operated pipe fabrication facilities in South Carolina,
Louisiana, Oklahoma, Utah, Virginia, the United Kingdom (the "UK") and Venezuela
as well as a 49% interest in a joint venture pipe fabrication facility in
Bahrain. These fabrication facilities are capable of handling and fabricating
pipe ranging in diameter from one inch to 72 inches, with overall wall
thicknesses from 1/8 inch to 7 inches. The Company can fabricate prefabricated
pipe assemblies up to 100 feet in length and weighing up to 45 tons.
The Company's products must meet rigid quality control standards. In
addition to visual inspection, the Company uses radiography, hydro testing, dye
penetration and ultrasonic flaw detection to confirm that its products meet
specifications. A significant portion of Shaw's work is the fabrication of
"critical piping systems" for use in high pressure, high temperature or
corrosive applications, including systems designed to withstand pressures of up
to 2,700 pounds per square inch and temperatures of up to 1,020 degrees
Fahrenheit.
Bending
Beginning in fiscal 1994, the Company began purchasing
state-of-the-art induction-bending equipment, which significantly increased the
Company's capacity to fabricate piping systems in both volume and complexity. In
addition, on certain projects Shaw can substitute bends for the cutting of pipe
and welding fittings, resulting in labor, time and raw material savings. In
January 1998, the Company announced that it acquired all of the outstanding
capital stock of Cojafex B.V. ("Cojafex") of Rotterdam, Holland. Cojafex owns
the technology for certain induction-bending machines used for bending pipe and
other carbon steel and alloy items for industrial, commercial and architectural
applications.
The market for pipe fabrication is increasingly moving in the direction
of custom pipe bending according to the specifications of customers, since
bending generally allows for significant reductions in labor, time and material
costs, as compared to traditional means of fabrication. The Company believes its
state-of-the-art equipment gives it a technological advantage in this growing
segment of the market.
Shaw currently has seven induction pipe-bending machines in operation
capable of bending pipe up to 66 inches in diameter with wall thicknesses of up
to 5 inches.
Pipe Bending Capabilities
--------------------------
Maximum PipeMaximum Pipe
Model Location Diameter Wall Thickness
----- -------- --------- --------------
Cojafex PB Special 16 Walker, Louisiana 16 inches 2.5 inches
Cojafex PB Special 16 Laurens, South Carolina 16 inches 2.5 inches
Cojafex PB Special 16 Tulsa, Oklahoma 16 inches 2.5 inches
Cojafex PB-1200 Walker, Louisiana 48 inches 4.0 inches
Cojafex PB-1600 Clearfield, Utah 66 inches 5.0 inches
Cojafex PB-850 Clearfield, Utah 34 inches 3.0 inches
Cojafex PB Special 12 Clearfield, Utah 12 inches .75 inches
An additional induction pipe bending machine is expected to be delivered to
Manana, Bahrain in December, 1998.
The Company has also developed portable versions of the PB Special 16
and PB Special 8 induction bending machines that are capable of producing
multi-directional bends at project sites around the world. The Company has sold
several of these machines that are currently being utilized on-site in India to
fabricate piping systems for one of the largest grass roots refinery projects
ever planned.
Engineering and Design
In 1994, as an integral part of its strategy of becoming a "Total
Piping Resource", the Company integrated engineering and design capabilities
into its business for complex piping systems for electric power projects, mainly
for the Company's customers outside the United States. Shaw also designs and
engineers pipe hanger and support systems and specializes in engineering
analyses of complex piping systems and related services, primarily for the
electric power industry. These engineering, design and pipe support capabilities
complement the Company's fabrication business, particularly for electric power
projects, enabling the Company to provide more comprehensive piping packages
with reduced overall lead times and lower total installed costs.
The Company utilizes sophisticated plant design software to create
virtual three-dimensional piping system models. The result is a clear,
understandable picture of the complete project, which allows clients to "walk
through", the three-dimensional model for an accurate design review. The Company
currently operates 25 workstations utilizing the plant design software.
The Company's engineering capabilities are directly linked to the
Company's fabrication shops and the Company's proprietary computer aided design
system, SHAW-DRAW(TM). SHAW-DRAW(TM) converts certain customer design drawings
to the Company's detailed production drawings in seconds, significantly reducing
the lead-time required before fabrication can begin and substantially
eliminating detailing errors. The Company has also implemented SHAW-MAN(TM),
which efficiently manages and controls the movement of all required materials
into and through each stage of the fabrication process utilizing bar code
technology. These proprietary programs enhance the planning and scheduling
efforts for Shaw's customers, helping to reduce total installed costs and
project cycle times.
Pipe Fittings Manufacturing
Shaw's manufacturing capabilities extend to specialty stainless,
alloy and carbon steel pipe fittings for the electric power, refining, chemical,
oil and gas and other industries, including the pulp and paper, pharmaceutical
and food processing industries. These fittings include stainless and other alloy
elbows, tees, reducers and stub ends ranging in size from 1/2 to 48 inches and
heavy wall carbon and chrome elbows, tees, caps and reducers with wall
thicknesses of up to 3 1/2 inches. In addition to its manufacturing facility in
Shreveport, Louisiana, Shaw has manufacturing outlets in New Jersey, Georgia,
Louisiana, Texas and Oklahoma which also distribute pipe and fittings
manufactured by third parties. Shaw's in-house manufacturing capabilities for
pipe fittings further enhance the Company's piping package, enable the Company
to realize greater efficiencies in the purchase of raw materials, help reduce
overall lead times and lower total installed costs, and are additional steps in
the Company's commitment to being a "Total Piping Resource".
Project Construction and Maintenance
With the acquisitions of two industrial construction and maintenance
businesses in fiscal 1997 and three in fiscal 1998, the Company expanded its
piping package to include on-site piping systems installation and broadened its
overall project scope to include total project construction and plant
maintenance services for the refining, petrochemical, chemical, oil and gas and
power industries. These capital-intensive projects include grass roots
facilities, as well as plant expansions and upgrades. Shaw's services
incorporate most of the construction disciplines, including civil, structural
and steel erection, mechanical/equipment installation and assembly, piping
erection, skid and modular unit fabrication and assembly, constructability
reviews, materials and labor procurement and management, ASME code work and
plant maintenance. As a result of these acquisitions, the Company has an
established regional presence, in Gulf Coast region of the United States and in
the UK, Australia and Venezuela and has plans to expand domestically and
internationally.
Markets
The Company's principal markets are new construction and retrofits
in the electric power, refining, petrochemical, chemical and oil and gas
industries, both in the United States and internationally. The Company also
historically has supplied piping systems to the pulp and paper, pharmaceutical
and manufacturing industries.
The Company's sales were to customers in the following industries
(in millions):
Year Ended August 31,
Industry Sector 1997 1998
- --------------- ---- ----
Power $101.8 $193.5
Chemical 130.4 141.4
Refining 50.0 83.9
Petrochemical * 33.6
Oil and Gas * 23.1
Other 53.5 26.1
------ ------
$335.7 $501.6
====== ======
* Sales for Petrochemical and Oil and Gas sectors are not segregated
and are included elsewhere in the above chart.
The Company's sales were to customers in the following geographic
regions (in millions):
Year Ended August 31,
Geographic Region 1997 1998
- ----------------- ---- ----
United States $232.5 $286.5
Far East/Pacific Rim 62.6 100.6
Europe 4.0 55.8
South America 18.4 31.9
Middle East 12.8 18.4
Other 5.4 8.4
------ ------
$335.7 $501.6
====== ======
Prior to February 1994, the Company's international business was
conducted exclusively from its plants in the United States. The Company believes
that having facilities in certain key international markets assists in securing
additional overseas work, specifically for chemical and refining projects, where
the piping is generally fabricated at the project site or in a regional shop by
local welders. The Company currently has wholly-owned subsidiaries operating in
Venezuela, the U.K. and Australia and a joint-venture facility operating in
Bahrain.
In November 1993, the Company entered into a joint-venture agreement
to construct and operate a fabrication facility in Bahrain. The Company's joint
venture partner is Abdulla Ahmed Nass, a Bahrain industrialist. The Bahrainian
joint-venture facility is one of the first modern pipe fabrication facilities in
the Middle East and has received the Gulf States Certification from the Gulf
Cooperation Council. The Gulf States Certification enables the venture to export
products to other Arab countries without payment of additional tariffs. For
fiscal 1998, the joint venture had sales of approximately $6,600,000 and the
Company's share of the joint venture's net losses were approximately $40,000.
In the future, the Company's use of joint-venture relationships for
foreign operations will be determined on a case-by-case basis depending on
market, operational, legal and other relevant factors.
Contracts and Pricing
The Company obtains orders through competitive bidding, negotiated
contracts and awards under Alliance Agreements. The awarding of contracts is
frequently not based exclusively on price but on the Company's reputation,
experience, know-how and ability to meet project deadlines.
The Company's contracts are generally priced on either a "unit" price,
"fixed/lump-sum", or "cost-plus" basis. A significant portion of the Company's
contracts (particularly domestic piping fabrication contracts) are bid on a
"unit" price basis, pursuant to which the customer pays an agreed-upon rate for
each individual service provided, such as a weld, radiograph inspection, bend or
engineering revision, or the amount of inventory items used. Raw materials
generally are billed to customers at published prices in effect at the date of
the contract, and the Company generally obtains fixed pricing commitments from
its suppliers at such time for most of the items necessary to complete the
project. The Company thereby minimizes the risk of raw material price increases
that may occur during the fabrication process.
A significant portion of the Company's projects are quoted on a
"fixed/lump-sum" price basis. Increasingly, this type of contract is being
requested by the Company's customers, particularly for international electric
power projects. The Company generally does not quote the actual contract price
until it has secured a fixed pricing commitment from its suppliers for most of
the items necessary to complete the project, thereby minimizing any risk of
price increases between the contract date and the time the project is completed.
A significant portion of the Company's construction contracts are bid
on a "cost-plus" basis. Revenues are recognized on the basis of costs incurred
plus the fee earned, measured by the cost-to-cost method.
The Company also obtains work under Alliance Agreements, which are
agreements that the Company enters into with its customers in order to expedite
individual project contract negotiations through means other than the formal
bidding process. These agreements are typically implemented by establishing a
joint steering committee to provide guidance and direction on alliance issues.
Normally this committee meets on a periodic basis to monitor alliance progress
and assign resources to effect continuous improvements in the various work
processes associated with project execution.
Alliance Agreements allow the customer to achieve greater cost
efficiency and reduced cycle times in the design and fabrication of complex
piping systems for electric power, chemical and refinery projects. In addition,
the Company believes that these agreements will provide Shaw with a steady
source of new projects and help minimize the impact of short-term pricing
volatility.
Backlog
Shaw generally bids for projects that require delivery of piping
systems over a period of three to eighteen months. The Company defines its
backlog as a "working backlog", which generally includes only projects with a
written commitment. Typically, electric power projects remain in the Company's
backlog for at least nine months, depending on the size of the project or
whether the Company is doing the design and engineering as well as the
fabrication and/or erection for a given project. Refining and chemical projects
remain in the Company's backlog three to six months on average.
On occasion, customers will cancel or delay projects for reasons out
of the Company's control. Projects will remain in the Company's backlog for
longer periods if delays occur. Historically, delays have impacted the Company's
operations from time to time, but cancellations have been insignificant. The low
cancellation rate is due to the fact that piping systems are one of the final
steps in the construction of a project and are essential to the construction of
these systems as a whole.
The Company estimated its backlog at approximately $254 million at
August 31, 1998. This compares to the previously announced $154 million and $253
million at August 31, 1996 and 1997, respectively. The Company estimates that
$209 million, or 82%, of its backlog at August 31, 1998 will be completed in
fiscal 1999.
The following table breaks out the percentage of backlog in the
following industry sectors and geographic regions for the periods indicated:
At August 31,
1996* 1997* 1998
----- ----- ----
Industry Sector:
Electric Power 57% 30% 30%
Chemical 32 22 39
Petrochemical -- 21 11
Refining 10 15 8
Oil and Gas -- 7 9
Other 1 5 3
--- --- ---
100% 100% 100%
=== === ===
Geographic Region:
Domestic 66% 68% 65%
International 34 32 35
--- --- ---
100% 100% 100%
=== === ===
* Excludes backlog by industry sector and geographic region for the
pooled entity, NAPTech, Inc., which is not available.
Customers and Marketing
The Company's customers are principally major multi-national
engineering and construction firms, equipment manufacturers and industrial
corporations. For fiscal 1998, no single customer represented more than 10% of
the Company's sales.
As of August 31, 1998, the Company's marketing efforts are principally
conducted through its own full-time employed sales force comprised of 64
employees. In addition, certain customers and territories are covered by
independent representatives. The Company's sales force is paid a base salary
plus, when applicable, an annual bonus, while independent representatives
receive commissions.
Raw Materials and Suppliers
The Company's principal raw materials are carbon steel, stainless and
other alloy piping, which it obtains from a number of domestic and foreign
primary steel producers. The Company believes that it is not generally dependent
upon any one of its suppliers for raw materials, that the market is extremely
competitive and that its relationship with its suppliers is good. Certain types
of raw materials, however, are available from only one or a few specialized
suppliers, and the Company has experienced sourcing problems in the past; there
can be no assurance that sourcing problems will not occur in the future.
Shaw purchases a majority of its piping directly from manufacturers.
This eliminates the need for a distributor and results in lower costs to the
Company. Because of the volume of these materials purchased, the Company is
often able to negotiate advantageous purchase prices for piping. Certain items
are kept in stock at each of the Company's facilities and are transported
between facilities as required. The Company obtains more specialized materials
from suppliers when required for a project.
At the time of obtaining a contract, the Company generally obtains
fixed pricing commitments from its suppliers for most of the items necessary to
complete the project, thereby minimizing any risk of price increases that may
occur during the fabrication process. See "Contracts and Pricing".
Industry Certifications
In order to perform fabrication and repairs of coded piping systems,
the Company's domestic construction operations and fabrication facilities, as
well as its subsidiaries in Derby, UK and Maracaibo, Venezuela, have obtained
the required American Society of Mechanical Engineers (ASME) certification (S,U
& PP stamps), and its facilities in Laurens, South Carolina; Walker, Louisiana;
Derby, UK; and Maracaibo, Venezuela have obtained the National Board
certification (R stamp). In addition, the Laurens, South Carolina and the
Troutville, Virginia facilities are licensed to fabricate piping for nuclear
power plants and are registered by the International Organization of Standards
(ISO 9002). The Company's engineering subsidiary and its UK operations are also
registered by the International Organization of Standards (ISO 9001), as is its
pipe support fabrication facility (ISO 9002).
Patents, Trademarks and Licenses
The Company does not own any material patents, registered trademarks
or licenses. However, the Company considers its design and project control
systems, SHAW-DRAW(TM) and SHAW-MAN(TM), to be proprietary information of the
Company.
Competition
In the piping engineering and fabrication segments, the Company
experiences significant competition from a limited number of competitors in both
international and domestic markets. In the United States, there are a number of
smaller pipe fabricators. Internationally, the principal competitors are
divisions of large industrial firms. Some of the Company's competitors,
especially in the international sector, have greater financial and other
resources than the Company.
In the construction segments, the Company has numerous regional,
national and international competitors, many of which have greater financial and
other resources than the Company.
Orders are obtained by the Company through competitive bidding,
negotiated contracts and awards under Alliance Agreements. In a competitive bid,
the awarding of contracts is frequently not based solely on price but also on
the Company's reputation experience, know-how and ability to meet project
deadlines.
Employees
At August 31, 1998, the Company employed approximately 4,500 full-time
employees, 786 of whom are represented by unions. Of the total employees, 189
worked in the Company's wholly owned subsidiary in Venezuela and 446 worked in
the United Kingdom and Australia. In 1998, a five-year agreement was reached
between the Company and a union whereby several of the Company's subsidiaries in
the United States are represented by local affiliates of the union.
Environmental
The Company is subject to environmental laws and regulations,
including those concerning emissions into the air, discharges into waterways,
generation, storage, handling, treatment and disposal of waste materials and
health and safety. These laws and regulations generally impose limitations and
standards for certain pollutants or waste materials to obtain a permit and
comply with various other requirements. In addition, under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA") and comparable state laws, the Company may be required to investigate
and remediate hazardous substances. CERCLA and these comparable state laws
typically impose liability without regard to whether a company knew of or caused
the release, and liability has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis of allocation. The Company
has not been notified that it is a potentially responsible party under CERCLA or
any comparable state law at any site. The Company's foreign operations are also
subject to various requirements governing environmental protection.
The environmental, health and safety laws and regulations to which the
Company is subject are constantly changing, and it is impossible to predict the
effect of such laws and regulations on the Company in the future. The Company
believes that it is in substantial compliance with all applicable environmental,
health and safety laws and regulations. However, with respect to environmental
matters, the Company has not conducted environmental audits of all of its
properties. To date, the Company's costs with respect to environmental
compliance have not been material, and the Company does not anticipate any
material environmental liability.
ITEM 2. Properties
The principal properties of the Company at August 31, 1998 are as
follows:
Location Description Square Feet
Baton Rouge, LA Corporate Headquarters 20,000(1)
Laurens, SC Pipe Fabrication Facility 200,000(2)
Prairieville, LA Pipe Fabrication Facility 60,000(1)
West Monroe, LA Pipe Fabrication Facility 70,000
Walker, LA Pipe Fabrication Facility 154,000(2)
Maracaibo, Venezuela Pipe Fabrication Facility 45,000
Tulsa, OK Pipe Fabrication Facility 158,600(2)
Clearfield, UT Pipe Fabrication Facility 335,000(2)
Houston, TX Pipe Fabrication Facility 12,000
Troutville, VA Pipe Fabrication Facility 150,000(1)
Derby, U.K. Pipe Fabrication Facility 200,000(1)
Wolverhampton, U.K. Pipe Fabrication Facility 43,000(1)
Baton Rouge, LA Distribution Facility 30,000(1)
Englewood, NJ Design and Engineering Headquarters 14,000(1)
Longview, TX Pipe Supports Manufacturing and Fabrication Facility 28,000
Shreveport, LA Piping Components and Manufacturing Facility 385,000(2)
Shreveport, LA Pipe Storage Facility 40,000(2)
Houston, TX Pipe Fittings Distribution Facility 107,000(1)
Vacaville, CA Pipe Supports Manufacturing Facility 43,000(1)
Baton Rouge, LA Construction, Administrative, Warehouse and Fabrication Facility 32,400(2)
Baton Rouge, LA Divisional Offices 12,000
Delcambre, LA Offshore Construction and Fabrication Facility 80,000
(1) Leased facility. (2) Encumbered with debt.
The Bahrain joint venture leases a 94,000 square foot pipe fabrication
facility in Manama, Bahrain.
The Company considers each of its current facilities to be in good
operating condition and adequate for its present use.
ITEM 3. Legal Proceedings
The company is involved in various lawsuits in the ordinary course of
its business. Although the outcome of certain of these matters cannot be
predicted, management believes based upon information currently available, that
none of such lawsuits, if adversely determined, would have a material adverse
effect on its financial position or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
The company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal 1998.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock, no par value (the "Common Stock"), is
traded on the New York Stock Exchange (the "NYSE") under the symbol "SGR". The
Company delisted the Common Stock from the Nasdaq National Market on October 17,
1996, and the Common Stock commenced trading on the NYSE on October 18, 1996.
The following table sets forth, for the quarterly periods indicated, the high
and low sale prices per share for the Common Stock as reported on the Nasdaq
National Market through October 17, 1996, and thereafter as reported by the
NYSE, for the Company's two most recent fiscal years and for the current fiscal
year to date.
High Low
Fiscal year ended August 31, 1997
First quarter $37 -- $21 7/8
Second quarter 26 3/4 18 5/8
Third quarter 23 3/4 12 1/2
Fourth quarter 22 1/4 15 3/4
Fiscal year ended August 31, 1998
First quarter $24 3/8 $17 3/4
Second quarter 26 3/8 18 1/2
Third quarter 25 5/8 22 1/8
Fourth quarter 27 15/16 8 1/16
Fiscal year ending August 31, 1999
First quarter (through November 16, 1998) $10 15/16 $ 6 3/8
The closing sale price of the Common Stock on November 16, 1998, as
reported on the NYSE, was $8 7/8 per share. As of November 20, 1998, the Company
had approximately 3,750 total shareholders.
The Company has not paid any dividends on the Common Stock and
currently anticipates that, for the foreseeable future, any earnings will be
retained for the development of the Company's business. Accordingly, no
dividends are expected to be declared or paid on the Common Stock for the
foreseeable future. While the declaration of dividends is at the discretion of
the Company's Board of Directors, the Company is subject to certain prohibitions
on the payment of dividends under the terms of existing credit facilities.
On July 29, 1998 the Company issued an aggregate of 645,000 shares of
its Common Stock in exchange for all of the remaining capital stock of Bagwell.
The Common Stock was issued to the former shareholders of Bagwell pursuant to
Regulation D under the Securities Act of 1933, as amended, and was valued at an
aggregate of $13.0 million as of the date of exchange.
ITEM 6. Selected Consolidated Financial Data
The following table presents, for the periods and as of the dates
indicated, selected statement of income data and balance sheet data of the
Company on a consolidated basis. The selected historical consolidated financial
data for each of the three fiscal years in the period ended August 31, 1998
presented below have been derived from the Company's audited consolidated
financial statements. Such data should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto
included elsewhere in this Annual Report on Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
information has been restated to exclude discontinued operations.
YEAR ENDED AUGUST 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(1)(2)(4)(9) (1)(5)(9) (1)(6)(9) (7) (9) (8)
(in thousands, except per share amounts)
Consolidated Statements of Income
Sales $131,145 $156,922 $248,969 $335,734 $501,638
======= ======== ======== ======== ========
Income from continuing operations $ 3,236 $ 3,912 $ 6,915 $ 14,300 $ 16,232
======== ======== ======== ======== ========
Basic income per common share from
continuing operations (3) $ .40 $ .44 $ .71 $ 1.23 $ 1.29
======== ======== ======== ======== ========
Diluted income per common share from
continuing operations (3) $ .39 $ .43 $ .69 $ 1.20 $ 1.26
======== ======== ======== ======== ========
Consolidated Balance Sheets
Total assets $105,454 $121,084 $218,503 $262,459 $389,844
======== ======== ======== ======== ========
Long-term debt obligations,
net of current maturities $ 7,906 $ 11,718 $ 36,840 $ 39,039 $ 91,715
======== ======== ======== ======== ========
Cash dividends declared per common share $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ======== ======== ========
(1) Restated to account for the acquisition of NAPTech, Inc., which was
completed on January 27, 1997, and which was accounted for using the
pooling-of-interests method.
(2) In connection with the initial public offering of the Company's common
stock, the Company's shareholders approved a stock split and
recapitalization on December 6, 1993 which caused the number of outstanding
shares to increase from 4,567.5 to 5,602,000. For fiscal 1994, the per
share data have been adjusted to give effect to the stock split.
(3) Earnings per share amounts for fiscal 1994, 1995, 1996 and 1997 have
been restated for the adoption of Statement of Financial Standards No. 128,
"Earnings Per Share."
(4) Includes the acquisition of the assets of Fronek Company, Inc. and F.C.I.
Pipe Support Sales, Inc. in fiscal 1994.
(5) Includes the acquisition of the 50% interest of the other participant in
the Company's joint venture located in Venezuela in fiscal 1995.
(6) Includes the acquisitions of the assets of Word Industries Pipe
Fabricating, Inc. and certain affiliates and of Alloy Piping Products, Inc.
in fiscal 1996. See Note 3 of "Notes to Consolidated Financial Statements."
(7) Includes the acquisitions of Pipe Shields Incorporated and United Crafts,
Inc. and certain assets of MERIT Industrial Constructors, Inc. in fiscal
1997. See Note 3 of "Notes to Consolidated Financial Statements."
(8) Includes the acquisitions of certain assets of Prospect and Lancas, Cojafex
and Bagwell in fiscal 1998. See Note 3 of "Notes to Consolidated Financial
Statements."
(9) Fiscal 1996 and 1997 were restated to exclude the discontinued operations
disposed of in fiscal 1998. The effect in fiscal 1994 and 1995 is
immaterial. See Note 17 of "Notes to Consolidated Financial Statements."
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements, including the notes thereto.
Recent Acquisitions and Disposals
On January 16, 1996, the Company purchased certain assets and assumed
certain liabilities of Word Industries Pipe Fabricating, Inc, TS&M Corporation
and T.N. Word and certain of Mr. Word's family members (collectively, "Word").
The acquisition of Word increased the Company's production capacity and added a
facility in Tulsa, Oklahoma. The total purchase price related to the acquisition
was approximately $4.2 million, consisting of the issuance of 385,000 shares of
the Company's Common Stock valued at $3.4 million and cash and acquisition costs
of approximately $750,000.
Effective March 1, 1996, the Company acquired all of the outstanding
capital stock of Alloy Piping Products, Inc. ("APP"), a leading United States
manufacturer of specialty stainless and carbon steel pipe fittings and other
stainless pipe products, and the assets of an APP-related entity, Speedline. In
connection with the acquisition of APP, the Company issued 541,177 shares of the
Company's Common Stock valued at $6.8 million and paid cash and acquisition
costs of $11.6 million.
Effective October 1, 1996, the Company acquired all of the outstanding
capital stock of Pipe Shields Incorporated ("Pipe Shields"), an industrial pipe
insulation company located in Vacaville, California, for approximately $2.5
million in cash, net of cash received.
On January 27, 1997, the Company acquired all of the outstanding stock
of NAPTech, Inc., a fabricator of industrial piping systems and engineered
piping modules located in Clearfield, Utah, and the 335,000 square foot facility
that NAPTech, Inc. leased from a related entity (collectively, "NAPTech"). In
connection with the acquisition, the Company issued 432,881 shares of the
Company's Common Stock. The transaction was accounted for using the
pooling-of-interests method, and accordingly the financial information for all
periods presented has been restated to include the financial information of
NAPTech.
Effective February 1, 1997, the Company purchased all of the
outstanding capital stock of United Crafts, Inc. ("UCI"), now named Shaw
Constructors, Inc., an industrial construction and maintenance company based in
Baton Rouge, Louisiana, for cash and acquisition costs of $8.2 million.
On March 20, 1997, the Company, through a newly-formed, wholly-owned
subsidiary, completed the purchase of certain assets and the assumption of
certain liabilities of MERIT Industrial Constructors, Inc. ("MERIT"), an
industrial construction and maintenance firm based in Baton Rouge, Louisiana,
and certain of its affiliates. Total consideration paid by the Company was
approximately $1.3 million in cash and acquisition costs, 62,500 shares of the
Company's Common Stock valued at $1.3 million, options to purchase 25,000 shares
of the Company's Common Stock at $20.25 per share, as well as the assumption of
approximately $340,000 of debt.
On October 8, 1997, the Company purchased the capital stock of
Pipework Engineering and Developments Limited ("PED"), a pipe fabrication
company in Wolverhampton, United Kingdom, for $699,000 in cash and acquisition
costs, net of cash received, and notes payable to former stockholders of
$1,078,000.
On November 14, 1997, the Company purchased all of the capital stock or
substantially all of the assets of the principal operating businesses of
Prospect of Derby, United Kingdom, for approximately $16.6 million in cash and
acquisition costs, net of cash received. Prospect, a mechanical contractor and
provider of turnkey piping systems serving the power generating and process
industries worldwide, operated through several wholly-owned subsidiaries
including Connex, a piping systems fabrication business located in Troutville,
Virginia; Aiton Australia, a piping systems, boiler refurbishment and project
management company based near Sydney, Australia; and PEL, a mechanical
contractor and a provider of turnkey piping systems located in Derby, United
Kingdom. Prospect also owned a 66% interest in Inflo, a manufacturer of boiler
steam leak detection, acoustic mill and combustion monitoring equipment and
related systems. Under the terms of the acquisition agreement, the Company
acquired all of the outstanding capital stock of Prospect Industries Overseas
Limited, a United Kingdom holding company that held the entire ownership
interest in Connex and CBP, all of the capital stock of Aiton Australia and
certain assets of PEL, as well as Prospect's entire ownership interest in Inflo.
The Company also assumed certain liabilities of PEL and Prospect relating to its
employees and pension plans. Excluded from the purchase price is $1.4 million,
which represents the fair value of the assets and liabilities of a discontinued
operation, CBP. The sale of the assets of CBP was consummated in 1998 at no gain
or loss.
On January 15, 1998, the Company purchased all of the outstanding
capital stock of Lancas, a construction company in Punto Fijo, Venezuela for
approximately $2.7 million in cash and acquisition costs, net of cash received.
On January 19, 1998, the Company completed the acquisition of all of
the outstanding capital stock of Cojafex of Rotterdam, Holland for $8.5 million;
$4.6 million of cash and acquisition costs of which was paid at closing (net of
cash received). The balance of the purchase price will be paid through December
31, 2003. Cojafex owns the technology for certain induction pipe bending
machines used for bending pipe and other carbon steel and alloy items for
industrial, commercial and agricultural applications, and using such technology,
Cojafex designs, engineers, manufactures, markets and sells such induction
bending machines.
On July 28, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Bagwell. Total consideration paid was $1.8 million
of cash and acquisition costs and 645,000 shares of the Company's Common Stock
valued at $13.0 million. Bagwell specializes in the fabrication and construction
of offshore modules, topsides, heliports, vessels and offshore platforms, as
well as management of offshore construction and maintenance work. Bagwell had
revenues of approximately $30 million for its most recent fiscal year ended
February 28, 1998.
See Note 3 of the Notes to Consolidated Financial Statements for
discussions regarding these acquisitions.
In June 1998, the Company adopted a plan to discontinue its operations
of the following subsidiaries: Weldtech, a seller of welding supplies; Inflo, a
manufacturer of boiler steam leak detection, acoustic mill and combustion
monitoring equipment and related systems; Greenbank (a division of PEL), an
abrasive and corrosion resistant pipe systems specialist; and NAPTech Pressure
Systems Corporation, a manufacturer of pressure vessels. The Company sold and/or
discontinued its investment in each of these operations prior to August 31,
1998. Proceeds from the sale of these operations totaled approximately $1.2
million in net cash and notes receivable of approximately $7.4 million, which
resulted in a net gain on the disposal of $2.6 million, net of tax. The results
of these operations have been classified as discontinued operations in the
consolidated financial statements of the Company. Revenues of these discontinued
operations totaled approximately $0.4 million, $2.6 million, and $7.7 million in
1996, 1997 and 1998, respectively.
Results of Operations
General
The following table sets forth, for the periods indicated, the
percentages of the Company's sales that certain income and expense items
represent:
Year Ended August 31,
1996 1997 1998
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of sales 83.7 80.9 84.1
---- ---- ----
Gross profit 16.3 19.1 15.9
General and administrative expenses 10.7 11.2 9.7
----- ----- ----
Operating income 5.6 7.9 6.2
Interest expense (2.0) (2.0) (1.7)
Other income, net 0.4 0.0 0.1
---- ---- ----
Income before income taxes 4.0 5.9 4.6
Provision for income taxes 1.3 1.8 1.4
---- ---- ----
Income from continuing operations before earnings (losses) from
unconsolidated entity 2.7 4.1 3.2
Earnings (losses) from unconsolidated entity 0.1 0.2 0.0
--- --- ---
Income from continuing operations 2.8 4.3 3.2
Discontinued operations, net of tax:
Operating results 0.1 (0.1) .1
Net gain on disposals -- -- .5
------ ----- ----
Net income 2.7% 4.2% 3.8%
==== ==== ====
Fiscal 1998 Compared to Fiscal 1997
Sales increased 49.4% for fiscal 1998 to $501.6 million from $335.7
million for fiscal 1997. Gross profit increased 24.4% to $79.6 million for
fiscal 1998 from $64.0 million for fiscal 1997. Approximately $112 million of
the increase in sales relates to sales of subsidiaries acquired during fiscal
1998.
The Company's sales were to customers in the following geographic regions:
Fiscal 1997 Fiscal 1998
---------------------------- ------------------------
(in millions) % (in millions) %
Geographic Region:
U.S.A. $ 232.5 69.3% $286.5 57.1%
Far East/Pacific Rim 62.6 18.6 100.6 20.0
Middle East 12.8 3.8 18.4 3.7
South America 18.4 5.5 31.9 6.4
Europe 4.0 1.2 55.8 11.1
Other 5.4 1.6 8.4 1.7
------ ----- ------ -----
$335.7 100.0% $501.6 100.0%
====== ===== ===== =====
The Company's sales were to customers in the following industry
sectors:
Fiscal 1997 Fiscal 1998
----------------------------- --------------------------
(in millions) % (in millions) %
Industry Sector:
Power $101.8 30.3% $193.5 38.6%
Refining 50.0 14.9 83.9 16.7
Chemical 130.4 38.9 141.4 28.2
Petrochemical * * 33.6 6.7
Oil and Gas * * 23.1 4.6
Other 53.5 15.9 26.1 5.2
------ ----- ------ -----
$335.7 100.0% $501.6 100.0%
====== ===== ====== =====
* Sales for Petrochemical and Oil and Gas sectors are not segregated
and are included elsewhere in the above chart.
Revenues in fiscal 1998 from all geographic areas increased over fiscal
1997 levels primarily due to the Company's continued expansion through
acquisitions. The Company's domestic market for its construction services
continues to expand while sales from the Company's pipe fabrication and bending
operations declined in fiscal 1998 due to the substantial completion of a large
mining contract in fiscal 1997. With respect to the Far East/Pacific Rim region,
the Company expects that sales in the foreseeable future will be negatively
impacted by the economic problems in the region, although the Company has not
experienced any significant project cancellations, only delays in the
commencement of work. The Company believes that the long-term outlook for growth
in sales in the South America region is positive based upon the current economic
outlook, the prospective projects identified by the Company and the Company's
existing presence and contacts in the region, particularly in Venezuela;
however, there are short-term economic and political uncertainties that will
likely negatively impact sales growth in the region in fiscal 1999. The increase
in sales to Europe in fiscal 1998, compared to the prior year, is primarily due
to the acquisitions of the Company's United Kingdom operations (PED and certain
of the Prospect businesses) in the first quarter of fiscal 1998. The Company is
still in process of integrating these UK operations with Shaw's strategies and
procedures and expects to be completed with this process during fiscal 1999.
Until such time, the Company expects sales to Europe to be negatively impacted.
Gross margins for fiscal 1998 decreased to 15.9% from 19.1% from
fiscal 1997 due primarily to the following factors: (i) a higher volume of
construction and maintenance work, which typically produces a lower gross profit
margin; (ii) reduced gross margins on the Company's manufactured products due to
pricing pressure experienced in 1998 from foreign imports; and (iii) lower
margins realized from the Company's UK operations since the acquisition of PED
and certain businesses of Prospect. The Company expects that construction and
maintenance work will continue to be a significant portion of its operations,
and gross margins may be at lower than historical levels as a result. With
regard to the pricing pressures from foreign imports on its manufactured
products, the Company does not foresee a change in these pressures in the
short-term. While the UK market has historically produced lower margins than
other markets, the Company is in the process of integrating these operations
with the Company's operating processes, which the Company believes will enhance
the overall profitability of the operation. By the end of the second quarter of
fiscal 1999, the Company will have terminated approximately 55% of the UK
workforce, which will result in future cost savings. The related contractual
severance costs have been included as a cost of the acquisition of the
businesses.
General and administrative expenses for fiscal 1998 increased $11.1
million to $48.5 million, as compared to $37.4 million in fiscal 1997.
Approximately, $9 million of the increase relates to general and administrative
expenses of newly acquired subsidiaries, including those owned for only part of
fiscal 1997. The remaining increase in these expenses relates to increased costs
of corporate overhead due to the increase in the Company's operations. As a
percentage of sales, however, general and administrative expenses decreased from
11.2% in fiscal 1997 to 9.7% in fiscal 1998.
Interest expense for fiscal 1998 was $8.5 million, up 25.0% from the
$6.8 million incurred in fiscal 1997, primarily due to increased borrowings
resulting from the expansion of business and the acquisitions of Prospect,
Cojafex, PED and Lancas in 1998.
The Company's effective tax rates for fiscal 1997 and fiscal 1998 were
30.6% and 30.2%, respectively. The decrease in the fiscal 1998 rates from fiscal
1997 was primarily due to additional tax savings from higher foreign sales and
foreign sourced income taxed at lower rates partially offset by lower state
income tax incentives and refunds.
Fiscal 1997 Compared to Fiscal 1996
Sales increased 34.8% for fiscal 1997 to $335.7 million from $249.0
million for fiscal 1996. Gross profit increased 58.0% to $64.0 million for
fiscal 1997 from $40.5 million for fiscal 1996. Approximately $68 million of the
sales increase relates to sales of newly acquired subsidiaries, including those
owned for only part of fiscal 1996. The remaining increase was due primarily to
increased sales for projects in the domestic chemical and other sectors
(primarily mining), and the foreign power sector, offset by a decrease in the
domestic refining sector.
The Company's sales were to customers in the following geographic
regions:
Fiscal 1996 Fiscal 1997
---------------------------- ------------------------
(in millions) % (in millions) %
Geographic Region:
U.S.A. $ 173.3 69.7% $232.5 69.3%
Far East/Pacific Rim 39.6 15.9 62.6 18.6
Middle East 21.4 8.6 12.8 3.8
Latin America 2.6 1.0 18.4 5.5
Europe 9.0 3.6 4.0 1.2
Other 3.1 1.2 5.4 1.6
-------- ------- -------- -------
$249.0 100.0% $335.7 100.0%
====== ===== ====== =====
The Company's sales were to customers in the following industry
sectors:
Fiscal 1996 Fiscal 1997
----------------------------- ---------------------
(in millions) % (in millions) %
Industry Sector:
Power $ 86.7 39.0% $ 101.8 30.3%
Refining 62.4 28.1 50.0 14.9
Chemical 62.1 28.0 130.4 38.9
Other 10.8 4.9 53.5 15.9
------ ------- ------- ------
222.0 100.0% $ 335.7 100.0%
======= =======
Pooled Sales * 27.0
------
$249.0
======
* Sales by industry sector for the pooled entity, NAPTech, are not
available.
Gross margins for fiscal 1997 increased to 19.1% from 16.3% for fiscal
1996. This increase was due primarily to improved profitability on domestic
process projects, an increase in revenues from the power segment and an increase
in the sale of value-added services, such as engineering and design.
General and administrative expenses for fiscal 1997 increased $10.8
million to $37.4 million, as compared to $26.6 million in fiscal 1996.
Approximately $5.6 million of the increase relates to general and administrative
expenses of newly acquired subsidiaries, including those owned for only part of
fiscal 1996. Additionally, the Company incurred merger and business combination
costs of approximately $700,000 related to the NAPTech acquisition, which was
accounted for using the pooling-of-interests method. These acquisition-related
costs are included in general and administrative expenses for the year ended
August 31, 1997. See Note 3 of Notes to Consolidated Financial Statements. The
remaining increase in these expenses relates to variable costs associated with
increased sales.
Interest expense for fiscal 1997 was $6.8 million, up 40.5% from the
$4.8 million incurred in fiscal 1996, primarily due to increased borrowing
resulting from the expansion of business and the acquisitions of Pipe Shields,
UCI and MERIT in 1997.
The Company's effective tax rates for fiscal 1996 and fiscal 1997 were
32.1% and 30.6%, respectively. The decrease in the fiscal 1997 rates from fiscal
1996 was primarily due to state income tax incentives and refunds. The majority
of these incentives and refunds may not be recurring; however, any increase in
state income taxes should be partially offset by additional tax savings from
foreign sales.
Liquidity and Capital Resources
Net cash used in operations was $3.2 million for fiscal 1998, compared
to net cash provided by operations of $7.6 million for fiscal 1997. For fiscal
1998, net cash was favorably impacted by net income of $19.2 million,
depreciation and amortization of $10.3 million, increases of $5.8 million in
accounts payable and $8.4 million in advanced billings and billings in excess of
cost and estimated earnings on uncompleted contracts and a decrease of $4.2
million in inventories. Offsetting these positive factors were increases of
$38.3 million in receivables and $7.5 million in costs and estimated earnings in
excess of billings on uncompleted contracts.
The increase in receivables was primarily attributable to a higher
volume of sales activity. Receivables from contracts which are subject to
renegotiations or legal proceedings during fiscal 1998 (see Note 1 of Notes to
Consolidated Financial Statements) also contributed to the increase in
receivables. Inventories decreased due to a concentrated effort by the Company
to reduce and better manage its inventory levels. Accounts payables and other
items changed due to normal operating activities and contract billing
provisions.
Net cash used in investing activities was $38.0 million for fiscal
1998, compared to $28.4 million for fiscal 1997. During fiscal 1998, the Company
invested net cash of $18.0 million in connection with the acquisition of the
Prospect businesses, net cash of $4.6 million in connection with the acquisition
of Cojafex, and $5.1 million in connection with other acquisitions. See Note 3
of Notes to Consolidated Financial Statements. In addition, the Company
purchased $14.6 million of property and equipment in fiscal 1998. Major property
and equipment purchases include $1.4 million of assets for a new facility in
Houston, Texas and $13.2 million of other property and equipment purchases.
These uses of cash were partially offset by proceeds from sale of property and
equipment of $3.2 million due primarily to the sale of corporate transportation
equipment and proceeds from the sale of discontinued operations of $1.2 million.
Net cash provided by financing activities totaled $40.8 million for fiscal
1998, compared to $22.2 million provided in fiscal 1997. $62.2 million of cash
was provided from the issuance of new debt, primarily $60 million of Senior
Secured Notes funded in May 1998. The proceeds from the Senior Secured Notes
were used primarily to pay down the Company's principal revolving line of credit
facility, which had reached a balance of $69.5 million at the time the Senior
Secured Notes were funded. The principal revolving line of credit had been used
generally to provide working capital and fund fixed asset purchases and
subsidiary acquisitions. The Senior Secured Notes are payable primarily to
insurance companies, rank in pari passu with the Company's revolving line of
credit and are secured by domestic accounts receivable, inventory, intangible
assets and bank deposits. Seven equal annual principal payments beginning May
1999 are due with respect to $20 million of the Senior Secured Notes that bear
interest at 6.44%, payable semi-annually, and seven equal annual principal
payments beginning May 2002 are due with respect to $40 million of the Senior
Secured Notes that bear interest at 6.93%, payable semi-annually. See Note 6 of
Notes to Consolidated Financial Statements.
In May 1998, in connection with the private placement of the Senior
Secured Notes, the Company entered into a new three-year secured revolving line
of credit facility with its existing commercial lenders providing for a line of
credit of up to $100 million. This replaced the Company's secured revolving line
of credit of up to $77 million and the Company's unsecured revolving line of
credit of up to $17 million with such commercial lenders. The Company believes
that its current financing arrangements are sufficient to support its operations
for the next twelve months.
Subsequent to August 31, 1998, in accordance with a plan adopted by the
Board of Directors, the Company began to repurchase shares of the Company's
Common Stock through open market and block transactions. The Board has approved
acquisition of up to 2,700,000 shares, or approximately 20% of the shares
outstanding at August 31, 1998. As of November 24, 1998, 1,473,100 shares of
Common Stock had been repurchased at a total price, including brokerage
commissions, of $12.7 million. This repurchase of stock has been financed by the
Company's principal revolving line of credit facility (see Note 7 of Notes to
Consolidated Financial Statements).
Year 2000 Compliance
The Year 2000 ("Y2K") issue is the result of computerized systems being
written to store and process the year portion of dates using two digits rather
than four. Date-sensitive systems may fail or produce erroneous results on or
before January 1, 2000 because the year 2000 will be interpreted as the year
1900. During 1998, the Company's executive management and Board of Directors
began implementation of a program to identify, evaluate and address the
Company's Y2K risks to ensure that its Information Technology ("IT") systems and
non-IT systems will be able to process dates from and after January 1, 2000
without critical systems failure. In addition to evaluating its own systems, the
Company is attempting to assess the Y2K risks associated with its significant
customers and suppliers.
In general, the Company's program for identifying, evaluating and
addressing its Y2K risks for both IT and non-IT systems involves preliminary
assessments by Company personnel, detail audits and assessments by consultants
(scheduled to be completed by February 28, 1999 and estimated to cost
approximately $150,000) and correction or replacement of any non-compliant
systems.
The Company is currently evaluating its IT systems for Y2K compliance.
Over the last 18 months, the Company has been evaluating, updating and
consolidating its principal IT systems. While this project was undertaken
primarily to integrate the Company's various operations and increase the
efficiency, accuracy and usefulness of the Company's IT systems, the Company has
been able to evaluate and address its Y2K risks with respect to its principal IT
systems without incurring significant additional costs. The Company's
non-compliant IT systems are currently scheduled for replacement or modification
to Y2K compliant systems by June 1999.
Regarding the Company's non-IT systems, which primarily consist of
systems with embedded technology, the Company is in the process of completing
its preliminary assessment of all date-sensitive components. Upon completion of
its assessment, the Company will replace or modify other non-compliant non-IT
systems as necessary.
The Company has not incurred significant costs related to Y2K compliance as
of August 31, 1998. Based upon the information currently available, the Company
does not believe that the cost to modify or replace its non-compliant IT and
non-IT systems will be significant; however, there can be no assurance that such
cost will not materially and negatively impact its financial condition or
results of operations.
Based on its preliminary risk assessments, the Company believes the
most likely Y2K related failure would be a temporary disruption in certain
materials and services provided by third parties, which could have a material
adverse effect on the Company's financial condition or results of operations. As
part of its assessment of the Y2K risk associated with third parties' systems,
the Company intends to contact its significant material suppliers and customers
to determine their level of Y2K compliance. The Company has scheduled to
complete its assessment by June 1999.
Based upon the outcome of its assessments and audits and the
information derived from its significant customers and suppliers, the Company
will develop specific contingency plans to address certain risk areas, as
needed, beginning in July 1999. There can be no assurance that the Company will
not be materially adversely affected by Y2K problems or related costs.
Financial Accounting Standards Board Statements
In February 1997, Statement of Financial Accounting Standards No. 128
- -- "Earnings Per Share" ("SFAS 128") was issued which establishes standards for
computing and presenting earnings per share ("eps"). Under SFAS 128, primary eps
is replaced with basic eps. Basic eps is computed by dividing income applicable
to common shares by the weighted average shares outstanding; no dilution for any
potentially convertible shares is included in the calculation. Fully diluted
eps, now called diluted eps, is still required; however, when applying the
treasury stock method, the average stock price is used rather than the greater
of the average or closing stock price for the period. See Note 12 of Notes to
Consolidated Financial Statements.
In June 1998, the Financial Accounting Standards Board (the FASB)
issued Statement of Financial Accounting Standards No. 133 -- "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The provisions
of this statement are effective for the Company's fiscal year ending August 31,
2000. Management does not believe that the impact of adopting this statement
will have a material impact on the Company's financial position or results of
operations.
In early 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP"). The SOP is effective for fiscal years beginning after
December 15, 1998 and will require costs of start-up activities and organization
costs to be expensed as incurred. Any such unamortized costs on the date of
adoption of the new standard will be written off and reflected as a cumulative
effect of a change in accounting principle. As of August 31, 1998, the Company
had total deferred organizational costs of approximately $850,000. The Company
intends to adopt this new requirement in fiscal 2000.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company is exposed to interest rate risk due to changes in interest
rates, primarily in the United States. The Company's policy is to manage
interest rates through the use of a combination of fixed and floating rate debt.
The Company currently does not use any derivative financial instruments to
manage its exposure to interest rate risk. The table below provides information
about the Company's future maturities of principal for outstanding debt
instruments and fair value at August 31, 1998. All instruments described are
non-trading instruments ($ in millions).
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Long-term Debt
Fixed rate $6.2 $7.5 $4.5 $12.8 $10.1 $40.2 $81.3 $84.0
Average interest rate 6.9% 7.0% 6.7% 7.2% 6.7% 6.7% 6.8% --
Variable rate $3.1 $3.2 $4.4 $ 3.3 $ 3.4 $ 2.3 $19.7 $19.7
Average interest rate 7.6% 7.6% 7.7% 7.6% 7.6% 7.7% 7.6%
- --
Short-term Debt
Variable rate $20.9 -- -- -- -- -- $20.9 $20.9
Average interest rate 7.3% -- -- -- -- -- 7.3% --
Foreign Currency Risks
Although the majority of the Company's transactions are in U.S.
dollars, the Company does have certain of its subsidiaries which conduct their
operations in various foreign currencies. The Company currently does not use any
off-balance sheet hedging instruments to manage its risks associated with its
operating activities conducted in foreign currencies unless that particular
operation enters into a contract in a foreign currency which is different than
the local currency of the particular operation. In limited circumstances and
when considered appropriate, the Company will utilize forward exchange contracts
to hedge the anticipated purchases and/or sales. The Company has historically
used these instruments primarily in the buying and selling of certain pipe
bending machines. The Company attempts to minimize its exposure to foreign
currency fluctuations by matching its revenues and expenses in the same currency
for its contracts. As of August 31, 1998, the Company does not have any
outstanding forward exchange contracts. See Notes 1 and 16 of Notes to the
Consolidated Financial Statements.
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants......................................23
Consolidated Balance Sheets as of August 31, 1997 and 1998...............24 - 25
Consolidated Statements of Income for the years ended
August 31, 1996, 1997 and 1998..............................................26
Consolidated Statements of Shareholders' Equity for the years
ended August 31, 1996, 1997 and 1998........................................27
Consolidated Statements of Cash Flows for the years
ended August 31, 1996, 1997 and 1998...................................28 - 29
Notes to Consolidated Financial Statements...............................30 - 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of The Shaw Group Inc.:
We have audited the accompanying consolidated balance sheets
of The Shaw Group Inc. (a Louisiana corporation) and subsidiaries as of August
31, 1997 and 1998, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of The Shaw
Group Inc. and subsidiaries as of August 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP /s/ Hannis T. Bourgeois,L.L.P.
- ------------------------ -------------------------------
Arthur Andersen LLP Hannis T. Bourgeois,L.L.P.
New Orleans, Louisiana Baton Rouge, Louisiana
October 22, 1998
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of August 31, 1997 and 1998
(Dollars in thousands)
ASSETS
1997 1998
---- ----
Current assets:
Cash and cash equivalents $ 4,358 $ 3,743
Accounts receivable, net 84,167 140,631
Receivables from unconsolidated entity 1,453 1,758
Inventories 70,310 65,861
Cost and estimated earnings in excess of billings
on uncompleted contracts 3,236 19,797
Prepaid expenses 2,352 4,948
Deferred income taxes 2,855 4,697
Other current assets 2,615 9,559
Current assets of discontinued operations 1,956 --
-------- -------
Total current assets 173,302 250,994
Investment in unconsolidated entity 4,005 3,965
Property and equipment:
Transportation equipment 4,893 3,153
Furniture and fixtures 8,331 10,756
Machinery and equipment 46,637 65,158
Buildings and improvements 22,770 32,920
Land 3,973 5,923
-------- -------
86,604 117,910
Less: Accumulated depreciation (17,705) (25,050)
-------- -------
68,899 92,860
Goodwill, net of accumulated amortization of $493
and $1,430 at August 31, 1997 and 1998, respectively 11,100 33,356
Assets of discontinued operations 1,466 --
Other assets 3,687 8,669
-------- --------
$262,459 $389,844
======== ========
(Continued)
The accompanying notes are an integral part of these statements.
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of August 31, 1997 and 1998
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1998
Current liabilities:
Outstanding checks in excess of bank balance $ 676 $ 4,009
Accounts payable 30,713 45,307
Accrued liabilities 8,622 24,831
Current maturities of long-term debt 6,392 9,314
Revolving lines of credit 29,146 20,898
Deferred revenue-prebilled 3,582 1,813
Advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts 834 14,367
Current liabilities of discontinued operations 380 --
------- -------
Total current liabilities 80,345 120,539
Long-term debt, less current maturities 39,039 91,715
Deferred income taxes 5,260 6,895
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, no par value,
50,000,000 shares authorized;
19,151,309 and 19,942,782 shares issued, respectively;
12,488,393 and 13,279,866 shares outstanding, respectively 104,870 119,360
Retained earnings 39,773 58,950
Cumulative translation adjustments -- (420)
Unearned restricted stock compensation -- (367)
Treasury stock, 6,662,916 shares (6,828) (6,828)
-------- -------
Total shareholders' equity 137,815 170,695
-------- -------
$262,459 $389,844
======== =======
The accompanying notes are an integral part of these statements.
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended August 31, 1996, 1997 and 1998
(Dollars in thousands, except per share amounts)
1996 1997 1998
---- ---- ----
Income:
Sales $248,969 $ 335,734 $ 501,638
Cost of sales 208,473 271,759 422,057
------- --------- ---------
Gross profit 40,496 63,975 79,581
General and administrative expenses 26,569 37,377 48,503
------- --------- ---------
Operating income 13,927 26,598 31,078
Interest expense (4,823) (6,778) (8,471)
Other income, net 923 155 698
------- --------- ---------
(3,900) (6,623) (7,773)
------- --------- ---------
Income before income taxes 10,027 19,975 23,305
Provision for income taxes 3,215 6,112 7,033
------ --------- --------
Income from continuing operations
before earnings (losses) from unconsolidated entity 6,812 13,863 16,272
Earnings (losses) from unconsolidated entity 103 437 (40)
------ --------- --------
Income from continuing operations 6,915 14,300 16,232
Discontinued operations, net of taxes:
Operating results (298) (252) 298
Net gain on disposals -- -- 2,647
------ --------- --------
Net income $6,617 $ 14,048 $ 19,177
====== ========= ========
Basic:
Income per common share:
Continuing operations $ .71 $ 1.23 $ 1.29
Discontinued operations (.03) (.02) .23
------ --------- --------
Net income per common share $ .68 $ 1.21 $ 1.52
====== ========= ========
Diluted:
Income per common share:
Continuing operations $ .69 $ 1.20 $ 1.26
Discontinued operations (.03) (.02) .23
------ --------- --------
Net income per common share $ .66 $ 1.18 $ 1.49
====== ========= ========
The accompanying notes are an integral part of these statements.
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended August 31, 1996, 1997 and 1998
(Dollars in thousands)
Unearned Cumulative Total
Common Stock Restricted Stock Treasury Stock Translation Retained Shareholders
------------ --------------
Shares Amount Compensation Shares Amount Adjustments Earnings Equity
------ ------ ------------ ------ ------ ----------- -------- ------
Balance, September 1, 1995 15,606,924 $ 45,871 $ -- 6,662,916 $ (6,828) $ -- $20,313 $59,356
Net income -- -- -- -- -- -- 6,617 6,617
Shares issued to acquire Word 385,000 3,402 -- -- -- -- -- 3,402
Shares issued to acquire APP 541,177 6,725 -- -- -- -- -- 6,725
Exercise of options 45,125 281 -- -- -- -- -- 281
Pooled entity:
Net loss not included in
reporting period -- -- -- -- -- -- (906) (906)
Share sale 40,873 570 -- -- -- -- -- 570
------------------------------------------------------------------------------------------------
Balance, August 31, 1996 16,619,099 56,849 -- 6,662,916 (6,828) -- 26,024 76,045
Net income -- -- -- -- -- -- 14,048 14,048
Shares issued in public
offering 2,398,000 46,986 -- -- -- -- -- 46,986
Shares issued to acquire
certain assets of MERIT
Industrial Constructors, Inc.
and certain of its affiliates 62,500 1,266 -- -- -- -- -- 1,266
Exercise of options 71,710 433 -- -- -- -- -- 433
Pooled entity:
Purchase of treasury stock -- (664) -- -- -- -- -- (664)
Distributions to members of
Freeport Properties, L.C. -- -- -- -- -- -- (168) (168)
Net loss not included in
reporting period -- -- -- -- -- -- (131) (131)
-----------------------------------------------------------------------------------------------
Balance, August 31, 1997 19,151,309 104,870 -- 6,662,916 (6,828) -- 39,773 137,815
Net income 19,177 19,177
Restricted stock compensation 30,000 581 (581) -- -- -- -- --
Amortization of restricted stock
compensation 214 -- -- -- -- 214
Shares issued to acquire Bagwell 645,000 13,033 -- -- -- -- -- 13,033
Exercise of options 116,473 876 -- -- -- -- -- 876
Translation adjustments -- -- -- -- (420) -- (420)
---------- -------- ------- --------- --------- -------- ------- --------
Balance, August 31, 1998 19,942,782 $119,360 $ (367) 6,662,916 $ (6,828) $ (420) $58,950 $170,695
========== ======== ======= ========= ========= ======== ======= ========
The accompanying notes are an integral part of these statements.
THE SHAW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended August 31, 1996, 1997 and 1998
(Dollars in thousands)
1996 1997 1998
---- ---- ----
Cash flows from operating activities:
Net income $ 6,617 $14,048 $19,177
Net loss not included in reporting period (906) ( 132) --
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,992 7,358 10,280
Provision (benefit) for deferred
income taxes (2,803) 2,231 40
(Earnings) losses from unconsolidated
entity (103) (437) 40
Transaction losses 864 6 702
Gain on sale of marketable securities (855) -- --
Gain on sale of discontinued operations -- -- (3,010)
Other (251) 290 246
Changes in assets and liabilities, net of effects of acquisitions:
(Increase) in receivables (16,165) (2,817) (38,291)
(Increase) decrease in cost and estimated
earnings in excess of billings on uncompleted contracts 1,307 (1,050) (7,530)
(Increase) decrease in inventories (20,570) (5,833) 4,211
(Increase) decrease in other current assets (494) (1,847) 848
(Increase) decrease in prepaid expenses (1,480) 257 (2,708)
(Increase) decrease in other assets (851) 311 (1,317)
Increase in accounts payable 9,306 274 5,842
Increase (decrease) in deferred
revenue--prebilled 938 1,742 (1,769)
Increase (decrease) in accrued
liabilities (2,295) (3,467) 1,660
Increase (decrease) in advanced billings and billings in
excess of cost and estimated earnings on uncompleted
contracts 781 (3,330) 8,355
-------- -------- ------
Net cash provided by (used in)
operating activities (21,968) 7,604 (3,224)
Cash flows from investing activities:
Investment in unconsolidated entity 95 (1,647) --
Investment in subsidiaries, net of
cash received (9,516) (11,651) (27,738)
Proceeds from sale of property and
equipment 1,703 622 3,167
Proceeds from sale of discontinued operations -- -- 1,208
Purchase of property and equipment (18,478) (15,832) (14,616)
Purchase of marketable securities (1,433) -- --
Proceeds from sale of marketable
securities 2,288 -- --
Payment (issuance) of note receivable to a
related party (625) 87 --
--------- -------- -------
Net cash used in investing activities (25,966) (28,421) (37,979)
(Continued)
The accompanying notes are an integral part of these statements.
1996 1997 1998
---- ---- ----
Cash flows from financing activities:
Net proceeds (repayments) from
revolving credit agreement 31,440 (23,890) (10,182)
Proceeds from issuance of debt 22,244 15,031 62,154
Repayment of debt and leases (5,788) (13,107) (13,817)
Increase (decrease) in outstanding
checks in excess of bank balance 2,324 (2,414) 1,725
Distributions to members of Freeport Properties, L.C. -- (168) --
Purchase of treasury stock -- (664) --
Issue common stock 852 47,419 876
------- -------- -------
Net cash provided by financing activities 51,072 22,207 40,756
Effects of exchange rate changes
on cash (954) -- (168)
------- ------- -------
Net increase (decrease) in cash 2,184 1,390 (615)
Cash and cash equivalents--beginning
of year 784 2,968 4,358
------- -------- -------
Cash and cash equivalents--end of year $ 2,968 $ 4,358 $ 3,743
====== ======= =======
Supplemental disclosures:
Cash payments for:
Interest $ 4,865 $ 6,663 $ 7,048
======= ======= =======
Income taxes $ 7,713 $ 5,784 $ 2,873
====== ======= ========
Noncash investing and financing activities:
Property and equipment acquired through
issuance of debt $ 15 $ 83 $ 85
======= ======= =======
Investment in subsidiaries acquired
through issuance of common stock $10,127 $ 1,266 $13,033
======= ======= =======
Investment in unconsolidated entity
through reduction in receivables $ 89 $ -- $ --
======= ======= =======
Other current assets acquired through issuance
of debt $ 2,132 $ 134 $ --
======== ======= =======
Purchase of inventory and payment of liabilities through
cancellation of notes receivable to a related party $ -- $ 538 $ --
======== ======= =======
Investment in subsidiaries acquired through issuance
of debt $ -- $ -- $ 4,702
======== ======= =======
Sale of subsidiaries financed through issuance of
notes receivables $ -- $ -- $ 8,792
======== ======= =======
The accompanying notes are an integral part of these statements.
THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of The Shaw
Group Inc. (a Louisiana corporation) and its wholly-owned subsidiaries
(collectively, the Company). All material intercompany accounts and transactions
have been eliminated in these financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Nature of Operations
The Company is a supplier of industrial piping systems for new
construction and retrofit projects throughout the world, primarily for customers
in the electric power, refining, chemical, petrochemcial, and oil and gas
industries. The Company offers comprehensive design and engineering services,
piping system fabrication, industrial construction and maintenance services,
manufacturing and sale of specialty pipe fittings and design and fabrication of
pipe support systems. The Company's operations are conducted primarily through
wholly-owned subsidiaries and one joint venture.
Cash and Cash Equivalents
For purposes of reporting cash flows, all highly liquid investments
with a maturity of three months or less when purchased are cash equivalents. At
August 31, 1997 and 1998, the Company included in cash and cash equivalents
approximately $1,100,000 and, $1,200,000 respectively, the proceeds of which
came from industrial development bond financing. These funds are required to be
invested in short-term marketable securities until used for other capital
improvements.
Accounts Receivable and Credit Risk
The Company's customers include major multi-national construction and
engineering firms and industrial corporations. Work is performed under contract
and the Company believes that its credit risk is minimal. The Company grants
short-term credit to its customers.
At August 31, 1997 and 1998, accounts receivable includes approximately
$7,000,000 and $18,000,000, respectively, of receivables and claims due under
contracts which are subject to contract renegotiations or legal proceedings and
which are recorded at estimated net realizable value. At August 31, 1998,
contracts with five customers made up the $18,000,000 balance discussed above.
Management believes that the ultimate resolution of these disputes will not have
a significant impact on future results of operations.
Allowance for Uncollectable Receivables and Contract Adjustments
The allowance for uncollectable receivables and contract adjustments of
$2,800,000 and $7,100,000 at August 31, 1997 and 1998, respectively, is based on
management's estimate of the amount expected to be uncollectable considering
historical experience and the information management is able to obtain regarding
the financial condition of significant customers. Net provisions to this
allowance were not material during fiscal 1997 and were approximately $1,700,000
in fiscal 1998. During fiscal 1998, the Company acquired subsidiaries with
allowances of approximately $2,600,000.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) or weighted-average cost
methods.
Property and Equipment
Property and equipment are recorded at cost. Additions and improvements
are capitalized. Maintenance and repair expenses are charged to income as
incurred. The cost of property and equipment sold or otherwise disposed of and
the accumulated depreciation thereon are eliminated from the property and
related accumulated depreciation accounts, and any gain or loss is credited or
charged to income.
For financial reporting purposes, depreciation is provided by utilizing
the straight-line method over the following estimated useful service lives:
Transportation equipment 5-15 Years
Furniture and fixtures 3-7 Years
Machinery and equipment 3-18 Years
Buildings and improvements 8-40 Years
Income Taxes
The Company provides for deferred taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes," which
requires an asset and liability approach for measuring deferred tax assets and
liabilities due to temporary differences existing at year end using currently
enacted tax rates.
Revenues
The Company recognizes revenue using the following methods:
Pipe fabrication contracts - For certain operating units, revenues are
recognized upon completion of individual spools of production. A spool consists
of piping materials and associated shop labor to form a prefabricated unit
according to contract specifications. Spools are generally shipped to job site
locations when complete. During the fabrication process, all direct and indirect
costs related to the fabrication process are capitalized as work in progress.
For other operating units, revenues are recognized based on the
percentage of labor incurred to date to total estimated contract labor for each
contract or contract costs incurred to date, excluding the cost of any purchased
but uninstalled materials, compared with total estimated contract costs.
Project construction services - Revenues are measured under the
percentage of completion method based primarily on contract costs incurred to
date, excluding the costs of any purchased but uninstalled materials, compared
with total estimated contract costs. Revenues from cost-plus-fee contracts are
recognized on the basis of costs incurred during the period plus the fee earned,
measured by the cost-to-cost method.
Pipe fittings, manufacturing operations and other services - Revenues
are recognized on product sales at the time of shipment or upon completion of
the services.
Provisions for estimated losses for uncompleted contracts are made in
the period in which such losses are identified. Other changes, including those
arising from contract penalty provisions and final contract settlements, are
recognized in the period in which the revisions are identified. To the extent
that these adjustments result in a reduction or elimination of previously
reported profits, the Company would report such a change by recognizing a charge
against current earnings, which might be significant depending on the size of
the project or the adjustment.
Goodwill
Goodwill represents the excess of the purchase price of acquisitions
over the fair value of the net assets acquired. Such excess costs are being
amortized on a straight-line basis over a twenty-year period. The Company
periodically assesses the recoverability of the unamortized balance based on
expected future profitability and undiscounted future cash flows of the
acquisitions and their contribution to the overall operation of the Company.
Financial Instruments, Forward Contracts - Non-Trading Activities
When considered appropriate, the Company utilizes forward foreign
exchange contracts to hedge the anticipated purchases and sales of certain pipe
bending machines. Financial instruments are designated as a hedge at inception
where there is a direct relationship to the price risk associated with the
Company's future sales and purchases. Hedges of anticipated transactions are
accounted for under the deferral method with gains and losses on these
transactions recognized in revenues when the hedged transaction occurs. Gains
and losses on the early termination or maturity of forward contracts designated
as hedges are deferred and included in revenues in the period the hedged
transaction is recorded. If the direct relationship to price risk ceases to
exist, the difference in the carrying value and fair value of a forward contract
is recognized as a gain or loss in revenues in the period the direct
relationship ceases to exist. Future changes in fair value of the forward
contracts are recognized as gains or losses in revenues in the period of change.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements in order to conform to current reporting practices.
New Accounting Standards
In February 1997, Statement of Financial Accounting Standards No. 128
- -- "Earnings Per Share" ("SFAS 128") was issued which establishes standards for
computing and presenting earnings per share ("eps"). Under SFAS 128, primary eps
is replaced with basic eps. Basic eps is computed by dividing income applicable
to common shares by the weighted average shares outstanding; no dilution for any
potentially convertible shares is included in the calculation. Fully diluted
eps, now called diluted eps, is still required; however, when applying the
treasury stock method, the average stock price is used rather than the greater
of the average or closing stock price for the period. SFAS 128 was effective for
financial statements issued for periods ending after December 15, 1997, and the
Company has restated its eps calculations for all periods presented.
In early 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP"). The SOP is effective for fiscal years beginning after
December 15, 1998 and will require costs of start-up activities and organization
costs to be expensed as incurred. Any such unamortized costs on the date of
adoption of the new standard will be written off and reflected as a cumulative
effect of a change in accounting principle. As of August 31, 1998, the Company
had total deferred organizational costs of approximately $850,000. The Company
intends to adopt this new requirement in fiscal 2000.
Note 2--Public Offering of Common Stock
On December 23, 1996, the Company closed the sale of 2,000,000 shares
of its common stock, no par value (the "Common Stock"), in an underwritten
public offering at a price of $21.00 per share less underwriting discounts and
commissions. On January 10, 1997, the underwriters for such offering exercised
an option to purchase an additional 398,000 shares of Common Stock from the
Company pursuant to such terms to cover over-allotments. The net proceeds to the
Company, less underwriting discounts and other expenses of the offering, totaled
approximately $47,000,000 and were used to pay down amounts outstanding under
the Company's revolving line of credit. The Company's revolving line of credit
has been used to provide working capital, as well as to fund fixed asset and
subsidiary acquisitions.
Note 3--Acquisitions
On January 16, 1996, the Company's newly formed, wholly-owned
subsidiary, Word Industries Fabricators, Inc., purchased certain assets and
assumed certain liabilities from Word Industries Pipe Fabricating, Inc. (WIPF),
TS&M Corporation and T.N. Word and certain of his family members (collectively,
Word). The acquisition was completed through the issuance of 385,000 shares of
the Company's common stock valued at $3,442,000 and cash of $503,000.
Acquisition costs of $246,000 were incurred by the Company. The purchase method
was used to account for the acquisition. The purchase price has been allocated
to the estimated fair value of assets acquired and liabilities assumed at the
date of acquisition as follows (in thousands):
Property and equipment $5,405
Notes payable (294)
Accrued liabilities (306)
Deferred income taxes (614)
-----
Purchase price $4,191
======
The operating results of Word have been included in the consolidated
statements of income from the date of acquisition.
Effective March 1, 1996, the Company purchased all of the outstanding
capital stock of Alloy Piping Products, Inc. (APP), a leading U.S. manufacturer
of specialty stainless and carbon steel pipe fittings and other stainless pipe
products, and the assets of an APP-related entity, Speedline, a Louisiana
partnership (Speedline). The acquisition was completed through the issuance of
541,177 shares of the Company's common stock valued at $6,765,000 and cash of
$11,280,000. Acquisition costs of $366,000 were incurred by the Company. The
purchase method was used to account for the acquisitions. The purchase price has
been allocated to the estimated fair value of assets purchased and liabilities
assumed at the date of acquisition as follows (in thousands):
Accounts receivable $ 6,751
Inventory 16,175
Other current assets 268
Property and equipment 13,001
Other assets 222
Revolving line of credit (4,855)
Notes payable (5,789)
Accounts payable and accrued liabilities (8,117)
Deferred income taxes (2,205)
-------
Purchase price (net of cash received of $2,960) $15,451
=======
The operating results of APP have been included in the consolidated
statements of income from the effective date of acquisition.
In addition, in connection with the Company's acquisition of APP and
Speedline, options to acquire an aggregate of 85,000 shares of the Company's
Common Stock at an exercise price of $19.50 per share were issued. The options
are exercisable in 25% increments on each April 5, 1997, 1998, 1999 and 2000
based upon continued employment of the recipients by the Company. At August 31,
1998, options to acquire 35,000 of these shares remain outstanding.
Effective October 1, 1996, the Company acquired all of the outstanding
capital stock of Pipe Shields Incorporated (Pipe Shields), an industrial pipe
insulation company located in Vacaville, California, for approximately
$2,500,000 in cash, net of cash received. The purchase method was used to
account for the acquisition. The excess of cost over the estimated fair value of
the assets acquired (goodwill) was approximately $2,000,000 and is being
amortized on a straight-line basis over 20 years. The operating results of Pipe
Shields have been included in the consolidated statements of income of the
Company from the effective date of the acquisition. The pro-forma effect of the
acquisition of Pipe Shields, had it occurred on September 1, 1995, is not
material to the operations of the Company.
On January 27, 1997, the Company completed the acquisition of NAPTech,
Inc., a fabricator of industrial piping systems and engineered piping modules
located in Clearfield, Utah. The Company issued 432,881 shares of its Common
Stock in exchange for NAPTech, Inc. and the 335,000 square foot facility that
NAPTech, Inc. had leased from a related entity, Freeport Properties, L.C.
(Freeport). The acquisition was accounted for using the pooling-of-interests
method; accordingly, the Company's financial information for all prior periods
presented herein has been restated to include financial information of NAPTech,
Inc. and Freeport, (collectively, NAPTech). Summarized results of operations of
the separate companies for the period from September 1, 1996 through January 27,
1997, the date of acquisition, are as follows (in thousands):
Shaw NAPTech
---- -------
Sales $106,555 $24,482
======== =======
Net income $ 2,505 $ 584
======== =======
Net income of the combined companies for the fiscal year ended August 31,
1997 has been reduced by approximately $700,000 of merger and business
combination costs of the NAPTech acquisition.
Because the fiscal periods of the Company and NAPTech were not the
same, the 1996 fiscal year financial statements of NAPTech were recast from the
twelve months ended March 31, 1996 to the twelve months ended June 30, 1996. As
a result, the following sales and losses of NAPTech have been excluded from the
respective statements of income (in thousands):
Fiscal Period Months Excluded Sales Net Losses
------------- --------------- ----- ----------
1996 April, May and June, 1995 $3,811 $906
====== ====
1997 July and August, 1996 $5,194 $132
====== ====
Effective February 1, 1997, the Company purchased all of the
outstanding capital stock of United Crafts, Inc., now named Shaw Constructors,
Inc. ("Shaw Constructors"), an industrial construction and maintenance company
based in Baton Rouge, Louisiana, for cash of $8,000,000. Acquisition costs of
approximately $192,000 were incurred by the Company. The purchase method was
used to account for the acquisition. Goodwill of approximately $4,800,000 is
being amortized on a straight-line basis over 20 years. The estimated fair value
of the assets and liabilities of Shaw Constructors as of February 1, 1997 are as
follows (in thousands):
Accounts receivable $6,040
Property and equipment 2,992
Other assets 4,832
Accounts payable & accrued liabilities (3,502)
Advanced billings (1,277)
Notes payable (1,101)
Deferred income taxes (146)
------
Purchase price (net of cash received of $354) $7,838
======
The operating results of Shaw Constructors have been included in the
consolidated statements of income from the effective date of the acquisition.
On March 20, 1997, the Company, through a newly-formed, wholly-owned
subsidiary, completed the purchase of certain assets and the assumption of
certain liabilities of MERIT Industrial Constructors, Inc. (MERIT), an
industrial construction and maintenance firm based in Baton Rouge, Louisiana,
and certain of its affiliates. Total consideration paid by the Company was
approximately $1,300,000 in cash (including acquisition costs), 62,500 shares of
the Company's Common Stock valued at approximately $1,300,000, options to
purchase 25,000 shares of the Company's Common Stock at $20.25 per share, as
well as the assumption of approximately $340,000 of debt. The purchase method
was used to account for the acquisition. Goodwill of approximately $1,100,000 is
being amortized on a straight-line basis over 20 years. The operating results
related to the acquired MERIT assets have been included in the consolidated
statements of income from the date of the acquisition. The pro-forma effect of
the acquisition of the MERIT assets, had it occurred on September 1, 1995, is
not material to the operations of the Company.
On October 8, 1997, the Company purchased the capital stock of Pipework
Engineering and Developments Limited (PED), a pipe fabrication company in
Wolverhampton, United Kingdom, for $539,000 in cash, net of cash received, and
notes payable to former stockholders of $1,078,000. Acquisition costs of
approximately $160,000 were incurred by the Company. The purchase method was
used to account for the acquisition. Goodwill, which is being amortized over 20
years using the straight-line method, was approximately $1,600,000. The
operating results of PED have been included in the consolidated statements of
income of the Company from the date of acquisition. The pro-forma effect of the
acquisition of PED, had it occurred on September 1, 1996, is not material to the
operations of the Company.
On November 14, 1997, the Company purchased all of the capital stock or
substantially all of the assets of the principal operating businesses of
Prospect Industries plc (Prospect) of Derby, United Kingdom, for approximately
$14,600,000 in cash, net of cash received. Acquisition costs of approximately
$2,000,000 were incurred by the Company. Excluded from the purchase price is
$1,438,000, which represents the fair value of the assets and liabilities of a
discontinued operation, CBP Engineering Corp. (CBP). The sale of CBP was
completed in 1998 at no gain or loss. Prospect, a mechanical contractor and
provider of turnkey piping systems serving the power generating and process
industries worldwide, operated through several wholly-owned subsidiaries
including Connex Pipe Systems, Inc. (Connex), a piping systems fabrication
business located in Troutville, Virginia; Aiton Australia Pty Limited (Aiton
Australia), a piping systems, boiler refurbishment and project management
company based near Sydney, Australia; and Prospect Engineering Limited (PEL), a
mechanical contractor and a provider of turnkey piping systems located in Derby,
United Kingdom. Prospect also owned a 66% interest in Inflo Control Systems
Limited (Inflo), a manufacturer of boiler steam leak detection, acoustic mill
and combustion monitoring equipment and related systems. Under the terms of the
acquisition agreement, the Company acquired all of the outstanding capital stock
of Prospect Industries Overseas Limited, a United Kingdom holding company that
held the entire ownership interest in Connex and CBP, all of the capital stock
of Aiton Australia and certain assets of PEL, as well as Prospect's entire
ownership interest in Inflo. The Company also assumed certain liabilities of PEL
and Prospect relating to its employees and pension plans including approximately
$4,100,000 of costs related to the Company's plan to reduce the workforce at
Prospect. These costs relate to amounts due to employees under statutory and
contractual severance entitlements. As of August 31, 1998, approximately
$2,400,000 had been paid to former employees with the remaining $1,700,000
expected to be paid during the first half of fiscal 1999, upon completion of the
Company's workforce reduction plan. The purchase method was used to account for
the acquisition. Goodwill, which is being amortized over 20 years using the
straight-line method, was approximately $4,600,000. The estimated fair value of
the assets acquired and liabilities assumed as of November 14, 1997 are as
follows (in thousands):
Accounts receivable $15,288
Inventories 2,087
Cost and estimated earnings in excess of billings on
uncompleted contracts 7,588
Property and equipment 11,339
Other assets 6,486
Outstanding checks in excess of bank balance (1,527)
Accounts payable and accrued liabilities (19,910)
Revolving line of credit (318)
Advanced billings and billings in excess of cost and
eastimated earnings on uncompleted contracts (4,456)
-------
Purchase price (net of cash received of $99) $16,577
=======
The operating results of the Prospect businesses have been included in
the consolidated statements of income from the date of the acquisition.
In connection with the Prospect acquisition, the Company incurred certain
contingent liabilities (see Note 11 of Notes to Consolidated Financial
Statements).
On January 15, 1998, the Company purchased all of the outstanding capital
stock of Lancas, C.A. (Lancas), a construction company in Punto Fijo, Venezuela
for approximately $2,600,000 in cash, net of cash received. The Company also
incurred approximately $100,000 of acquisition costs. Goodwill of approximately
$400,000 is being amortized over 20 years, using the straight-line method. The
purchase method was used to account for this acquisition. The operating results
of Lancas have been included in the consolidated statements of income from the
date of acquisition. The pro-forma effect of the acquisition of Lancas, had it
occurred on September 1, 1996, is not material to the operations of the Company.
On January 19, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Cojafex, B.V. of Rotterdam, Holland (Cojafex) for
approximately $8,500,000; $4,547,000 (net of cash received) of which was paid at
closing. The balance of the purchase price will be paid through December 31,
2003. Acquisition costs of approximately $60,000 were incurred by the Company.
Cojafex owns the technology for certain induction pipe bending machines used for
bending pipe and other carbon steel and alloy items for industrial, commercial
and agricultural applications, and using such technology, Cojafex designs,
engineers, manufactures, markets and sells such induction bending machines.
Goodwill, which is being amortized over 20 years using the straight-line method,
was approximately $8,500,000. The purchase method was used to account for this
acquisition. The operating results of Cojafex have been included in the
consolidated statements of income from the date of acquisition. The pro-forma
effect of the acquisition of Cojafex, had it occurred on September 1, 1996, is
not material to the operations of the Company.
On July 28, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Bagwell Brothers, Inc. and a subsidiary
(collectively, Bagwell). Total consideration paid was $1,600,000 cash and
645,000 shares of the Company's Common Stock valued at $13,033,000. The Company
also incurred $184,000 of acquisition costs. The purchase method was used to
account for the acquisition. Goodwill of approximately $10,300,000 is being
amortized on a straight-line basis over 20 years. The operating results of
Bagwell have been included in the consolidated statements of income from the
date of acquisition. The pro-forma effect of the acquisition of Bagwell, had it
occurred on September 1, 1996, is not material to the operations of the Company.
The following summarized unaudited income statement data reflects the
impact the Word, APP and Shaw Constructors acquisitions would have had on 1996;
the Shaw Constructors and Prospect acquisitions would have had on 1997; and the
Prospect acquisition would have had on 1998, if such acquisitions had taken
place at the beginning of the applicable fiscal year (in thousands, except per
share data):
Unaudited Pro-forma Results
for the Years Ended August 31,
1996 1997 1998
---- ---- ----
Gross revenue $321,990 $476,384 $ 531,329
======== ======== ==========
Income from continuing operations $ 7,262 $ 10,196 $ 16,193
======== ======== ==========
Basic earnings from continuing operations per common share $ .73 $ .88 $ 1.28
======== ======== ==========
Diluted earnings from continuing operations per common share $ .71 $ .86 $ 1.26
========= ======== ==========
Note 4--Inventories
The major components of inventories consist of the following (in
thousands):
August 31,
-------------------------------------------------------------------------------
1997 1998
--------------------------------- -----------------------------------
Weighted Weighted
Average FIFO TOTAL Average FIFO TOTAL
------- ---- ----- ------- ---- -----
Finished Goods $29,028 $ -- $29,028 $28,671 $ -- $28,671
Raw Materials 3,712 29,314 33,026 3,162 25,937 29,099
Work In Process 835 7,421 8,256 1,914 6,177 8,091
------- ------- ------- ------- ------- -------
$33,575 $36,735 $70,310 $33,747 $32,114 $65,861
======= ======= ======= ======= ======= =======
Note 5--Investment in Unconsolidated Entities
During the year ended August 31, 1997, the Company invested an
additional $1,647,000 in Shaw-Nass Middle East, W.L.L., the Company's Bahrain
joint venture (Shaw-Nass). There was no additional investment in fiscal 1996 or
1998. The Company owns 49% of Shaw-Nass and accounts for this investment on the
equity basis. As such, during the years ended August 31, 1996, 1997, and 1998,
the Company recognized earnings (losses) of $103,000, $437,000, and $(40,000),
respectively, from Shaw-Nass. No distributions have been received through August
31, 1998 from Shaw-Nass. As of August 31, 1997 and 1998, the Company had
outstanding receivables from Shaw-Nass totaling $1,453,000 and $1,758,000,
respectively. These receivables relate primarily to inventory and equipment sold
to Shaw-Nass. At August 31, 1998, the Company also had a note receivable from
Shaw-Nass for $436,000, included in other assets.
During 1996, 1997 and 1998, revenues of $270,000, $782,000, and $1,626,000
were recognized on sales of products from the Company to Shaw-Nass. The
Company's 49% of profit on these sales was eliminated. At August 31, 1998,
undistributed earnings of Shaw-Nass included in the consolidated retained
earnings of the Company amounted to approximately $294,000.
Note 6--Long-Term Debt
Long-term debt consisted of: August 31,
1997 1998
---- ----
(in thousands)
Notes payable to insurance companies; variable interest rates based on 30-day
commercial paper rates plus 190 to 235 basis points ranging from 7.41% to
7.85% as of August 31, 1998; payable in monthly installments based on
amortization over the respective note lives; maturing from 2001 to 2006;
secured by property and equipment with an approximate net book value of
$23,415,000 as of August 31, 1998 and guaranties by the Company
and certain subsidiaries of the Company $ 17,714 $ 13,638
Note payable to a bank; interest payable quarterly based upon London Interbank
Offering Rate (LIBOR) plus 1.6%; payable in 28 quarterly principal
installments of $264,286 with remaining balance due in 2003; secured by
equipment with an approximate net book value of $9,233,000 as
of August 31, 1998 6,343 5,286
South Carolina Revenue Bonds payable; principal due in 2005; interest paid
monthly accruing at a variable rate of 5.38% as of August 31, 1998;
secured by $4,000,000 letter of credit 4,000 4,000
Note payable to a bank; variable interest rate based upon London Interbank
Offering Rate (LIBOR) plus 1.4%; payable in 28 quarterly principal
installments of $142,857 through March 25, 2004 plus interest; secured by
equipment with an approximate net book value of $2,597,000 as of August 31,
1998 3,857 3,286
Notes payable to a bank; variable interest rate based upon London Interbank
Offering Rate (LIBOR) plus 85 to 200 basis points depending upon certain
financial ratios; 60 monthly principal payments of $50,000 and $36,233
through May 31, 2000 and November 15, 2001, respectively; secured by
property and equipment, accounts receivable and inventory 3,584 --
Mortgages payable to a bank; interest payable monthly at 8.38%; 95 monthly
payments of $9,850 and $26,935 with remaining balance due on June 1, 2002;
secured by real property with an approximate net book value of $2,350,000 and
deposits at financial institutions with an approximate value of $17,000 as of
August 31, 1998 3,276 3,107
Mortgage payable to an insurance company; variable interest rate based on
average weekly yield of 30 day commercial paper plus 2.35%; payable in 120
monthly installments of $39,934 through June 30, 2007, secured by land and
buildings with an approximate net book value of $1,851,000 as of August 31,
1998 3,263 3,036
Notes payable to employees relating to non-competition agreements; interest
payable monthly at 7.125% and 7%; monthly payments of $20,830 and $5,000
until April 2004 and August 2000 respectively; unsecured; see Note 15 -
Related Party Transactions 1,740 1,274
August 31,
1997 1998
---- ----
(in thousands)
Mortgage payable to a bank; interest payable monthly at 8.63%; 59 monthly
installments of $7,520 with remaining balance due on November 7, 2001;
secured by real property with an approximate net book value of $677,000 as of
August 31, 1998 572 524
Senior secured notes of $20,000,000 and $40,000,000 payable primarily to
insurance companies; interest payable semi-annually at 6.44% and 6.93%
respectively; payable in seven annual principal installments of $2,857,143
beginning May, 1999 and $5,714,286 beginning May 2002, respectively; rank in
pari passu with the Company's U. S. revolving credit facility (see Note 7
Revolving Lines of Credit); secured by domestic accounts receivable,
inventory, intangible assets, and bank deposits with an approximate net book
value of $200,000,000 as of August 31, 1998 -- 60,000
Notes payable to former owners in conjunction with an acquisition; payable in
six annual installments of $750,000 (including interest imputed at 6.56%)
through December 31, 2003; secured by the stock of the acquired subsidiary -- 3,624
Note payable to a bank; interest payable quarterly at 7.23%; 28 quarterly
payments of $51,877 through April 1, 2005; secured by equipment with an
approximate net book value of $1,006,000 as of August 31, 1998 -- 1,100
Notes payable to employees in conjunction with an acquisition; interest payable
semi-annually at 7.00%; payable on April 30th or October 31st of any year
with balance due no later than April 30, 2002; secured by letters of credit
totaling $1,128,000 as of August 31, 1998; see Note 15 - Related Party
Transactions -- 1,078
Other mortgages payable; interest rates at 8%; payable in monthly installments
through February and July, 1998; secured by real property 567 --
Other notes payable; interest rates ranging from 4.65% to 18.3%; payable in
monthly installments based on amortization over the respective note
lives; maturing from 1999 through 2003 515 1,076
------- -------
Total debt 45,431 101,029
Less: current maturities
(6,392) (9,314)
--------- -------
Total long-term debt $ 39,039 $ 91,715
========= ========
Annual maturities of long-term debt during each year ending August 31, are
as follows (in thousands):
1999 $ 9,314
2000 10,713
2001 8,850
2002 16,092
2003 and thereafter 56,060
---------
$ 101,029
=========
Certain of the debt agreements contain restrictive covenants which the
Company is required to meet including financial ratios and minimum capital
levels. As of August 31, 1998 the Company was in compliance with the covenants
or had obtained the required waivers.
The estimated fair value of long-term debt approximated its carrying value,
based on borrowing rates currently available to the Company for notes with
similar terms and average maturities, as of August 31, 1997. As of August 31,
1998, the estimated fair value of long-term debt is approximately $103,700,000.
Note 7--Revolving Lines Of Credit
In May 1998, the Company entered into a three-year revolving credit
facility with its U.S. banks, which allows the Company to borrow up to
$100,000,000 at an interest rate not to exceed 2% over the London Interbank
Offering Rate (LIBOR) or .75% over the Prime rate. The index used to determine
the interest rate is selected by the Company and the spread over the index is
dependent upon certain financial ratios of the Company. This agreement replaced
a $77,000,000 secured revolving credit facility (at an interest rate based on
the same indices and spreads as the current agreement) and a $13,000,000
unsecured revolving credit facility. During fiscal 1997 and 1998, the maximum
amount outstanding under these revolving credit facilities was approximately
$66,198,000 and $87,873,000 respectively, and the average amount outstanding was
approximately $44,462,000 and $51,523,000 respectively, at weighted average
interest rates of 7.27% and 7.19% respectively. The new agreement expires May
15, 2001. The revolving credit facility ranks in pari passu with the Company's
Senior Secured Notes and is secured by the Company's domestic accounts
receivable, inventory, intangible assets and bank deposits.
In 1998, a foreign subsidiary of the Company initiated an overdraft
credit facility with a bank for up to (pound)3,000,000, with interest at the
bank's base rate plus 1.25%. The facility is secured by the assets of the
subsidiary and a (pound)10,000,000 limited guarantee given by the Company. The
facility expires December 17, 1998. The outcome of the negotiations to renew or
replace this overdraft credit facility is not expected to have any material
adverse effect on the future operations of the Company.
Note 8--Income Taxes
A summary of net deferred taxes is as follows (in thousands):
August 31,
---------------------------
1997 1998
---- ----
Deferred tax assets $ 4,165 $ 6,036
Deferred tax liabilities 6,570 8,234
------- -------
Net deferred taxes $ 2,405 $ 2,198
======= =======
The significant components of net deferred taxes are as follows (in
thousands):
August 31,
-----------------------------
1997 1998
---- ----
Assets:
Tax basis of inventory in excess of book basis $ 926 $ 946
Receivable reserves not currently deductible 1,008 1,437
Self insurance reserves not currently deductible 439 667
Net operating loss and tax credit carry forwards 1,259 1,895
Other expenses not currently deductible 533 1,091
-------- --------
Assets 4,165 6,036
Liabilities:
Excess of financial reporting over tax basis of assets 6,570 6,462
Excess of financial reporting over tax basis of receivables -- 1,067
Pension -- 705
-------- --------
Liabilities 6,570 8,234
-------- --------
Net deferred tax liabilities 2,405 2,198
Plus: Net deferred tax assets assumed in fiscal year
ending August 31, 1998 acquisitions -- 247
------- -------
$ 2,405 $ 2,445
======= =======
Income before provision for income taxes for the years ended August 31
was as follows (in thousands):
1996 1997 1998
---- ---- ----
Domestic $ 9,985 $17,544 $12,764
Foreign 42 2,431 10,541
------- ------- -------
Total $10,027 $19,975 $23,305
======= ======= =======
The provision for income taxes for the years ended August 31 was as
follows (in thousands):
1996 1997 1998
---- ---- ----
Current $ 5,860 $4,313 $6,874
Net operating loss utilized -- (890) (200)
Deferred (2,802) 2,230 40
State 157 459 319
------- ------ ------
Total $ 3,215 $6,112 $7,033
======= ====== ======
A reconciliation of Federal statutory and effective income tax rates
for the years ended August 31 was as follows:
1996 1997 1998
---- ---- ----
Statutory rate 34% 35% 35%
State taxes provided 1 1 1
Foreign income taxed at different rates (4) (4) (6)
Other 1 2 3
State tax credits -- (3) (3)
---- ---- ----
32% 31% 30%
== == ==
As of August 31, 1998, for Federal income tax return purposes, the
Company had approximately $3,300,000 of U.S. net operating loss carryforwards
available to offset future taxable income of its NAPTech subsidiary, subject to
an annual limitation of approximately $500,000. The carryforwards expire
beginning in 2008 through 2010. As of August 31, 1998, the Company's United
Kingdom operations had net operating loss carryforwards of approximately
(pound)3,000,000, which can be used to reduce future taxable income in the
United Kingdom. As of August 31, 1998, no benefit had been given to these losses
in the accompanying financial statements due to the current operating
environment in that market.
Unremitted foreign earnings reinvested abroad upon which deferred
income taxes have not been provided aggregated approximately $4,500,000 at
August 31, 1998. Due to the timing and circumstances of repatriation of such
earnings, if any, it is not practicable to determine the unrecognized deferred
tax liability relating to such amounts. Withholding taxes, if any, upon
repatriation would not be significant.
Note 9--Common Stock
The Company previously had two classes of common stock. The classes had
identical rights, preferences and powers except that Class A common stock had
certain voting preferences. In connection with the Company's initial public
offering in 1993, the Company's charter was amended to provide for only one
class of common stock; however, holders for at least four consecutive years
generally have voting preferences. Also, the amended charter authorizes the
Board of Directors to approve the issuance of preferred stock.
Note 10--Leases
Operating Leases - The Company leases certain offices, fabrication
shops, warehouse facilities, office equipment and machinery under non-cancelable
operating lease agreements which expire at various times and which require
various minimum rentals. The non-cancelable operating leases which were in
effect as of August 31, 1998 require the Company to make the following future
minimum lease payments:
For the year ending August 31 (in thousands):
1999 $ 3,226
2000 2,479
2001 1,698
2002 1,213
2003 and thereafter 3,421
-----
Total minimum lease payments $12,037
=======
The Company enters into short-term lease agreements for equipment
needed to fulfill the requirements of specific jobs. Any payments owed or
committed under these lease arrangements as of August 31, 1998 are not included
as part of total minimum lease payments. Rent expense for the fiscal years ended
August 31, 1996, 1997 and 1998 was $2,258,000, $3,587,000 and $7,902,000,
respectively.
Note 11--Commitments and Contingencies
The Company has posted letters of credit aggregating approximately
$6,800,000 as of August 31, 1998 to secure its performance under certain
contracts and insurance arrangements.
On August 11, 1997, the Company announced that Shaw Power Services,
Inc., its wholly-owned subsidiary, and China Baoyuan Industry and Trade Company,
a wholly-owned subsidiary of China National Nuclear Corporation, had signed a
letter of intent to establish joint-venture ownership of a piping systems
fabrication facility located in Dalian, Peoples Republic of China (P.R.C.). The
letter of intent has subsequently expired; at August 31, 1998, ultimate
completion of this joint-venture is uncertain.
During 1997 and 1998, the Company was self-insured for workers'
compensation claims in certain states up to certain policy limits. Claims in
excess of $250,000 per incident are insured by third party reinsurers. The
Company has accrued a liability for outstanding and incurred, but not reported,
claims based on historical experience totaling approximately $840,000 and
$780,000 at August 31, 1997 and 1998, respectively.
During 1997 and 1998, certain subsidiaries of the Company were
self-insured for health claims up to certain policy limits. Claims in excess of
$100,000 per incident and approximately $1,000,000 in the aggregate per year are
insured by third party reinsurers. The Company had accrued a liability of
$444,000 and $812,000, respectively, for outstanding and incurred, but not
reported, claims based on historical experience.
In connection with the acquisition of the principal operating
businesses of Prospect (see Note 3 of Notes to Consolidated Financial
Statements), the Company entered into several indemnification agreements in
favor of Prospect, PEL, and Prospect's principal lender (the Lender). The first
agreement required the Company to indemnify the Lender for any losses that the
Lender may incur in connection with certain letters of credit, bonds and
guarantees previously issued by the Lender relating to projects entered into by
PEL, Connex, CBP, Aiton Australia and other subsidiaries of Prospect. The
Company has determined that its exposure for indemnity under the agreement with
the Lender as of August 31, 1998 was approximately $1,900,000.
Additionally, the Company has agreed to indemnify each of Prospect, PEL
and the Lender with respect to certain preferential creditors of Prospect and
PEL. Immediately after the closing of the acquisition by the Company of
Prospect, the Lender had an administrative receiver appointed for Prospect, PEL
and the subsidiaries not acquired by the Company. The Company is obligated to
indemnify Prospect and PEL for preferential debts of PEL and Prospect in
connection with the receivership proceedings. Further, the Company has agreed to
indemnify the Lender for any loss the Lender may suffer as a result of the
Company's failure to perform its indemnity obligations under the Company's
agreement with Prospect and PEL concerning preferential creditors. As of August
31, 1998, the Company estimates the aggregate preferential debt of Prospect and
PEL to be approximately $4,000,000; this amount is included in accrued
liabilities in the accompanying financial statements.
Note 12--Earnings Per Common Share
In 1997, the Financial Accounting Standards Boards issued Statement of
Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 replaced
the previously reported primary and fully-diluted earnings per share with basic
and diluted earnings per share.
Basic earnings per common share were computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. Diluted earnings per common share were determined on the assumptions that
all dilutive stock options (see Note 14 of Notes to Consolidated Financial
Statements) were exercised and stock was repurchased using the treasury stock
method, at the average price for each year. The Company adopted SFAS No. 128
effective December 15, 1997. The following table sets forth the computation of
basic and diluted income from continuing operations per share:
For the years ended August 31,
1996 1997 1998
------------- ------------ ------------
Income from continuing operations (dollars in thousands) $ 6,915 $ 14,300 $ 16,232
========== =========== ============
Shares:
Weighted average number of common shares outstanding 9,757,610 11,632,068 12,616,997
Net effect of stock options 255,181 269,253 214,980
---------- ----------- ------------
Weighted average number of common shares outstanding,
plus assumed exercise of stock options 10,012,791 11,901,321 12,831,977
========== ========== ============
Income from continuing operations:
Basic earnings per share $ .71 $ 1.23 $ 1.29
========== =========== ===========
Diluted earnings per share $ .69 $ 1.20 $ 1.26
========== =========== ===========
Note 13--Major Customers and Export Sales
For the year ended August 31, 1996, sales to a customer accounting for
more than 10% of sales totaled approximately $27,200,000 and comprised 11% of
sales. For the years ended August 31, 1997 and 1998, no one customer had sales
to them exceeding 10% of sales. Because of the nature of the Company's business,
the significant customers vary between years.
For the years ended August 31, 1996, 1997 and 1998, the Company has
included as part of its international sales approximately $74,000,000,
$89,000,000 and $111,000,000, respectively, of exports from its domestic
facilities.
The following information presents the location of the Company's
subsidiaries producing sales and operating profits, and the location of the
assets of the Company (in thousands):
Years ended August 31,
1996 1997 1998
---- ---- ----
Sales:
United States $240,088 $322,658 $396,852
United Kingdom/Europe -- 6,838 59,964
Other International 8,881 6,238 44,822
-------- -------- --------
Total sales $248,969 $335,734 $501,638
======== ======== ========
Operating profit and income before income taxes:
United States $ 24,748 $33,915 $36,272
United Kingdom/Europe -- 456 3,837
Other International 688 2,583 7,754
-------- -------- --------
Total operating profit 25,436 36,954 47,863
Less:
General corporate expenses (10,586) (10,201) (16,087)
Interest expense (4,823) (6,778) (8,471)
-------- --------- --------
Income before income taxes $ 10,027 $ 19,975 $ 23,305
======== ======== ========
Identifiable assets:
United States $204,011 $239,998 $295,394
United Kingdom/Europe -- 2,521 51,559
Other International 14,492 19,940 42,891
-------- -------- --------
Total identifiable assets $218,503 $262,459 $389,844
======== ======== ========
With the acquisition of the Prospect and PED subsidiaries (see Note 3
of Notes to Consolidated Financial Statements), the Company has begun to have
additional intra-enterprise sales between geographical regions to other
wholly-owned subsidiaries at reasonable margins. These sales were immaterial in
fiscal 1996 and 1997. In fiscal 1998, these sales, which approximated
$1,600,000, have been eliminated from the amounts shown above.
Note 14--Employee Benefit Plans
The Company has a Stock Option Plan (the Plan) under which both
qualified and non-qualified options and restricted stock may be granted. As of
August 31, 1998, 596,692 shares of common stock are reserved for issuance under
the Plan. The Plan is administered by a committee of the Board, which selects
persons eligible to receive options and determines the number of shares subject
to each option, the vesting schedule, the exercise price, and the duration of
the option. The exercise price of any option granted under the Plan cannot be
less than 100% of the fair market value on the date of grant and its duration
cannot exceed 10 years. Only qualified options have been granted under the Plan.
Shares of restricted stock are subject to risk of forfeiture during the
vesting period. Restrictions related to these shares and the restriction terms
are determined by the committee. Holders of restricted stock have the right to
vote the shares. During the year ended August 31, 1998, the Company issued
30,000 shares of restricted stock which had a weighted average grant-date fair
value of $19.38. These shares remain outstanding as of August 31, 1998.
In connection with the Company's acquisition of FCI and PSSI during
1994, options to acquire 5,000 shares with an exercise price of $18.00 were
issued. In January 1995, the exercise price of these options was amended to
$5.875 per share, which was the fair market value of the common stock at the
date of such amendment. These options were exercised in 1998. In addition, in
1994 the Company granted options contingent upon the ability of FCI, PSSI and
certain other subsidiaries to generate consolidated net income in excess of
certain thresholds during the fiscal years ending August 31, 1995, 1996 and
1997. The maximum number of shares related to these options issuable under this
plan was 19,000 per year or 57,000. These options expire in 2004 and have an
exercise price equal to the closing price quoted on the last business day of the
immediately preceding fiscal year to which the grant of options relate. The
minimum threshold for the year ended August 31, 1995 was not met, and therefore,
no options were issued for that year. For the year ended August 31, 1996,
options to acquire 12,000 shares with an exercise price of $9.59 per share were
earned and subsequently issued. For the year ended August 31, 1997, options to
acquire an additional 12,000 shares with an exercise price of $32.875 were
earned and were issued in fiscal 1998.
In fiscal 1997, the Company adopted a Non-Employee Director Stock
Option Plan. Each member of the Board of Directors who is not, and who has not
been during the one year period immediately preceding the date the director is
first elected to the Board, an officer or employee of the Company or any of its
subsidiaries or affiliates, is eligible to participate in the Plan. A committee
of two or more members of the Board who are not eligible to receive grants under
the Option Plan administers the Plan. Upon adoption, options to acquire an
aggregate of 20,000 shares of Common Stock were issued. Additionally, each
eligible director will be granted an option to acquire 1,500 shares of Common
Stock on an annual basis upon his election or re-election to the Board of
Directors. An aggregate of 50,000 shares of Common Stock have been reserved for
issuance under the Option Plan.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS No. 123) which is effective for the Company's fiscal year
beginning September 1, 1996. Under SFAS No. 123, companies can either record
expense based on the fair value of stock-based compensation upon issuance or
elect to remain under the APB 25 method whereby no compensation cost is
recognized upon grant if certain requirements are met. The Company has elected
to continue to account for its stock-based compensation under APB 25. However,
pro-forma disclosures, as if the Company adopted the cost recognition
requirements under SFAS No. 123, are presented below.
Had compensation cost been determined based on the fair value at the
grant date consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per common share would have approximated the pro-forma
amounts below:
1997 1998
------ -----
Net income from continuing operations (in thousands):
As reported $14,300 $16,232
======= =======
Pro-forma $14,086 $15,751
======= =======
Basic earnings per share from continuing operations:
As reported $ 1.23 $ 1.29
======= =======
Pro forma $ 1.21 $ 1.25
======= =======
Diluted earnings per share from continuing operations:
As reported $ 1.20 $ 1.26
======= =======
Pro-forma $ 1.18 $ 1.23
======= =======
The pro-forma effect on net earnings for 1997 and 1998 is not
representative of the pro-forma effect on net earnings in future years because
it does not take into consideration pro-forma compensation expense related to
grants prior to September 1, 1995.
The following table summarizes the activity in the Company's stock
option plans:
Shares Weighted Average
--------------------------
Plan Acquisitions Option Price
---- ------------ ------------
Outstanding at September 1, 1995 462,947 5,000 $6.962
Granted 21,793 85,000 $19.243
Exercised (45,125) -- $6.239
-------- -------
Outstanding at August 31, 1996 439,615 90,000 $9.500
Granted 41,189 42,500 $19.623
Exercised (71,710) -- $5.984
Canceled (36,250) (50,000) $15.755
-------- -------
Outstanding at August 31, 1997 372,844 82,500 $10.729
Granted 87,000 -- $23.920
Exercised (111,473) (5,000) $7.511
Cancelled (7,625) -- $6.499
-------- -------
Outstanding at August 31, 1998 340,746 77,500 $14.447
======= ======
Exercisable at August 31, 1998 163,871 28,125 $20.608
======= ======
As of August 31, 1996, 1997 and 1998, the number shares relating to
options exercisable under the stock option plans was 97,365; 160,344; and
191,996, respectively, and the weighted average exercise price of those options
was $9.745, $10.023 and $20.608, respectively.
The weighted average fair value at date of grant for options granted
during 1997 and 1998 was $12.72 and $13.21 per share, respectively. The fair
value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions in 1997 and 1998, respectively: (a) dividend yield of 0.00% and
0.00%; (b) expected volatility of 54% and 59% (c) risk-free interest rate of
6.7% and 5.8%; and (d) expected life of 5 years and 5 years.
The following table summarizes information about stock options
outstanding as of August 31, 1998:
Options Outstanding Options Exercisable
----------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Exercise
Exercise Prices Shares Contract Life Price Shares Price
--------------- ------ ------------- ----- ------ -----
$5.875-$9.594 197,875 6.4 Yrs $ 6.356 107,875 $ 6.443
$13.875-$19.500 62,500 8.0 Yrs $18.005 25,625 $18.485
$20.250-$22.375 83,530 7.8 Yrs $20.949 41,655 $21.293
$24.000-$27.890 62,341 8.6 Yrs $24.302 4,841 $27.883
$32.875-$32.875 12,000 9.0 Yrs $32.875 12,000 $32.875
------- -------
418,246 7.3 Yrs $14.447 191,996 $20.608
======= =======
During 1994, the Company, excluding NAPTech, adopted a voluntary 401(k)
profit sharing plan for substantially all employees who are not subject to
collective bargaining agreements. The plan provides for the eligible employee to
contribute from 1% to 10% of annual compensation, subject to an annual limit,
with the Company matching 50% of the employee's eligible contribution up to 6%.
The Company's expense for this plan during 1996, 1997 and 1998 was approximately
$292,000, $480,000 and $803,000, respectively.
The Company has a qualified, contributory 401(k) savings plan covering
all employees of NAPTech who belong to the Certified Metal Trades Journeymen
collective bargaining unit. The Company is required to make a contribution of 3%
of participants' compensation on an annual basis. The Company's expense for this
plan was approximately $24,000, $52,000 and $61,000 for the years ended August
31, 1996, 1997 and 1998, respectively.
The Company has a qualified contributory 401(k) savings plan covering
all non-union employees of Connex after one year of service. The Company matched
75% of employees' contribution up to 6% of eligible compensation. From date of
acquisition through August 31, 1998 the Company's expense for this plan was
$55,000. The plan will be merged with the Company's 401(k) plan as of December
1, 1998.
The Company maintains a 401(k) savings plan for Bagwell's domestic
employees, who have completed one (1) year of service and have attained age 21.
Eligible employees may elect to defer up to 15% of their salary, subject to
Internal Revenue Service limits. The Company makes a matching contribution of up
to 2% of the employee's deferral. Company contributions to the plan amounted to
$10,000 for the period from acquisition to August 31, 1998.
The Company has a defined benefit pension plan for employees of Connex.
Effective January 1, 1994, no new participants were admitted to the plan. The
pension plan's benefit formulas generally base payments to retired employees
upon their length of service and a percentage of qualifying compensation during
their final year of employment. The pension plan's assets are invested in fixed
income assets, equity based mutual funds, and money market funds. At August 31,
1998, the fair market value of the plan assets was $1,264,000, which exceeded
the estimated projected benefit obligation.
The Company has two pension plans (Plan A and Plan B) for employees of
one of its United Kingdom subsidiaries. Plan A is a money purchase plan in which
the employer and employee make matching contributions between 3% and 6%
depending on age. From date of acquisition through August 31, 1998, the
Company's expense for this plan was $98,000. Plan B is a salary-related plan for
certain employees; admittance to this plan is now closed. The employees in Plan
B contribute 7%. The Company contribution depends on length of service, the
employee's salary at retirement, and the earnings of the fund investments. If
the plan's earnings are sufficient, the Company makes no contributions. From the
date of acquisition to August 31, 1998 the Company expensed $111,000 for this
plan. The following table sets forth Plan B's pension cost from the date of
acquisition (November 14, 1997) to August 31, 1998, and the plan's funded status
as of August 31, 1998 in accordance with the provisions of Statement of
Financial Accounting Standards No. 87 "Employers' Accounting for Pensions":
Net periodic pension cost for the period ending August 31, 1998 (in
thousands):
Service cost $ 284
Interest cost 711
Actual return on plan assets (1,333)
Net amortization and deferral 449
--------
Net periodic pension cost $ 111
========
Reconciliation of funded status at August 31, 1998 (in thousands):
Vested benefit obligation $ (16,363)
==========
Accumulated benefit obligation $ (16,370)
==========
Projected benefit obligation $ (17,133)
Fair value of plan assets 17,437
----------
Funded status 304
Unrecognized net transition (asset) --
Unrecognized net (gain)/loss 615
---------
Prepaid pension cost $ 919
=========
The key assumptions used to determine the net periodic pension cost for
the period and the funded status at the end of the year were:
Net Periodic
Pension Cost Funded Status
------------ -------------
Discount rate 6% 5.5%
Expected long term return on plan assets 7% --
Salary increases 4.5% 4.5%
The Company contributes to a Group Employee superannuation fund for its
employees in Australia. This fund is a defined contribution fund with both
employees and the Company contributing a fixed percentage of salary each week.
The Company also contributes to Industry Funds for its employees. These Funds
are also defined contribution funds with the Company contributing a fixed amount
each week for each employee. All members are entitled to benefits on termination
due to retrenchment, retirement, death or disability. The Company is under no
obligation to make up any shortfall in the funds assets to meet payments due to
employees. From the date of acquisition to August 31, 1998, the Company expensed
$139,000 (US dollars) for this plan.
Note 15--Related Party Transactions
During 1994, the Company entered into an employment agreement with the
President and Chief Executive Officer (CEO) of the Company. Under terms of the
agreement, the President and CEO will receive, among other things, an annual
base salary of $575,000, participation in the Company's annual bonus plan as
determined by the Compensation Committee of the Board of Directors, and other
benefits such as health and life insurance. In the event the President and CEO's
employment is terminated due to events as defined in the agreement, the
President and CEO will receive a lump-sum payment equal to the full amount
payable under the agreement. The employment agreement was amended on August 25,
1997 to extend the expiration date to December 31, 2007. The term shall be
automatically extended for an additional one-year period upon each December 31,
unless a party electing not to extend the agreement provides written notice to
the other party at least three months prior to such December 31.
The Company has entered into several loan agreements with key
management, some of which were non-interest bearing. The impact of discounting
such loans to record interest income was not significant. The balance of these
employee loan receivables as of August 31, 1996, 1997, and 1998 was
approximately $220,000, $416,000 and $996,000, respectively. These balances are
included in other assets.
During 1996 and 1997, in connection with certain acquisitions discussed
in Note 3, the Company has entered into non-competition agreements with several
key employees. Related assets totaling approximately $2,300,000, included in
other assets, are being amortized over five to eight years using the
straight-line method. Any corresponding liabilities are included in long-term
debt as further discussed in Note 6 of Notes to Consolidated Financial
Statements.
A director of the Company is a managing director of the investment
banking firm that was an underwriter and acted as one of the representatives of
the underwriters for the public offering of 2,000,000 shares of Common Stock
discussed in Note 2 of Notes to Consolidated Financial Statements. The Company
also granted to the underwriters an option to purchase up to an additional
398,000 shares of Common Stock pursuant to such terms to cover over-allotments,
which over-allotment option was exercised. The closing of such public offering
was completed in December 1996 and January 1997, at a price of $21.00 per share,
less the underwriting discounts and commissions of approximately $2,500,000.
Approximately 40% of these commissions were earned by the director's investment
banking firm. In connection with this public offering, certain officers and
directors of the Company sold 494,118 shares of stock. The same investment
banking firm is handling the repurchase of shares of the Company's common stock,
which began subsequent to August 31, 1998 (see Note 19 of Notes to Consolidated
Financial Statements.)
A director of the Company is an owner of construction companies that
were used primarily as a sub-contractor by the Company. During fiscal 1998, the
Company paid these construction companies approximately $4,000,000 for work
performed.
In connection with the acquisition of a subsidiary in fiscal 1998, the
Company financed $1,078,000 of the purchase with two of the former owners, who
are now employees of the Company. The related liability, which is secured by
letters of credits, is discussed further in Note 6 of Notes to Consolidated
Financial Statements.
Note 16--Foreign Currency Transactions
The Company's wholly-owned subsidiaries in Venezuela had net assets of
approximately $8,700,000 and $16,300,000 denominated in Venezuelan Bolivars as
of August 31, 1997 and 1998, respectively. In accordance with SFAS 52, "Foreign
Currency Translation," the U.S. dollar is used as the functional reporting
currency since the Venezuelan economy is defined as highly inflationary.
Therefore, the asset and liabilities must be translated into U.S. dollars using
a combination of current and historical exchange rates.
During 1996, the Venezuelan government lifted its foreign exchange
controls. Subsequent to this action, the Bolivar devalued from 170 to 475 to the
U.S. dollar. As a result, the Company recorded a translation loss of
approximately $864,000 in translating the assets and liabilities into U.S.
dollars. The Company also recognized a gain of approximately $818,000 during
1996 related to a Venezuelan Government bond purchased at a fixed exchange rate
which was subsequently sold. At August 31, 1998, 582 Bolivars is equivalent to
one U.S. dollar. During 1997 and 1998, the Company recorded losses of
approximately $6,000 and $734,000 respectively, in translating the assets and
liabilities of its Venezuelan subsidiaries into U.S. dollars. Because these
losses were partially offset by inflationary billing provisions in certain
Company contracts, the $734,000 was offset against sales.
Other foreign subsidiaries maintain their accounting records in their
local currency (primarily British Sterling, Australian Dollar and Dutch
Guilder). The currencies are converted to U.S. dollars with the effect of the
foreign currency translation reflected as a component of shareholders' equity in
accordance with SFAS No. 52. Foreign currency transaction gains or losses are
credited or charged to income. There were no material exchange gains or losses
incurred in fiscal 1996 and 1997. At August 31, 1998, cumulative foreign
currency translation adjustments related to these subsidiaries reflected in
shareholders' equity amounted to $420,000; transaction gains reflected in income
amounted to $32,000.
Note 17--Discontinued Operations
In June 1998, the Company adopted a plan to discontinue its operations
of the following subsidiaries: Weldtech, a seller of welding supplies; Inflo
Control Systems Limited (Inflo), a manufacturer of boiler steam leak detection,
acoustic mill and combustion monitoring equipment and related systems; Greenbank
(a division of PEL), an abrasive and corrosion resistant pipe systems
specialist; and NAPTech Pressure Systems Corporation, a manufacturer of pressure
vessels and truck tanker trailers. The Company sold and/or discontinued its
investment in each of these operations prior to August 31, 1998. Proceeds from
the sale of these operations totaled approximately $1,200,000 in net cash and
notes receivable of approximately $7,400,000, which resulted in a net gain on
the disposal of $2,647,000, net of tax. The results of these operations have
been classified as discontinued operations in the consolidated financial
statements of the Company. Revenues of these discontinued operations totaled
approximately $390,000; $2,600,000; and $7,700,000 in 1996, 1997 and 1998,
respectively.
Note 18--Unbilled Receivables, Retainage Receivable and Costs and Estimated
Earnings on Uncompleted Contracts
Included in accounts receivable is $14,426,000 and $17,173,000 at
August 31, 1997 and 1998, respectively, related to unbilled receivables which
represents revenues recorded based on completion of an individual spool (see
Note 1 of Notes to Consolidated Financial Statements) over amounts billed on
these lump sum contracts. Advanced billings related to these contracts as of
August 31, 1997 and 1998 was $369,000 and $5,476,000, respectively. Balances
under retainage provisions totaled $2,164,000 and $9,222,000 at August 31, 1997
and 1998, respectively, and are also included in accounts receivable in the
accompanying consolidated balance sheets.
The components of costs and estimated earnings in excess of billings
and billings in excess of costs and estimated earnings on uncompleted contracts
as of August 31, 1997 and 1998 are as follows (in thousands):
1997 1998
---- ----
Costs incurred on uncompleted contracts $ 71,315 $170,048
Estimated earnings thereon 13,321 17,578
-------- --------
84,636 187,626
Less billings applicable thereto (81,865) (176,720)
------- --------
$ 2,771 $ 10,906
======== ========
Included in the accompanying balance sheet under the following captions:
Cost and estimated earnings in excess
of billings on uncompleted contracts $ 3,236 $19,797
Billings in excess of costs and estimated
earnings on uncompleted contracts (465) (8,891)
-------- -------
$ 2,771 $10,906
======== =======
Note 19--Subsequent Event
Subsequent to August 31, 1998, in accordance with a plan adopted by the
Board of Directors, the Company began to repurchase shares of the Company's
Common Stock through the open market and/or block transactions. As of October
22, 1998, 1,168,500 shares of stock had been repurchased at a total price,
including brokerage commissions, of $9,620,000. This repurchase of stock has
been financed by the Company's U.S. revolving line of credit facility (see Note
7 of Notes to Consolidated Financial Statements).
Note 20--Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
1997 (Dollars in thousands, except per share amounts)
Sales
As previously reported $ 75,719 $ 85,516 $ 88,884 $ 88,231
Sales of discontinued operations (427) (607) (783) (799)
-------- -------- -------- ----------
As restated $ 75,292 $ 84,909 $ 88,101 $ 87,432
======== ======== ======== ========
Gross Profit
As previously reported $ 14,570 $ 15,137 $ 17,343 $ 17,066
Gross (profit) loss of discontinued operations 142 107 (184) (206)
-------- -------- -------- ----------
As restated $ 14,712 $ 15,244 $ 17,159 $ 16,860
======== ======== ======== ========
Net Income from continuing operations
As previously reported $ 3,145 $ 3,588 $ 3,555 $ 3,760
Net (income) loss of discontinued operations 149 149 (24) (22)
-------- -------- --------- ----------
As restated $ 3,294 $ 3,737 $ 3,531 $ 3,738
======== ======== ========= ========
Basic Net Income from continuing operations per share
As previously reported $ .30 $ .31 $ .29 $ .30
Net loss of discontinued operations .01 .01 -- --
-------- -------- --------- ---------
As restated $ .31 $ .32 $ .29 $ .30
======== ======== ========= =========
Diluted Net Income from continuing operations per share
As previously reported $ .29 $ .30 $ 28 $ .30
Net loss of discontinued operations .01 .01 -- --
-------- -------- --------- -------------
As restated $ .30 $ .31 $ .28 $ .30
======== ======== ========= ===========
1998
Sales
As previously reported $ 99,742 $137,457 $147,684 *
Sales of discontinued operations (1,072) (2,812) (3,362) *
-------- -------- --------
As restated $ 98,670 $134,645 $144,322 $124,001
======== ======== ======== ========
Gross Profit
As previously reported $18,280 $ 23,232 $ 23,736 *
Gross (profit) of discontinued operations (306) (480) (899) *
------- -------- --------
As restated $17,974 $ 22,752 $ 22,837 $ 16,018
======= ======== ======== ========
Net Income from continuing operations
As previously reported $ 4,704 $ 5,338 $ 5,978 *
Net (income) loss of discontinued operations (69) 57 (286) *
------- -------- --------
As restated $ 4,635 $ 5,395 $ 5,692 $ 510
======= ======== ======== ==========
Basic Net Income from continuing operations per share
As previously reported $ .38 $ .43 $ .48 *
Net (income) loss of discontinued operations (.01) -- (.03) *
-------- --------- --------
As restated $ .37 $ .43 $ .45 $ .04
======== ========= ======== =========
Diluted Net Income from continuing operations per share
As previously reported $ .37 $ .42 $ .47 *
Net (income) loss of discontinued operations (.01) -- (.02) *
-------- --------- -------
As restated $ .36 $ .42 $ .45 $ .04
======== ========= ======= ========
* Fourth quarter of 1998 was not previously reported on a Form 10-K or
10-Q.
The unaudited quarterly financial data above have been restated from the
Company's previously filed Forms 10-K and 10-Q to reflect the revenues and
expenses of discontinued operations.
ITEM 9. Changes in and Disagreements on Accounting and Financial Disclosures
There have been no changes in accountants and no disagreements on
accounting principles or practices, financial statement disclosure or auditing
scope or procedure between the Company and its independent certified public
accountants during the period beginning September 1, 1995 and ending on the date
hereof.
The single jointly signed auditor's report is considered to be the
equivalent of two separately signed auditor's reports. Thus, each firm
represents that it has complied with generally accepting auditing standards and
is in a position that would justify being the only signatory of the report.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of the Company is to
be included in the Company's definitive proxy statement prepared in connection
with the 1999 Annual Meeting of the Shareholders to be held in January 1999 and
is incorporated herein by reference.
Item 11. Executive Compensation
Information regarding executive compensation is to be included in the
Company's definitive proxy statement prepared in connection with the 1999 Annual
Meeting of Shareholders to be held in January 1999 and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management is to be included in the Company's definitive proxy statement
prepared in connection with the 1999 Annual Meeting of Shareholders to be held
in January 1999 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is to
be included in the Company's definitive proxy statement prepared in connection
with the 1999 Annual Meeting of Shareholders to be held in January 1999 and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements.
See Item 8 of Part II of this report.
2. Financial Statement Schedules.
3. Exhibits.
*3.1 Restatement of the Articles of Incorporation of the Company
dated December 10, 1993.
*3.2 Amended and Restated By-Laws of the Company dated
December 9, 1993.
**4.1 Specimen Common Stock Certificate.
***10.1 Credit Agreement dated May 15, 1998 among the Company,
Mercantile Business Credit, Inc., City National Bank of
Baton Rouge, Hibernia National Bank and Union Planters Bank
of Louisiana.
+10.2 Amendment to Credit Agreement made as of August 31.1998
among the Company, Mercantile Business Credit Inc., City
National Bank of Baton Rouge, Hibernia National Bank and
Union Planters Bank of Louisiana.
***10.3 Note Purchase Agreement dated May 21, 1998.
****10.4 1993 Employee Stock Option Plan, as amended and restated
**10.5 Employment Agreement by and between the Company and James M.
Bernhard, Jr.
**10.6 Joint Venture Agreement of Shaw-Nass Middle East, W.L.L.
dated November 18, 1993, by and among Shaw Overseas
(Cayman), Ltd., Abdulla Ahmed Nass and the Company.
___10.7 Plan and Agreement of Merger, dated as of August 5, 1996,
among the hareholders of NAPTech, Inc. (NAPTech"),
NAPTech, The Shaw Group Inc. and SAON, Inc., as amended by
the First amendment to Plan and Agreement of Merger dated as
of January 27, 1997.
___10.8 Purchase and Sale Agreement dated as of January 27, 1997,
among the members of Freeport Properties, L.C. ("Freeport"),
Freeport, The Shaw Group Inc. and SAON
Properties, Inc.
____10.9 1996 Non-Employee Director Stock Option Plan.
+21.1 Subsidiaries of the Company.
+24.1 Powers of Attorney
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* Incorporated by reference from the Company's Form 10-K for
the fiscal year ended August 31, 1994, as amended.
** Incorporated by reference from the Company's Registration
Statement on Form S-1 filed October 22, 1993, as amended
(Registration Number 33-70722).
*** Incorporated by reference from the Company's Form 10-Q for
the quarterly period ended May 31, 1998.
**** Incorporated by reference from the Company's Form 10-K for
the fiscal year ended August 31, 1997.
+ Filed herewith.
___ Incorporated by reference from the Company's Current Report
on Form 8-K dated February 11, 1997, as amended by Amendment
No.1 to Current Report on Form 8-K/A-1 dated April 9, 1997.
____ Incorporated by reference from the Company's Registration
Statement on Form S-8 filed on September 24, 1997
(Registration Number 333-36315).
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the Company during the fourth
quarter of fiscal 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE SHAW GROUP INC.
/s/ Robert L. Belk
--------------------
By: Robert L. Belk
Executive Vice President, Chief Financial
Officer and Chief Accounting Officer
Date: November 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
* Chairman of the Board, November 30, 1998
(J. M. Bernhard, Jr.) President and
Executive Officer
/s/ Robert L. Belk Executive Vice President, Chief Financial November 30, 1998
- ---------------------------- Officer and Chief Accounting Officer
(Robert L. Belk)
* Director November 30, 1998
- --------------------------------
(Albert McAlister)
* Director November 30, 1998
- -------------------------------
(L. Lane Grigsby)
* Director November 30, 1998
- ------------------------------
(David W. Hoyle)
* Director November 30, 1998
- -----------------------------
(John W. Sinders, Jr.)
* Director November 30, 1998
- ----------------------------
(William H. Grigg)
* By: /s/ Robert L. Belk November 30, 1998
---------------------------
Robert L. Belk
Attorney-in-Fact